WEYCO GROUP INC quarterly report, Q3 FY2022

Weyco Group, Inc. Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2022. The filing is unaudited. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. Operations are reported as North American Wholesale, North American Retail, and Other, primarily Florsheim Australia.

Financial Results and Key Metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net sales	$97.0 million	$61.8 million	$252.7 million	$166.3 million
Gross earnings	$39.4 million	$24.7 million	$98.3 million	$66.7 million
Gross margin	40.6%	40.0%	38.9%	40.1%
Operating earnings	$14.2 million	$6.7 million	$25.3 million	$12.9 million
Net earnings	$10.8 million	$5.1 million	$19.3 million	$10.2 million
Diluted EPS	$1.12	$0.52	$2.01	$1.05
Cash dividends declared per share	$0.24	$0.24	$0.72	$0.72

Wholesale sales increased 63% in Q3 and 66% for the nine-month period; wholesale operating earnings increased 114% and 118%, respectively.
Retail sales increased 13% in Q3 and 24% year to date, but retail operating earnings declined 41% and 17%, respectively, due primarily to higher outbound freight and advertising costs.
Other sales increased 54% in Q3, reflecting recovery in Australia, while nine-month sales declined 1% because of the closure of Florsheim Europe. Other operating results improved from a loss of $682,000 to earnings of $476,000 in Q3.
Q3 effective tax rate was 24.4%; the nine-month rate was 24.8%.

Cash Flow, Balance Sheet, Debt, and Liquidity

Cash used in operating activities was $42.1 million in the first nine months of 2022, compared with $9.7 million of cash provided in the prior-year period. The principal driver was a $41.1 million inventory investment.
Inventory was $112.0 million at September 30, 2022, versus $71.0 million at December 31, 2021 and $52.9 million at September 30, 2021.
Cash and cash equivalents were $9.8 million. Cash, short-term investments, and marketable securities totaled approximately $18.7 million.
The Company had $34.7 million outstanding under its revolving credit facility at September 30, 2022. The facility limit was increased to $50.0 million and maturity extended to September 28, 2023. Borrowings bear interest at one-month SOFR plus 145 basis points; the reported rate at quarter-end was 4.49%.
The credit facility is secured by general business assets and includes customary covenants, including a minimum tangible net worth covenant. The Company was in compliance at quarter-end.
Financing activities included $71.8 million of borrowings and $37.2 million of repayments. The Company paid $6.9 million in dividends and repurchased $3.3 million of common stock during the first nine months.
Capital expenditures were $1.5 million year to date. Management estimated full-year 2022 capital expenditures of $2.0 million to $2.5 million.
Management believes available liquidity and borrowing capacity will support cash needs for at least one year, although no assurance is provided.

Material Changes Versus Prior Comparable Period

Consolidated Q3 sales rose 57%, operating earnings rose 111%, and net earnings rose more than 100% year over year.
Year-to-date sales rose 52%, operating earnings rose 96%, and net earnings rose 89%. Management noted that year-to-date comparisons are affected by COVID-19 impacts on the 2021 first quarter.
Q3 wholesale gross margin improved to 36.3% from 34.6%, helped by higher selling prices and lower inbound freight costs. Year-to-date wholesale gross margin declined to 33.5% from 33.8%, primarily because of elevated first-quarter freight costs.
Retail profitability weakened despite higher sales because e-commerce shipping and digital advertising costs increased.
Interest expense increased because of higher borrowings, while interest income declined because cash and investment balances were lower.
Accumulated other comprehensive loss increased to $26.7 million from $24.8 million at December 31, 2021, primarily reflecting foreign-currency translation losses.

Guidance, Outlook, Risks, and Unusual Items

Management expects fourth-quarter wholesale sales to be below the unusually strong prior-year fourth quarter, because supply-chain delays shifted some 2021 third-quarter shipments into the fourth quarter. Management nevertheless expects the second half of 2022 to exceed the comparable 2021 period.
Management reported strong demand for legacy brands and BOGS, but noted that the outdoor market is becoming oversupplied and demand has softened relative to 2021.
Forsake’s rollout has been slower than anticipated because of supply-chain challenges. New styles are planned for Fall 2023, with a potential relaunch in the second half of 2023.
The Forsake contingent consideration liability was reduced by $407,000 to $950,000 after performance thresholds were not met; the resulting gain was recorded in selling and administrative expenses. Estimated possible aggregate payments ranged from $400,000 to $1.2 million.
The Company recorded a $350,000 impairment of the Forsake trademark after reducing projected sales. The trademark carrying value was reduced from $1.9 million to an estimated fair value of $1.55 million.
Management cited inflation, higher interest rates, changing consumer spending, economic weakness in the United States or Australia, the war in Ukraine and related sanctions, COVID-19 developments, supply-chain execution, foreign-exchange movements, and competitive and consumer-trend risks.
The Company had foreign-exchange contracts covering the purchase of $1.9 million of U.S. dollars, expiring in the fourth quarter of 2022; no significant unrealized gain or loss was reported at quarter-end.
The Company expects to adopt the current expected credit loss standard in the first quarter of 2023 and was still evaluating its impact.
No legal proceedings were reported. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.

Investor Verification Checklist

Verify whether elevated inventory converts to sales without requiring material markdowns, especially in BOGS and other outdoor products.
Monitor operating cash flow, borrowing levels, interest rates, and compliance with the minimum tangible net worth covenant.
Assess the sustainability of wholesale demand and the effect of shipment timing on fourth-quarter comparisons.
Track retail e-commerce profitability as freight and digital advertising costs remain elevated.
Review Forsake sales projections, trademark valuation, and contingent consideration payments.
Confirm the effect of foreign-exchange movements, inflation, supply-chain conditions, and consumer spending trends on future margins.
Note that the filing does not provide formal consolidated revenue or earnings guidance beyond the qualitative outlook and capital expenditure estimate.