Weyco Group Inc. 10-Q Summary: Period Ended September 30, 2010
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Weyco Group Inc., a distributor of men's casual, dress, and fashion shoes under brands including Florsheim, Nunn Bush, Stacy Adams, and Umi. The report covers the three and nine months ended September 30, 2010. The company operates through North American wholesale, North American retail, and international ("Other") segments.
Key Financial Metrics
| Metric | 9 Months 2010 | 9 Months 2009 | 3 Months 2010 | 3 Months 2009 |
|---|---|---|---|---|
| Net Sales ($000s) | $166,898 | $166,904 | $57,136 | $57,943 |
| Gross Earnings ($000s) | $64,217 | $60,273 | $22,151 | $21,671 |
| Gross Margin % | 38.5% | 36.1% | 38.8% | 37.4% |
| Operating Earnings ($000s) | $11,618 | $10,117 | $4,491 | $4,582 |
| Net Earnings to Weyco ($000s) | $8,532 | $8,049 | $3,393 | $3,360 |
| Diluted EPS | $0.74 | $0.70 | $0.30 | $0.29 |
| Cash & Equivalents ($000s) | $6,771 | $30,000 (Dec 31, 2009) | N/A | |
| Total Debt ($000s) | $6,000 | $0 (Dec 31, 2009) | N/A | |
| Operating Cash Flow ($000s) | ($1,859) | $17,876 | N/A |
Material Changes vs. Prior Period
- Revenue: Consolidated net sales were flat year-over-year for both the quarter (-1%) and the nine-month period (0%).
- Profitability: Operating earnings increased 15% year-to-date ($11.6M vs $10.1M) driven by higher gross margins in the wholesale segment and Florsheim Australia, partially offset by higher selling and administrative expenses. Quarterly operating earnings declined slightly (-2%).
- Cash Flow: Operating cash flow turned negative ($1.9M outflow) compared to a $17.9M inflow in the prior year, primarily due to increased inventory levels in 2010 versus inventory reductions in 2009.
- Debt: The company drew $6.0 million on its revolving credit facility during the period, whereas it had no outstanding debt at year-end 2009.
- Acquisition: On April 28, 2010, the company acquired the Umi children's footwear brand for approximately $2.6 million. Umi contributed approximately $1.0 million in sales for the nine-month period.
Guidance, Outlook, and Risks
- Outlook: Management expects capital expenditures for the full year 2010 to be less than $2.0 million. The company plans to close one additional retail store in the fourth quarter.
- Dividends: The quarterly dividend was increased from $0.15 to $0.16 per share in April 2010.
- Share Repurchases: The company repurchased 97,683 shares for approximately $2.2 million year-to-date. Approximately 1.29 million shares remain available under the buyback program.
- Risks: The filing references risk factors from the 2009 10-K, including economic conditions affecting the U.S. retail environment and foreign currency fluctuations (specifically the Australian dollar strengthening against the U.S. dollar).
- Unusual Items: Other income decreased significantly year-to-date due to lower foreign exchange gains on intercompany loans ($318k in 2010 vs $1.1M in 2009).
Investor Verification Checklist
- Verify the sustainability of the gross margin expansion in the wholesale segment given the decline in sales for key brands like Florsheim and Nunn Bush.
- Confirm the impact of the $6.0 million debt drawdown on future interest expenses and covenant compliance.
- Assess the cash burn rate from operating activities and the adequacy of the $70.9 million cash and marketable securities balance to fund operations and dividends.
- Review the performance of the newly acquired Umi brand and the integration costs associated with it.
- Monitor the planned closure of retail stores and the impact on same-store sales growth.