Weyco Group, Inc. 10-Q Summary
Business Context and Reporting Period
Weyco Group designs and markets branded footwear for men, women, and children, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Its operations comprise North American wholesale, North American retail, and international “other” operations. The filing covers the unaudited quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
As of June 30, 2011, the retail segment operated 31 company-owned stores and an Internet business. The March 2, 2011 acquisition of The Combs Company, marketed as Bogs, was consolidated into North American wholesale results.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $56.6 million, up 16% | $121.7 million, up 11% |
| Gross earnings | $22.7 million, up 21% | $47.5 million, up 13% |
| Gross margin | 40.1%, versus 38.3% | 39.0%, versus 38.3% |
| Earnings from operations | $2.7 million, up 62% | $7.5 million, up 6% |
| Operating margin | 4.8%, versus 3.5% | 6.2%, versus 6.5% |
| Net earnings attributable to Weyco | $1.9 million, versus $1.3 million | $5.3 million, versus $5.1 million |
| Diluted earnings per share | $0.17, versus $0.11 | $0.47, versus $0.45 |
Second-quarter sales growth included a $2.6 million contribution from Bogs, approximately $565,000 of higher retail sales, and a $3.2 million increase in other businesses. First-half sales included $4.9 million from Bogs and $1.5 million from Umi.
Six-month operating cash flow was $14.9 million, compared with $7.9 million in the prior-year period. Investing cash flow was a use of $26.3 million, primarily reflecting the Bogs acquisition and $3.1 million of capital expenditures. Financing cash flow provided $14.4 million, including net commercial paper and bank borrowings, partially offset by dividends, share repurchases, and debt repayment.
At June 30, 2011, cash and cash equivalents were $10.2 million and marketable securities totaled $59.1 million at amortized cost, for combined cash and marketable securities of approximately $69.3 million. Short-term borrowings were $35.95 million, consisting of $25.0 million of commercial paper and $11.0 million of bank borrowings. The company had a $50.0 million unsecured revolving facility and was in compliance with its net-worth covenant. The facility was renewed through April 30, 2012.
Cash dividends were $0.16 per share in the second quarter and $0.32 per share for the first half. The company repurchased 450,907 shares during the first half for approximately $10.2 million, including 400,319 shares acquired in a private transaction.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 16% in the second quarter and 11% year to date, driven by Bogs, higher international sales, retail growth, and licensing revenue.
- North American wholesale sales rose 12% in the quarter and 9% year to date, but wholesale operating earnings declined 41% and 24%, respectively. Bogs generated an operating loss during the seasonal first and second quarters, and integration and transition costs increased expenses.
- North American retail sales increased 11% in the quarter and 8% year to date. Same-store sales increased 19% and 14%, respectively, despite four fewer stores than a year earlier. Retail operating earnings improved by $362,000 in the quarter and $491,000 year to date.
- Other operations sales increased 39% in the quarter and 18% year to date, while operating earnings increased approximately $1.4 million in each period, primarily due to stronger Florsheim Australia sales and margins and favorable currency translation.
- Wholesale gross margin declined to 30.1% in the quarter and 30.2% year to date, from 30.3% and 30.6%, respectively, reflecting higher labor and material costs and a stronger Chinese renminbi.
- Interest expense increased because of borrowings used to finance the Bogs acquisition. Foreign currency results improved from losses in 2010 to gains in 2011, benefiting pretax earnings.
- Total assets increased to $258.4 million from $223.4 million at December 31, 2010, primarily from the Bogs acquisition. Goodwill of $11.0 million and trademarks of $22.0 million were recorded in the preliminary purchase-price allocation.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected the Bogs acquisition to be accretive to 2011 earnings excluding purchase-accounting adjustments, transaction costs, and integration costs. Most expected accretion was anticipated in the second half because Bogs sales are seasonal and concentrated in the third and fourth quarters.
- The Bogs purchase-price allocation remains preliminary. The company recorded approximately $9.8 million of contingent consideration as a long-term liability. Changes in the estimated fair value could materially affect earnings and financial position.
- Bogs was acquired for $29.3 million in cash plus approximately $3.8 million of assumed debt and contingent payments. A $2.0 million cash holdback may be paid to the seller after 18 months, subject to indemnification claims.
- Management expected 2011 capital expenditures of approximately $4.0 million to $5.0 million. The company stated that cash, marketable securities, operating cash flow, and available borrowing capacity should adequately support business needs, including potential repurchases and acquisitions.
- Product costs, particularly from China and India, were increasing because of labor and material inflation and currency movements. The company had raised prices where possible but expected continued cost pressure.
- Retail performance remained sensitive to store economics and the broader retail environment. Two stores closed during the second quarter, and management planned to close another in the third quarter.
- The company disclosed no material changes to previously reported market risks or risk factors and no legal proceedings. Bogs integration represented a change in internal control activities, although management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether Bogs achieves the expected second-half seasonal sales and earnings contribution and whether integration costs remain within expectations.
- Final valuation of Bogs assets, goodwill, intangible assets, and contingent consideration, including any resulting earnings or balance-sheet adjustments.
- Wholesale margin trends in light of overseas manufacturing inflation, pricing actions, and foreign-exchange movements.
- Liquidity after acquisition spending, share repurchases, dividends, and the increase in short-term borrowings; also verify compliance with the revolving facility covenant and its April 30, 2012 maturity.
- Retail same-store sales, planned store closures, and the sustainability of improved retail operating margins.
- Potential impairment of the $11.0 million of goodwill and $34.7 million of trademarks if operating performance or brand valuations deteriorate.