Weyco Group, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2016, compared with the same period in 2015. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Its reportable segments are North American wholesale and North American retail; other operations include businesses in Australia, South Africa, Asia Pacific, and Europe.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $78.9 million | $78.1 million | Up 1% |
| Gross earnings | $27.1 million | $28.7 million | Down 6% |
| Gross margin | 34.4% | 36.8% | Down 2.4 points |
| Earnings from operations | $3.8 million | $5.8 million | Down 34% |
| Operating margin | 4.8% | 7.4% | Down 2.0 points |
| Net earnings attributable to Weyco | $2.7 million | $3.6 million | Down 26% |
| Diluted EPS | $0.25 | $0.33 | Down $0.08 |
| Operating cash flow | $13.5 million | $1.6 million | Up $11.9 million |
Net margin was approximately 3.4%, compared with 4.6% in the prior-year quarter. The effective tax rate declined to 35.8% from 37.5%. Cash dividends declared increased to $0.20 per share from $0.19.
At March 31, 2016, cash and cash equivalents were $16.3 million and marketable securities totaled $25.2 million, for combined cash and investments of approximately $41.5 million. Short-term borrowings were $24.6 million, compared with $26.6 million at December 31, 2015. The company had a $60 million unsecured revolving credit facility, with borrowings at 1.19% and maturity on November 4, 2016.
Total assets were $278.8 million, down from $299.0 million at December 31, 2015. Inventory declined to $74.9 million from $97.2 million, while accounts receivable increased to $59.1 million from $54.0 million. Long-term pension liability was $30.5 million.
Material changes versus the prior comparable period
- North American wholesale sales rose 2% to $62.2 million, but operating earnings fell 31% to $3.3 million. Product margins declined to 28.5% from 30.2%, primarily because of lower Canadian margins and the weaker Canadian dollar against U.S. dollar-denominated purchases.
- Wholesale brand trends were mixed: Stacy Adams sales increased 12% and Florsheim increased 8%; BOGS/Rafters decreased 17%, primarily because of a mild winter; Nunn Bush decreased 3% and Umi decreased 21%.
- North American retail sales increased 3% to $5.1 million, and same-store sales increased 7%, driven largely by the U.S. internet business. Retail operating earnings decreased 10% to $246,000.
- Other operations sales declined 4% to $11.6 million, while operating earnings declined 66% to $236,000. Florsheim Australia was affected by currency translation and lower gross margins, although local-currency sales increased 2%.
- Selling and administrative expenses increased to $23.3 million from $23.0 million. Distribution costs increased to $3.2 million from $2.8 million because of higher temporary labor and storage costs.
- Operating cash flow improved substantially, primarily because inventory reductions provided $22.3 million of cash, compared with $7.8 million in the prior-year quarter.
- The company paid $5.2 million on March 22, 2016, representing the final earn-out payment related to the 2011 BOGS acquisition.
- The company repurchased 111,939 shares for $2.9 million and paid $4.3 million in dividends. Shares outstanding declined, contributing modestly to per-share results.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects 2016 capital expenditures of approximately $4 million to $5 million, including expansion of the U.S. distribution center, which began in April and was expected to be completed in the third quarter.
- Management stated that cash, marketable securities, operating cash flow, and available borrowing capacity should provide adequate liquidity for at least one year, although no assurance was given.
- The company expects to evaluate liquidity uses including capital expenditures, share repurchases, and potential acquisitions.
- Key operating risks include U.S. economic and retail conditions, foreign-currency movements, especially the Canadian and Australian dollars, gross-margin pressure, seasonal demand, and reliance on overseas third-party manufacturers.
- The filing states that there were no material changes to contractual obligations or previously disclosed risk factors, and no material legal proceedings were reported.
- Foreign subsidiaries held approximately $1.9 million of cash and cash equivalents. Outstanding foreign-exchange contracts had no significant unrealized gain or loss at quarter-end.
- Quarterly results may not be indicative of full-year results because of seasonality and other operating factors.
Important facts for investors to verify
- Whether Canadian and Australian currency effects continue to pressure product margins.
- Whether the improvement in operating cash flow is sustained after the significant first-quarter inventory reduction.
- Execution, cost, and timing of the distribution-center expansion and the stated $4 million to $5 million capital-expenditure plan.
- Renewal or refinancing plans for the $60 million revolving credit facility expiring November 4, 2016.
- Sales and margin trends for BOGS/Rafters, Stacy Adams, Florsheim, and the North American wholesale segment.
- The effect of continued share repurchases, dividends, pension obligations, and potential acquisitions on liquidity.