Wolverine World Wide Inc: Form 10-Q for the period ended Mar 30, 2024

The following is a discussion of the Company’s results of operations and liquidity and capital resources. This section should be read in conjunction with the Company’s consolidated condensed financial statements and related notes included elsewhere in this Quarterly Report.

BUSINESS OVERVIEW

The Company is a leading global designer, marketer and licensor of branded footwear, apparel and accessories. The Company’s strategic vision is to build and grow high-energy footwear, apparel and accessories brands that inspire and empower consumers to explore and enjoy their active lives. The Company seeks to fulfill this vision by offering innovative products and compelling brand propositions; complementing its footwear brands with strong apparel and accessories offerings; expanding its global direct-to-consumer footprint; and delivering supply chain excellence.

The Company’s brands are marketed in approximately 170 countries and territories at March 30, 2024, including through owned operations in the U.S., Canada, the United Kingdom and certain countries in continental Europe and Asia Pacific. In other regions (Latin America, portions of Europe and Asia Pacific, the Middle East and Africa), the Company relies on a network of third-party distributors, licensees and joint ventures. At March 30, 2024, the Company operated 129 retail stores in the U.S., Europe and Canada and 54 direct-to-consumer eCommerce sites.

Effective February 4, 2023, the Company completed the sale of the Keds® business.

In the third quarter of fiscal 2023, the Company entered into a multi-year licensing agreement of the Hush Puppies® brand in the United States and Canada. In addition, the Company completed the sale of Hush Puppies® trademarks, patents, copyrights, and domains in China, Hong Kong, and Macau.

Effective August 23, 2023, the Company completed the sale of the U.S. Leathers business and effective December 28, 2023, the Company completed the sale of the Asia-based Leathers business.

Effective January 1, 2024, the Company completed the sale of the Company’s equity interest in the Merrell® and Saucony® joint venture entities.

Effective January 10, 2024, the Company completed the sale of the Sperry® business.

2024 FINANCIAL OVERVIEW

• Revenue was $394.9 million for the first quarter of 2024, representing a decrease of 34.1% compared to the first quarter of 2023.
• Gross margin was 45.9% in the first quarter of 2024 compared to 39.4% in the first quarter of 2023.
• The effective tax rates in the first quarters of 2024 and 2023 were 4.1% and 36.3%, respectively.
• Diluted loss per share for the first quarter of 2024 was $0.19 per share compared to diluted earnings per share of $0.23 per share for the first quarter of 2023.
• The Company declared cash dividends of $0.10 per share in the first quarters of both 2024 and 2023.
• Cash flow used in operating activities was $37.2 million for the first quarter of 2024 compared to $97.8 million for the first quarter of 2023.
• Compared to the first quarter of 2023, inventory as of the first quarter of 2024 decreased $371.6 million, or 51.2%. As of the end of the first quarter of 2024, the Company had $20.6 million of inventory in-transit, which represents a decrease of $32.2 million as compared to the end of the first quarter of 2023.

RESULTS OF OPERATIONS

(In millions, except per share data)

* Percentage change not meaningful

REVENUE

Revenue was $394.9 million for the first quarter of 2024, representing a decline of $204.5 million compared to the first quarter of 2023. The change in revenue reflected a $96.1 million, or 24.9%, decline from the Active Group, a $24.4 million, or 21.3%, decline from the Work Group, and a $84.0 million, or 84.8%, decline from Other. The Active Group’s revenue decrease was primarily driven by a decrease of $47.3 million from Merrell®, $32.5 million from Saucony®, and $14.1 million from Chaco®. The Work Group’s revenue decrease was primarily driven by a decrease of $10.5 million from Wolverine®, $8.6 million from Cat®, $2.3 million from HYTEST®, and $2.1 million from Bates®. The decline in Other revenue was primarily driven by a decrease in revenue from businesses that were sold in 2023 and 2024, and the licensing of the Hush Puppies® business, including decreases of $62.9 million from Sperry®, $12.2 million from the performance leathers business, $8.4 million from Hush Puppies®, and $6.5 million from Keds®. Changes in foreign exchange rates increased revenue by $3.1 million during the first quarter of 2024. Direct-to-consumer revenue decreased during the first quarter of 2024 by $20.1 million, or 15.9%, compared to the first quarter of 2023.

GROSS MARGIN

Gross margin was 45.9% in the first quarter of 2024 compared to 39.4% in the first quarter of 2023. The gross margin increase in the first quarter was primarily driven by favorable distribution channel mix, less end-of-life inventory sales, less supply chain costs and less promotional eCommerce channel activity.

