Weyco Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2012, filed August 9, 2012. Weyco designs and markets footwear under Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi brands. Operations are reported as North American wholesale, North American retail, and other international businesses. The company operated 26 company-owned U.S. retail stores and an Internet business at June 30, 2012.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $60.3 million, versus $56.6 million | $135.6 million, versus $121.7 million |
| Gross earnings | $22.9 million, versus $22.7 million | $50.9 million, versus $47.5 million |
| Gross margin | 37.9%, versus 40.1% | Approximately 37.5%, versus 39.0% |
| Earnings from operations | $3.4 million, versus $2.7 million | $9.2 million, versus $7.5 million |
| Net earnings attributable to Weyco | $2.2 million, versus $1.9 million | $6.1 million, versus $5.3 million |
| Diluted EPS | $0.20, versus $0.17 | $0.55, versus $0.47 |
| Operating margin | 5.6%, versus 4.8% | 6.8%, versus 6.2% |
Second-quarter wholesale sales increased 11% to $43.6 million, while retail sales declined 5% to $5.6 million and other sales declined 1% to $11.1 million. Year-to-date wholesale sales increased 15% to $100.2 million, retail sales declined 2% to $11.2 million, and other sales increased 6% to $24.2 million.
Cash flow from operating activities was $6.6 million in the first half of 2012, down from $14.9 million in the prior-year period. Investing activities provided $0.6 million, compared with $26.3 million used in the prior year, which included the Bogs acquisition. Financing activities used $8.3 million, including $3.5 million of dividends and $3.8 million of share repurchases.
At June 30, 2012, cash and cash equivalents were $9.3 million and marketable securities totaled $48.6 million at amortized cost, for approximately $58 million of cash and marketable securities. Short-term borrowings were $34.0 million, compared with $37.0 million at December 31, 2011. The company had a $50 million unsecured revolving credit facility, with borrowings at approximately 1.2% and availability subject to the facility terms. The company was in compliance with its minimum-net-worth covenant.
Total assets were $263.2 million, compared with $273.5 million at December 31, 2011. Total equity was $173.6 million, compared with $171.4 million. The pension liability was $27.1 million, and accumulated other comprehensive loss was $13.3 million.
Material Changes Versus Prior Comparable Period
- Sales growth was led by the North American wholesale business, with higher volumes across most brands. Stacy Adams, Nunn Bush, and Florsheim sales increased in the second quarter by 13%, 9%, and 5%, respectively.
- BOGS/Rafters sales increased 34% in the second quarter and 92% year to date. Comparability is affected because Bogs was acquired on March 2, 2011; 2012 includes a full first half, while 2011 includes only the post-acquisition period.
- Gross margins declined because of higher labor, material, and freight costs at overseas factories, primarily in China and India. Wholesale gross margin declined to 29.3% from 31.3% in the second quarter and to 30.0% from 31.1% year to date.
- Selling and administrative expenses declined as a percentage of sales, aided by operating leverage and reductions of approximately $0.7 million in the quarter and $1.2 million year to date from remeasurement of Bogs contingent consideration.
- Retail same-store sales increased 5% in the quarter and 9% year to date, but total retail sales declined because the company had five fewer stores than a year earlier. Retail operating earnings were reduced by a $0.2 million one-time lease termination fee.
- Operating cash flow declined primarily because of changes in operating assets and liabilities, especially accounts payable.
- The company repurchased 165,986 shares for $3.8 million during the first half and had 942,961 shares remaining under its repurchase authorization at June 30, 2012.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated 2012 capital expenditures of $7 million to $8 million.
- Management stated that cash, marketable securities, operating cash flow, and available borrowing facilities should adequately support business needs for at least one year, although no assurance was provided.
- Key risks include dependence on U.S. economic and retail conditions, retailer inventory levels, overseas sourcing costs, foreign currency movements, and execution of the Bogs brands.
- The mild U.S. winter reduced Bogs sales in late 2011 and early 2012 and may have left retailers with excess inventory.
- Bogs contingent consideration had a fair value of $8.5 million at June 30, 2012, consisting of $2.0 million current and $6.5 million long term. Potential aggregate payments were estimated at $5 million to $12 million, based on future Bogs sales and gross margins. The liability was reduced primarily because projected Bogs sales were lower than originally expected.
- A Bogs holdback payment was due in the third quarter of 2012, with additional contingent payments due in 2013 and 2016.
- No material legal proceedings or changes to previously disclosed risk factors were reported. Management concluded that disclosure controls and internal control over financial reporting were effective, with no significant changes during the quarter.
Investor Verification Points
- Verify whether wholesale growth and BOGS performance offset continued gross-margin pressure from overseas production costs.
- Review the timing, amount, and funding of the Bogs holdback and contingent consideration payments.
- Assess operating cash-flow conversion, particularly changes in accounts payable and working capital.
- Monitor the $34 million of borrowings, the April 30, 2013 credit-facility maturity, covenant compliance, and interest-rate exposure.
- Evaluate whether retail store closures and improved same-store sales can restore retail profitability.
- Compare actual capital expenditures with management’s $7 million to $8 million estimate and assess the sustainability of dividends and share repurchases.
- Consider the effect of the one-time contingent-consideration gain and the $0.2 million lease termination fee when evaluating underlying earnings.