Weyco Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2015, compared with the first quarter of 2014. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Operations comprise North American wholesale, North American retail, and international businesses classified as “Other.”
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $78.1 million | $74.9 million | +4% |
| Gross earnings | $28.7 million | $27.4 million | +5% |
| Gross margin | 36.8% | 36.5% | +0.3 percentage points |
| Earnings from operations | $5.8 million | $4.9 million | +19% |
| Operating margin | 7.4% | 6.5% | +0.9 percentage points |
| Net earnings attributable to Weyco | $3.6 million | $3.2 million | +13% |
| Diluted EPS | $0.33 | $0.29 | +14% |
| Net cash from operating activities | $1.6 million | $8.3 million | Down $6.7 million |
The effective tax rate increased to 37.5% from 35.0%, primarily because tax-exempt municipal bond income represented a lower percentage of U.S. pretax earnings.
At March 31, 2015, cash and cash equivalents were $12.1 million, marketable securities totaled $29.0 million, and outstanding short-term borrowings were $6.6 million. Total assets were $266.2 million and total equity was $198.7 million. The Company had a $60 million unsecured revolving credit facility expiring November 5, 2015; borrowings bore interest at 0.93% at quarter-end.
Material Changes Versus the Prior Comparable Period
- North American wholesale sales increased 8% to $61.1 million, driven primarily by Stacy Adams, BOGS, and Nunn Bush. Wholesale operating earnings increased 35% to $4.8 million.
- Wholesale gross margin increased to 31.0% from 30.4%, while wholesale selling and administrative expenses declined to 23% of sales from 24%.
- North American retail sales decreased 5% to $4.9 million, and retail operating earnings declined 35% to $272,000. Brick-and-mortar sales fell because of a 9% same-store sales decline and two fewer stores; internet sales increased to $2.4 million from $2.2 million.
- International “Other” sales decreased 8% to $12.0 million and operating earnings decreased 20% to $703,000, substantially reflecting unfavorable foreign-currency translation. Florsheim Australia sales increased 11% in local currency, while Florsheim Europe sales declined.
- Operating cash flow declined primarily because of changes in operating assets and liabilities. Inventory reductions provided $7.8 million of cash, but accounts payable and accrued liabilities used significant cash.
- Comprehensive income declined to $2.3 million from $3.5 million, mainly because of a $1.6 million foreign-currency translation loss.
- Pension expense increased to $937,000 from $678,000, primarily due to higher net amortization and deferral.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated 2015 capital expenditures of $2 million to $3 million; first-quarter capital expenditures were $531,000.
- Management stated that cash, marketable securities, operating cash flow, and available borrowing capacity should provide adequate liquidity for at least one year, although no assurance was given.
- The Company intends to evaluate liquidity uses including capital expenditures, stock repurchases, and potential acquisitions. It repurchased 85,901 shares for $2.4 million during the quarter and, after a May 5, 2015 authorization, had approximately 1.2 million shares available for repurchase.
- A contingent consideration payment related to the 2011 BOGS acquisition is due in March 2016. Its estimated fair value was approximately $5.7 million at March 31, 2015 and was recorded in accrued liabilities.
- Foreign exchange exposure remains material. The Company had forward contracts covering Canadian- and Australian-dollar exposures, with no significant quarter-end gains or losses.
- Key risks include U.S. economic and retail conditions, foreign-currency movements, reliance on overseas manufacturers, brand and product demand, inventory management, and the risks identified in the 2014 Form 10-K. The filing reports no material changes to disclosed risk factors, contractual obligations, or market-risk disclosures.
- The filing reports no legal proceedings and no significant changes affecting internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the improvement in wholesale performance with the continued weakness in retail and international operations.
- Monitor operating cash conversion, particularly accounts payable, accrued liabilities, inventory, and the decline from $8.3 million to $1.6 million in first-quarter operating cash flow.
- Assess liquidity ahead of the $5.7 million estimated BOGS contingent payment due in March 2016 and the November 2015 revolving-credit maturity.
- Evaluate the effect of currency movements on international revenue, earnings, accumulated other comprehensive loss, and future results.
- Review the sustainability of gross-margin gains, the higher tax rate, increased pension expense, dividends, and expanded share repurchase activity.
- Confirm that quarterly results are not necessarily indicative of full-year performance, as expressly noted by management.