Business Context and Reporting Period
Company: WEYCO GROUP INC
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Distributor of men's casual, dress, and fashion shoes under brands including Florsheim, Nunn Bush, and Stacy Adams. Operations consist of wholesale distribution and a retail division (38 stores as of period end).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Net Sales | $56.1 million | $160.5 million |
| Gross Earnings | $20.6 million (36.7% margin) | $59.1 million (36.8% margin) |
| Earnings from Operations | $7.9 million | $21.5 million |
| Net Earnings | $5.2 million | $14.1 million |
| Diluted EPS | $0.43 | $1.17 |
| Cash and Cash Equivalents | $5.3 million | $5.3 million (Balance Sheet) |
| Short-term Borrowings | $11.6 million | $11.6 million (Balance Sheet) |
| Operating Cash Flow (9mo) | $(2.8) million (Net cash used) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 1.6% for the quarter and 1.7% for the nine-month period compared to 2005.
- Profitability: Net earnings rose 7.2% for the quarter and 8.2% for the nine-month period. Diluted EPS increased from $0.40 to $0.43 (quarter) and $1.09 to $1.17 (nine months).
- Margins: Gross margins improved to 36.7% (quarter) and 36.8% (nine months) from 35.5% and 35.6% respectively in 2005, driven by higher margins on new footwear and favorable purchase prices.
- Cash Flow: Operating cash flow turned negative ($2.8 million used) for the nine months ended September 30, 2006, compared to $21.7 million provided in the prior year. This was primarily due to a strategic build-up of inventory levels ($8.5 million increase) and a $1 million pension contribution.
- Liquidity: Cash and cash equivalents decreased significantly from $22.8 million at year-end 2005 to $5.3 million at September 30, 2006.
Outlook, Risks, and Management Commentary
- Customer Concentration Risk: The loss of a significant customer (acquired by another retailer in 2005) resulted in a $3.1 million sales decline for the quarter and $6.1 million for the nine months. Management expects total 2006 sales volume loss from this customer to be approximately $9.2 million.
- Brand Performance: Stacy Adams and Florsheim sales grew despite the major customer loss, attributed to successful brand evolution toward casual and contemporary styles. Nunn Bush sales declined due to the customer loss, though some volume was recovered with other accounts.
- Retail Expansion: Retail sales increased 11% for the quarter, driven by five new stores. Same-store sales were up 6% for the quarter and 2% for the nine months.
- Capital Allocation: The company has $50 million available under its borrowing facility (with $11.6 million drawn) and 1.4 million shares remaining under its stock repurchase program. Management plans to evaluate dividends, repurchases, and acquisitions.
- Accounting Changes: The company is evaluating the impact of new accounting standards (FIN 48, SFAS 158, SFAS 157) effective in 2007 and 2008.
Investor Verification Checklist
- Inventory Levels: Verify the necessity and turnover rate of the $8.5 million increase in inventory, which drove the negative operating cash flow.
- Customer Concentration: Assess the long-term impact of the $9.2 million projected sales loss from the major customer and the success of replacement accounts.
- Liquidity Position: Monitor the reduction in cash reserves from $22.8 million to $5.3 million and the reliance on the $50 million credit facility.
- Margin Sustainability: Confirm if the improved gross margins (up ~1.2%) are sustainable given the shift in product mix and potential pricing pressures.
- Debt Covenants: Ensure continued compliance with the net worth covenant on the $50 million borrowing facility expiring April 30, 2007.