17 Feb Wolverine Reports Strong Q4 Growth, But Expects Slower Growth in 2015
Wolverine Worldwide (WWW) reported revenue increased 9.2 percent to a record $808.9 million in the fourth quarter ended Jan. 3, 2015. Adjusted earnings, which exclude restructuring, acquisition-related integration and debt extinguishment costs, grew 36.4 percent to $0.30.
For the full fiscal year, revenue increased 2.6 percent to a record $2.76 billion and adjusted earnings per share grew 13.3 percent to $1.62.
“We had a strong close to the year, with nine of our 16 brands generating double-digit revenue growth in the fourth quarter, and our two largest brands, Merrell and Sperry, delivering mid single-digit and high single-digit revenue growth, respectively,” commented Blake W. Krueger, Wolverine Worldwide’s Chairman, Chief Executive Officer and President. “I am equally pleased with our full-year performance, which was highlighted by our fifth consecutive year of record revenue, as well as record adjusted earnings. We believe the strategic investments we are planning for our brands position us to capitalize on the many opportunities we’ve identified to accelerate our growth around the world.”
Fourth quarter 2014 review
- Consolidated revenue increased to a record $808.9 million, representing growth of 9.2 percent versus prior year revenue of $740.8 million, with each of the company’s three brand operating groups contributing to the quarter’s revenue growth. On a constant currency basis, revenue grew 10.1 percent.
- Gross margin was 37.1 percent, a decrease of 10 basis points versus prior year reported gross margin and a decrease of 110 basis points versus prior year adjusted gross margin. The gross margin decline was driven primarily by a negative mix shift in international markets, the impact of inventory liquidation related to the company’s previously announced Strategic Realignment Plan and incremental LIFO expense.
- Adjusted operating expenses were $247.1 million, an increase of 0.6 percent versus the prior year, and included a solid double-digit increase in brand marketing investment. As a percentage of revenue, adjusted operating expenses were 30.5 percent, compared to 33.2 percent in the prior year. The decrease as a percentage of revenue was driven primarily by the strong revenue growth in the quarter and lower pension expense. Reported operating expenses were $270.5 million, an increase of 5.1 percent versus the prior year.
- Adjusted diluted earnings per share increased 36.4 percent to $0.30, compared to an adjusted $0.22 per share in the prior year. Reported diluted earnings per share were $0.10, compared to a loss of $0.02 per share in the prior year.
- Operating free cash flow was a record $189.4 million, enabling the company to reduce interest-bearing debt by $195.7 million, including $175 million of voluntary principal payments, a portion of which were funded by the company’s new accounts receivable financing facility.
Full year 2014 review
- Consolidated revenue was a record $2.76 billion, representing growth of 2.6 percent versus prior year revenue of $2.69 billion. Foreign exchange had a minimal impact on full-year revenue growth. High single-digit growth from the Heritage Group and mid single-digit growth from the Performance Group were partially offset by the expected low single-digit revenue decline from the Lifestyle Group.
- Adjusted gross margin decreased 40 basis points to 39.4 percent. Reported gross margin decreased 30 basis points to 39.3 percent.
- Adjusted operating expenses were $815.2 million, a decrease of 1.8 percent versus the prior year. As a percentage of revenue, adjusted operating expenses declined 130 basis points to 29.5 percent, driven by lower pension and incentive compensation expense. Reported operating expenses were $856.4 million, a decrease of 1.8 percent versus the prior year.
- Adjusted operating margin increased 90 basis points to 9.9 percent. Reported operating margin was 8.3 percent, an increase of 120 basis points versus the prior year.
- Adjusted diluted earnings per share increased 13.3 percent to $1.62, compared to $1.43 per share in the prior year. Reported diluted earnings per share were $1.30, compared to $0.99 per share in the prior year.
- Inventory decreased 3.3 percent versus the prior year.
- Operating free cash flow for the full year was a record $279.8 million. The company ended the year with cash and cash equivalents of $223.8 million and net debt of $677.0 million, with the latter down $258.8 million versus the prior year.
“The company delivered strong financial results in the fourth quarter and fiscal 2014. We are extremely pleased that our outstanding full-year operating cash flow enabled us to reduce our net debt by over $250 million while still investing behind our brands and maintaining our cash dividend to shareholders,” commented Don Grimes, Senior Vice President and Chief Financial Officer. “In what continues to be a volatile global macroeconomic and retail environment, we delivered full-year revenue growth across almost all geographic regions, which is a testament to the broad acceptance of our brands by consumers around the world. Double-digit revenue growth in Asia Pacific, high single-digit growth in EMEA and mid single-digit growth in Latin America – important regions for future growth across our portfolio – were partially offset by flat revenue in the U.S. and a low single-digit decline in Canada, with the latter significantly impacted by foreign currency headwinds.”
Multi-year investment plan and fiscal 2015 guidance
In order to capitalize on opportunities for accelerated growth around the world, last month the company announced plans to significantly increase brand-building investments in fiscal 2015. Specifically, the company intends to increase its investments behind consumer-demand creation, omnichannel initiatives and international expansion – all focused on deepening connections with consumers, elevating brand awareness and driving sustained growth for the portfolio. The company plans to incrementally invest approximately $30 million in these brand-building initiatives in fiscal 2015.
Given the global nature of the company’s operations, the significantly stronger U.S. dollar versus the Canadian dollar, euro and British pound is expected to have a meaningful negative impact on reported fiscal 2015 results. Further, the continued strengthening of the U.S. dollar since the beginning of this calendar year is the primary driver of the company’s current outlook for fiscal 2015, as detailed below.
Guidance
For 2015, the company now expects:
- Consolidated reported revenue in the range of $2.82 billion to $2.87 billion, representing growth in the range of approximately 2 percent to 4 percent versus the prior year, reflecting negative foreign exchange, the impact of retail store closures associated with the company’s realignment plan and the exit of the Patagonia Footwear license. Constant currency revenue growth is expected in the range of approximately 5 percent to 7 percent.
- Adjusted operating margin to decline approximately 80 basis points, driven primarily by the incremental brand-building investments and higher pension expense, partially offset by modest gross margin expansion. Reported operating margin is expected to be approximately flat to the prior year.
- Modestly lower interest expense of approximately $40 million.
- A modestly higher effective tax rate of approximately 27.5 percent.
- Diluted weighted average shares outstanding of approximately 101 million.
- Adjusted diluted earnings per share in the range of $1.53 to $1.60, reflecting the incremental brand-building investments, higher pension expense and the negative impact of foreign exchange. Constant currency adjusted earnings per share is expected in the range of $1.71 to $1.78. Reported diluted earnings per share is expected in the range of $1.46 to $1.53.
“The significant incremental investments we are planning for 2015 – which we expect to benefit primarily fiscal 2016 and beyond – represent the next step in achieving the company’s vision of building the most admired family of performance and lifestyle brands on earth,” commented Mr. Krueger. “We believe 2015 is the right time to make these investments and expect this, along with our ongoing global expansion strategies, to position our company for accelerated growth and drive significant future shareholder value.”