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Wolverine Growing Under a Pile of Debt

In January 2013, Wolverine started reporting its results in three segments: Performance, Lifestyle and Heritage. Wolverine now owns more than a dozen different brands in these segments. Before the acquisition, Wolverine counted about 43% of its revenues from Performance Group, 40% from Heritage Group and just around 11% from Lifestyle Group. Now the company gets around 41% of its revenues from the Lifestyle Group, 36% from Performance Group and just 20% from Heritage Group.

This is a significant shift from last year. Growth in the previous quarter was led by these two segments that reported a double-digit year-over-year revenue increases. On the other hand, the Heritage segment could only manage an 0.8% increase in revenues. The stark contrast between the growth numbers of the new and improved segments and its Heritage business highlights a key point; nearly all of Wolverine's growth has come as a result of the PLG acquisition.

As mentioned earlier, PLG came with a price tag of $1.25 billion, equivalent to 60% of Wolverine's market cap in October last year. The acquisition was financed through long term debt, which now stands at a massive $1.1 billion, up from zero in the same quarter last year. The company's long-term-debt-to-equity ratio, or D/E ratio, has swelled to 144%, which means that Wolverine has considerably more debt than its equity.

This is far from ideal; the industry's average is just 6%. Although Wolverine's financial health has been improving as its D/E ratio has dropped from 190% in December 2012, which clearly shows that the business has been moving in the right direction, but it still has a long way to go.

The adverse impact of this debt came in the form of a significant increase in interest expense which rose from just $1 million for the nine months ending Sept. 8, 2012, to nearly $37 million for the corresponding period in 2013. Some of its refinancing measures will cause a meaningful reduction in the interest expense, by as much as $8 million in the next year, but unlike 2012, the interest expense will continue to drag the company's earnings in the coming years.

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