Business Context and Reporting Period
Weyco Group, Inc. designs and markets footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters brands. Its reportable segments are North American wholesale and North American retail, with additional operations in Australia, South Africa, Asia Pacific, and Europe. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019.
Results were materially affected by the COVID-19 pandemic, including retail closures, weaker demand for dress footwear, customer bankruptcies, reduced store traffic, and international shutdowns.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $53.2 million, down 36% | $133.4 million, down 39% |
| Gross earnings | $20.3 million; 38.2% margin | $51.0 million; 38.2% margin |
| Earnings (loss) from operations | $(3.8) million; approximately (7.2)% margin | $(15.5) million; approximately (11.6)% margin |
| Net earnings (loss) | $(5.9) million | $(13.6) million |
| Diluted EPS | $(0.60) | $(1.39) |
| Operating cash flow | Not separately provided for the quarter | $6.8 million |
- Consolidated gross margin declined from approximately 39.2% to 38.2% in the quarter and from approximately 39.4% to 38.2% year to date.
- At September 30, 2020, cash and cash equivalents were $6.9 million and marketable securities totaled $15.7 million, for combined liquidity of approximately $22.5 million.
- Short-term borrowings were $5.2 million at September 30, 2020. The Company had a $60 million unsecured PNC revolving facility at quarter-end, with borrowings at 0.90% and a peak balance of $8.5 million during the first nine months.
- On November 4, 2020, after quarter-end, the Company replaced the PNC facility with a $30 million secured Associated Bank revolving facility expiring November 4, 2021. The facility bears interest at LIBOR plus 1.35% and includes customary covenants, including a minimum tangible net worth covenant.
- Inventories were $76.2 million at September 30, 2020, compared with $86.7 million at December 31, 2019. Operating lease liabilities totaled $14.4 million.
- The Company paid $9.4 million of dividends, repurchased $1.3 million of stock, and incurred $3.2 million of capital expenditures during the first nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales fell $29.3 million, and year-to-date sales fell $83.7 million, primarily because of COVID-19-related shutdowns and weaker demand.
- North American wholesale sales declined 35% in the quarter and 39% year to date. BOGS sales increased 6% in the quarter, offsetting part of declines in Stacy Adams, Nunn Bush, and Florsheim. Wholesale generated a $2.8 million operating profit in the quarter but a $4.7 million operating loss year to date.
- North American retail sales declined 15% in the quarter and 21% year to date. U.S. e-commerce sales increased 16% in the quarter and 4% year to date, but lower brick-and-mortar traffic more than offset the gains. Three unprofitable U.S. stores were closed, leaving five brick-and-mortar stores.
- Other international operations sales declined 50% in the quarter and 47% year to date. The related operating loss widened to $3.8 million in the quarter and $7.1 million year to date.
- Selling and administrative expenses increased as a percentage of sales because of lower volume and pandemic-related charges, despite reductions in advertising and other costs.
- Accounts receivable declined to $39.5 million from $51.5 million at December 31, 2019. The Company wrote off $3.3 million related to J.C. Penney in the second quarter and $1.1 million related to Tailored Brands in the third quarter.
- Lease liabilities declined from $20.6 million at December 31, 2019, primarily because of three U.S. store closures and lease expirations in Australia.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects BOGS demand and momentum to continue through the balance of 2020 and into 2021, supported by outdoor footwear demand and increased online shopping.
- Management expects dress and dress-casual footwear to remain under pressure until office attendance and normal social activity recover. The Company plans to increase casual, boot, and sport-casual offerings.
- Management expects inventories to reach an appropriate level relative to sales within three to six months.
- Management expects 2020 capital expenditures of $3.5 million to $4.0 million and 2021 capital expenditures of $1.0 million to $2.0 million.
- Management believes cash, marketable securities, operating cash flow, and borrowing availability will support the business for at least one year, although no assurance is provided.
- COVID-19 resulted in $3.1 million of long-lived asset impairment charges, including $1.9 million for retail fixed assets and $1.2 million for operating lease right-of-use assets. The Company also recorded store closure and early lease termination costs, employee restructuring costs, inventory reserves, and customer receivable write-offs.
- The Company performed interim impairment assessments for goodwill and trademarks. No impairment was recorded; however, future deterioration in sales, cash flow, market capitalization, or macroeconomic conditions could result in future impairment charges.
- Customer bankruptcies and slower collections may cause additional receivable write-downs. Supply-chain disruptions, renewed shutdowns, reduced consumer demand, store closures, foreign operations, and changes in consumer preferences remain material risks.
- No material legal proceedings were reported. Management stated that disclosure controls and procedures were effective as of September 30, 2020.
Most Important Facts for Investors to Verify
- Whether the post-quarter-end $30 million secured credit facility provides adequate liquidity and whether the Company remains in compliance with its tangible net worth covenant.
- The collectability of remaining customer receivables and any additional exposure to financially distressed wholesale customers.
- Whether the anticipated recovery in BOGS, e-commerce, casual footwear, and international operations offsets continued weakness in dress footwear and brick-and-mortar retail.
- Inventory aging, markdown risk, and progress toward management’s three-to-six-month inventory normalization target.
- Potential future impairment charges for goodwill, trademarks, stores, lease assets, or other long-lived assets.
- The sustainability of dividend payments, stock repurchases, and planned capital expenditures given the year-to-date net loss and pandemic-related uncertainty.