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, and Rafters. The company operates North American wholesale and retail segments, with additional operations in Australia, South Africa, Asia Pacific, and Europe. This unaudited report covers the three months ended March 31, 2020, and was filed on May 11, 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $63.6 million | $74.1 million | Down 14% |
| Gross earnings | $23.2 million | $28.8 million | Down 19% |
| Gross margin | 36.5% | 38.8% | Down 2.3 percentage points |
| Earnings from operations | $1.3 million | $5.1 million | Down 74% |
| Operating margin | 2.1% | 6.9% | Down 4.8 percentage points |
| Net earnings | $1.2 million | $4.0 million | Down 71% |
| Diluted EPS | $0.12 | $0.40 | Down $0.28 |
| Cash flow from operations | $15.0 million | $4.5 million | Increase of $10.5 million |
At March 31, 2020, cash and cash equivalents were $14.2 million, and marketable securities totaled $17.2 million, for combined liquidity of approximately $31.4 million. The company had no borrowings outstanding under its $60 million unsecured revolving credit facility, which expires November 5, 2020. Total assets were $268.8 million and total equity was $205.4 million.
Operating cash flow benefited primarily from reductions in inventories and accounts receivable. The company paid $4.7 million in dividends, repurchased $1.3 million of stock, and invested $1.8 million in capital expenditures. Management estimates full-year 2020 capital expenditures of $3.0 million to $4.0 million.
Material Changes Versus the Prior Comparable Period
- North American wholesale sales declined 11% to $52.7 million, with operating earnings down 47% to $2.8 million.
- North American retail sales declined 15% to $4.8 million, and the segment moved to an $89,000 operating loss from $483,000 of operating earnings.
- Other international operations declined 32% to $6.1 million and increased their operating loss to $1.3 million from $543,000.
- Gross margin decreased principally because of the tariff on certain footwear imported from China. The tariff was 15% beginning September 1, 2019, and was reduced to 7.5% on February 14, 2020.
- Other income improved to $407,000 from a $125,000 expense, primarily because of unrealized gains on foreign exchange contracts.
- The effective tax rate increased to 37.0% from 23.9%, partly because no tax benefit was recorded on foreign losses.
- Accumulated other comprehensive loss increased to $27.0 million from $24.5 million, primarily due to a $2.6 million unfavorable foreign-currency translation adjustment.
Guidance, Outlook, Risks, and Unusual Items
COVID-19 caused significant disruption beginning in the second half of March 2020. Government-mandated closures affected the company’s wholesale customers, domestic retail stores, and international operations. Domestic retail locations closed March 18 and remained closed as of the filing. Management stated that it could not estimate the pandemic’s full impact, but expected COVID-19 and the global economic slowdown to adversely affect 2020 results.
Management is prioritizing liquidity, costs, and inventory; reducing operating expenses; pursuing rent relief; actively managing slower receivable collections; and reducing planned inventory receipts. Chinese factories were operating, while production in India had ceased because of a countrywide shutdown. The company stated that supply-chain disruptions had not yet materially affected operations but could do so in the future.
The company believes cash, marketable securities, operating cash flow, and available borrowing capacity will support its needs for at least one year, although there can be no assurance. Renewal of the revolving credit facility later in 2020 was expected but not assured. On May 5, 2020, the board declared a $0.24-per-share dividend payable June 30, 2020.
Goodwill and trademarks were tested for impairment as of March 31, 2020, with no impairment identified. Management cautioned that future impairment remains possible. The company also had $3.0 million of foreign exchange contracts outstanding, with approximately $362,000 of first-quarter unrealized gains.
Important Facts for Investors to Verify
- Monitor the duration of store closures, customer reopenings, demand recovery, and the effect on wholesale orders and retail comparable sales.
- Verify collection trends for accounts receivable and the potential for bad-debt expense or working-capital pressure.
- Assess inventory levels, planned receipts, markdown risk, and supply-chain disruptions, particularly in India and China.
- Review the November 5, 2020 expiration and potential renewal of the $60 million revolving credit facility.
- Track gross-margin recovery as higher-tariff inventory is sold and evaluate the continuing effects of tariffs and foreign exchange.
- Evaluate the sustainability of dividends, share repurchases, and other uses of liquidity under the COVID-19 operating environment.
- Consider the risk of future goodwill or trademark impairment if pandemic-related deterioration persists.