Weyco Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The unaudited filing covers a footwear company operating through North American wholesale, North American retail, and international businesses primarily in Australia and Europe.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $60.5 million | $60.9 million | $134.6 million | $130.4 million |
| Gross earnings | $24.4 million | $23.7 million | $53.2 million | $50.3 million |
| Earnings from operations | $1.9 million | $1.9 million | $7.0 million | $5.5 million |
| Net earnings attributable to Weyco | $1.5 million | $1.6 million | $5.5 million | $4.6 million |
| Diluted EPS | $0.15 | $0.15 | $0.55 | $0.44 |
- Approximate consolidated gross margin was 40.4% in Q2 and 39.5% year to date; operating margin was 3.1% and 5.2%, respectively.
- Q2 net sales declined 1%, while six-month sales increased 3%. Q2 operating earnings were essentially flat and first-half operating earnings increased 27%.
- North American wholesale sales increased 1% in Q2 and 6% year to date. Wholesale operating earnings increased 27% in Q2 and 44% year to date, supported by higher sales and gross margins.
- North American retail sales increased 17% in Q2 and 15% year to date, with same-store sales, including U.S. e-commerce, up 14% in both periods. Retail operating earnings increased 81% in Q2 and 107% year to date.
- Other international sales decreased 15% in Q2 and 16% year to date. International operations reported operating losses of $0.7 million in Q2 and $1.3 million year to date, compared with losses of $23,000 and $53,000, respectively, in the prior-year periods.
Cash flow, debt and liquidity
- Cash provided by operating activities was $0.2 million for the first six months of 2019, down from $14.0 million in the prior-year period, primarily because of inventory and accounts-payable changes.
- Cash and cash equivalents were $9.7 million at June 30, 2019. Marketable securities totaled $28.8 million, for combined cash and marketable securities of approximately $38.5 million.
- Short-term borrowings were $12.0 million under a $60 million unsecured revolving credit facility bearing interest at LIBOR plus 0.75%; the reported rate at quarter-end was 3.15%.
- The revolving facility expires November 5, 2019. Management expects to renew it but provides no assurance.
- First-half cash uses included $7.0 million of dividends, $1.8 million of share repurchases, and $2.4 million of capital expenditures. Management estimates full-year 2019 capital expenditures of $4.0 million to $5.0 million.
- Management believes cash, marketable securities, operating cash flow and available borrowing facilities should fund the business for at least one year, subject to the stated risks and uncertainties.
Material changes and unusual items
- The company adopted ASC 842 lease accounting on January 1, 2019. It recognized operating lease right-of-use assets of $26.0 million and lease liabilities of $27.8 million at adoption. The adoption materially affected the balance sheet but did not materially affect beginning retained earnings, earnings or cash flows.
- At June 30, operating lease assets totaled $23.3 million and lease liabilities totaled $24.9 million. Six-month lease costs were $4.4 million.
- Interest expense increased to $66,000 year to date from zero in the prior-year period because of higher average debt.
- The effective tax rate was 21.6% in Q2 and 23.3% year to date, compared with 24.8% and 25.0% in the comparable 2018 periods.
- Shares outstanding declined year over year, reflecting repurchases and other equity activity. The company repurchased 63,481 shares in the first quarter and none in Q2; approximately 602,000 shares remained authorized for repurchase at June 30.
Outlook, commentary and risks
- On August 1, 2019, the company disclosed that an additional 10% U.S. tariff on certain Chinese consumer goods, including footwear, was expected to increase product costs. Management intends to mitigate the impact through wholesale price increases and supplier price reductions, but the effect on margins and results was unknown.
- Management cited weaker Australian currency translation, lower sales, lower gross margins and higher operating costs as the principal causes of deteriorating Florsheim Australia results.
- Slower U.S. mall traffic continues to challenge department-store sales, particularly for the Nunn Bush and Stacy Adams brands.
- The company sources inventory from third-party overseas manufacturers, creating exposure to tariffs, foreign currency movements, supplier pricing and international operating conditions.
- The filing provides no formal revenue or earnings guidance. It provides capital-expenditure expectations and states that the credit facility is expected to be renewed, without assurance.
- Management reported no material changes to the risk factors in the 2018 Form 10-K, no legal proceedings, and effective disclosure controls.
Investor verification items
- Verify the renewal and terms of the $60 million revolving credit facility before its November 5, 2019 expiration.
- Assess the ultimate effect of China-related tariffs on sourcing costs, pricing, gross margins and inventory decisions.
- Monitor whether Florsheim Australia and other international operations return to profitability.
- Reconcile the sharp decline in operating cash flow with inventory growth from $72.7 million at December 31, 2018 to $82.8 million at June 30, 2019.
- Evaluate the sustainability of dividends and share repurchases relative to operating cash generation and borrowings.
- Distinguish ASC 842 balance-sheet changes from changes in underlying operating performance because prior-year balance-sheet information was not restated.