Wolverine Tops Earnings Strong

February 17, 2006
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ROCKFORD — With $991 million in 2004 sales and a five-year growth trend, footwear manufacturer Wolverine World Wide Inc. was a shoe-in for achieving its first $1 billion sales year in 2005.

Hopeful investors will not be let down by the company’s just-released 2005 financial performance report. Wolverine ended the year with a strong, if not overwhelming, fourth quarter, turning $20 million in net profit from $321 million in sales. For the year, the company snuck past its billion-dollar benchmark, with final sales of $1.06 billion, 7 percent higher than last year. Earnings for the year totaled $74.4 million, a healthy 13-percent increase over the company’s solid 2004 performance.

On the cost side, Wolverine was able to control the growth of many expense categories, and in some cases reduce them. The company paid $1.3 million less in interest in 2005, for example. The healthy increase in revenue helped to offset a 1 percent increase in the company’s effective tax rate, up to 33 percent for 2005.

The company’s tax situation was improved by a fourth-quarter repatriation of $41.5 million in foreign income. Wolverine found this move beneficial under provisions of the American Jobs Creation Act of 2004. Despite the big-picture benefits the move may have generated, it cost shareholders two cents per share in fourth-quarter earnings, bringing that figure down to 36 cents per share. Even with the repatriation charge, fourth quarter earnings increased 5.9 percent year-over-year.

“The financial strength of the business has never been better,” CFO Steven L. Gulis reported along with the earnings announcement. “We generated a record $119 million in cash from operating activities, achieved an 11.8-percent inventory reduction and improved our cash collections. These results have allowed us to reduce debt by $11.5 million, repurchase company shares totaling $63.7 million, invest in new growth initiatives and end the year with a cash balance of $85.3 million.”

Looking at growth opportunities in 2006, Chairman and CEO Timothy J. O’Donovan sees some ups and downs, literally. The company’s successful outdoor shoe brand, Merrell, will move up into casual sportswear, and another popular apparel brand will spread downward with a new line of footwear.

“We believe that adding apparel capability will have long-term benefit for the company, and for Merrell and other brands,” said O’Donovan in a teleconference following the earnings announcement.

In a previously announced partnership with apparel maker Patagonia Co., Wolverine will introduce that brand’s first line of footwear, designed and built by Wolverine. The Patagonia footwear will hit the shelves later this year.

“We believe that both of these initiatives will be key growth drivers for the business over the next decade,” said Gulis. That comment followed Gulis’ description of Wolverine’s need to subsidize the development of these two product lines for approximately two years prior to any revenue from the brands being realized. He said that the company’s cost-trimming efforts have been designed to keep its funding of research and development of programs such as these as strong as possible.

The Patagonia footwear and Merrell apparel plans are two factors in a new, far-reaching company vision, summed up with the less-than-graceful catchphrase “To Excite Consumers Around the World With Innovative Footwear and Apparel That Bring Style to Purpose.”

O’Donovan expounded upon the initiative in the teleconference. He said that the plan will entail refining global operations with a focus on improving service and efficiency. The company will also look to expand its brand portfolio either through acquisitions or cooperative agreements like the Patagonia partnership.

Wolverine will go forward with this new growth initiative more carefully after being thwarted somewhat in its efforts to grow its Sebago brand in Europe. O’Donovan said the company may have tried to expand too far too fast with the recently acquired footwear brand, long associated with boating and water sports. Despite unexpected mark-downs due to overstocks, the Sebago brand managed to grow in sales by more than 15 percent.

Based on the brand growth initiative and the underlying strength of the business, Wolverine is forecasting approximately 10 percent growth in revenue and earnings this year.

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