Weyco Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. The filing is unaudited and should be read with the 2021 Form 10-K. Weyco designs and markets footwear under Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. Reportable segments are North American Wholesale and North American Retail; “Other” primarily represents Florsheim Australia after the closure of Florsheim Europe.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $74.4 million | $57.6 million | $155.7 million | $104.5 million |
| Gross earnings | $29.8 million | $22.7 million | $58.9 million | $42.0 million |
| Gross margin | 40.0% | 39.4% | 37.8% | 40.2% |
| Earnings from operations | $5.7 million | $4.5 million | $11.1 million | $6.2 million |
| Net earnings | $4.5 million | $3.8 million | $8.5 million | $5.1 million |
| Diluted earnings per share | $0.47 | $0.39 | $0.89 | $0.53 |
| Cash dividends per share | $0.24 | $0.24 | $0.48 | $0.48 |
- Q2 operating margin was approximately 7.6%, versus 7.9% in the prior-year quarter. Six-month operating margin was approximately 7.1%, versus 5.9% in 2021.
- Six-month operating cash flow was negative $18.7 million, compared with positive $27.1 million in 2021, primarily because inventory increased by $24.4 million and accounts payable declined by $12.3 million.
- Capital expenditures were $0.7 million in the first half. Management expects full-year 2022 capital expenditures of $1.0 million to $2.0 million.
- Cash and cash equivalents were $7.6 million at June 30, 2022, compared with $19.7 million at December 31, 2021. Cash, short-term investments, and marketable securities totaled approximately $17.0 million.
- Inventory was $95.5 million, compared with $71.0 million at year-end 2021. Approximately 40% was in transit and 60% was held in distribution centers.
- Total assets were $268.8 million and total equity was $203.4 million at June 30, 2022.
- The company had $5.4 million outstanding under a $40.0 million secured revolving credit facility at an interest rate of 2.47%. The facility expires November 4, 2022.
Material Changes Versus Prior Comparable Period
- Q2 sales increased 29%, while six-month sales increased 49%. Management described both as records for the respective periods.
- Wholesale sales rose 41% in Q2 and 67% year to date; wholesale operating earnings rose 58% and 125%, respectively. Growth reflected strong demand, higher shipments, price increases, and improved inbound freight costs in Q2.
- Retail sales rose 20% in Q2 and 29% year to date, but retail operating earnings declined 5% in Q2 and were approximately flat year to date because outbound freight, advertising, and other e-commerce costs increased.
- “Other” sales declined 16% in Q2 and 17% year to date, primarily because Florsheim Europe was closed and Florsheim Australia reported lower U.S.-dollar sales. Other operating earnings declined 49% in both periods.
- Consolidated Q2 gross margin improved modestly, but year-to-date gross margin declined from 40.2% to 37.8%, primarily because of higher wholesale inbound freight costs incurred in the first quarter.
- The company repurchased 104,733 shares for $2.5 million during the first half and paid $4.6 million in dividends. It had authorization to repurchase approximately 1.1 million additional shares at June 30.
- Cash declined by $12.1 million during the first half, reflecting inventory investment, dividends, share repurchases, foreign exchange effects, and other financing and investing activity.
Guidance, Outlook, Risks, and Unusual Items
- Management expects inventory to continue increasing during the second half to support demand and offset inconsistent shipping times from Asia. Borrowings are expected to peak over the next several months and decline as third- and fourth-quarter collections increase.
- BOGS had a record backlog and management expected strong second-half shipments, although results remain dependent on favorable winter weather.
- Forsake remains in a product and positioning transition. Supply-chain issues have delayed progress, and management does not expect significant progress until late 2023 at the earliest.
- Florsheim Australia’s move to a new Melbourne warehouse and office disrupted shipments, retail inventory, and e-commerce availability during much of May, June, and part of July 2022.
- Inflation, freight costs, labor costs, foreign currency movements, supply-chain disruptions, consumer demand, weather, and the retail environment remain important risks. Management has used price increases, cost renegotiations, and operating efficiencies to offset some cost pressure, but stated that future offsets are not assured.
- The company expects to renew its revolving credit facility later in 2022 but provided no assurance that renewal will occur on acceptable terms or at all. It reported compliance with financial covenants at June 30.
- Management believes available liquidity and borrowing capacity will support cash needs for at least one year, subject to the filing’s stated risks and uncertainties.
- The FASB credit-loss standard, ASU 2016-13, becomes effective for the company in the first quarter of 2023. The company was evaluating its effect and had not quantified an impact.
- The board declared a $0.24 per-share dividend on August 2, 2022, payable September 30, 2022, to shareholders of record on August 26, 2022.
- There were no legal proceedings reported. The company stated that disclosure controls were effective and that no significant changes to internal control over financial reporting occurred during the quarter.
Investor Verification Items
- Verify the company’s ability to refinance or renew the $40 million revolving facility before its November 4, 2022 expiration, including interest rate, collateral, and covenant terms.
- Monitor inventory levels, in-transit inventory, sell-through, and operating cash conversion as inventory is rebuilt and borrowings increase.
- Assess whether price increases and freight normalization restore wholesale gross margins without weakening demand.
- Evaluate whether retail e-commerce sales growth can offset higher outbound freight, advertising, and fulfillment costs.
- Track BOGS backlog conversion and the effect of winter weather on second-half shipments.
- Review the operational and financial progress of Forsake and the continuing wind-down of Florsheim Europe.
- Consider foreign exchange exposure, including Florsheim Australia and outstanding contracts to purchase $3.2 million of U.S. dollars for approximately $4.3 million Australian dollars.
- Reassess liquidity after dividends, share repurchases, capital expenditures, and expected seasonal borrowing needs.