Business Context and Reporting Period
Weyco Group, Inc. designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters. Its reportable segments are North American wholesale and North American retail; other operations include Florsheim Australia and Europe. The unaudited Form 10-Q covers the quarter ended March 31, 2018, compared with the quarter ended March 31, 2017.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $69.5 million | $69.1 million | Up 1% |
| Gross earnings | $26.6 million | $25.2 million | Up 6% |
| Gross margin | 38.3% | 36.5% | Up 1.8 percentage points |
| Earnings from operations | $3.6 million | $3.5 million | Up 3% |
| Operating margin | 5.1% | 5.0% | Approximately flat |
| Net earnings attributable to Weyco | $3.0 million | $2.2 million | Up 35% |
| Diluted earnings per share | $0.29 | $0.21 | Up $0.08 |
| Cash flow from operations | $8.4 million | $17.3 million | Down $8.9 million |
The effective tax rate declined to 25.0% from 39.5%, primarily because the Tax Cuts and Jobs Act reduced the U.S. federal rate to 21% from 35%. Interest income increased to $233,000 from $179,000, while interest expense was zero.
Cash and cash equivalents were $30.1 million at March 31, 2018, compared with $23.5 million at December 31, 2017. Cash and marketable securities totaled $53.6 million at quarter-end, versus $47.1 million at year-end. The Company had no borrowings under its $60 million unsecured revolving credit facility, which expires November 4, 2018 and bears interest at LIBOR plus 0.75%.
Operating cash flow was supported by a $9.2 million reduction in inventories, partly offset by a $1.4 million increase in accounts receivable and reductions in accounts payable and accrued liabilities. The Company paid $4.6 million in dividends and spent $125,000 on capital expenditures. Management estimates 2018 capital expenditures of $2.0 million to $3.0 million.
Material Changes Versus the Prior Comparable Period
- North American wholesale sales increased 2% to $53.8 million, driven primarily by Florsheim, whose sales rose 21%; Nunn Bush sales declined 10%.
- Wholesale operating earnings increased 7% to $3.4 million, primarily because of higher gross margins. Wholesale gross margin rose to 33.1% from 30.8%.
- North American retail sales were approximately flat at $4.9 million, but same-store sales, including U.S. internet sales, increased 6%. Retail operating earnings rose to $206,000 from $43,000, helped by website performance and lower selling and administrative expenses as a percentage of sales.
- Other operations sales declined 5% to $10.8 million, and operating results shifted to a $29,000 loss from $250,000 of earnings, primarily because of weaker Florsheim Australia sales.
- Net earnings attributable to Weyco increased more rapidly than operating earnings because of the lower effective tax rate.
- Cash flow from operations declined substantially, primarily because of changes in operating assets and liabilities, despite the inventory-related cash benefit.
- The Company declared a quarterly dividend of $0.22 per share, compared with $0.21 per share in the prior-year quarter, and did not repurchase shares during the quarter.
Outlook, Risks, Contingencies, and Unusual Items
Management states that cash, marketable securities, operating cash flow, and available borrowing capacity are expected to provide adequate liquidity for at least one year, although there can be no assurance. Available liquidity may be used for capital expenditures, stock repurchases, and acquisitions.
The filing identifies a challenging retail environment, particularly for mid-tier department stores and national shoe chains, and declining sales in Australian and Pacific Rim markets. Results are primarily affected by U.S. economic and retail conditions. The Company purchases inventory from overseas manufacturers, creating foreign currency and supply-related exposure; most foreign-sourced purchases are denominated in U.S. dollars.
Florsheim Australia had foreign exchange contracts covering the purchase of $2.2 million of U.S. dollars for approximately $2.8 million Australian dollars. The filing reports no significant unrealized gain or loss at quarter-end.
Weyco adopted ASC 606 revenue recognition on January 1, 2018, using the modified retrospective method. The adoption had no material effect on financial position or results of operations, and prior periods were not restated. No material changes to contractual obligations, market-risk disclosures, or risk factors were reported. No legal proceedings were disclosed.
The filing cautions that quarterly results may not be indicative of full-year results and that forward-looking statements are subject to risks and uncertainties described in the Company’s 2017 Form 10-K.
Investor Verification Items
- Verify whether wholesale momentum, particularly Florsheim growth and Nunn Bush weakness, continued beyond the first quarter.
- Monitor the decline in Florsheim Australia and other international operations and its effect on consolidated profitability.
- Assess whether lower cash flow from operations was temporary or reflects unfavorable working-capital trends.
- Confirm the sustainability of the 25.0% effective tax rate and quantify the ongoing benefit from the lower federal tax rate.
- Review the November 4, 2018 expiration and renewal status of the $60 million revolving credit facility.
- Track planned 2018 capital expenditures of $2.0 million to $3.0 million, dividend payments, and any future share repurchases or acquisitions.
- Review the 2017 Form 10-K risk factors and commitments, as the filing reports no material changes to those disclosures.