WEYS

Business Context and Reporting Period

Company: WEYCO GROUP INC
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: Weyco Group is a distributor of men's casual, dress, and fashion shoes, primarily under the brands "Florsheim," "Nunn Bush," and "Stacy Adams." Operations are divided into wholesale distribution (selling to retailers) and retail sales (company-owned stores and internet). The company sources inventory from third-party overseas manufacturers, with the majority of purchases denominated in U.S. dollars.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7.2% for the quarter and 7.5% for the six-month period compared to the prior year.
  • Florsheim: Sales rose 23.0% (quarter) and 20.8% (six months), driven by the company taking over direct distribution in Canada (previously a licensee) and increased sales to department stores.
  • Nunn Bush: Sales increased 7.8% (quarter) and 1.5% (six months), aided by the "Comfort Gel" product line, though offset by the loss of a significant customer.
  • Stacy Adams: Sales declined 12.2% (quarter) due to an early Easter and struggles among independent retailers, though year-to-date sales were flat due to strength in major chains.
• Profitability: Net earnings increased 11.2% for the quarter and 8.9% for the six-month period. The effective tax rate decreased to 36.5% (quarter) and 36.9% (six months) from 38.2% and 37.7% in the prior year, largely due to increased municipal bond interest income.
• Customer Concentration Impact: The company noted a loss of $600,000 in sales for the quarter and $2.9 million for the six months from a specific customer acquired by another retailer in late 2005, which discontinued Weyco's product lines.
• Liquidity: Cash and cash equivalents increased from $15.3 million (Dec 31, 2006) to $18.2 million (June 30, 2007). Short-term borrowings were reduced from $11.0 million to $5.6 million.

Guidance, Outlook, and Risks

• Capital Allocation: The company plans to continue repurchasing common stock and increasing dividends. A quarterly dividend of $0.11 per share was declared (a 22% increase), expected to increase annual dividend payments by approximately $900,000. In the first half of 2007, the company repurchased 282,699 shares for $7.3 million.
• Capital Expenditures: Expected to be between $3 million and $4 million for the full year 2007, driven by retail store remodeling and new openings.
• Margin Pressures: Management noted pricing pressures from overseas suppliers due to a weakening U.S. dollar and increased labor/material costs. The company intends to manage costs and pricing to maintain margins.
• Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ due to risks including economic conditions, the retail environment, and foreign currency fluctuations.
• Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on Jan 1, 2007, with no material effect on financial statements. SFAS 157 and 159 are pending adoption in 2008.

Investor Verification Checklist

• Customer Concentration: Verify the extent of reliance on major department store chains versus independent retailers, given the noted volatility in independent retail sales.
• Canadian Operations: Assess the sustainability of the sales growth in Florsheim attributed to the new direct Canadian distribution model.
• Margin Sustainability: Monitor future quarters for the impact of rising overseas labor/material costs and currency fluctuations on gross margins.
• Share Repurchase Program: Confirm the remaining capacity under the buyback program (approx. 1.0 million shares available as of June 30, 2007) and the company's commitment to continued buybacks.
• Debt Covenants: Review the $50 million borrowing facility terms, specifically the net worth covenant, to ensure continued compliance.