Weyco Group, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. Operations are reported through North American Wholesale, North American Retail, and Other operations, primarily Florsheim Australia and Asia Pacific. The filing covers the three and six months ended June 30, 2023; financial statements are unaudited.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Change | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|---|
| Net sales | $67.0 million | $74.4 million | Down 10% | $153.3 million | $155.7 million |
| Gross earnings | $29.0 million | $29.8 million | Down 3% | $66.2 million | $58.9 million |
| Gross margin | 43.3% | 40.0% | Up 330 bps | 43.2% | 37.8% |
| Operating earnings | $6.7 million | $5.7 million | Up 18% | $17.1 million | $11.1 million |
| Net earnings | $4.9 million | $4.5 million | Up 8% | $12.3 million | $8.5 million |
| Diluted EPS | $0.50 | $0.47 | Up $0.03 | $1.28 | $0.89 |
| Cash flow from operations | Not separately provided | Not separately provided | — | $43.6 million | $(18.7) million |
Q2 operating margin was approximately 10.0%, compared with 7.6% in the prior-year quarter. Six-month operating margin was approximately 11.1%, compared with 7.1% in the prior-year period. The effective tax rate was 26.2% for Q2 and 25.9% year to date, versus 24.1% and 25.3%, respectively, in the comparable periods.
At June 30, 2023, cash and cash equivalents were $22.0 million, short-term investments and marketable securities totaled approximately $7.6 million, and inventory was $103.9 million, down from $128.0 million at December 31, 2022. Total assets were $287.0 million and total equity was $230.1 million.
The Company had $2.6 million outstanding under its $50.0 million revolving credit facility, compared with $31.1 million at December 31, 2022. The facility bears interest at one-month SOFR plus 145 basis points, carried a 6.54% rate at quarter-end, is secured by general business assets, and expires September 28, 2023. The Company was in compliance with its financial covenants.
During the first six months, the Company paid $6.9 million in dividends, repurchased $2.1 million of common stock, paid $0.5 million of contingent consideration, and invested $1.4 million in capital expenditures. The quarterly dividend was increased to $0.25 per share; a dividend declared August 1, 2023 is payable September 29, 2023.
Material Changes Versus the Prior Comparable Period
- Sales declined because 2022 benefited from post-pandemic retailer pipeline filling and strong consumer demand, while 2023 reflected more normalized industry conditions and cautious retailer ordering.
- Wholesale sales fell 13% in Q2 and 4% year to date. Q2 brand sales declined 17% for Stacy Adams, 11% for Florsheim, 1% for Nunn Bush, and 35% for BOGS/Rafters; Forsake increased 5%.
- Retail sales increased 3% in Q2 and 8% year to date, supported primarily by higher e-commerce sales. Six-month retail operating earnings increased 21% to $2.4 million.
- Wholesale gross margin increased to 37.0% in Q2 from 33.7% and to 37.7% year to date from 31.7%, reflecting price increases and lower inbound freight costs.
- Operating earnings improved despite lower sales, primarily because of stronger wholesale margins and lower selling and administrative expenses in the quarter.
- Operating cash flow improved by $62.3 million year over year, driven by higher earnings and working-capital improvements, including reductions in accounts receivable and inventory.
- Interest expense increased by $121,000 in Q2 and $505,000 year to date because of higher average debt balances. Pension-related non-service costs also increased and contributed to other expense.
Guidance, Outlook, Risks, and Unusual Items
- Management expects 2023 capital expenditures of approximately $2.0 million to $4.0 million; $1.4 million had been spent through June 30.
- Management expects to renew the revolving credit facility later in 2023 but provides no assurance that it will be renewed on acceptable terms or at all.
- BOGS faces an oversaturated outdoor footwear and weather-boot market. Confirmed orders for the fall key selling season are below the prior year, and results will depend partly on at-once orders and favorable weather.
- The Company is carrying more slow-moving inventory than normal but believes the situation is manageable because of strong gross margins and more predictable supply and sales cycles.
- The Hong Kong office and distribution center are being closed, and the Asia Pacific wholesale and retail division is expected to be wound down by the end of 2023. Larger wholesale accounts are expected to transfer to the Australian office, while six Asian retail outlets will close as leases expire.
- Management believes available cash, investments, marketable securities, operating cash flow, and borrowing facilities will support cash needs for at least one year, although no assurance is provided.
- Approximately $4.8 million of cash and cash equivalents was held by foreign subsidiaries at June 30, 2023. Foreign exchange contracts covered purchases of $2.6 million U.S. dollars, with no significant quarter-end unrealized gain or loss.
- Management identified estimates involving inventory reserves, deferred tax assets, goodwill, and trademarks as areas where actual results could differ materially. No material legal proceedings were reported.
- The Company adopted the current expected credit loss standard in the first quarter of 2023; adoption had no material impact.
Most Important Facts for Investors to Verify
- Whether the revolving credit facility was renewed after its September 28, 2023 expiration and on what terms.
- Whether wholesale demand, particularly for BOGS/Rafters and legacy brands, recovered as retailer inventories normalized.
- Inventory aging, markdown requirements, and gross-margin sustainability while slow-moving footwear is reduced.
- The financial impact and execution of the Asia Pacific wind-down and Hong Kong closure.
- Whether operating cash flow remains strong after the significant first-half working-capital benefit.
- Actual 2023 capital expenditures relative to the $2.0 million–$4.0 million estimate and continued dividend and share-repurchase capacity.