Weyco Group, Inc. 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2015. The financial statements are unaudited. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Its principal reportable segments are North American wholesale and North American retail; other operations include Australia, South Africa, Asia Pacific, and Europe.
Key Financial Metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net sales | $63.9 million | $62.9 million | $142.0 million | $137.8 million |
| Gross earnings | $24.4 million | $24.2 million | $53.2 million | $51.6 million |
| Gross margin | 38.2% | 38.5% | 37.4% | 37.4% |
| Earnings from operations | $3.3 million | $3.4 million | $9.1 million | $8.3 million |
| Operating margin | 5.2% | 5.4% | 6.4% | 6.0% |
| Net earnings attributable to Weyco | $2.0 million | $2.2 million | $5.7 million | $5.4 million |
| Diluted EPS | $0.19 | $0.20 | $0.52 | $0.50 |
Six-month operating cash flow was a use of $8.7 million, compared with $7.8 million provided in the prior-year period. The cash use primarily reflected a $17.0 million increase in inventory, partly offset by an $11.4 million reduction in accounts receivable.
At June 30, 2015, cash and cash equivalents were $13.1 million and marketable securities totaled $26.9 million at amortized cost, for combined cash and investments of approximately $39.9 million. Short-term borrowings were $18.1 million, compared with $5.4 million at December 31, 2014. The company had a $60 million unsecured revolving credit facility, with borrowings at 0.94% and maturity on November 5, 2015.
Capital expenditures were $1.0 million during the first six months. Dividends paid totaled $6.3 million, and share repurchases totaled $2.4 million for 85,901 shares. Pension liability was $33.8 million at June 30, 2015.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 2%, while six-month sales increased 3%.
- Second-quarter operating earnings decreased 2% and attributable net earnings decreased 8%; six-month operating earnings increased 10% and attributable net earnings increased 5%.
- North American wholesale sales increased 7% in the quarter and 8% year to date, driven primarily by Stacy Adams, Nunn Bush, and BOGS. Wholesale operating earnings increased 26% and 32%, respectively, supported by higher sales and gross margins.
- North American retail sales decreased 5% in both the quarter and first half. Retail operating earnings decreased 13% in the quarter and 22% year to date. The company had two fewer stores, while internet sales increased.
- Other segment sales decreased 16% in the quarter and 12% year to date, primarily because of unfavorable Australian and European currency translation. Other operating earnings declined 40% and 31%, respectively, reflecting weaker Australian retail conditions and lower earnings from recently opened stores.
- Foreign currency transaction losses increased to $240,000 in the quarter and $443,000 year to date, compared with gains of $69,000 and $4,000, respectively, in the prior-year periods.
- The effective tax rate increased to 35% from 33% in the quarter and to 37% from 34% year to date, primarily because tax-exempt municipal bond income represented a smaller percentage of U.S. pretax earnings.
- Inventory increased to $86.0 million from $69.0 million at December 31, 2014, as management purchased inventory to support expected second-half backlogs and core-product availability.
Outlook, Risks, Contingencies, and Unusual Items
Management expects 2015 capital expenditures of approximately $2.0 million to $3.0 million and believes cash, marketable securities, operating cash flow, and available borrowing capacity will support business needs for at least one year, although no assurance is provided. Management stated that liquidity may be used for capital expenditures, share repurchases, and acquisitions.
The company expects a contingent consideration payment to former Bogs shareholders in March 2016. The estimated fair value was approximately $5.7 million at June 30, 2015 and was recorded in accrued liabilities.
Key risks include U.S. economic and retail conditions, sluggish Australian retail conditions, foreign currency fluctuations, inventory requirements, and dependence on third-party overseas manufacturers. The company uses foreign exchange contracts, including contracts involving Canadian dollars and Australian dollars; no significant quarter-end gain or loss was reported on outstanding contracts.
No material changes were reported to contractual obligations or previously disclosed risk factors. No material legal proceedings were reported. Management stated that disclosure controls and procedures were effective and that there were no significant changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the substantial inventory increase converts into second-half sales without elevated markdowns or obsolescence.
- The renewal or refinancing status of the $60 million revolving credit facility, which was scheduled to expire on November 5, 2015.
- The amount and funding source of the approximately $5.7 million Bogs contingent consideration payment due in March 2016.
- The effect of continued Australian and European currency weakness on sales, margins, and operating earnings.
- Whether wholesale growth, particularly in Stacy Adams, Nunn Bush, and BOGS, offsets ongoing retail and international pressure.
- The sustainability of dividends, share repurchases, and potential acquisitions given negative operating cash flow in the first half.