Weyco Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed August 10, 2020. Results were significantly affected by COVID-19-related retail closures and weakened demand. Weyco designs and markets footwear under Florsheim, Nunn Bush, Stacy Adams, BOGS and Rafters brands through North American wholesale and retail operations and international businesses.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $16.6 million | $60.5 million | $80.2 million | $134.6 million |
| Gross earnings | $7.5 million | $24.4 million | $30.7 million | $53.2 million |
| Gross margin | 45.0% | 40.4% | 38.2% | 39.5% |
| Operating income (loss) | $(13.0) million | $1.9 million | $(11.7) million | $7.0 million |
| Operating margin | (78.2)% | 3.1% | (14.5)% | 5.2% |
| Net income (loss) | $(8.9) million | $1.5 million | $(7.7) million | $5.5 million |
| Diluted EPS | $(0.91) | $0.15 | $(0.79) | $0.55 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $12.6 million | $0.2 million |
- Second-quarter sales declined 72%; first-half sales declined 40% year over year.
- Wholesale sales declined 80% in the quarter and 41% year to date. Retail sales declined 33% and 23%, respectively; same-store sales, including U.S. e-commerce, declined 31% and 22%.
- Wholesale gross margin was 34.7% in the quarter and 32.3% year to date, compared with 35.1% and 34.6% in the prior-year periods. The year-to-date decline primarily reflected China tariff costs.
- Retail gross margin was 61.1% in the quarter and 63.5% year to date, down from 65.0% and 65.1%.
- Cash and cash equivalents were $10.2 million at June 30, 2020. Marketable securities totaled $15.7 million, producing cash and marketable securities of approximately $25.9 million.
- There were no borrowings under the $60 million unsecured revolving credit facility at quarter end. The highest borrowing balance during the first half was $8.5 million. The facility expires November 5, 2020 and management expected to seek renewal.
- Inventories were $81.4 million, compared with $86.7 million at December 31, 2019. Total liabilities were $64.1 million and equity was $196.3 million.
- The company paid $7.0 million of dividends, repurchased $1.3 million of stock and spent $2.7 million on capital expenditures during the first half.
Material Changes Versus the Prior Comparable Period
- COVID-19 closures caused substantial order cancellations, reduced customer demand and lower wholesale, retail and international sales. The Fall 2020 order backlog was down, and management was working virtually with customers to solidify orders.
- Second-quarter selling and administrative expenses included a $3.3 million write-off of the J.C. Penney receivable. This was partially offset by approximately $1.4 million of U.S. and Canadian wage subsidies and lower advertising spending.
- Other international operations recorded approximately $1.0 million of obsolete inventory write-downs at Florsheim Asia, partially offset by approximately $1.3 million of rent and wage subsidies.
- Operating results shifted from profit to loss across North American wholesale, North American retail and other operations.
- Operating lease liabilities decreased to $17.8 million from $20.6 million at year-end 2019.
- Goodwill and trademarks were tested for impairment because of lower sales, reduced cash-flow projections and declining market capitalization. No impairment was recorded; however, the wholesale reporting unit’s estimated fair value exceeded carrying value by only 14%.
Outlook, Risks and Unusual Items
- Management provided no consolidated revenue or earnings guidance. It estimated 2020 capital expenditures of $3.0 million to $4.0 million, including $2.7 million spent through June 30.
- Management viewed liquidity as strong and believed available cash, investments, operating cash flow and borrowing capacity would support needs for at least one year, while noting there could be no assurance.
- Demand for dress and dress-casual footwear remained depressed as offices and formal events were disrupted. Management was shifting new product toward casual and relaxed-lifestyle offerings.
- BOGS online sales increased in the second quarter, and management identified potential growth opportunities as the brand entered its seasonal period.
- Inventory was considered higher than optimal given reduced demand. Additional markdowns or write-downs could result from continued weakness or obsolete and discontinued products.
- Accounts receivable collections slowed. On August 2, 2020, Tailored Brands filed for bankruptcy; Weyco had an approximately $1.2 million receivable and expected that all or a significant portion could be lost.
- Supply chain and distribution operations were fully operational at quarter end, but future closures, labor shortages, quarantines or transportation restrictions could disrupt product availability.
- Potential future customer bankruptcies, prolonged COVID-19 effects, further market capitalization declines and deteriorating cash-flow assumptions could result in additional receivable losses or goodwill and trademark impairment.
Important Facts for Investors to Verify
- Progress of retail reopening, wholesale order backlog and recovery in customer demand.
- Collectability of receivables, including the J.C. Penney write-off and Tailored Brands exposure.
- Inventory aging, markdown activity and any additional inventory reserves.
- Renewal or replacement of the $60 million revolving credit facility before its November 2020 expiration.
- Future impairment testing sensitivity for goodwill and trademarks, particularly given the 14% wholesale reporting-unit valuation cushion.
- Whether operating cash flow and liquidity remain sufficient while dividends, capital expenditures and potential share repurchases continue.