Business Context and Reporting Period
Weyco Group, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2014. The company designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Reportable segments are North American wholesale, North American retail and other international operations.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $74.9 million | $73.6 million | 2% increase |
| Gross earnings | $27.4 million | $27.7 million | 1% decrease |
| Gross margin | 36.5% | 37.6% | Down 110 basis points |
| Earnings from operations | $4.9 million | $4.7 million | 4% increase |
| Operating margin | 6.5% | 6.4% | Slight increase |
| Net earnings attributable to Weyco | $3.2 million | $3.2 million | Approximately flat |
| Diluted earnings per share | $0.29 | $0.30 | Decrease |
| Operating cash flow | $8.3 million | $3.7 million | Increase |
- North American wholesale sales increased 3% to $56.7 million, led by BOGS/Rafters, Florsheim and Nunn Bush. Wholesale operating earnings declined 4% to $3.6 million.
- North American retail sales decreased 9% to $5.2 million, partly because the company operated six fewer domestic stores. Same-store sales, including U.S. internet sales, declined 1%; retail operating earnings declined 5% to $418,000.
- Other operations sales increased 3% to $13.0 million, while operating earnings increased 72% to $884,000, primarily due to improved Florsheim Australia retail performance.
- Cash and cash equivalents were $16.1 million at March 31, 2014. Marketable securities totaled $31.4 million at amortized cost, producing cash and marketable securities of approximately $47.5 million.
- Outstanding short-term borrowings were $9.0 million, down from $12.0 million at December 31, 2013. The company had a $60 million unsecured revolving credit facility expiring November 5, 2014, with borrowings priced at LIBOR plus 0.75%.
- Total assets were $256.6 million and total equity was $198.9 million at quarter-end. The long-term pension liability was $22.3 million.
- The effective tax rate was 35.0%, compared with 36.0% in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Sales growth was modest, but gross margin contracted because of currency pressure, particularly the weaker Canadian dollar against the U.S. dollar.
- Selling and administrative expenses declined to $22.5 million from $23.0 million, supporting the increase in operating earnings despite lower gross earnings.
- Operating cash flow more than doubled, primarily from changes in accounts receivable, inventory, accrued liabilities and other working-capital balances.
- Investing activities used $1.4 million, including $3.5 million of marketable-security purchases and $300,000 of capital expenditures.
- Financing activities used $6.8 million, including $3.9 million of dividends, $81,000 of share repurchases and net debt repayments of approximately $3.0 million.
- The company declared a quarterly dividend of $0.18 per share; no dividend was declared in the first quarter of 2013 because dividend timing had been accelerated into 2012.
- Comprehensive income attributable to Weyco increased to $3.2 million from $3.0 million, aided by favorable foreign-currency and pension-related adjustments.
Outlook, Commentary, Risks and Unusual Items
- Management estimated 2014 capital expenditures of $2 million to $3 million.
- Management stated that cash, marketable securities, operating cash flow and available borrowing facilities should provide adequate liquidity for at least one year, while noting that no assurance can be given.
- The company expected to evaluate liquidity uses including capital expenditures, share repurchases and potential acquisitions.
- The long, harsh winter benefited BOGS winter-boot sales, particularly through internet retailers. Easter occurred three weeks later in 2014, shifting some Stacy Adams and Umi shipments from March into April; management said the year-to-date shortfall had substantially narrowed for Stacy Adams and that Umi had exceeded prior-year shipments by the end of April.
- A contingent consideration liability related to the 2011 Bogs acquisition was approximately $5.1 million at March 31, 2014. The second formula-driven payment is due in March 2016; the first payment of $1.27 million was made in March 2013.
- Foreign-exchange exposure included forward contracts covering purchases of $6.8 million of U.S. dollars by Florsheim Australia and $8.0 million of Canadian dollars. The filing reported no significant quarter-end gains or losses on these contracts.
- As of March 31, 2014, $3.6 million of cash and cash equivalents was held by foreign subsidiaries.
- Management reported no material changes to contractual obligations, market risks or previously disclosed risk factors. No legal proceedings were reported.
- The company cautioned that quarterly results are not necessarily indicative of full-year results and that actual outcomes may differ from forward-looking statements due to economic, retail, currency and other risks.
Investor Verification Checklist
- Verify renewal, refinancing or replacement of the $60 million revolving credit facility expiring November 5, 2014.
- Monitor gross-margin trends and the effects of Canadian- and Australian-dollar movements.
- Assess whether wholesale growth, especially BOGS, can offset declining North American retail sales and store closures.
- Review the timing and amount of the Bogs contingent consideration payment due in March 2016.
- Reconcile the strong first-quarter operating cash flow with working-capital movements and assess sustainability.
- Track the company’s stated $2 million to $3 million 2014 capital-expenditure outlook, dividend policy and share-repurchase activity.
- Evaluate pension obligations, foreign-subsidiary cash balances and international operating exposure.