Weyco Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2017, filed August 9, 2017. Weyco designs and markets branded footwear, primarily for men, under Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Operations comprise North American wholesale, North American retail, and international businesses in Australia, South Africa, Asia Pacific, and Europe.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $57.5 million | $56.9 million | $126.6 million | $135.8 million |
| Gross earnings | $22.1 million | $22.3 million | $47.3 million | $49.4 million |
| Gross margin | 38.4% | 39.2% | 37.4% | 36.4% |
| Earnings from operations | $1.9 million | $2.0 million | $5.3 million | $6.2 million |
| Operating margin | 3.3% | 3.6% | 4.2% | 4.6% |
| Net earnings attributable to Weyco | $1.3 million | $1.0 million | $3.5 million | $3.7 million |
| Diluted EPS | $0.12 | $0.09 | $0.33 | $0.35 |
| Cash flow from operations | Not provided | Not provided | $20.7 million | $29.1 million |
- Cash and cash equivalents were $11.9 million at June 30, 2017, compared with $13.7 million at December 31, 2016.
- Marketable securities totaled $30.0 million at June 30, 2017, bringing cash and marketable securities to $41.9 million.
- The company had no borrowings outstanding under its $60 million unsecured revolving credit facility at June 30, 2017. The facility expires November 3, 2017 and bears interest at LIBOR plus 0.75%.
- Inventories were $60.9 million, down from $69.9 million at year-end 2016; accounts receivable were $37.2 million, down from $50.7 million.
- First-half investing cash outflow was $5.3 million, including $772,000 of capital expenditures and a net $4.4 million investment in marketable securities.
- First-half financing cash outflow was $17.5 million, including $6.6 million of dividends, $6.8 million of share repurchases, and $4.3 million of debt repayment.
- The company contributed $4.0 million to its pension plan during the second quarter and expects no additional cash contributions for the remainder of 2017.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 1%, but first-half sales declined 7%, reflecting a difficult retail environment and lower wholesale volumes.
- Second-quarter operating earnings declined 7%, primarily because of lower wholesale gross margins. First-half operating earnings declined 14%, primarily because of lower wholesale sales volumes.
- Second-quarter net earnings attributable to Weyco increased 26% and diluted EPS rose to $0.12 from $0.09, primarily because pension expense was lower following the freezing of pension benefits effective December 31, 2016.
- First-half net earnings attributable to Weyco declined 6%, and diluted EPS declined to $0.33 from $0.35.
- North American wholesale sales increased 2% in the quarter, led by Stacy Adams and Florsheim, but declined 8% year to date. Nunn Bush sales declined 13% in the quarter and 16% year to date.
- North American retail sales increased 1% in the quarter and declined 1% year to date. Same-store sales declined 2% in the quarter and 4% year to date.
- International and other sales declined 3% in the quarter and 2% year to date, while operating earnings increased due to higher gross margins.
- The company adopted ASU 2017-07 regarding pension-cost presentation and retrospectively reclassified prior-period amounts; the adoption did not affect previously reported net earnings or equity.
Outlook, Commentary, Risks, and Unusual Items
- Management expects 2017 capital expenditures of approximately $1.5 million to $2.5 million; $772,000 had been spent through June 30.
- Management believes cash, marketable securities, operating cash flow, and available borrowing capacity will support business needs for at least one year, although no assurance is provided.
- Management identified declining brick-and-mortar traffic, growing online retail adoption, challenging department-store conditions, reduced consumer spending in certain footwear channels, product transitions, and foreign exchange exposure as relevant operating considerations.
- The company continues to evaluate liquidity uses, including capital expenditures, stock repurchases, and potential acquisitions. Approximately 317,000 shares remained available under the repurchase program at June 30, 2017.
- Foreign exchange contracts covered Canadian dollars, U.S. dollars, and euros; no significant unrealized gains or losses were reported at quarter-end.
- The filing states that there were no material changes in contractual obligations, market-risk disclosures, or risk factors from the 2016 Form 10-K, and no legal proceedings were reported.
- The filing does not provide a clear full-year revenue or earnings forecast.
Important Facts for Investors to Verify
- Whether wholesale demand, particularly for Nunn Bush and BOGS/Rafters, improves as new product programs ship in the second half of 2017.
- Whether the challenging department-store and brick-and-mortar environment continues to pressure sales and operating margins.
- The renewal or replacement terms of the $60 million revolving credit facility before its November 3, 2017 expiration.
- The sustainability of dividends and share repurchases relative to operating cash flow, especially given lower first-half operating cash generation.
- The effect of pension-plan changes and the $4.0 million contribution on future pension expense and funding requirements.
- The eventual impact of adopting the new revenue-recognition standard in 2018; management expected no material impact but had not completed its assessment.