Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
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 December 28, 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 December 28, 2024, the Company oper ated 119 retail stores in the U.S., United Kingdom, and Italy an d 39 direct-to-consumer eCommerce sites.
Effective May 4, 2024, the Company entered into global multi-year licensing agreements of Merrell ® and Saucony ® kids footwear and Merrell ® apparel and accessories.
Effective January 10, 2024, the Company completed the sale of the Sperry ® business.
Effective January 1, 2024, the Company completed the sale of the Company’s equity interests in the Merrell ® and Saucony ® China joint venture entities.
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.
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 the Hush Puppies ® trademarks, patents, copyrights, and domains in China, Hong Kong, and Macau. The Company continues to own the Hush Puppies ® brand throughout the rest of the world.
Effective February 4, 2023, the Company completed the sale of the Keds ® business.
The following discussion includes a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2024 and 2023. A discussion of a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2023 and 2022 has been omitted from this Form 10-K but may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023, filed with the SEC on February 22, 2024.
2024 FINANCIAL OVERVIEW
• Revenue was $1,755.0 million for 2024, representing a decrease of 21.8% compared to the prior year's revenue of $2,242.9 million.
• Gross margin for 2024 was 44.5%, compared to 38.9% in 2023.
• The effective tax rate in 2024 was 16.3%, compared to 70.7% in 2023.
• Diluted earnings per share in 2024 was $0.58, compared to diluted loss per share of $0.51 in 2023.
• The Company declared cash dividends of $0.40 per share in 2024 and 2023.
• Cash flow provided by operating activities was $180.1 million in 2024 and $121.8 million in 2023.
• Compared to the prior year, inventory decreased $133.0 million, or 35.6%, as of year-end.
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RESULTS OF OPERATIONS
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 financial statements and related notes, which are included in Item 8 of this Annual Report on Form 10-K.
Fiscal Year
(In millions, except per share data) 2024 2023 Percent Change
Revenue
$ 1,755.0 $ 2,242.9 (21.8) %
Cost of goods sold
973.5 1,370.4 (29.0) %
Gross profit
781.5 872.5 (10.4) %
Selling, general and administrative expenses
690.0 856.2 (19.4) %
Gain on sale of businesses, trademarks and long-lived assets (8.5) (90.4) (90.6) %
Impairment of long-lived assets 9.3 185.3 (95.0) %
Environmental and other related costs (income), net of recoveries (10.3) (10.4) (1.0) %
Operating profit (loss) 101.0 (68.2) 248.1 %
Interest expense, net
42.7 63.5 (32.8) %
Other expense (income), net (3.3) 2.5 (232.0) %
Earnings (loss) before income taxes 61.6 (134.2) 145.9 %
Income tax expense (benefit) 10.1 (95.0) 110.6 %
Net earnings (loss) 51.5 (39.2) 231.4 %
Less: net earnings (loss) attributable to noncontrolling interests 3.6 0.4 800.0 %
Net earnings (loss) attributable to Wolverine World Wide, Inc. $ 47.9 $ (39.6) 221.0 %
Diluted earnings (loss) per share $ 0.58 $ (0.51) 213.7 %
REVENUE
Revenue was $1,755.0 million for 2024, representing a decrease of 21.8% compared to the prior year's revenue of $2,242.9 million. The change in revenue reflected a $193.0 million, or 13.4%, decrease from the Active Group, a $25.3 million, or 5.3%, decrease from the Work Group and a $269.6 million, or 83.4%, decrease from Other. The Active Group's revenue decrease was driven by a decrease of $89.3 million from Saucony ® , $77.4 million from Merrell ® , $21.4 million from Chaco ® , and $4.9 million from Sweaty Betty ® . The Work Group’s revenue decrease was driven primarily by a decrease of $9.0 million from Cat ® , $8.1 million from Wolverine ® , $3.3 million from Bates ® , $2.6 million from Harley-Davidson ® and $2.3 million from HYTEST ® . The decrease 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 in 2023, which includes decreases of $191.9 million from Sperry ® , $37.0 million from the performance leathers business, $25.7 million from Hush Puppies ® and $6.5 million from Keds ® . International revenue represented 49.1%, and 45.7% of total reported revenues in 2024 and 2023, respectively. Changes in foreign exchange rates increased revenue by $2.8 million during 2024. Direct-to-consumer revenue decreased by $98.5 million, or 16.9% during 2024 compared to 2023.
