Weyco Group, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2022. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Forsake. Reportable segments are North American Wholesale and North American Retail; international operations are included in Other. Florsheim Europe was closed and was being wound down.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $81.4 million | $46.9 million | 73% |
| Gross earnings | $29.1 million | $19.3 million | 51% |
| Gross margin | 35.8% | 41.2% | Down 540 basis points |
| Earnings from operations | $5.4 million | $1.6 million | 232% |
| Net earnings | $4.1 million | $1.3 million | 206% |
| Diluted EPS | $0.42 | $0.14 | Up $0.28 |
| Cash flow from operations | $0.2 million | $14.2 million | Down $13.9 million |
- Wholesale sales increased 101% to $67.1 million, with operating earnings rising to $4.8 million from $1.4 million. Wholesale gross margin declined to 30.0% from 34.5%, primarily because of higher inbound freight costs.
- Retail sales increased 40% to $7.9 million. Operating earnings were $0.8 million versus $0.8 million, as higher e-commerce sales were largely offset by increased freight and advertising costs.
- Other sales declined 19% to $6.4 million, while the operating loss improved to $0.2 million from $0.5 million, primarily because of the winding down of Florsheim Europe.
- Cash, short-term investments and marketable securities totaled approximately $34.0 million at March 31, 2022. Cash and cash equivalents were $24.2 million, compared with $19.7 million at December 31, 2021.
- Total assets were $261.8 million and total liabilities were $59.4 million at March 31, 2022. The company had no borrowings under its $40 million revolving credit facility.
- Inventory declined to $62.1 million from $71.0 million at year-end, but management stated it was continuing to build inventory to support increased demand.
- Dividends paid were $2.3 million, share repurchases were $1.8 million, and capital expenditures were $0.4 million. The quarterly dividend remained $0.24 per share.
Material Changes Versus Prior Comparable Period
- Results benefited from strong wholesale demand and easier comparisons with Q1 2021, which was significantly affected by COVID-19 restrictions. Management reported Q1 2022 consolidated sales 10% above Q1 2019 and operating earnings 6% above Q1 2019.
- Wholesale sales exceeded Q1 2021 across all major brands: Florsheim increased 132%, Stacy Adams 113%, Nunn Bush 79%, and BOGS/Rafters 72%. Forsake contributed $0.4 million of wholesale sales following its June 2021 acquisition.
- Retail same-store sales increased 39%, including a 38% increase in e-commerce sales. Retail sales exceeded Q1 2019 by 41%.
- Foreign operations were pressured by Omicron-related restrictions in Hong Kong and the Pacific Rim. Florsheim Australia sales decreased 8% in U.S. dollars, although Australian and New Zealand sales increased slightly in local currency.
- Operating cash flow fell sharply because of changes in working capital, particularly accounts payable and inventory-related activity.
- Comprehensive income was $4.7 million versus $1.4 million, supported by favorable foreign-currency translation and pension-related adjustments.
Guidance, Outlook, Risks and Unusual Items
- Management expects wholesale gross margins to improve in mid-to-late 2022 as supply-chain conditions stabilize and negotiated customer price increases take effect.
- Management expects continued strong demand but anticipates inventory constraints and supply-chain disruptions could persist into the second half of 2022.
- Annual 2022 capital expenditures are estimated at $2.0 million to $3.0 million.
- Management expects to renew the $40 million revolving credit facility, which expires November 4, 2022, but provided no assurance that renewal will occur.
- Management believes available liquidity, operating cash flow and borrowing capacity will support the business for at least one year, subject to uncertainty.
- Key risks include normalization of elevated dress-footwear demand, supply-chain and freight costs, higher e-commerce advertising and shipping costs, foreign-exchange movements, international COVID-19 disruptions, inventory valuation, pension obligations, and impairment of goodwill and trademarks.
- The company acquired Forsake in June 2021 for approximately $2.6 million plus estimated contingent payments with a discounted fair value of approximately $1.3 million. Management stated the acquisition was not material to consolidated results.
- On May 3, 2022, the board authorized repurchase of an additional 1.0 million shares, increasing shares available for repurchase to approximately 1.1 million.
- The company is evaluating adoption of the expected-credit-loss standard, which becomes effective in the first quarter of 2023; the filing does not provide a quantified expected impact.
Important Facts for Investors to Verify
- Whether wholesale gross-margin recovery occurs as freight costs moderate and customer price increases take effect.
- Whether demand for dress footwear normalizes after the post-pandemic rebound and how the company’s expanded casual offerings perform.
- Inventory availability, supplier lead times and the effect of continued freight inflation on margins and cash flow.
- The timing and terms of renewal of the revolving credit facility expiring November 4, 2022.
- The sustainability of e-commerce growth after higher shipping and advertising costs.
- Progress in winding down Florsheim Europe and profitability of Florsheim Australia.
- The eventual impact of the 2023 expected-credit-loss accounting standard and the carrying values of goodwill, trademarks and other intangible assets.