Weyco Group, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Weyco designs and markets footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi brands. Its reportable segments are North American wholesale and North American retail; other operations include Australia, South Africa, Asia Pacific, and Europe.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $91.2 million | $87.4 million | $233.2 million | $225.2 million |
| Gross earnings | $32.6 million | $32.4 million | $85.8 million | $84.0 million |
| Gross margin | 35.7% | 37.1% | 36.8% | 37.3% |
| Earnings from operations | $9.1 million | $9.0 million | $18.3 million | $17.3 million |
| Operating margin | 10.0% | 10.3% | 7.8% | 7.7% |
| Net earnings attributable to Weyco | $5.5 million | $5.5 million | $11.2 million | $10.9 million |
| Diluted EPS | $0.51 | $0.51 | $1.03 | $1.00 |
Nine-month operating cash flow was a use of $27.2 million versus a use of $3.4 million in 2014, primarily reflecting a $23.8 million inventory increase and higher receivables. Investing activities provided $2.4 million, while financing activities provided $26.6 million. Cash and cash equivalents increased to $13.9 million from $12.5 million at December 31, 2014.
At September 30, 2015, cash and marketable securities totaled $40.3 million, short-term borrowings were $42.0 million, and total equity was $199.8 million. The company had a $60 million unsecured revolving credit facility, with borrowings at a 0.94% interest rate. Inventory was $92.6 million, up from $69.0 million at year-end 2014.
Material changes versus the prior comparable period
- Q3 sales increased 4%, and nine-month sales increased 4%, driven primarily by North American wholesale.
- North American wholesale sales increased 10% in Q3 and 8% year to date; BOGS/Rafters and Stacy Adams were significant contributors. Wholesale operating earnings increased 10% in Q3 and 19% year to date.
- North American retail sales declined 11% in Q3 and 7% year to date. Same-store sales declined 5% and 2%, respectively, while operating earnings fell 37% and 28%. Results reflected weaker brick-and-mortar sales and three fewer stores.
- Other segment sales declined 15% in Q3 and 13% year to date, primarily because of weaker Australian and European currencies. Other operating earnings declined 38% and 34%, respectively.
- Q3 gross margin declined to 35.7% from 37.1%, while nine-month gross margin declined to 36.8% from 37.3%. Australian and Canadian currency effects pressured margins.
- Nine-month net earnings attributable to Weyco increased 2%, and diluted EPS increased to $1.03 from $1.00. Q3 diluted EPS was unchanged at $0.51.
- Foreign currency transaction losses increased to $783,000 year to date from $174,000, largely from revaluation of intercompany loans involving Florsheim Australia.
Outlook, liquidity, risks, and unusual items
Management estimated 2015 capital expenditures of approximately $2.5 million, compared with $1.5 million incurred during the first nine months. Management stated that cash, marketable securities, operating cash flow, and available borrowing facilities should support cash needs for at least one year, although no assurance was provided.
The revolving credit facility was renewed on November 3, 2015, extending its maturity to November 4, 2016, on the same terms. The company drew a net $36.6 million during the first nine months, mainly to fund inventory purchases intended to support increased backlogs and demand for core products, particularly BOGS.
A contingent consideration liability related to the 2011 BOGS acquisition was estimated at $5.7 million at September 30, 2015. A second payment is due in March 2016. The company also made approximately $2.6 million of pension contributions during the first nine months and expected no additional contributions for the remainder of 2015.
Key risks include retail weakness, foreign currency movements, margin pressure from currencies because foreign subsidiaries purchase inventory in U.S. dollars, inventory and working-capital requirements, dependence on wholesale demand, and the impact of economic and retail conditions in the United States. The filing reported no material changes to previously disclosed risk factors, contractual obligations, market risks, legal proceedings, or internal controls.
Facts investors should verify
- Whether elevated inventory and increased revolver borrowings convert into sales without markdown or working-capital pressure.
- The timing and amount of the BOGS contingent consideration payment due in March 2016.
- North American retail traffic, same-store sales, store count, and the effect of the internet channel.
- Australian and Canadian currency trends and their effects on sales, gross margins, and foreign-currency losses.
- Wholesale brand momentum, particularly BOGS/Rafters, Stacy Adams, and Nunn Bush.
- Progress toward management’s approximately $2.5 million 2015 capital-expenditure estimate and continued dividend and repurchase activity.