GROSS MARGIN
For 2024, the Company’s gross margin was 44.5%, compared to 38.9% in 2023. The gross margin increase was primarily driven by less end-of-life inventory sales, lower supply chain costs and lower product costs.
OPERATING EXPENSES
Operating expenses decreased $260.2 million in 2024, to $680.5 million. The decrease was primarily driven by lower impairment of long-lived assets ($176.3 million), lower general and administrative costs ($48.8 million), lower selling costs ($45.2 million), lower advertising costs ($28.9 million), lower distribution costs ($25.5 million), lower reorganization costs ($18.0 million), and lower product development costs ($7.8 million), partially offset by lower gains on the sale of businesses, trademarks, and long-lived assets ($81.8 million), higher incentive compensation costs ($12.9 million) and lower environmental and other related costs, net of recoveries ($0.1 million). Environmental and other related costs were $15.6 million and $8.4 million in 2024 and 2023, respectively. See Note 17 to the Company's Consolidated Financial Statements for further discussion of environmental remediation costs.
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INTEREST, OTHER AND TAXES
Net interest expense was $42.7 million in 2024 compared to $63.5 million in 2023. Interest expense decreased in the current year due to lower average principal balances of variable rate debt and lower weighted average interest rates on variable rate debt.
Other income was $3.3 million in 2024 compared to other expense of $2.5 million in 2023.
The effective tax rate in 2024 was 16.3%, compared to 70.7% in 2023. In 2023 the Company recognized more tax benefits compared to 2024 primarily related to the generation and utilization of a capital loss.
REPORTABLE SEGMENTS
The Company’s portfolio of brands is 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 Hush Puppies ® footwear, sourcing operations that include third-party commission revenues, multi-branded direct-to-consumer retail stores, the Stride Rite ® licensed business, Sperry ® footwear, Keds ® footwear, and apparel and the Company’s leather marketing operations,. 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 for years 2024 and 2023 are as follows:
Fiscal Year
(In millions) 2024 2023 Change Percent Change
REVENUE
Active Group $ 1,246.1 $ 1,439.1 $ (193.0) (13.4) %
Work Group 455.3 480.6 (25.3) (5.3) %
Other
53.6 323.2 (269.6) (83.4) %
Total
$ 1,755.0 $ 2,242.9 $ (487.9) (21.8) %
OPERATING PROFIT (LOSS)
Active Group $ 184.9 $ 140.3 $ 44.6 31.8 %
Work Group 69.2 58.1 11.1 19.1 %
Other
31.3 32.8 (1.5) (4.6) %
Corporate
(184.4) (299.4) 115.0 38.4 %
Total
$ 101.0 $ (68.2) $ 169.2 248.1 %
Further information regarding the reportable segments can be found in Note 18 to the Company's Consolidated Financial Statements.
Active Group
The Active Group’s revenue decreased $193.0 million, or 13.4%, in 2024 compared to 2023. The revenue decrease was driven by a decrease of $89.3 million from Saucony ® , $77.4 million from Merrell ® , $21.4 million from Chaco ® and $4.9 million from Sweaty Betty ® . The Saucony ® decrease was primarily due to lower end of life inventory sales compared to the prior year, the divestiture of the Company's equity interest in the China joint venture entity, effective January 1, 2024, and lower Saucony ® kids revenue resulting from licensing the brand in the United States and Canada starting in the second quarter of 2024. The Merrell ® decrease was primarily due to lower end of life inventory sales compared to the prior year, softer consumer demand in the U.S. wholesale and International channels and lower Merrell ® kids revenue resulting from licensing the brand in the United States and Canada starting in the second quarter of 2024, partially offset by growth from new products, including Moab Speed and Speed Strike, and growth in core brand franchises, including Moab 3 and Jungle Moc. The Chaco ® decrease was primarily due to lower closeout and end of life inventory sales compared to the prior year and softer consumer demand. The Sweaty
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Betty ® decrease was primarily due to softer consumer demand in direct-to-consumer and wholesale sales channels across the U.S. and China markets and lower end of life inventory sales compared to the prior year.
