Wolverine cuts net debt by $108 million, announces realignment plan

By Paul Deckelman

New York, July 15 – Wolverine World Wide, Inc. cut its net debt by $108 million in its recently ended fiscal second quarter, its chief financial officer said Tuesday, bringing that leverage measure down to its lowest level since the company levered up to make a large acquisition nearly two years ago.

Its executives also unveiled a strategic realignment plan that will close a number of stores and put the anticipated savings into the burgeoning and lucrative world of e-commerce.

Big debt for a big deal

Rockford, Mich.-based footwear, apparel and accessories company Wolverine, along with Golden Gate Capital and Blum Capital Partners, announced on May 1, 2012, that they had agreed to buy Collective Brands Inc. and split up that company’s businesses in a transaction valued at about $2 billion, including debt assumption. When the deal closed in the fall of that year, Wolverine paid about $1.24 billion for Collective Brands’ Performance +Lifestyle Group unit, consisting of the well-known Sperry Top-Sider, Saucony, Stride Rite and Keds footwear brands. The brands were added to its existing operations, which included the Hush Puppies and Merrell shoe brands.

Wolverine financed the acquisition with nearly $1.3 billion of new debt, consisting of $375 million of 6 1/8% senior notes due 2020 and $900 million of term loan debt split into a $550 million five-year term loan A tranche and a $350 million seven-year term loan B tranche.

The company got some additional liquidity in the form a $200 million five-year revolving credit facility that was undrawn at the time of closing. The total $1.1 billion credit facility, including the two term loan tranches and the revolver, also contained a $200 million accordion feature, according to the company’s regulatory filings with the Securities and Exchange Commission.

Wolverine’s chief financial officer and senior vice president, Donald T. Grimes, told investors on its conference call following the release of results for the 2014 fiscal second quarter ended June 14 that “when we announced the PLG acquisition two years ago, we stated that one of our most important priorities for our free cash flow was to pay down our acquisition debt, and we’ve stayed true to our word, with net debt just a shade below $900 million at the quarter’s end.”

Grimes said that represented a decrease in net debt of more than $108 million since the end of the first quarter “and a decrease of more than a quarter of a billion dollars since the transaction closed less than two years ago.”

As of the end of the quarter, total debt stood at $1.13 billion, consisting of $1.08 billion of long-term debt plus $48 million of current-portion debt. That was down from $1.19 billion in the year-earlier quarter and down from $1.17 billion at the end of the 2014 fiscal first quarter on March 22. According to the company’s most recent 10-Q filing with the SEC covering that first quarter, its capital structure at that time consisted of $765 million of term loan debt, the $375 million of outstanding bonds and $34 million of revolver borrowings.

Wolverine refinanced its credit facility last fall, consolidating the two term loan tranches it had entered into in 2012 into a single new term loan A tranche and using the new borrowings and cash on hand to reduce the overall term loan debt to $775 million from the original $900 million. The maturity of the term loan was extended by a year to 2018, and the interest rate was reduced to Libor plus a margin ranging from 137.5 basis points to 225 bps for the 2013 facility, versus Libor plus 200 bps on the former term loan A and Libor plus 300 bps plus a 1% Libor floor on the old term loan B. It also entered into a new $200 million five-year revolver carrying the same interest rate terms as the new term loan, versus the previous revolver’s Libor plus 200 bps rate. The accordion feature on the credit facility was raised to $375 million.

During the second quarter, Wolverine reduced its interest-bearing debt by $43 million, including fully paying off all of its outstanding revolver borrowings.

‘Record’ results in quarter

The company generated $113.6 million of operating free cash flow in the quarter – a figure Grimes termed “outstanding”– and it finished the quarter with $232.4 million of cash and equivalents, versus a year-earlier cash cushion of $171 million, allowing it to bring its net debt down to $898.9 million.

Interest expense during the second quarter was $10.9 million. Grimes noted that this was down by $2.2 million from a year earlier, “reflecting the impact of year-over-year principal reductions and a lower interest rate on our term-loan debt, which was driven by both our lower average ratio and last year’s debt refinancing.”

He also declared that Wolverine “took advantage of our strong cash position by making a voluntary principal payment of $25 million on our term loan earlier this month.”

Grimes and the company’s chairman, president and chief executive officer, Blake W. Krueger, both proclaimed on the call that the company had notched record revenues and record adjusted earnings during the quarter, with the CEO praising its “excellent performance in what continues to be a volatile retail environment,” particularly in the United States.

Revenues in the quarter rose to $613.5 million, a 4.4% increase from $587.8 million a year earlier.

Net income rose to $27.5 million, or 27 cents per diluted share, a 50% increase from $17.9 million, or 18 cents a share, a year ago. Adjusted earnings per share rose to 31 cents, up by 34.8% from 23 cents a year ago.

Plan will close stores

During the conference call, Krueger unveiled the company’s strategic alignment plan, which he said is aimed at addressing the “fundamental shift” in consumer shopping behavior seen over the past few years away from traditional physical brick-and-mortar stores and towards an increasing reliance on online buying.

To that end, he said, Wolverine plans to close about 140 of its existing retail locations – primarily in its Stride Rite chain of children’s shoe stores – over the next 18 months. It expects to close about 60 stores by the end of its fiscal year in mid-December, with the rest slated for shutdown by the end of 2015. It will seek to realize other efficiencies in its store operations and field support teams and will implement additional organizational and infrastructure changes to realize further synergies.

Krueger said that once the plan is fully implemented, the company expects annual pretax benefits of about $11 million.

“We anticipate reinvesting much of this benefit into e-commerce, mobile and other omni-channel capabilities and opportunities intended to enable our consumers to engage with our brands anywhere anytime,” the CEO concluded.

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