Business Context and Reporting Period
Weyco Group, Inc. designs and markets branded footwear, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Operations comprise North American wholesale, North American retail and international “other” businesses. The unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
The company operated 30 company-owned U.S. retail stores and an Internet business at September 30, 2011. On March 2, 2011, Weyco acquired Bogs, whose results were included in North American wholesale from the acquisition date.
Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $74.6 million | $57.1 million | $196.3 million | $166.9 million |
| Gross earnings | $28.5 million | $22.2 million | $76.0 million | $64.2 million |
| Gross margin | 38.3% | 38.8% | 38.7% | 38.5% |
| Earnings from operations | $6.7 million | $4.5 million | $14.3 million | $11.6 million |
| Net earnings attributable to Weyco | $4.4 million | $3.4 million | $9.7 million | $8.5 million |
| Diluted EPS | $0.40 | $0.30 | $0.86 | $0.74 |
| Operating margin | 9.0% | 7.9% | 7.3% | 7.0% |
- Q3 sales increased 31%; nine-month sales increased 18%.
- Q3 operating earnings increased 50%; nine-month operating earnings increased 23%.
- Q3 selling and administrative expenses were 29.3% of sales versus 30.9% in 2010. Nine-month expense ratios were approximately level year over year.
- Interest expense increased to $124,000 in Q3 and $351,000 for the first nine months, primarily because of borrowings associated with the Bogs acquisition.
- Effective tax rates were 35.7% for Q3 and 34.0% for the first nine months, compared with 32.6% and 34.7%, respectively, in the prior-year periods.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $5.4 million for the first nine months of 2011, compared with cash used of $1.9 million in 2010.
- Investing activities used $21.0 million, including approximately $27.0 million for acquisitions and $4.0 million of capital expenditures. Management expected 2011 capital expenditures of $4.0 million to $5.0 million.
- Financing activities provided $19.2 million. The company paid $5.4 million in dividends, repurchased shares for $12.1 million and recorded net bank borrowings of $44.0 million.
- Cash and cash equivalents were $10.6 million at September 30, 2011, compared with $7.2 million at December 31, 2010. Total marketable securities were $53.2 million at amortized cost, producing cash and marketable securities of approximately $63.8 million.
- Total outstanding debt was $44.0 million, versus $5.0 million at December 31, 2010. The unsecured revolving credit facility provides $50.0 million, bears interest at approximately 0.99% at quarter-end, includes a minimum-net-worth covenant and expires April 30, 2012. The company was in compliance with the covenant.
- Management stated that cash, marketable securities, operating cash flow and available borrowing capacity should adequately support business needs for at least one year.
Material Changes Versus the Prior Comparable Period
- North American wholesale sales increased 37% in Q3 and 19% year to date. Bogs contributed $10.7 million of Q3 sales and $15.6 million year to date; licensing revenues also increased substantially.
- North American retail sales increased 13% in Q3 and 10% year to date. Same-store sales increased 22% in Q3 and 17% year to date despite six fewer stores year over year. Retail operations improved from a $378,000 operating loss in Q3 2010 to $245,000 of operating earnings in Q3 2011.
- Wholesale gross margin declined to 30.3% in Q3 from 30.9% and to 30.2% year to date from 30.7%. Management cited higher labor and material costs in China and India and the strengthening of the renminbi.
- Other operations sales increased 16% in Q3 and 17% year to date, aided by foreign-exchange translation, while Q3 operating earnings declined $73,000.
- Foreign-currency transaction results shifted from a $547,000 gain in Q3 2010 to a $424,000 loss in Q3 2011, and from a $334,000 year-to-date gain to a $303,000 loss.
- The company repurchased 536,442 shares during the first nine months for $12.1 million, including 400,319 shares purchased in a private transaction. Reinvested earnings declined to $143.3 million from $150.5 million at year-end 2010 after dividends and share repurchases.
Guidance, Outlook, Risks and Unusual Items
- Management expected the Bogs acquisition to be accretive to 2011 earnings, excluding certain purchase-accounting adjustments, transaction costs and integration costs. Bogs sales are seasonal, with most sales occurring in the third and fourth quarters.
- The Bogs purchase-price allocation remained preliminary. It included $11.0 million of goodwill, a $22.0 million trademark and $9.8 million of estimated contingent payments recorded as other long-term liabilities. Changes in the contingent-payment fair value could materially affect earnings and financial position.
- Bogs transaction costs of approximately $220,000 were recorded in wholesale selling and administrative expenses. Integration included moving operations from Oregon to Wisconsin.
- The company continues to evaluate store closures, additional acquisitions and share repurchases. It planned to close unprofitable retail locations as leases expire.
- Key risks include continued product-cost inflation, foreign-exchange volatility, retail and economic conditions, seasonal Bogs performance, acquisition integration, the pending April 2012 credit-facility expiration and the company’s reliance on overseas manufacturers.
- The filing reported no material changes to previously disclosed risk factors, no legal proceedings and no material changes in market risk disclosures. Management concluded that disclosure controls were effective; internal-control integration related to Bogs remained ongoing.
Investor Verification Items
- Verify the final valuation and accounting treatment of Bogs goodwill, trademarks, other intangible assets and contingent consideration.
- Assess whether Bogs’ seasonal fourth-quarter performance supports the acquisition’s expected earnings accretion.
- Monitor wholesale gross-margin pressure from overseas labor, material, currency and pricing factors.
- Review refinancing or renewal plans for the $50.0 million revolving facility expiring April 30, 2012.
- Evaluate liquidity after acquisition spending, capital expenditures, dividends, share repurchases and the $44.0 million of borrowings.
- Reconcile reported gross margins with peers because distribution costs are included in selling and administrative expenses rather than cost of sales.