Weyco Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2018. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters. Operations are reported as North American wholesale, North American retail, and other international operations. The company had nine U.S. retail stores and internet businesses as of September 30, 2018.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $78.4 million | $76.9 million | $208.8 million | $203.5 million |
| Gross earnings | $30.4 million | $29.5 million | $80.7 million | $76.8 million |
| Gross margin | 38.8% | 38.3% | 38.7% | 37.7% |
| Earnings from operations | $8.0 million | $7.8 million | $13.6 million | $13.2 million |
| Operating margin | 10.3% | 10.1% | 6.5% | 6.5% |
| Net earnings attributable to Weyco | $6.3 million | $4.9 million | $10.9 million | $8.4 million |
| Diluted EPS | $0.60 | $0.48 | $1.05 | $0.81 |
| Cash dividends per share | $0.23 | $0.22 | $0.68 | $0.65 |
For the nine months, operating cash flow was $1.8 million versus $16.4 million in the prior-year period. Investing cash flow used $1.4 million, including $876,000 of capital expenditures. Financing cash flow used $8.0 million, including $9.2 million of dividends, $6.6 million of share repurchases, and $3.7 million to acquire the remaining minority interest in Florsheim Australia.
At September 30, 2018, cash and cash equivalents were $15.8 million, marketable securities were $24.0 million, and total liquidity resources were approximately $39.7 million. Short-term borrowings were $8.0 million under a $60 million unsecured revolving credit facility. Total assets were $257.7 million and total liabilities were $55.1 million. The company had no remaining noncontrolling interest after acquiring the 45% minority interest in Florsheim Australia.
Material changes versus the prior comparable period
- Q3 sales increased 2%, operating earnings increased 3%, and earnings attributable to Weyco increased 27%. Nine-month sales and operating earnings increased 3%, while attributable earnings increased 30%.
- Wholesale sales increased 4% in both Q3 and the nine-month period, led principally by Stacy Adams and Florsheim. Wholesale gross margin improved to 34.4% from 33.9% in Q3 and to 33.7% from 32.1% year to date.
- Retail sales increased 15% in Q3 and 4% year to date. Same-store sales, including internet sales, increased 20% in Q3 and 9% year to date, primarily from higher website sales and, year to date, the closure of unprofitable stores.
- Other sales declined 14% in Q3 and 6% year to date, primarily because Florsheim Australia sales declined 16% and 8%, respectively. Other operations generated only $8,000 of operating earnings in Q3 and an operating loss of $45,000 year to date, versus $369,000 and $1.0 million of operating earnings in the comparable periods.
- The effective tax rate declined to 24.0% in Q3 and 24.4% year to date, from 38.1% in both prior-year periods, primarily because of the 21% U.S. federal tax rate under the Tax Cuts and Jobs Act.
- Cash and marketable securities declined from $47.1 million at December 31, 2017 to $39.7 million at September 30, 2018, while debt increased from zero to $8.0 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management estimated 2018 capital expenditures of $1.0 million to $1.5 million; $876,000 had been spent through September 30.
- Management believed cash, marketable securities, operating cash flow, and available borrowing facilities would support business needs for at least one year, although no assurance was provided.
- The revolving credit facility was renewed after quarter end on the same terms through November 5, 2019. Borrowings bear interest at LIBOR plus 0.75%; the quarter-end rate was 3.0%.
- The $3.7 million purchase of the remaining 45% interest in Florsheim Australia was accounted for as an equity transaction, with no gain or loss recognized in earnings.
- The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method; management reported no material impact.
- The company expected adoption of the new lease standard in the first quarter of 2019 to create a right-of-use asset and lease liability, but not to materially affect results of operations or cash flows.
- Key operating risks include challenging retail conditions in Australia and the Pacific Rim, foreign currency movements, reliance on overseas third-party manufacturers, U.S. retail conditions, and general risks disclosed in the 2017 Form 10-K. No material changes to reported risk factors, contractual obligations, market risks, or legal proceedings were disclosed.
- Foreign currency translation reduced comprehensive income, contributing to accumulated other comprehensive loss of $19.4 million at September 30, 2018.
Important facts for investors to verify
- Whether the decline in operating cash flow and increased use of revolving debt are temporary working-capital effects or a developing trend.
- The sustainability of wholesale gross-margin improvement and the strong growth in online retail sales.
- Whether Florsheim Australia can stabilize sales and return the international “other” segment to profitability.
- The effect of the 2018 tax-rate reduction on future earnings comparability and cash taxes.
- Future capital allocation among dividends, share repurchases, acquisitions, and debt repayment; approximately 817,000 shares remained available for repurchase at September 30, 2018.
- The effect of lease-accounting adoption in 2019 on reported assets and liabilities.