OPERATING EXPENSES

Operating expenses decreased $6.5 million, from $191.0 million in the first quarter of 2023 to $184.5 million in the first quarter of 2024. The decrease was primarily driven by lower selling costs ($10.7 million), lower advertising costs ($9.0 million), lower distribution costs ($8.0 million), lower general and administrative costs ($6.5 million), and lower product development costs ($2.4 million), partially offset by the 2023 gain on the divestiture of the Keds® business ($20.1 million), the impairment of long-lived assets ($6.1 million), higher environmental and other related costs, net of insurance recoveries ($2.5 million), and higher reorganization costs ($1.3 million). Environmental and other related costs were $1.9 million and $1.6 million in the first quarter of 2024 and 2023, respectively.

INTEREST, OTHER AND INCOME TAXES

Net interest expense was $12.0 million in the first quarter of 2024 compared to $15.8 million in the first quarter of 2023. The decrease in interest expense is due to lower average principal balances of variable rate debt.

Other income was $0.8 million in the first quarter of 2024, compared to other expense of $1.2 million in the first quarter of 2023.

The effective tax rates in the first quarter of 2024 and 2023 were 4.1% and 36.3%, respectively. In both the current and prior years, the Company recognized discrete tax expenses related to stock-based compensation. In the current year, the discrete tax expense reduced the tax benefit of the pretax loss which resulted in a decrease to the effective tax rate. In the prior year, the discrete tax expense increased the tax expense on the pretax income which resulted in an increase to the effective tax rate.

REPORTABLE SEGMENTS

The Company’s portfolio of brands are organized into the following reportable segments.

• Active Group, consisting of Merrell® footwear and apparel, Saucony® footwear and apparel, Sweaty Betty® activewear, and Chaco® footwear; and
• Work Group, consisting of Wolverine® footwear and apparel, Cat® footwear, Bates® uniform footwear, Harley-Davidson® footwear and HYTEST® safety footwear;

Kids' footwear offerings from Saucony®, Sperry®, Keds®, Merrell®, Hush Puppies® and Cat® are included with the applicable brand.

The Company also reports “Other” and “Corporate” categories. The Other category consists of Sperry® footwear, Keds® footwear, Hush Puppies® footwear and apparel, the Company’s leather marketing operations, sourcing operations that include third-party commission revenues, multi-branded direct-to-consumer retail stores and the Stride Rite® licensed business. The Corporate category consists of gains on the sale of businesses and trademarks, unallocated corporate expenses, such as corporate employee costs, corporate facility costs, reorganization activities, impairment of long-lived assets and environmental and other related costs.

The reportable segment results are as follows:

(In millions)

Further information regarding the reportable segments can be found in Note 16 to the consolidated condensed financial statements.

Active Group

The Active Group’s revenue decreased $96.1 million, or 24.9%, in the first quarter of 2024 compared to the first quarter of 2023. The revenue decline was primarily driven by decreases of $47.3 million from Merrell®, $32.5 million from Saucony®, and $14.1 million from Chaco®. The Merrell®, Saucony® and Chaco® decreases were primarily due to timing of shipments in the international channel, lower closeout and end of life inventory sales versus the prior year, and softer consumer demand.

The Active Group’s operating profit decreased $15.9 million, or 30.5%, in the first quarter of 2024 compared to the first quarter of 2023. The operating profit decrease was due to revenue decreases, partially offset by a 350 basis point increase in gross margin and a $14.6 million decrease in selling, general and administrative expenses. The increase in gross margin in the current year period was due to decreased end-of-life inventory sales and lower promotional activity in the Company's wholesale and direct-to-consumer channels. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower variable costs including advertising costs and selling costs and lower employee costs.

Work Group

The Work Group’s revenue decreased $24.4 million, or 21.3%, during the first quarter of 2024 compared to the first quarter of 2023. The revenue decline was primarily driven by a decrease of $10.5 million from Wolverine®, $8.6 million from Cat®, $2.3 million from HYTEST®, and $2.1 million from Bates®. The Wolverine® decrease was primarily due to softer consumer demand in the U.S. wholesale channel, high inventory levels at certain retail customers, and lower closeout sales versus the prior year. The Cat® decrease was primarily due to lower closeout sales versus the prior year and softer consumer demand in the direct-to-consumer channel. The HYTEST® decrease was primarily due to timing of shipments in certain channels. The Bates® decrease was primarily due to softer consumer demand in the U.S. wholesale channel, high inventory levels at certain retail customers, and lower closeout sales versus the prior year.

The Work Group’s operating profit decreased $2.8 million, or 18.1%, in the first quarter of 2024 compared to the first quarter of 2023. The operating profit decrease was due to revenue decreases, partially offset by a 260 basis point increase in gross margin and a $3.3 million decrease in selling, general and administrative expenses. The increase in gross margin in the current year period was due to primarily due to decreased end-of-life inventory sales and lower supply chain costs including lower ocean freight costs. The decrease in selling, general and administrative expenses in the current year period was primarily due to lower variable costs including advertising costs, selling expenses and distribution costs.

