Weyco Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023; filed November 9, 2023. Weyco designs and markets footwear under Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. Reportable segments are North American Wholesale, North American Retail, and other international operations, primarily Florsheim Australia.
Financial Performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|
| Net sales | $84.2 million | $97.0 million | $237.5 million | $252.7 million |
| Gross earnings | $36.2 million | $39.4 million | $102.3 million | $98.3 million |
| Gross margin | 43.0% | 40.6% | 43.1% | 38.9% |
| Operating earnings | $12.4 million | $14.2 million | $29.5 million | $25.3 million |
| Net earnings | $9.3 million | $10.8 million | $21.6 million | $19.3 million |
| Diluted EPS | $0.98 | $1.12 | $2.27 | $2.01 |
- Q3 sales declined 13%, operating earnings declined 12%, and net earnings declined 13% versus the prior-year record quarter.
- Despite lower sales, gross margin expanded by 240 basis points in Q3 and 420 basis points year to date, primarily from lower inbound freight costs and, for the year-to-date period, higher selling prices.
- Year-to-date operating earnings and net earnings reached record levels, increasing 17% and 12%, respectively.
- Effective tax rates were 25.7% in Q3 and 25.8% year to date, compared with 24.4% and 24.8% in the comparable 2022 periods.
Segment Results and Material Changes
| Segment | Q3 2023 Sales | Q3 Change | 9M 2023 Sales | 9M Change | 9M Operating Earnings Change |
|---|
| North American Wholesale | $69.5 million | Down 15% | $190.8 million | Down 8% | Up 16% |
| North American Retail | $7.6 million | Up 6% | $24.1 million | Up 8% | Up 18% |
| Other operations | $7.1 million | Down 14% | $22.5 million | Approximately flat | Up 35% |
- Wholesale sales were affected by softer consumer demand, retailer inventory reductions, post-pandemic pipeline normalization, and outdoor-market inventory saturation.
- Q3 BOGS/Rafters sales declined 42%; year-to-date sales declined 30%. Florsheim declined 7% in Q3 and 2% year to date, while Nunn Bush increased 11% in Q3 and 4% year to date.
- Retail growth was driven primarily by e-commerce. Brick-and-mortar sales were relatively flat year to date.
- Florsheim Australia was adversely affected by lower wholesale sales, the loss of a sizeable wholesale account, and foreign-exchange translation.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash provided by operating activities was $62.9 million for the first nine months of 2023, compared with cash used of $42.1 million in the prior-year period. The improvement was primarily attributable to a $48.4 million inventory-related cash benefit.
- Cash and cash equivalents were $33.4 million at September 30, 2023, versus $16.9 million at December 31, 2022. Cash, short-term investments, and marketable securities totaled approximately $41.0 million.
- Inventory declined to $79.6 million from $128.0 million at year-end 2022. Management stated that inventory was at a normalized level but continued to review slow-moving product.
- The company had no borrowings under its $40.0 million revolving credit facility at September 30, 2023, compared with $31.1 million outstanding at December 31, 2022. The facility matures September 28, 2024, bears interest at one-month SOFR plus 125 basis points, is secured by general business assets, and includes a minimum tangible net worth covenant. The company was in compliance with its covenants.
- Operating lease liabilities totaled $12.5 million, including $3.8 million current and $8.6 million non-current.
- Year-to-date cash uses included $9.3 million of dividends, $3.4 million of share repurchases, $2.6 million of capital expenditures, and $500,000 of contingent consideration payments.
- Management estimated 2023 capital expenditures of $3.0 million to $4.0 million. Approximately $4.5 million of cash was held by foreign subsidiaries.
- The Board declared a $0.25 per-share dividend on November 7, 2023, payable January 2, 2024.
Outlook, Commentary, Risks, and Unusual Items
- Management expects outdoor-footwear channel inventory to normalize no earlier than the second half of 2024. BOGS inventory is primarily core product, but the company is taking steps to reduce slower-moving styles.
- Management remains optimistic about BOGS’s long-term prospects and is emphasizing less-insulated products with longer selling seasons. It also views hybrid footwear as an important growth area for the Legacy brands.
- The filing identifies risks from macroeconomic pressure, cautious consumer spending, retailer inventory levels, mild weather, foreign currency movements, dependence on overseas manufacturers, and changing wholesale demand.
- The company stated that available cash, investments, operating cash flow, and borrowing capacity should support business needs for at least one year, although no assurance was provided.
- Pension expense increased to $970,000 year to date from $53,000 in the prior-year period, contributing to higher other expense.
- The company adopted the credit-loss standard in the first quarter of 2023; adoption had no material financial statement impact.
- Foreign-exchange contracts at September 30, 2023 covered purchases of $1.2 million U.S. dollars for approximately $1.7 million Australian dollars, with no significant unrealized gain or loss reported.
- The company reported no legal proceedings expected to have a material adverse effect on its business, financial condition, results, or cash flows.
Investor Verification Points
- Verify the sustainability of improved gross margins after freight-cost normalization and higher selling prices.
- Monitor BOGS inventory clearance, outdoor-channel normalization, and potential markdown or reserve requirements.
- Assess whether wholesale demand and retailer inventory reductions continue to pressure sales into 2024.
- Review the September 2024 credit-facility maturity, borrowing capacity, interest-rate exposure, and covenant requirements.
- Track e-commerce growth, retail profitability, and the effect of the lost Australian wholesale account.
- Reconcile ongoing dividends and share repurchases with operating cash flow, capital expenditures, and potential acquisition activity.
- Consider pension obligations, foreign-currency translation, marketable-security valuation changes, and management estimates for inventory, taxes, goodwill, and trademarks.
