Weyco Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Weyco Group designs and markets branded footwear, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. The company reports North American wholesale and retail segments, with international operations classified as “Other.” The filing covers the unaudited three months ended March 31, 2013, compared with the first quarter of 2012.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $73.6 million | $75.3 million | Down 2% |
| Gross earnings | $27.7 million | $28.0 million | Down 1% |
| Gross margin | 37.6% | 37.2% | Up 40 basis points |
| Earnings from operations | $4.7 million | $5.8 million | Down 20% |
| Operating margin | 6.4% | 7.7% | Down 130 basis points |
| Net earnings attributable to Weyco | $3.2 million | $3.9 million | Down 17% |
| Diluted EPS | $0.30 | $0.35 | Down $0.05 |
| Net cash from operating activities | $3.7 million | $0.3 million | Up $3.3 million |
At March 31, 2013, cash and cash equivalents were $13.8 million and marketable securities totaled $41.4 million at amortized cost, for combined cash and marketable securities of approximately $55 million. Short-term borrowings were $38.0 million, compared with $45.0 million at December 31, 2012. The company had a $60 million unsecured revolving credit facility and was in compliance with its minimum-net-worth covenant.
Total assets were $271.6 million, compared with $285.3 million at year-end 2012. Inventory declined to $53.6 million from $65.4 million, while accounts receivable increased to $56.3 million from $49.0 million. The pension liability was $27.9 million.
Material Changes Versus the Prior Comparable Period
- Wholesale sales declined 2% to $55.2 million; retail sales increased 2% to $5.7 million; Other sales declined 3% to $12.6 million.
- Wholesale operating earnings fell 17% to $3.7 million. The prior-year period benefited from a $518,000 reduction in estimated BOGS contingent consideration; no significant comparable adjustment occurred in 2013.
- Retail operating earnings improved to $442,000 from a $5,000 loss, supported by 10% same-store sales growth, particularly online, and the closure of underperforming stores. The company had six fewer domestic stores than a year earlier.
- Other operating earnings declined 62% to $514,000, primarily because of lower wholesale volumes and higher retail selling and administrative expenses in Australia and Asia.
- Selling and administrative expenses increased to 31% of sales from 29%, while gross margin improved modestly.
- Net earnings and diluted EPS decreased despite lower interest expense, partly because interest income declined with lower average investment balances and other income and expense shifted from income to expense.
- Cash flow improved significantly because of working-capital movements, particularly an $11.8 million inventory reduction, although cash declined $3.5 million after investing and financing activities.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management estimated 2013 capital expenditures of $5 million to $6 million. Capital expenditures were $564,000 during the first quarter.
- The company expected to resume its regular quarterly dividend schedule in July 2013 after accelerating its first- and second-quarter 2013 dividends into 2012.
- Management believed cash, marketable securities, operating cash flow and available borrowing capacity would support business needs for at least one year, although no assurance was provided.
- The revolving credit agreement expired April 30, 2013 and was renewed through April 30, 2014 on essentially the same terms.
- The company paid $1.27 million of BOGS contingent consideration on March 28, 2013. A second payment is due in March 2016; the remaining recorded fair value was $5.0 million at March 31, 2013.
- On May 1, 2013, the company purchased a 50% interest in its Montreal office and distribution-center building for $3.4 million.
- Management cited economic conditions, the U.S. retail environment, sales volatility, foreign operations and currency effects as relevant uncertainties. The filing states that there were no material changes to previously disclosed risk factors or market risks.
- The company indicated that mild winter conditions caused U.S. retailers to carry over BOGS inventory, reducing new orders.
- No legal proceedings were reported. Management stated that disclosure controls were effective and that no significant changes in internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Whether wholesale demand, particularly Nunn Bush and U.S. BOGS sales, improves after the first-quarter weakness.
- The sustainability of retail same-store sales growth and the financial benefit from store closures and online sales.
- The remaining BOGS contingent consideration, including the assumptions underlying the March 2016 payment.
- Debt levels, borrowing availability and compliance with the minimum-net-worth covenant after the Montreal property investment and planned capital spending.
- The timing and amount of resumed dividend payments and continued share repurchases; 172,885 shares were repurchased for $4.1 million during the quarter.
- The impact of pension obligations, foreign currency movements and international operating performance on comprehensive income and equity.