The Active Group’s operating profit increased $44.6 million, or 31.8%, in 2024 compared to 2023. The operating profit increase was due to a 520 basis point increase in gross margin and a $58.9 million decrease in selling, general and administrative costs partially offset by revenue decreases. The increase in gross margin in the current year period was primarily due to decreased closeout sales, lower product costs, and lower supply chain costs. The decrease in selling, general and administrative expenses in 2024 is primarily due to lower advertising costs, selling expenses, distribution costs, and employee costs.
Work Group
The Work Group’s revenue decreased $25.3 million, or 5.3%, in 2024 compared to 2023. The revenue decrease was primarily driven by a decrease of $9.0 million from Cat ® , $8.1 million from Wolverine ® , $3.3 million from Bates ® , $2.6 million from Harley-Davidson ® and $2.3 million from HYTEST ® . The Cat ® decrease was primarily due to timing of shipments in the U.S. and international channels, lower closeout sales versus the prior year and softer consumer demand in direct-to-consumer channels, partially offset by growth in the U.S. wholesale channel. The Wolverine ® decrease was primarily due to lower closeout sales compared to the prior year. The Bates ® decrease was primarily due to softer consumer demand in the U.S. direct-to-consumer channels, high inventory levels at certain retail customers and lower closeout sales versus the prior year. The Harley-Davidson ® decrease was primarily due to declines in top dealer accounts. The HYTEST ® decrease was primarily due to lower closeout sales compared to the prior year, partially offset by growth in the U.S. wholesale channel.
The Work Group’s operating profit increased $11.1 million, or 19.1%, in 2024 compared to 2023. The operating profit increase was due to a 180 basis point increase in gross margin and an $11.1 million decrease in selling, general and administrative costs partially offset by revenue decreases. The increase in gross margin in the current year was due to decreased closeout sales, lower product cost and favorable average selling price. The decrease in selling, general and administrative expenses in 2024 was primarily due to lower advertising costs, selling expenses, and employee costs.
Other
Other revenue decreased $269.6 million, or 83.4%, in 2024 compared to 2023. The revenue decline was primarily driven by a decrease of $191.9 million from Sperry ® , $37.0 million from the performance leathers business, $25.7 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 the Asia-based leathers business, effective 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 $1.5 million, or 4.6%, in 2024 compared to 2023. The operating profit decrease was due to revenue decreases partially offset by a $90.0 million decrease in selling, general and administrative costs. The decrease in selling, general and administrative expenses in the current year period was primarily due to the divestiture of the Sperry ® business, performance leathers business, and Keds ® business, along with the licensing of the Hush Puppies ® business.
Corporate
Corporate expenses decreased $115.0 million in 2024 compared to 2023 primarily due to lower impairment of long-lived and intangible assets ($176.3 million), lower reorganization activities ($18.0 million) and lower employee costs ($5.3 million), partially offset by lower gains on sale of businesses, trademarks, and long-lived assets ($81.5 million), higher incentive compensation costs ($11.6 million) and higher environmental and other related costs ($0.1 million).
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Year
(In millions) 2024 2023
Cash and cash equivalents (1)
$ 152.1 $ 184.6
Debt 648.0 920.8
Available Revolving Facility (2)
724.0 688.4
(1) Cash and cash equivalents at the end of the year in the Consolidated Statements of Cash Flows includes $5.6 million of cash and cash equivalents that are classified as held for sale as of December 30, 2023 that are not included in cash and cash equivalents in the Consolidated Balance Sheets.
