Weyco Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The unaudited consolidated statements cover footwear brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Reportable segments were North American wholesale, North American retail, and other international operations.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $79.5 million | $74.6 million | $215.1 million | $196.3 million |
| Gross earnings | $30.4 million | $28.5 million | $81.4 million | $76.0 million |
| Gross margin | 38.3% | 38.3% | 37.8% | 38.7% |
| Earnings from operations | $8.1 million | $6.7 million | $17.3 million | $14.3 million |
| Operating margin | 10.2% | 9.0% | 8.1% | 7.3% |
| Net earnings attributable to Weyco | $5.2 million | $4.4 million | $11.3 million | $9.7 million |
| Diluted EPS | $0.48 | $0.40 | $1.03 | $0.86 |
- Q3 sales increased 7%, operating earnings increased 21%, and attributable net earnings increased 18% year over year.
- For the first nine months, sales increased 10%, operating earnings increased 22%, and attributable net earnings increased 16%.
- North American wholesale sales rose 8% in Q3 and 12% year to date; wholesale operating earnings rose 32% and 36%, respectively.
- Retail sales declined 5% in Q3 and 3% year to date, although same-store sales increased 2% and 7%, respectively. Four fewer domestic stores were operating year over year as unprofitable locations were closed.
- At September 30, cash and cash equivalents were $7.5 million and marketable securities totaled $45.6 million. Total debt was $44.0 million, compared with $37.0 million at December 31, 2011.
- Total assets were $282.3 million and total equity was $177.0 million at September 30, 2012.
- Operating cash flow was negative $51,000 for the first nine months, compared with $5.4 million of cash provided in the prior-year period. Accounts receivable increased $15.2 million, largely reflecting the Canadian BOGS distribution transition.
- Capital expenditures were $5.4 million year to date, compared with $4.0 million in 2011. Management expected an additional $3 million to $5 million in 2012 to complete the distribution-center expansion project.
Material Changes Versus the Prior Comparable Period
- The company assumed sales and distribution of BOGS and Rafters in Canada on June 1, 2012. Canadian BOGS sales contributed approximately $4.1 million in Q3, while licensing revenue declined because a third-party licensee no longer handled those sales.
- BOGS sales were $24.9 million in the first nine months of 2012 versus $15.6 million in the comparable 2011 period; the comparison is affected by the March 2, 2011 acquisition and the differing periods of consolidation.
- Wholesale Q3 gross margin improved to 32.4% from 31.6%, but year-to-date wholesale gross margin declined to 30.9% from 31.3% because of higher labor, material, and freight costs at overseas factories.
- Wholesale selling and administrative expenses declined to 22% of sales in Q3 and 23% year to date, versus 23% and 25%, respectively, in 2011. The reductions included approximately $461,000 in Q3 and $1.7 million year to date from remeasurement of BOGS contingent consideration.
- The estimated fair value of BOGS contingent consideration declined to $8.1 million from $9.7 million at December 31, 2011, producing a $1.7 million remeasurement gain. Management attributed the reduction primarily to lower projected BOGS gross margin dollars.
- The company paid the $2.0 million BOGS indemnification holdback in Q3 2012 and repurchased 247,000 shares for $5.7 million during the first nine months.
Liquidity, Outlook, Risks, and Unusual Items
- The company had a $50 million unsecured revolving credit facility, with $44 million drawn at approximately 1.2% interest and a maturity of April 30, 2013. On November 2, 2012, the facility was amended to increase capacity to $60 million; other terms were unchanged. The company was in compliance with its net-worth covenant at September 30.
- Management stated that cash, marketable securities, operating cash flow, and available borrowing capacity should support operating needs for at least one year, although no assurance was provided.
- Management expected 2013 capital expenditures to decline to approximately $2 million to $4 million after completion of the distribution-center project.
- Future BOGS contingent payments are due in 2013 and 2016. Management estimated a reasonably possible aggregate payment range of $5 million to $10 million, based on BOGS future sales and gross margins.
- Key operating risks include U.S. economic and retail conditions, overseas manufacturing cost inflation, foreign currency exposure, demand and weather effects on BOGS, execution of the Canadian distribution transition, and the company’s reliance on third-party overseas manufacturers.
- The company reported no material changes to previously disclosed market risks or risk factors, and no legal proceedings were reported.
- A $208,000 lease-termination fee for an unprofitable retail store reduced year-to-date retail results. Pension expense increased to $2.6 million from $2.2 million year to date.
Investor Verification Items
- Verify the sustainability of wholesale growth, particularly BOGS sales and the Canadian distribution operation.
- Assess the effect of overseas labor, material, and freight inflation on gross margins and the company’s ability to pass through price increases.
- Monitor operating cash conversion, accounts receivable growth, inventory levels, and the need for additional borrowings.
- Verify renewal or replacement of the revolving credit facility before its April 30, 2013 expiration and compliance with its financial covenant.
- Reconcile future BOGS contingent consideration payments with actual sales and gross-margin performance.
- Evaluate the impact of continued store closures, retail same-store sales, and the distribution-center capital project on future results.