Weyco Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. 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 Australia, South Africa, Asia Pacific and Europe.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $56.9 million | $63.9 million | $135.8 million | $142.0 million |
| Gross earnings | $22.3 million | $24.4 million | $49.4 million | $53.2 million |
| Gross margin | 39.2% | 38.2% | 36.4% | 37.4% |
| Earnings from operations | $1.6 million | $3.3 million | $5.4 million | $9.1 million |
| Operating margin | 2.8% | 5.2% | 4.0% | 6.4% |
| Net earnings attributable to Weyco | $1.0 million | $2.0 million | $3.7 million | $5.7 million |
| Diluted EPS | $0.09 | $0.19 | $0.35 | $0.52 |
| Cash dividends declared per share | $0.21 | $0.20 | $0.41 | $0.39 |
Six-month operating cash flow was $29.1 million, compared with cash used of $8.7 million in the prior-year period. The improvement was primarily driven by a $20.6 million inventory reduction and a $14.6 million decrease in accounts receivable. Investing cash flow was an outflow of $3.2 million, including $3.5 million of capital expenditures. Financing cash flow was an outflow of $28.8 million, including $6.5 million of dividends, $6.1 million of share repurchases, a $5.2 million BOGS contingent-consideration payment and net debt repayments.
At June 30, 2016, cash and cash equivalents were $15.3 million, marketable securities totaled $24.7 million at amortized cost, and short-term borrowings were $15.2 million. The company had a $60 million unsecured revolving credit facility expiring November 4, 2016, bearing interest at LIBOR plus 0.75%; outstanding borrowings carried a 1.2% rate. Total equity was $200.6 million, and the long-term pension liability was $28.4 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 11%, while first-half sales declined 4%. The primary weakness was North American wholesale, down 14% in the quarter and 5% year to date.
- Wholesale sales were pressured by soft consumer spending, reduced department-store inventory models, lower Nunn Bush shipments and weak BOGS demand following a mild winter. BOGS/Rafters sales declined 47% in the quarter and 28% year to date.
- Operating earnings fell 53% in the quarter and 41% year to date. Wholesale operating earnings declined 54% in the quarter and 38% year to date; retail and other operations also declined.
- Quarterly wholesale gross margin improved to 32.6% from 31.0%, partly due to selective price increases. First-half wholesale gross margin declined to 30.5% from 31.0%, partly reflecting unfavorable Canadian currency effects.
- Retail sales declined 6% in the quarter and 1% year to date. Same-store sales decreased 2% in the quarter but increased 2% year to date; remodeling interruptions affected results.
- Foreign currency transaction results improved, with other income including a $138,000 gain in the quarter and a $287,000 gain year to date, versus losses in the corresponding 2015 periods.
- Inventories declined to $76.6 million from $97.2 million at December 31, 2015, primarily because the company reduced BOGS inventory in line with lower expected orders.
Guidance, Outlook, Risks and Unusual Items
- Management estimated that BOGS annual sales would decline approximately 25%; second-half backlogs remained down.
- Management expected 2016 capital expenditures of approximately $5.0 million. The company planned to complete a U.S. distribution-center capacity expansion and open a new outlet store in the third quarter.
- Management stated that cash, marketable securities, operating cash flow and available borrowing facilities should support the business for at least one year, although no assurance was provided.
- Key risks include weak consumer spending, changes in department-store and off-price retail inventory practices, seasonal BOGS demand, foreign-exchange movements affecting Canadian and Australian margins, and the November 2016 maturity of the revolving credit facility.
- The company paid the final $5.2 million contingent-consideration amount related to its 2011 BOGS acquisition in March 2016.
- There were no material changes to contractual obligations or previously disclosed risk factors, and no legal proceedings were reported. Management concluded that disclosure controls were effective and that there were no significant changes in internal control over financial reporting.
Investor Verification Priorities
- Verify the renewal, replacement or repayment terms for the $60 million revolving credit facility expiring November 4, 2016.
- Monitor BOGS orders, inventory levels and the approximately 25% full-year sales decline estimate.
- Assess whether wholesale volume weakness and fixed selling and administrative costs continue to pressure operating margins.
- Review Canadian and Australian currency trends and their effect on gross margins.
- Confirm completion and spending for the distribution-center expansion, store remodeling and planned outlet opening.
- Reconcile cash generation with dividends, share repurchases, capital expenditures and any future acquisitions.