Other

The Other category’s revenue decreased $84.0 million, or 84.8%, in the first quarter of 2024 compared to the first quarter of 2023. The revenue decline was driven by a decrease of $62.9 million from Sperry®, $12.2 million from the performance leathers business, $8.4 million from Hush Puppies®, and $6.5 million from Keds®. The Sperry® decrease is due to the divestiture of the business effective January 10, 2024. The performance leathers business decrease is due to the divestiture of the U.S. leathers business effective August 23, 2023 and Asia-based leathers business effected December 28, 2023. The Hush Puppies® decrease is due to the licensing of the brand in the United States and Canada starting in the third quarter of 2023. The Keds® decrease is due to the divestiture of the business effective February 4, 2023.

Other operating profit decreased $2.0 million, or 32.3%, in the first quarter of 2024 compared to the first quarter of 2023. The operating profit decrease was due to revenue decreases partially offset by a 2,550 basis point increase in gross margin and a $26.2 million decrease in selling, general and administrative costs. The increase in gross margin in the current year period was primarily due to the divestiture of the lower margin Sperry® business, performance leathers business, and Keds® business, along with the licensing of the Hush Puppies® business. The decrease in selling, general and administrative expenses in the current year period was primarily due to lower advertising costs, selling expenses and the divestiture of the Sperry® business, performance leathers business, and Keds® business, along with the licensing of the Hush Puppies® business.

Corporate

Corporate expenses increased $27.7 million in the first quarter of 2024 compared to the first quarter of 2023, primarily due to the 2023 gain recorded on the sale of the Keds® business ($20.1 million), higher impairment of long-lived and intangible assets ($6.1 million), higher environmental and other related costs ($2.5 million), and higher reorganization activities ($1.3 million), partially offset by lower employee costs ($0.3 million).

LIQUIDITY AND CAPITAL RESOURCES

(In millions)

(1) Cash and cash equivalents at December 30, 2023 and April 1, 2023 includes $5.6 million and $4.4 million, respectively, of cash and cash equivalents that are classified as held for sale that are not included in cash and cash equivalents in the Consolidated Balance Sheets.

(2) Amounts are net of both borrowings, if any, and outstanding standby letters of credit in accordance with the terms of the revolving credit facility.

Liquidity

Cash and cash equivalents of $169.7 million as of March 30, 2024 were $49.1 million higher compared to April 1, 2023. The increase is due primarily to cash provided by operating activities of $182.4 million, proceeds from divestitures of $199.5 million, contributions from noncontrolling interests of $31.2 million, and proceeds from company-owned life insurance policies of $7.0 million, partially offset by borrowings less repayments of debt of $325.0 million, cash dividends paid of $32.3 million, and additions to property, plant and equipment of $12.4 million. The Company had $728.1 million of borrowing capacity available under the revolving facility as of March 30, 2024. Cash and cash equivalents located in foreign jurisdictions totaled $149.4 million as of March 30, 2024.

Cash flow from operating activities is expected to be sufficient to meet the Company’s working capital needs for the foreseeable future. Any excess cash flow from operating activities is expected to be used to fund organic growth initiatives, reduce debt, pay dividends and for general corporate purposes.

The Company did not repurchase shares during the first quarters of both 2024 and 2023.

A detailed discussion of environmental remediation costs is found in Note 15 to the consolidated condensed financial statements. The Company has established a reserve for estimated environmental remediation costs based upon an evaluation of currently available facts with respect to each individual site. As of March 30, 2024, the Company had a reserve of $48.1 million, of which $22.1 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities, and the remaining $26.0 million is recorded in other liabilities and is expected to be paid over the course of up to 25 years. It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternative cleanup methods.

Developments may occur that could materially change the Company’s current cost estimates. The Company adjusts recorded liabilities as further information develops or circumstances change.

Financing Arrangements

The Company’s Credit Agreement provides for a term loan A facility (the “Term Facility”) and for a revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”). The maturity date of the loans under the Senior Credit Facilities is October 21, 2026. The Credit Agreement provides for a debt capacity of up to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed $2.0 billion unless certain specified conditions set forth in the Credit Agreement are met. The Revolving Facility allows the Company to borrow up to an aggregate amount of $1.0 billion.

The Company’s $550.0 million 4.0% senior notes issued on August 26, 2021 are due on August 15, 2029. Related interest payments are due semi-annually. The senior notes are guaranteed by substantially all of the Company’s domestic subsidiaries.

