WEYCO GROUP INC quarterly report, Q1 FY2021

Weyco Group, Inc. Form 10-Q Summary

Business Context and Reporting Period

Weyco Group designs and markets footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS and Rafters brands. Its reportable segments are North American wholesale and North American retail; other operations include Florsheim Australia and the wind-down of Florsheim Europe. The filing covers the unaudited quarter ended March 31, 2021, compared with the quarter ended March 31, 2020.

Financial Performance and Position

Metric	Q1 2021	Q1 2020	Change
Net sales	$46.9 million	$63.6 million	Down 26%
Gross earnings	$19.3 million	$23.2 million	Down 17%
Gross margin	41.2%	36.5%	Up 4.7 percentage points
Earnings from operations	$1.6 million	$1.3 million	Up 22%
Operating margin	3.5%	2.1%	Improved
Net earnings	$1.3 million	$1.2 million	Up 14%
Diluted EPS	$0.14	$0.12	Up $0.02
Cash flow from operations	$14.2 million	$15.0 million	Down $0.8 million

North American wholesale sales declined 37% to $33.4 million, and operating earnings declined 51% to $1.4 million. BOGS sales increased 32%, while Stacy Adams, Nunn Bush and Florsheim sales declined.
North American retail sales increased 18% to $5.6 million. Same-store sales rose 32%, driven by a 36% increase in e-commerce sales, while brick-and-mortar same-store sales declined 5%.
Other sales increased 29% to $7.9 million, primarily because Florsheim Australia sales rose 39%. Other operations recorded a $0.5 million operating loss, an improvement from a $1.3 million loss.
Consolidated gross margin improved primarily because the Company sold through much of the inventory subject to higher China tariffs during 2020. Wholesale gross margin was 34.5%, compared with 31.8% in the prior-year quarter.
Cash, short-term investments and marketable securities totaled approximately $58.2 million at March 31, 2021. Cash and cash equivalents were $24.9 million, and investments at fair value were $20.0 million.
Inventories declined to $47.3 million from $59.0 million at December 31, 2020. Management stated that it began rebuilding inventory in response to higher demand and increased orders.
The Company had no borrowings under its $30 million revolving credit facility. The facility expires November 4, 2021, bears interest at LIBOR plus 1.35%, and includes customary covenants.
Operating lease liabilities totaled $12.6 million, including $4.0 million current and $8.6 million non-current.
The Company paid $2.3 million in dividends, repurchased 61,737 shares for $1.1 million, and spent $73,000 on capital expenditures. Annual 2021 capital expenditures are estimated at $1.0 million to $2.0 million.

Material Changes Versus the Prior Comparable Period

Sales were substantially lower because the COVID-19 pandemic continued to suppress demand for traditional dress and dress-casual footwear, particularly in the wholesale business.
Profitability improved despite lower sales because of higher gross margins, cost reductions, store closures, lower advertising and wage costs, and approximately $1.8 million of government wage subsidies in wholesale selling and administrative expenses.
Retail operations moved from an $89,000 operating loss to $756,000 of operating earnings, reflecting stronger e-commerce performance and the closure of unprofitable stores.
Operating cash flow remained strong but declined modestly year over year. The Company invested $20.0 million in highly liquid taxable bond funds, resulting in a $7.6 million quarterly decrease in cash and cash equivalents.
The effective tax rate decreased to 30.1% from 37.1%. Both periods were negatively affected because no tax benefits were recorded for foreign subsidiary losses.
Comprehensive income was $1.4 million, compared with a $1.3 million comprehensive loss in the prior-year quarter, primarily reflecting less adverse foreign currency translation.
The Board extended the expiration dates of certain 2015 and 2016 stock options, resulting in $232,000 of additional share-based compensation expense. Total share-based compensation expense was $545,000.

Guidance, Outlook, Risks and Unusual Items

Management reported that business improved in March and continued improving through April, citing stimulus payments, pent-up demand, office reopenings and anticipated weddings and graduations. The filing provides no formal revenue or earnings guidance.
Demand for legacy brands improved earlier than expected, although management stated that demand remained below 2019 levels. The Company believes it is positioned to gain market share because it maintained inventory of traditional footwear.
Orders for BOGS fall 2021 were described as significantly higher. The Company expects to bring in additional inventory for core styles, successful casual products and BOGS products.
Freight and material costs were increasing. Management planned to raise selling prices in the second half of 2021 to help maintain gross margins.
Florsheim Europe is being wound down after several unprofitable years. A licensing agreement is expected to permit Florsheim footwear sales in Europe and select markets beginning in November 2021.
Management stated that forecasting remains difficult because retailers remain cautious and supply chains have long lead times. COVID-19, consumer demand, retail conditions, foreign exchange, freight costs, material costs and the ability to renew the revolving credit facility are significant uncertainties.
The Company expects to renew its revolving credit facility later in 2021 but provided no assurance. Management believes available liquidity and borrowing capacity will support operating needs for at least one year.
Foreign exchange contracts were outstanding at quarter-end, with no significant unrealized gains or losses. The Company also held approximately $3.5 million of cash at foreign subsidiaries.
No material changes were reported to the risk factors in the 2020 Form 10-K, and no legal proceedings or material commitments were reported.

Important Facts for Investors to Verify

Whether the March and April improvement in demand continues through the remainder of 2021, particularly for Florsheim, Nunn Bush and Stacy Adams.
Whether planned price increases offset higher freight and material costs without weakening demand or reducing gross margins.
The sustainability of cost reductions and government wage subsidies, including the effect of subsidies that may not recur.
Inventory rebuilding, retailer order backlogs and the risk of excess inventory if demand or store reopenings slow.
Completion and financial impact of the Florsheim Europe wind-down and the new European licensing arrangement.
Renewal terms and availability of the $30 million revolving credit facility before its November 4, 2021 expiration.
The effect of COVID-19, foreign exchange movements, supply-chain delays, freight costs and overseas manufacturing conditions on future results.
The filing’s unaudited first-quarter results, which management cautions may not be indicative of full-year performance.