WEYCO GROUP INC annual report, FY2020

Weyco Group, Inc. 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter filing, although management reported that the Company returned to profitability in the fourth quarter.

Business context

Weyco designs and distributes footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS and Rafters brands. Operations comprise North American wholesale, North American retail, and other businesses in Australia, South Africa, Asia Pacific and Europe. Products are sourced primarily from independent manufacturers in China and India. COVID-19-related store closures, reduced foot traffic and weaker demand for dress and occasion footwear materially affected 2020 results.

Wholesale represented 78% of consolidated sales, retail 11%, and other businesses 11%.
BOGS performed comparatively well as outdoor and lifestyle footwear demand increased.
The Company decided to close Florsheim Europe, which generated $2.6 million of 2020 sales and was not expected to have a material consolidated impact.

Financial performance and key metrics

Metric	2020	2019	Change
Net sales	$195.4 million	$304.0 million	Down 36%
Gross earnings	$78.6 million	$124.0 million	Down 37%
Gross margin	40.2%	40.8%	Down approximately 60 basis points
Operating income (loss)	$(7.6) million	$27.0 million	Declined $34.6 million
Operating margin	(3.9)%	8.9%	Down approximately 12.8 percentage points
Net income (loss)	$(8.5) million	$20.9 million	Declined $29.4 million
Diluted EPS	$(0.87)	$2.10	Declined $2.97
Cash flow from operations	$40.0 million	$9.4 million	Increased $30.6 million

North American wholesale sales declined 37% to $152.2 million; operating income declined to $1.0 million from $27.8 million.
North American retail sales declined 15% to $21.5 million; the segment moved to a $1.1 million operating loss from $2.8 million of operating income.
Other-business sales declined 41% to $21.7 million; operating loss increased to $7.5 million from $3.5 million.
Wholesale gross margin declined to 35.5% from 36.6%, primarily due to China tariffs and higher overseas freight costs. Consolidated retail gross margin was approximately unchanged at 64.8%.
North American e-commerce sales increased 9%; BOGS U.S. e-commerce sales increased 53% and Canadian e-commerce sales increased nearly 80%.

Cash, liquidity, debt and balance sheet

Cash and cash equivalents were $32.5 million at December 31, 2020, compared with $9.8 million at year-end 2019.
Marketable securities totaled $15.0 million at amortized cost, bringing cash and marketable securities to approximately $47.5 million.
No borrowings were outstanding under the $30 million revolving credit facility at year-end. The highest 2020 balance was $8.5 million.
The credit facility bears interest at LIBOR plus 1.35% and expires November 4, 2021; it includes customary covenants, including a minimum tangible net worth covenant.
Inventory declined to $59.0 million from $86.7 million, and accounts receivable declined to $34.6 million from $51.5 million.
Total assets were $256.7 million, total liabilities were $68.8 million, and total equity was $187.9 million at December 31, 2020.
Operating cash flow was supported by reductions in inventory and receivables, including $27.5 million of cash from inventory changes.
Capital expenditures were $3.4 million, cash dividends paid were $11.8 million, and share repurchases totaled $2.1 million for 106,490 shares.
Management expected 2021 capital expenditures of $1.0 million to $2.0 million and believed available liquidity and borrowing capacity would support operating needs for at least one year.

Material changes versus 2019

COVID-19 caused significant revenue contraction, store closures and reduced demand for dress and dress-casual footwear.
Two large wholesale customers, J.C. Penney and Tailored Brands, filed for bankruptcy. Weyco recorded a net $4.3 million write-off of related receivables.
Operating expenses included restructuring and temporary-closure costs, retail lease termination charges, retail asset impairments and obsolete-inventory reserves. These were partly offset by approximately $5.4 million of government wage and rent subsidies across the businesses.
Retail operations closed three unprofitable U.S. brick-and-mortar stores during 2020; the U.S. store base was reduced to four locations in early 2021.
The Company reduced advertising spending by $5.2 million and consolidated distribution and operating costs in response to lower demand.
The unfunded pension obligation increased to $34.0 million from $28.0 million, primarily because of lower discount rates.
Goodwill of $11.1 million and trademarks of $32.9 million were tested for impairment multiple times during 2020. No impairment charges were recorded, although the wholesale reporting unit’s estimated fair value exceeded carrying value by 37% at year-end.

Outlook, commentary, risks and unusual items

Management expected at least the first half of 2021 to remain affected by the pandemic, with an improved retail environment and higher sales potentially developing in the second half as vaccinations progressed. Management did not provide formal numerical revenue or earnings guidance.

Management expected traditional dress-footwear demand to improve as employees returned to offices and social events resumed, but acknowledged that timing was uncertain.
The Company planned to expand legacy brands into more casual and lifestyle categories and continue investing in e-commerce.
Management believed leaner operations and the Company’s balance sheet positioned it for growth and profitability as conditions improved.
Key risks include renewed COVID-19 disruptions, customer bankruptcies and slower collections, supply-chain interruptions, foreign sourcing concentration, tariffs, freight and raw-material costs, changing consumer preferences, foreign exchange exposure, retail-store performance, cybersecurity and potential goodwill, trademark or long-lived-asset impairments.
The Company had $43.2 million of inventory purchase commitments due within one year.
The pension plan’s projected benefit obligation and supplemental plan obligation were approximately $56.0 million and $21.1 million, respectively, at year-end; management expected 2021 required cash contributions to be immaterial.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective.

Important facts for investors to verify

Whether wholesale demand for Florsheim, Stacy Adams and Nunn Bush recovered as offices and social activities reopened.
Whether BOGS demand and inventory replenishment remained strong after the 2020 outdoor-footwear surge.
Collections from customers affected by bankruptcy and the adequacy of receivable allowances.
The status, renewal terms and covenant compliance of the revolving credit facility after its November 2021 expiration.
The sustainability of cash flow after inventory reductions and the Company’s ability to maintain dividends and share repurchases.
Potential future impairment charges for goodwill, trademarks, retail assets or right-of-use assets if the recovery is delayed.
Progress in closing Florsheim Europe and improving profitability in Australia and New Zealand.
Exposure to tariffs, freight costs, foreign suppliers, raw materials and pandemic-related supply-chain disruptions.