As of March 30, 2024, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.

The Company’s debt at March 30, 2024 totaled $856.9 million compared to $920.8 million at December 30, 2023. The reduced debt position primarily resulted from repayments of debt using proceeds received from sale of the Sperry® business.

Cash Flows

The following table summarizes cash flow activities:

(In millions)

Operating Activities

The principal source of the Company’s operating cash flow is net earnings, including cash receipts from the sale of the Company’s products, net of costs of goods sold.

For the first quarter of 2024, an increase in net working capital represented a use of cash of $28.0 million. Working capital balances were favorably impacted by a decrease in inventories of $15.8 million and a decrease in other operating assets of $5.1 million, offset by an increase in accounts receivable of $2.6 million, an increase in other operating liabilities of $42.2 million, an increase in accounts payable of $3.7 million, and an increase in income taxes payable of $0.4 million. Operating cash flows included depreciation and amortization expense adjustment of $7.1 million, impairment of long-lived assets of $6.1 million, stock-based compensation expense adjustment of $4.1 million, environmental and other related costs, net of cash payments and recoveries received cash outflow of $10.0 million, and pension expense adjustment of $0.2 million.

Investing Activities

The Company made capital expenditures of $5.1 million and $7.3 million in the first quarter of 2024 and 2023, respectively, for corporate headquarters improvements, eCommerce sites, new retail stores, distribution operations improvements and information systems and technology. The current year investing activity includes proceeds from divestitures of $92.5 million.

Financing Activities

The current year activity includes net payments under the Revolving Facility of $40.0 million. The Company paid $24.2 million and $2.5 million in principal payments associated with its financing arrangements during the first quarter of 2024 and 2023, respectively. The Company paid $1.6 million and $5.5 million during the first quarter of 2024 and 2023, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans. The Company did not repurchase shares in the first quarter of 2024 or 2023.

The Company declared cash dividends of $0.10 per share during the first quarter of 2024 and 2023. Dividends paid in the first quarter of 2024 and 2023 totaled $8.1 million and $8.4 million respectively. A quarterly dividend of $0.10 per share was declared on May 1, 2024 to shareholders of record on July 1, 2024.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s consolidated condensed financial statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.

The Company has identified the critical accounting policies used in determining estimates and assumptions in the amounts reported. For information regarding our critical accounting policies refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in the Company’s 2023 Form 10-K. Management believes there have been no material changes in those critical accounting policies.

The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company’s foreign assets, liabilities and inventory purchase commitments. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars. The Company does not believe that there has been a material change in the nature of the Company’s primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Quarterly Report on Form 10-Q, the Company does not know of any material change in the near-term in the general nature of its primary market risk exposure.

Under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging, the Company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If a derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings.

The Company conducts wholesale operations outside of the U.S. in Canada, continental Europe, United Kingdom, Hong Kong, China and Mexico where the functional currencies are primarily the Canadian dollar, euro, British pound, Hong Kong dollar, Chinese renminbi and Mexican peso, respectively. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated primarily with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business as well as to manage foreign currency translation exposure. As of March 30, 2024 and April 1, 2023, the Company had outstanding forward currency exchange contracts to purchase primarily U.S. dollars in the amounts of $273.0 million and $285.2 million, respectively, with maturities ranging up to 531 and 524 days, respectively.

The Company also has sourcing locations in Asia, where financial statements reflect the U.S. dollar as the functional currency. However, operating costs are paid in the local currency. Revenue generated by the Company from third-party foreign licensees is calculated in the local currencies but paid in U.S. dollars. Accordingly, the Company’s reported results are subject to foreign currency exposure for this stream of revenue and expenses. Any associated foreign currency gains or losses on the settlement of local currency amounts are reflected within the Company's consolidated condensed statement of operations and comprehensive income.

Assets and liabilities outside the U.S. are primarily located in the United Kingdom, Canada and the Netherlands. The Company’s investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. As of March 30, 2024, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $8.4 million from their value as of December 30, 2023. As of April 1, 2023, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $1.4 million from their value as of December 31, 2022.

The Company is exposed to interest rate changes primarily as a result of interest expense on the term loan borrowings and any borrowings under the Revolving Facility. The Company’s total variable-rate debt was $312.5 million at March 30, 2024 and the Company held a forward-dated interest rate swap agreement, denominated in U.S. dollars, that effectively converts $68.5 million of this amount to fixed-rate debt.

The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on, and as of the time of such evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15(e), were effective as of the end of the period covered by this report. There have been no changes during the quarter ended March 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in the assessment of the Company’s risk factors from those set forth in the Company’s Annual Report on Form 10-K for the year ended December 30, 2023, filed with the SEC on February 22, 2024.