Weyco Group, Inc. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing, although fourth-quarter items include annual pension mark-to-market accounting and other year-end adjustments.
Business Context
Weyco designs and distributes branded footwear, principally for men, under Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters. Operations include North American wholesale, North American retail, and other businesses in Australia, South Africa, Asia Pacific, and Europe. Wholesale represented 78% of consolidated net sales, retail 8%, and other businesses 14% in 2018.
The Company sourced products primarily from independent manufacturers in China and India and operated nine U.S. brick-and-mortar stores plus internet businesses at year-end. On August 30, 2018, Weyco acquired the remaining 45% interest in Florsheim Australia for $3.7 million and now owns the business outright.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $298.4 million | $283.7 million | +5% |
| Gross earnings | $120.1 million | $110.7 million | +8% |
| Gross margin | 40.3% | 39.0% | +130 bps |
| Earnings from operations | $25.5 million | $23.4 million | +9% |
| Operating margin | 8.5% | 8.2% | +30 bps |
| Net earnings attributable to Weyco | $20.5 million | $16.5 million | +24% |
| Diluted EPS | $1.97 | $1.60 | +23% |
| Effective tax rate | 22.5% | 30.2% | Lower by 770 bps |
| Cash flow from operations | $13.1 million | $33.5 million | -$20.5 million |
Wholesale sales increased 7% to $233.4 million and operating earnings increased 14% to $23.1 million. Retail sales increased 9% to $22.7 million, with same-store sales up 13%, primarily from internet sales; retail operating earnings increased 99% to $2.7 million. Other-business sales declined 7% to $42.3 million and produced an operating loss of $0.4 million versus $1.8 million of operating earnings in 2017.
Key brand trends included higher Florsheim and BOGS/Rafters sales, higher Stacy Adams sales, and lower Nunn Bush sales. Nunn Bush was affected in part by the bankruptcy of two major customers. The Umi brand was being wound down.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $23.0 million at December 31, 2018; marketable securities totaled $20.2 million at amortized cost. Management reported cash and marketable securities of $43.2 million in total.
- Inventory increased to $72.7 million from $60.3 million, reflecting a North American wholesale inventory build to support expected demand. The inventory increase was a major use of operating cash.
- The Company had $5.8 million outstanding on a $60 million unsecured revolving credit facility at year-end, compared with no borrowings at December 31, 2017. The facility bears interest at LIBOR plus 0.75% and expires November 5, 2019.
- 2018 cash uses included $11.4 million for share repurchases, $9.3 million of dividends, $3.7 million for the Florsheim Australia minority-interest purchase, and $1.4 million of capital expenditures.
- Management expects 2019 capital expenditures of $3.0 million to $4.0 million, including an expansion of the corporate headquarters.
- Management believes cash, marketable securities, operating cash flow, and available borrowing capacity will support business needs for at least the next 12 months, subject to customary uncertainties.
Material Changes Versus 2017
- Sales, gross earnings, operating earnings, net earnings attributable to Weyco, and diluted EPS all increased.
- Gross margin improved, although consolidated selling and administrative expenses rose to $94.6 million from $87.3 million, including higher advertising and employee benefit costs.
- Operating performance weakened materially in the other international businesses, primarily because of lower Florsheim Australia sales and a challenging Australian retail environment.
- Operating cash flow declined substantially because of the inventory build and changes in working capital.
- The Tax Cuts and Jobs Act reduced the 2018 tax provision by approximately $3.2 million and increased diluted EPS by approximately $0.31.
- Weyco acquired the remaining Florsheim Australia minority interest, eliminating the $7.1 million noncontrolling interest reported at the end of 2017.
- 2018 included $246,000 of impairment charges on certain Florsheim Australia retail fixed assets and a $110,000 impairment of the remaining Umi trademark. No goodwill impairment was recorded.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management identified potential uses of liquidity including capital expenditures, continued share repurchases, and acquisitions. The Company expects the 2019 lease-accounting adoption to add approximately $25 million to $30 million of right-of-use assets and lease liabilities, with no material expected effect on earnings or cash flows.
- Consumer spending, economic conditions, retailer financial health, retail consolidation, customer bankruptcies, and increasing online shopping may affect demand and collections.
- Foreign sourcing creates exposure to supplier disruption, labor and freight costs, raw-material prices, tariffs or trade wars, port disruptions, and political or regulatory changes. The filing specifically notes the risk of potential tariffs on footwear sourced from China.
- Foreign-currency exposure is primarily to the Australian and Canadian dollars. A $3.0 million Canadian-dollar foreign-exchange contract was outstanding at year-end and expires in 2019.
- The Company held approximately $20.2 million of investment-grade municipal bonds; deterioration in these investments could affect liquidity and financial results.
- The defined benefit pension obligation was approximately $23.5 million underfunded at year-end, including the supplemental plan. Pension results remain sensitive to discount rates, asset returns, and actuarial assumptions.
- Inventory forecasting is significant because foreign production requires demand forecasts at least five months in advance. Excess inventory could require markdowns, while shortages could result in lost sales.
- Other risks include competition, changing fashion preferences, cybersecurity and data breaches, information-system interruptions, key executive dependence, limited stock trading liquidity, and acquisition-integration risk.
- Operating lease commitments totaled $32.3 million, and inventory purchase commitments totaled $64.9 million at December 31, 2018.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that internal controls and disclosure controls were effective. No material legal proceedings or unresolved SEC staff comments were reported.
Investor Verification Checklist
- Verify whether the wholesale inventory build converts into sales or results in markdowns and lower future margins.
- Assess the sustainability of 2018 earnings growth after considering the $3.2 million tax benefit from the lower federal tax rate.
- Monitor Florsheim Australia and Europe for recovery after the decline in international operating performance.
- Review the maturity and renewal terms of the revolving credit facility, along with borrowing needs and interest-rate exposure.
- Evaluate exposure to China-related tariffs, sourcing disruptions, freight costs, and foreign-currency movements.
- Review pension funding requirements and sensitivity to discount rates and investment returns.
- Confirm the effect of ASC 842 lease adoption and the final recorded right-of-use assets and liabilities in 2019.
- Consider the effect of share repurchases, dividends, option exercises, and the Company’s limited public float on per-share value and stock liquidity.