Wolverine World Wide, Inc. - Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the 12-week period ended March 27, 2010. Wolverine World Wide, Inc. is a global designer, manufacturer, and marketer of branded footwear, apparel, and accessories. The company operates through a primary reportable segment (Branded Footwear, Apparel, and Licensing) and other business units including retail, leather, and pigskin procurement. As of the period end, the company operated 85 retail stores and 26 consumer-direct internet sites.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $284.9 million | $255.3 million |
| Gross Profit | $117.6 million | $102.9 million |
| Gross Margin | 41.3% | 40.3% |
| Operating Profit | $38.5 million | $15.5 million |
| Net Earnings | $27.5 million | $10.5 million |
| Diluted EPS | $0.54 | $0.21 |
| Cash and Equivalents | $84.9 million | $56.8 million |
| Interest-Bearing Debt | $1.0 million | $94.4 million |
| Operating Cash Flow | ($43.5 million) used | ($41.5 million) used |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 11.6% year-over-year, driven by an 11.3% increase in the branded footwear segment and a 15.3% increase in other business units. Currency translation (weaker U.S. dollar) contributed $9.2 million to the increase.
- Profitability Surge: Net earnings increased 161.9% to $27.5 million. This was primarily due to a significant reduction in restructuring costs ($1.5 million in 2010 vs. $14.5 million in 2009) and improved gross margins.
- Inventory Reduction: Total inventory decreased 21.0% compared to the prior year quarter, reflecting effective inventory control initiatives.
- Debt Reduction: The company paid down its revolving credit facility, reducing interest-bearing debt from $94.4 million to $1.0 million. The $150 million credit facility had zero drawn balance at period end.
- Share Repurchases: The company repurchased approximately 884,000 shares of common stock during the quarter under two active programs.
Outlook, Risks, and Management Commentary
- Segment Performance: The Outdoor Group (Merrell, Chaco, Patagonia) led growth with a 15.7% revenue increase. The Hush Puppies Group grew 13.3%, while the Heritage Brands Group grew 6.9%. Harley-Davidson Footwear revenue declined due to a weak motorcycle market.
- Restructuring: The company is nearing completion of a strategic restructuring plan initiated in 2009, with remaining initiatives expected to finish in the first half of fiscal 2010. Total estimated implementation costs are $38-$39 million.
- Liquidity: Management expects cash flows from operations and the existing credit facility to be sufficient for working capital needs. A new revolving credit agreement is being negotiated to replace the one expiring in July 2010.
- Risks: Key risks include foreign currency fluctuations, changes in consumer demand, raw material costs (leather, petroleum), and the impact of global economic conditions. The company utilizes forward exchange contracts to hedge currency volatility.
Investor Verification Checklist
- Verify the sustainability of the 100 basis point gross margin expansion (41.3%) given the reduction in one-time restructuring costs.
- Confirm the status and terms of the new revolving credit agreement negotiation to ensure no disruption to liquidity before the July 2010 expiration.
- Monitor the performance of the Harley-Davidson Footwear brand, which showed revenue decline due to external market factors.
- Review the continued effectiveness of inventory control initiatives, as inventory levels dropped significantly year-over-year.
- Assess the impact of the weaker U.S. dollar on future international revenue and translation adjustments.