Business Context and Reporting Period
Weyco Group, Inc. designs and markets branded footwear, 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. The unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $79.1 million | $91.2 million | $214.8 million | $233.2 million |
| Gross earnings | $29.3 million | $32.6 million | $78.7 million | $85.8 million |
| Gross margin | 37.1% | 35.7% | 36.6% | 36.8% |
| Earnings from operations | $7.3 million | $9.1 million | $12.7 million | $18.3 million |
| Operating margin | 9.3% | 10.0% | 5.9% | 7.8% |
| Net earnings attributable to Weyco | $4.6 million | $5.5 million | $8.3 million | $11.2 million |
| Diluted EPS | $0.44 | $0.51 | $0.78 | $1.03 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $27.8 million | $(27.2) million |
At September 30, 2016, cash and cash equivalents were $14.8 million, marketable securities totaled $24.6 million, and total liquidity from these sources was approximately $39.4 million. Outstanding short-term borrowings were $22.8 million under a $60 million unsecured revolving credit facility, with an interest rate of approximately 1.3%. The company reported a $28.8 million long-term pension liability and total equity of $200.7 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 13%, operating earnings declined 20%, and net earnings attributable to Weyco declined 17%. For the first nine months, sales declined 8%, operating earnings declined 30%, and attributable net earnings declined 26%.
- North American wholesale sales decreased 17% in the quarter and 10% year to date. The principal pressures were lower BOGS, Nunn Bush, and Stacy Adams sales, while Florsheim sales increased.
- BOGS sales were affected by retailer inventory carried over after the prior year's mild North American winter. Nunn Bush and Stacy Adams were affected by weaker consumer spending and challenging mid-tier department-store conditions.
- North American retail sales were approximately flat, but retail operating earnings declined 22% in the quarter and 32% year to date. Higher internet marketing costs and lower brick-and-mortar sales contributed to the decline.
- Other operations generated higher sales and operating earnings in the quarter, primarily because of improved Florsheim Europe results, but year-to-date operating earnings declined 33% because of lower Florsheim Australia sales and margins.
- Quarterly consolidated gross margin improved to 37.1% from 35.7%, primarily from selected price increases. Year-to-date gross margin was broadly stable, while lower sales volumes increased selling and administrative expenses as a percentage of sales.
- Inventory fell to $70.5 million from $97.2 million at December 31, 2015, producing a major working-capital benefit. Operating cash flow improved from a $27.2 million use in 2015 to $27.8 million generated in 2016.
- The company repurchased 352,175 shares for $9.4 million during the first nine months, paid $8.8 million of dividends, invested $4.9 million in capital expenditures, and paid the final $5.2 million BOGS acquisition earn-out.
Outlook, Risks, Contingencies, and Unusual Items
- Management estimated 2016 capital expenditures of approximately $5.5 million. It stated that cash, marketable securities, operating cash flow, and available borrowing capacity should support business needs for at least one year, subject to customary uncertainties.
- The revolving credit facility was renewed on November 4, 2016, on the same terms, with a new expiration date of November 3, 2017.
- On November 7, 2016, the board authorized freezing all benefit accruals under the Weyco pension plan effective December 31, 2016. Management had not yet determined the accounting impact but did not expect a material adverse effect.
- Foreign-exchange exposure remains material because certain foreign operations purchase inventory in U.S. dollars while selling in local currencies. The filing states that the weaker Canadian and Australian dollars negatively affected margins; outstanding currency contracts had no significant unrealized gain or loss at quarter-end.
- The company identified consumer spending, department-store and retail-channel weakness, weather-related BOGS demand, foreign currency movements, and fixed operating costs as important business risks. No material changes to previously disclosed risk factors or contractual obligations were reported.
- The filing reported no legal proceedings and no material impairment of the company's municipal bond investments.
Investor Verification Checklist
- Verify whether BOGS and Nunn Bush demand and retailer inventory levels recover during the subsequent winter and holiday selling periods.
- Assess whether wholesale volume weakness continues to pressure operating leverage despite selected price increases.
- Reconcile cash, marketable securities, borrowings, dividends, repurchases, capital expenditures, and the BOGS earn-out against subsequent filings.
- Review the renewed credit agreement for covenants, borrowing availability, and interest-rate exposure.
- Monitor the accounting and funding effects of the December 31, 2016 pension freeze.
- Evaluate Canadian and Australian currency trends and the effectiveness of the company's foreign-exchange contracts.
- Confirm whether management's approximately $5.5 million 2016 capital-expenditure estimate and liquidity assessment were achieved.