Weyco Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2021, compared with the same periods in 2020. Weyco 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 Florsheim Australia and the wind-down of Florsheim Europe.
The company acquired substantially all operating assets of outdoor-footwear distributor Forsake, Inc. on June 7, 2021, for approximately $2.6 million plus estimated discounted contingent consideration of approximately $1.4 million. Forsake contributed approximately $524,000 of sales after acquisition through September 30, 2021.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $61.8 million | $53.2 million | $166.3 million | $133.4 million |
| Gross earnings | $24.7 million | $20.3 million | $66.7 million | $51.0 million |
| Gross margin | 40.0% | 38.2% | 40.1% | 38.2% |
| Operating earnings (loss) | $6.7 million | $(3.8) million | $12.9 million | $(15.5) million |
| Operating margin | 10.9% | (7.2%) | 7.8% | (11.6%) |
| Net earnings (loss) | $5.1 million | $(5.9) million | $10.2 million | $(13.6) million |
| Diluted EPS | $0.52 | $(0.60) | $1.05 | $(1.39) |
- North American Wholesale sales increased 14% in Q3 and 18% year to date; operating earnings were $6.0 million and $10.0 million, respectively.
- North American Retail sales increased 44% in Q3 and 42% year to date; operating earnings were $1.4 million and $3.3 million, respectively. U.S. retail growth was led by e-commerce, while only four brick-and-mortar stores remained open.
- Other sales increased 11% in Q3 and 55% year to date, but the segment remained unprofitable, with operating losses of $682,000 and $445,000, respectively, primarily due to Australian lockdowns and the Europe wind-down.
- Cash flow from operations was $9.7 million for the first nine months, compared with $6.8 million in 2020. Capital expenditures were $673,000.
- At September 30, 2021, cash and cash equivalents were $18.9 million, investments at fair value were $15.2 million, and marketable securities at amortized cost were $11.4 million. Management reported total cash, short-term investments, and marketable securities of approximately $45.4 million.
- There were no borrowings under the revolving credit facility. Total liabilities were $65.6 million, including $9.1 million of operating lease liabilities and $32.5 million of long-term pension liability.
- Inventory was $52.9 million, with approximately 56% of wholesale inventory in transit at quarter-end because of extended shipping times.
- The company paid $6.9 million of dividends and repurchased $1.5 million of common stock during the first nine months. The quarterly dividend remained $0.24 per share.
Material Changes Versus the Prior Comparable Period
- Results improved sharply from 2020, which was heavily affected by COVID-19 closures, customer bankruptcies, restructuring costs, lease terminations, asset impairments, inventory reserves, and other unusual charges totaling approximately $7.4 million in Q3 2020.
- Q3 2021 sales were 16% higher and year-to-date sales were 25% higher than in 2020. Q3 and year-to-date operating results moved from losses to profits.
- Q3 2021 wholesale gross margin declined to 34.6% from 35.7% because of higher inbound freight costs. Management raised prices but expects freight and material costs to pressure margins at least through the first half of 2022.
- Retail gross margin improved to 68.4% in Q3 from 63.6%, while retail selling and administrative expenses declined substantially following store closures and the absence of 2020 impairment and lease-termination charges.
- Accounts receivable increased to $43.3 million from $34.6 million at December 31, 2020, while inventory declined from $59.0 million at year-end but rose materially during the third quarter as goods entered the supply chain.
- Cash declined to $18.9 million from $32.5 million at December 31, 2020, primarily reflecting purchases of investments, dividends, share repurchases, the Forsake acquisition, and capital expenditures.
Outlook, Risks, and Unusual Items
- Management reported strong demand across brands and expects improved inventory flow during Q4 2021, with demand for dress and dress-casual footwear expected to remain strong into 2022 absent adverse pandemic developments.
- Supply-chain bottlenecks, container availability, extended transit times, premium freight, and delayed BOGS deliveries remain significant risks. Management expects margin pressure from higher freight and material costs through at least the first half of 2022.
- Renewed COVID-19 lockdowns affected Florsheim Australia during Q3; stores began reopening in October. Future pandemic restrictions could adversely affect demand, store operations, shipments, and financial condition.
- Management estimated 2021 capital expenditures of $1.0 million to $1.5 million.
- On November 4, 2021, after quarter-end, the revolving credit facility was renewed through November 4, 2022, and its borrowing limit increased from $30 million to $40 million. The facility bears interest at LIBOR plus 1.35% and is secured by general corporate assets.
- The company believes available liquidity and borrowing capacity will support cash needs for at least one year, although no assurance is provided. Approximately $2.5 million of cash was held by foreign subsidiaries.
- Potentially material estimates include inventory reserves, deferred tax asset realizability, goodwill, trademarks, and pension obligations. The company has annual testing requirements for indefinite-lived goodwill and trademarks.
- The company had foreign-exchange contracts outstanding with no significant unrealized gains or losses at quarter-end.
Investor Verification Checklist
- Verify whether supply-chain constraints ease as expected and whether delayed BOGS and other inventory receipts convert into Q4 sales without excessive markdowns.
- Monitor wholesale gross margin, premium freight expense, pricing actions, and the expected margin pressure through the first half of 2022.
- Assess the sustainability of e-commerce-led retail growth and the profitability impact of the reduced brick-and-mortar footprint.
- Review the performance and contingent consideration obligations associated with the Forsake acquisition.
- Track COVID-19 developments in Australia and other international markets, including the completion of the Florsheim Europe wind-down.
- Reconcile inventory in transit, accounts receivable growth, and operating cash flow as supply-chain conditions normalize.
- Confirm compliance with the renewed credit facility’s covenants and assess liquidity after dividends, repurchases, acquisitions, and capital expenditures.