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(2) Amounts are net of both borrowings, if any, and outstanding standby letters of credit issued in accordance with the terms of the Revolving Facility.
Liquidity
Cash and cash equivalents of $152.1 million as of December 28, 2024 were $32.5 million lower compared to December 30, 2023. The decrease is due primarily to net revolver payments of $235.0 million, long-term debt payments of $39.2 million, cash dividends paid of $32.5 million, additions to property, plant, and equipment of $20.2 million and shares acquired related to employee stock plans of $2.6 million, partially offset by cash provided by operating activities of $180.1 million, proceeds from the sale of businesses, trademarks, long-lived assets and other assets of $102.4 million, proceeds from company-owned life insurance policy liquidations of $7.9 million and proceeds from company-owned life insurance policies of $7.0 million. The Company had $724.0 million of borrowing capacity available under the Revolving Facility as of December 28, 2024. Cash and cash equivalents located in foreign jurisdictions totaled $134.1 million as of December 28, 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 of its common stock during 2024 and 2023.
A detailed discussion of environmental remediation costs is found in Note 17 to the Company's Consolidated 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 affected site. As of December 28, 2024, the Company has a reserve of $39.7 million, of which $19.4 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities, with the remaining $20.3 million recorded in other liabilities and expected to be paid over the course of up to 25 years. The Company's remediation activity at its former Tannery site and sites where the Company disposed of Tannery byproducts is ongoing. 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.
Note 17 to the Company's Consolidated Financial Statements also includes a detailed discussion of environmental litigation matters. As of December 28, 2024, the Company had recorded liabilities of $10.1 million for certain of these environmental litigation matters which are recorded as other accrued liabilities in the consolidated balance sheets.
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.
The Company expects to meet its contractual obligations through its customary sources of liquidity in the normal course of business, such as cash from operating activities, and believes it has the financial resources to satisfy these contractual obligations. The Company had the following contractual obligations due by period at December 28, 2024:
(In millions) Total Less than
1 year 1-3 years 3-5 years More than
5 years
Long-term debt obligations (1)
$ 768.4 $ 111.8 $ 69.8 $ 586.8 $ —
Operating lease obligations
178.5 34.0 51.0 38.6 54.9
Purchase obligations (2)
322.5 322.5 — — —
Supplemental Executive Retirement Plan
45.4 4.1 9.1 9.1 23.1
Municipal water improvements (3)
13.4 5.2 8.2 — —
Tax Cuts and Jobs Act transition obligation 11.7 11.7 — — —
Total (4)
$ 1,339.9 $ 489.3 $ 138.1 $ 634.5 $ 78.0
(1) Includes principal and interest payments on the Company’s long-term debt. Estimated future interest payments on outstanding debt obligations are based on interest rates as of December 28, 2024. Actual cash outflows may differ significantly due to changes in underlying interest rates.
(2) Purchase obligations related primarily to inventory and capital expenditure commitments.
(3) Under the terms of a Consent Decree resolving certain civil and regulatory actions, the Company is obligated to contribute towards the costs of extending municipal water lines, developing a replacement wellfield and making certain improvements to Plainfield Township’s existing water treatment plant, all subject to an aggregate cap of $69.5 million. During 2024 and 2023, the Company made payments of $12.2 million and $6.4 million towards the total cap, respectively. Due to the
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uncertainty of the timing and amounts related to the Company's other environmental remediation costs, they have been excluded from this table. See Note 17 to the Company's Consolidated Financial Statements for additional information.
(4) The total amount of unrecognized tax benefits on the consolidated balance sheet at December 28, 2024 is $1.6 million. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the table above.
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 $800.0 million.
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 December 28, 2024, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.
