WEYCO GROUP INC quarterly report, Q2 FY2021

Weyco Group, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Weyco Group designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. Its reportable segments are North American Wholesale and North American Retail; other operations include Australia, South Africa, Asia Pacific, and Europe. The filing covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. The 2020 comparison was significantly affected by COVID-19-related retail closures.

Financial Performance and Position

Metric	Three Months Ended June 30	Six Months Ended June 30
Net sales	$57.6 million vs. $16.6 million	$104.5 million vs. $80.2 million
Gross earnings	$22.7 million vs. $7.5 million	$42.0 million vs. $30.7 million
Operating earnings	$4.5 million vs. $(13.0) million	$6.2 million vs. $(11.7) million
Net earnings	$3.8 million, or $0.39 diluted EPS, vs. $(8.9) million, or $(0.91) EPS	$5.1 million, or $0.53 diluted EPS, vs. $(7.7) million, or $(0.79) EPS
Operating cash flow	Not separately provided for the quarter	$27.1 million vs. $12.6 million

Second-quarter consolidated gross margin was approximately 39.4%; six-month gross margin was approximately 40.2%.
North American wholesale gross margin was 32.4% in the quarter and 33.3% year to date. Retail gross margin was 65.6% in the quarter and 65.5% year to date.
At June 30, 2021, cash and cash equivalents were $22.8 million. Cash, short-term investments, and marketable securities totaled approximately $65.2 million.
The Company had no borrowings outstanding under its $30 million revolving credit facility and reported compliance with its financial covenants.
Total assets were $252.2 million and total equity was $188.1 million at June 30, 2021. Inventory was $33.6 million, down from $59.0 million at December 31, 2020.
The Company paid $4.6 million in dividends, repurchased $1.5 million of stock, invested $30.1 million in highly liquid fixed-income funds, and incurred $404,000 of capital expenditures during the first six months.

Material Changes Versus the Prior Comparable Period

Sales recovered sharply as retail activity resumed: second-quarter sales increased 246%, and first-half sales increased 30%, compared with the pandemic-affected 2020 periods.
North American wholesale sales increased 350% in the quarter and 21% year to date; retail sales increased 70% and 41%, respectively; other operations increased 156% and 77%.
Retail same-store sales increased 73% in the quarter and 30% year to date, supported by e-commerce growth and the reopening of stores. The Company had four active U.S. brick-and-mortar stores at June 30, 2021, four fewer than a year earlier.
Operating results benefited from higher volumes, cost reductions, lower bad-debt expense, and approximately $1.8 million of second-quarter and $3.6 million of year-to-date government wage subsidies. The 2020 period included an approximately $3.3 million receivable write-off related to JC Penney’s bankruptcy.
Gross margins were pressured by increased overseas freight costs and supply-chain bottlenecks. Management expects these challenges to continue at least into early 2022.
On June 7, 2021, the Company acquired substantially all operating assets and certain liabilities of Forsake, Inc. for approximately $2.6 million, plus contingent payments with an estimated discounted fair value of approximately $1.4 million. Forsake’s reported results were not material for the quarter.
Cash decreased to $22.8 million from $32.5 million at year-end, primarily because the Company invested $30.1 million in fixed-income funds and used cash for dividends, stock repurchases, and the Forsake acquisition.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management expects continued retailer pipeline replenishment during the second half of 2021, supported by demand for refined footwear, casual footwear, and BOGS outdoor products.
Management expects inventory levels to improve by the end of the third quarter, but Asian supply-chain bottlenecks and premium freight costs remain risks.
The Company expects the Forsake brand to expand its outdoor-category presence and leverage Weyco’s distribution and e-commerce infrastructure.
Renewed COVID-19 lockdowns associated with the Delta variant in Australia create uncertainty for international results during the balance of 2021. Florsheim Europe is being wound down.
Management estimates 2021 capital expenditures of $1.0 million to $2.0 million.
The $30 million revolving credit facility expires November 4, 2021. The Company expects to renew it but provides no assurance that renewal will occur.
Management believes available liquidity, operating cash flow, investments, marketable securities, and borrowing capacity will support cash needs for at least one year, subject to risks and uncertainties.
The Board declared a $0.24-per-share dividend on August 3, 2021, payable September 30, 2021, to shareholders of record August 27, 2021.
There were no material changes to the risk factors disclosed in the 2020 Form 10-K, and no legal proceedings were reported.

Important Facts for Investors to Verify

Whether the sharp year-over-year recovery is sustainable once comparisons normalize against 2019 rather than pandemic-disrupted 2020 results.
The effect of freight inflation, supply-chain disruptions, product availability, and potential inventory constraints on future gross margins and sales.
Progress, profitability, contingent consideration, and purchase-accounting adjustments related to the Forsake acquisition.
The renewal terms and availability of the revolving credit facility after its November 2021 expiration.
The effect of Australian lockdowns, international operating conditions, and the wind-down of Florsheim Europe.
The sustainability of dividends and share repurchases given cash usage, acquisition plans, and investment activity.
Management’s estimates concerning inventory reserves, deferred tax assets, goodwill, trademarks, pension liabilities, and other valuation-sensitive items.