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. Its reportable segments are North American wholesale and North American retail; other operations primarily include Florsheim Australia and Europe. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $82.5 million | $78.4 million | $217.1 million | $208.8 million |
| Gross earnings | $32.3 million | $30.4 million | $85.5 million | $80.7 million |
| Gross margin | 39.2% | 38.8% | 39.4% | 38.7% |
| Earnings from operations | $8.5 million | $8.0 million | $15.5 million | $13.6 million |
| Operating margin | 10.3% | 10.3% | 7.1% | 6.5% |
| Net earnings attributable to Weyco | $6.6 million | $6.3 million | $12.1 million | $10.9 million |
| Diluted EPS | $0.66 | $0.60 | $1.21 | $1.05 |
- Q3 sales increased 5%, operating earnings increased 5%, and attributable net earnings increased 5% year over year. Nine-month sales increased 4%, operating earnings 14%, and attributable net earnings 11%.
- North American wholesale sales increased 7% in both Q3 and year to date, driven primarily by Florsheim and BOGS/Rafters. Wholesale operating earnings increased 25% in Q3 and 33% year to date, supported by higher sales and gross margins.
- North American retail sales increased 4% in Q3 and 11% year to date, mainly from e-commerce. Retail operating earnings declined 15% in Q3 but increased approximately $0.4 million year to date.
- Other sales declined 7% in Q3 and 13% year to date, primarily because of weaker Australian currency translation and lower Florsheim Australia sales. Other operations generated a $1.4 million Q3 operating loss and a $2.7 million year-to-date operating loss.
- Net cash used in operating activities was $4.2 million for the first nine months of 2019, compared with $1.8 million provided in 2018, principally due to increased inventory and working-capital use.
- Capital expenditures were $4.6 million year to date. Management estimated full-year 2019 capital expenditures of $5.5 million to $6.5 million, including the corporate headquarters expansion scheduled for completion in the first quarter of 2020.
- At September 30, 2019, cash and cash equivalents were $9.1 million, marketable securities were $23.1 million, and total cash and marketable securities were $32.1 million. Short-term borrowings were $16.9 million under a $60 million unsecured revolving facility.
- Total assets were $292.9 million and total equity was $207.7 million at September 30, 2019. Inventory was $81.3 million, compared with $72.7 million at December 31, 2018.
- The Company paid $9.4 million in dividends and repurchased 154,710 shares for $4.0 million during the first nine months. The remaining repurchase authorization was 510,300 shares at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Wholesale gross margin increased to 35.9% in Q3 from 34.4% and to 35.1% year to date from 33.7%, reflecting stable overseas supplier pricing and selective price increases.
- Retail same-store sales, including U.S. e-commerce, increased 3% in Q3 and 10% year to date, but Q3 retail gross margin declined to 64.9% from 65.6%.
- Florsheim Australia’s sales declined 9% in Q3 and 11% year to date in U.S. dollars; local-currency sales declined 3% in both periods.
- Other businesses incurred approximately $350,000 of one-time costs in Q3 to exit an underperforming Australian retail store.
- Interest expense increased because of higher average debt balances, while interest income declined because of lower cash balances. The effective tax rate decreased to 23.6% from 24.0% in Q3 and to 23.4% from 24.4% year to date.
- On January 1, 2019, the Company adopted ASC 842. Operating lease right-of-use assets and lease liabilities were $19.8 million and $21.3 million, respectively, at September 30, 2019. The adoption materially affected the balance sheet but did not materially affect earnings or cash flows.
Outlook, Risks, Contingencies, and Unusual Items
- A 15% U.S. tariff on China-sourced leather footwear became effective September 1, 2019; a corresponding tariff on rubber and other non-leather footwear was expected to begin December 15, 2019. Management negotiated wholesale price increases and supplier price reductions, but stated that the ultimate effect on margins and results was unknown.
- Management expects available cash, marketable securities, operating cash flow, and borrowing capacity to support business needs for at least one year, although no assurance was provided.
- The revolving credit facility was renewed on November 4, 2019, on the same terms, through November 5, 2020, at LIBOR plus 0.75%.
- Key operating risks include U.S. retail conditions, inventory levels, foreign currency movements, Australian operating performance, tariff costs, supplier pricing, and demand by brand and distribution channel.
- The filing reported no material legal proceedings and no material changes to the risk factors disclosed in the 2018 Form 10-K. Management stated that disclosure controls were effective and that no significant changes affected internal control over financial reporting.
Important Facts for Investors to Verify
- Whether tariffs imposed on China-sourced footwear reduce gross margins after the company’s pricing and supplier-cost actions.
- Whether elevated inventory levels convert to sales without increased markdowns or further pressure on operating cash flow.
- Whether Florsheim Australia and Europe return to profitability after the Q3 loss and Australian store-exit costs.
- Progress and final cost of the headquarters expansion relative to the $5.5 million–$6.5 million 2019 capital-expenditure estimate.
- Use of the revolving credit facility, borrowing costs, and liquidity after dividends, repurchases, capital expenditures, and seasonal working-capital needs.
- Trends in e-commerce growth, brick-and-mortar retail profitability, and brand-level sales, particularly Florsheim, BOGS/Rafters, Nunn Bush, and Stacy Adams.