The Company’s debt at December 28, 2024 totaled $648.0 million, compared to $920.8 million at December 30, 2023. The Company expects to use the current borrowings to fund organic growth initiatives, pay dividends and for general corporate purposes. The decreased debt position is due to lower borrowings under the Revolving Facility resulting from operating cash inflows and proceeds from divestitures.
Cash Flows
The following table summarizes cash flow activities:
Fiscal Year Ended
(In millions) December 28,
2024 December 30,
2023
Net cash provided by operating activities 180.1 121.8
Net cash provided by investing activities 86.8 171.6
Net cash used by financing activities (299.2) (246.3)
Additions to property, plant and equipment (20.2) (14.6)
Depreciation and amortization 26.2 35.1
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.
Cash from operations during 2024 was higher compared to 2023, due primarily to a decrease in net working capital representing a source of cash of $82.6 million. Working capital balances were favorably impacted by a decrease in inventories of $127.1 million and a decrease in accounts receivable of $16.7 million, partially offset by a decrease in other operating liabilities of $47.9 million, an increase in other operating assets of $5.6 million, a decrease in income taxes payable of $4.3 million, and a decrease in accounts payable of $3.4 million. Operating cash flows included non-cash add back for depreciation and amortization expense adjustment of $26.2 million, deferred income tax adjustment of $21.4 million, stock-based compensation expense adjustment of $19.1 million, environmental and other related costs, net of cash payments and recoveries received cash outflow of $13.3 million, the impairment of long-lived assets of $9.3 million, gain on sale of business, trademarks and long-lived assets of $8.5 million, and pension expense adjustment of $0.2 million.
Investing Activities
The Company made capital expenditures of $20.2 million and $14.6 million in years 2024 and 2023, respectively, for building improvements, eCommerce site enhancements, new retail stores, distribution operations improvements and information system
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enhancements. The current year activity includes proceeds from the sale of businesses and trademarks of $102.4 million and company-owned life insurance policy liquidations of $7.9 million.
Financing Activities
The current year debt activity includes net payments under the Revolving Facility of $235.0 million, payments on long-term debt of $39.2 million and proceeds from company-owned life insurance policies of $7.0 million. The Company paid $2.6 million and $5.8 million in 2024 and 2023, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans. The Company received $31.2 million from noncontrolling interests in 2023.
The Company declared cash dividends of $0.40 per share in each of 2024 and 2023 . Dividends paid totaled $32.5 million and $32.6 million for 2024 and 2023 , respectively. A quarterly dividend of $0.10 per share was declared on February 5, 2025 to shareholders of record on April 1, 2025.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company's Consolidated Financial Statements for information related to new accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("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 following critical accounting policies used in determining estimates and assumptions in the amounts reported. Management believes that an understanding of these policies is important to an overall understanding of the Company’s Consolidated Financial Statements. Significant accounting policies are summarized in Note 1 to the Company's Consolidated Financial Statements.
Revenue Recognition and Performance Obligations
Revenue is recognized upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration to be received in exchange for those goods or services. The Company identifies the performance obligation in the contract, determines the transaction price, allocates the transaction price to the performance obligations, and recognizes revenue upon completion of the performance obligation. Revenue is recognized net of variable consideration and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Control of the Company's goods and services, and associated revenue, are transferred to customers at a point in time. The Company’s contract revenue consists of wholesale revenue and direct-to-consumer revenue. Wholesale revenue is recognized for products sourced by the Company when control transfers to the customer generally occurring upon the shipment or delivery of branded products to the customer. Direct-to-consumer includes eCommerce revenue that is recognized for products sourced by the Company when control transfers to the customer once the related goods have been shipped and retail store revenue recognized at time of sale. The point of purchase or shipment was evaluated to best represent when control transfers based on the Company’s right of payment for the goods, the customer’s legal title to the asset, the transfer of physical possession and the customer having the risks and rewards of the goods. Payment terms for the Company's revenue vary by sales channel. Standard credit terms apply to the Company's wholesale receivables, while payment is rendered at the time of sale within the direct-to-consumer channel.
