Weyco Group Inc. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Weyco Group Inc., a distributor of men's casual, dress, and fashion shoes under the brands Florsheim, Nunn Bush, and Stacy Adams. The report covers the three and nine months ended September 30, 2009. The company operates through North American wholesale, North American retail, and foreign segments. A significant event during the period was the acquisition of a majority interest in Florsheim Australia Pty Ltd. on January 23, 2009, which expanded operations into Australia, South Africa, and Asia Pacific.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Units |
|---|---|---|---|
| Net Sales | $57,943 | $166,904 | Thousands |
| Gross Earnings | $21,671 | $60,273 | Thousands |
| Gross Margin | 37.4% | 36.1% | Percent |
| Earnings from Operations | $4,582 | $10,117 | Thousands |
| Net Earnings (Total) | $3,600 | $8,453 | Thousands |
| Net Earnings Attributable to Weyco | $3,360 | $8,049 | Thousands |
| Diluted EPS | $0.29 | $0.70 | Per Share |
| Cash and Cash Equivalents | $10,709 | $10,709 | Thousands (Sep 30) |
| Marketable Securities | $47,645 | $47,645 | Thousands (Sep 30) |
| Short-term Borrowings | $0 | $0 | Thousands |
| Operating Cash Flow (9 Months) | N/A | $17,876 | Thousands |
Material Changes vs. Prior Period
- Revenue: Consolidated net sales increased 1% ($0.8 million) in the third quarter compared to 2008, driven by $8.2 million in sales from the new Florsheim Australia acquisition. However, excluding the acquisition, North American wholesale sales declined 13% and retail same-store sales declined 10% due to a challenging retail environment.
- Profitability: Operating earnings decreased 28% to $4.6 million in the third quarter (from $6.3 million in 2008). Net earnings attributable to Weyco declined 23% to $3.4 million. Year-to-date operating earnings dropped 49% to $10.1 million.
- Expenses: Selling and administrative expenses increased significantly ($2.5 million in Q3, $7.1 million YTD) primarily due to the inclusion of Florsheim Australia operations and one-time acquisition costs of $400,000.
- Balance Sheet: The company eliminated its short-term borrowings, reducing debt from $1.25 million at year-end 2008 to $0. Total assets increased to $199.9 million, largely due to the acquisition and growth in accounts receivable.
Outlook, Risks, and Management Commentary
- Management Commentary: Management attributes declines in North American sales to reduced consumer demand, leaner retailer inventory levels, and store closures. The Florsheim acquisition is expected to generate approximately $25 million in consolidated sales for 2009.
- Liquidity: The company maintains a strong liquidity position with $58.4 million in cash and marketable securities. It has a $50 million revolving credit facility with no outstanding borrowings and is in compliance with all covenants.
- Capital Allocation: The company continues to repurchase common stock (116,164 shares repurchased YTD for $2.6 million) and increased its quarterly dividend to $0.15 per share in April 2009.
- Risks: The filing references standard risk factors from the 2008 10-K, including economic conditions affecting consumer spending and the retail environment. No new material risks were disclosed.
Investor Verification Checklist
- Verify the integration progress and performance of the Florsheim Australia acquisition against the projected $25 million annual sales target.
- Monitor the trend in North American wholesale sales, specifically the decline in the Florsheim brand (-21.3% in Q3) versus the more resilient Nunn Bush brand.
- Review the sustainability of gross margins given the pressure from overseas vendor cost increases and retailer pricing demands.
- Confirm the status of the $50 million credit facility renewal, which expires on April 30, 2010.
- Assess the impact of the $1 million pension contribution made in Q3 on future cash flow requirements.