Revenue is recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, customer markdowns, customer rebates and other sales incentives relating to the sale of the Company’s products. These reserves are based on the amounts earned, or to be claimed on the related sales. These estimates take into consideration a range of possible outcomes, which are probability-weighted in accordance with the expected value method for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. Revenue recognized during the year ended December 28, 2024 related to the Company’s contract liabilities was nominal.
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Inventory
The Company values its inventory at the lower of cost or net realizable value. Cost is determined by the last-in, first out ("LIFO") method for certain domestic finished product inventories. Cost is determined using the first-in, first-out (“FIFO”) method for all raw materials, work-in-process and finished product inventories in foreign countries and certain domestic finished product inventories. The average cost of inventory is used for finished product inventories of the Company’s U.S. retail store business inventory. The Company has applied these inventory cost valuation methods consistently from year to year.
The Company reduces the carrying value of its inventories to the lower of cost or net realizable value for excess or obsolete inventories based upon assumptions about future demand and market conditions. If the Company were to determine that the estimated realizable value of its inventory is less than the carrying value of such inventory, the Company would provide a reserve for such difference as a charge to cost of sales. If actual market conditions are different from those projected, adjustments to those inventory reserves may be required. The adjustments would increase or decrease the Company’s cost of sales and net income in the period in which they were realized or recorded. Inventory quantities are verified at various times throughout the year by performing physical inventory counts and subsequently comparing those results to perpetual inventory balances. If the Company determines that adjustments to the inventory quantities are appropriate, an adjustment to the Company’s cost of goods sold and inventory is recorded in the period in which such determination was made.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, which requires that once control is obtained, the consolidated financial statements reflect the operations of an acquired business starting from the acquisition date.
All assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The Company allocates the purchase price of an acquired business to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill. Contingent consideration, if any, is included in the purchase price and is recognized at its fair value on the acquisition date. During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.
The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques and requires management to make judgments that may involve the use of significant estimates. For intangible assets acquired in a business combination, the Company typically uses the income method. Significant estimates used in valuing certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates and discount rates, among other items. If the actual results differ from the estimates and judgments used, the amounts recorded in the Consolidated Financial Statements may be exposed to potential impairment of the intangible assets and goodwill as discussed in the "Goodwill and Indefinite-Lived Intangibles" section below.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill and indefinite-lived intangible assets by reporting unit at least annually, or when indicators of impairment are present, to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon discounted cash flow and market approach analyses, the carrying amounts of such assets are reduced by the estimated difference between the carrying values and estimated fair values. The Company includes assumptions such as a discount rate and expected future operating performance, which includes forecasted revenue growth, earnings before interest, taxes, depreciation and amortization ("EBITDA") margin and cost of capital, which are derived from internal projections and operating plans, as part of a discounted cash flow analysis to estimate fair value.
For goodwill, if the estimated fair value of the reporting unit exceeds its carrying value, no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, the Company records an impairment charge equal to the excess of the recorded goodwill over the fair value of the goodwill.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill and indefinite-lived intangible assets are less than their carrying value. The Company would not be required to quantitatively determine the fair value unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value.
The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the fiscal year for all reporting units. The Company did not recognize any impairment charges for goodwill during 2024 and 2023. In the fourth quarter of 2022, after completion of the annual impairment testing, the Company recorded
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a $48.4 million impairment charge for Sweaty Betty ® goodwill. The Company did not recognize any impairment charges for indefinite-lived intangible assets during 2024. In the third quarter of 2023, after completion of impairment testing, the Company recorded a $38.3 million impairment charge for the Sperry ® trade name. In the fourth quarter of 2022, the Company recognized impairment charges of $191.0 million for the Sperry ® trade name and $189.3 million for the Sweaty Betty ® trade name. Refer to Note 4, “Goodwill and Other Intangible Assets” for additional discussion of the Sweaty Betty ® goodwill impairment and the Sweaty Betty ® and Sperry ® trade name impairments.
Environmental
The Company establishes a reserve for estimated environmental remediation costs based upon the evaluation of currently-available facts with respect to each individual affected site. The costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies, the Company’s commitment to a plan of action, or approval by regulatory agencies. Liabilities for estimated costs of environmental remediation are based primarily upon third-party environmental studies, other internal analysis and the extent of the contamination and the nature of required remedial actions at each site. The Company records adjustments to the estimated costs if there are changes in the scope of the required remediation activity, extent of contamination, governmental regulations or remediation technologies. Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed as incurred. Refer to Note 17, “Litigation and Contingencies” for additional discussion on estimated environmental remediation costs.
Assets related to potential recoveries from other responsible parties are recognized when a definitive agreement is reached and collection of cash is realizable. Recoveries of covered losses under insurance policies are recognized only when realization of the claim is deemed probable.
The Company is subject to legal proceedings and claims related to the environmental matters as described in Note 17 to the Company's Consolidated Financial Statements. The Company routinely assesses the legal and factual circumstances of each matter and the likelihood of any adverse outcomes in these matters, as well as ranges of possible losses. Assessments of lawsuits and claims can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and estimable and reserves may change in future periods due to new developments in each matter. For further discussion, refer to Note 17 “Litigation and Contingencies”.
Retirement Benefits
The determination of the obligation and expense for retirement benefits depends upon the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets, mortality rates and rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, long-term expected asset returns, rates of termination, regulatory requirements and plan changes.
The Company utilizes a bond matching calculation to determine the discount rate used to calculate its year-end pension liability and subsequent year pension expense. A hypothetical bond portfolio is created based on a presumed purchase of individual bonds to settle the plans' expected future benefit payments. The discount rate is the resulting yield of the hypothetical bond portfolio. The bonds selected are listed as high grade by at least two recognized ratings agency and are non-callable, currently purchasable and non-prepayable. The calculated discount rate was 5.75% at December 28, 2024, compared to 5.30% at December 30, 2023. Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company has determined to be 6.96% and 6.88% for fiscal 2024 and 2023, respectively. This rate is based on both actual historical rates of return experienced by the pension assets and the long-term rate of return of a composite portfolio of equity and fixed income securities that reflects the approximate diversification of the pension assets.
Income Taxes
The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that have generally been lower than the U.S. federal statutory income tax rate. A significant amount of the Company’s earnings are generated by its Canadian, European and Asian subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. Income tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates. The Company evaluates the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in the Company’s assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. The carrying value of the Company’s deferred tax assets assumes that the Company will be able to generate sufficient taxable income in future years to utilize these deferred tax assets. If these assumptions change, the
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Company may be required to record valuation allowances against its gross deferred tax assets in future years, which would cause the Company to record additional income tax expense in its consolidated statements of operations. Management evaluates the potential that the Company will be able to realize its gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis.
On a periodic basis, the Company estimates the full year effective tax rate and records a quarterly income tax provision in accordance with the projected full year rate. As the year progresses, that estimate is refined based upon actual events and the distribution of earnings in each tax jurisdiction during the year. This continual estimation process periodically results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the revised anticipated annual rate.
The Company intends to repatriate cash held in foreign jurisdictions and has recorded a deferred tax liability related to estimated state taxes and foreign withholding taxes on the future dividends received in the U.S. from the foreign subsidiaries.
The Company intends to permanently reinvest all non-cash undistributed earnings outside of the U.S. and has, therefore, not established a deferred tax liability on that amount of foreign unremitted earnings. However, if these non-cash undistributed earnings were repatriated, the Company would be required to accrue and pay applicable U.S. taxes and withholding taxes payable to various countries. It is not practicable to estimate the amount of the deferred tax liability associated with these non-cash unremitted earnings due to the complexity of the hypothetical calculation.