Business Context and Reporting Period
Weyco Group, Inc. designs and markets branded footwear, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Its reportable segments are North American wholesale and North American retail; other operations include Australia, South Africa, Asia Pacific, and Europe. The unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Financial Highlights
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $87.4 million | $83.1 million | $225.2 million | $221.7 million |
| Gross earnings | $32.4 million | $31.6 million | $84.0 million | $84.0 million |
| Gross margin | 37.1% | 38.0% | 37.3% | 37.9% |
| Earnings from operations | $9.0 million | $8.6 million | $17.3 million | $17.0 million |
| Operating margin | 10.3% | 10.3% | 7.7% | 7.6% |
| Net earnings attributable to Weyco | $5.5 million | $5.4 million | $10.9 million | $10.8 million |
| Diluted EPS | $0.51 | $0.50 | $1.00 | $1.00 |
Third-quarter sales and operating earnings each increased 5%, while attributable net earnings increased 2%. Nine-month sales increased 2%, operating earnings increased 2%, and attributable net earnings increased 1%; diluted EPS was unchanged.
- Q3 wholesale sales increased 5% to $68.1 million, led by BOGS/Rafters sales growth of 37% and Stacy Adams growth of 10%. Wholesale operating earnings increased 5% to $7.4 million.
- Q3 retail sales increased 2% to $5.4 million, while retail operating earnings increased 25% to $0.6 million. Same-store sales increased 6%, including a 12% increase in U.S. internet sales.
- Other-segment sales increased 7% to $14.0 million, but operating earnings declined 6% to $0.9 million in the quarter.
- The effective tax rate was 38.7% in Q3 and 36.5% for the first nine months, versus 35.9% and 35.5%, respectively, in 2013.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash flow from operations was a use of $3.4 million in the first nine months of 2014, compared with $13.9 million provided in the prior-year period. The change primarily reflected higher accounts receivable and inventory, including inventory accumulated to support anticipated BOGS sales.
- Capital expenditures were $1.9 million; management estimated approximately $2.5 million of capital expenditures for full-year 2014.
- Cash dividends paid were $8.0 million, and share repurchases totaled $4.0 million for 152,660 shares. The company had 475,815 shares remaining under its repurchase authorization at September 30, 2014.
- Cash and cash equivalents were $11.7 million and marketable securities were $30.6 million at September 30, 2014, for total cash and marketable securities of $42.4 million. The comparable December 31, 2013 amount was $46.2 million.
- Short-term borrowings were $24.3 million at September 30, 2014, versus $12.0 million at December 31, 2013. Borrowings were under a $60 million unsecured revolving credit facility at an interest rate of 0.90%.
- The credit facility was renewed on November 4, 2014, through November 5, 2015, on the same terms. Management stated that available liquidity, operating cash flow, and borrowing capacity should support business needs for at least one year, subject to stated uncertainties.
- Total assets were $275.7 million and total equity was $199.9 million at September 30, 2014. Accounts receivable increased to $63.0 million from $48.5 million at year-end, while inventories increased modestly to $64.2 million from $63.2 million.
Material Changes, Outlook, and Unusual Items
- Wholesale gross margin declined to 31.7% in Q3 from 32.6% and to 31.0% for nine months from 31.3%, primarily because of the weaker Canadian dollar relative to the U.S. dollar. Management expected fourth-quarter wholesale gross margins to remain relatively flat with Q3.
- Nunn Bush and Florsheim sales declined in the wholesale channel, while BOGS sales increased substantially. Based on higher backlogs, management anticipated continued BOGS sales growth in Q4 and expected fourth-quarter sales for Stacy Adams, Nunn Bush, and Florsheim to be comparable to or slightly above the prior year.
- The retail business closed underperforming stores. One store closed November 1, 2014, and another was scheduled to close at the end of its lease term on January 31, 2015.
- Q3 other expense increased because of foreign-exchange losses on intercompany loans. The prior-year period included a $200,000 other-than-temporary investment impairment; no such impairment was recorded in 2014.
- The company recorded a $5.1 million estimated fair value liability for contingent consideration related to the 2011 BOGS acquisition. A second payment is due in March 2016; the estimate is subject to remeasurement based on BOGS performance.
- Foreign currency exposure remains material. At quarter-end, the company had forward contracts involving Canadian dollars and Australian dollars; the Australian contracts generated an approximately $200,000 gain based on quarter-end exchange rates.
- The company made $1.3 million of pension contributions during the first nine months and expected no additional contributions for the remainder of 2014.
- Management identified no material changes to previously reported contractual obligations, market risks, or risk factors. No legal proceedings were reported, and management concluded that disclosure controls were effective.
- The company was assessing the potential impact of the new revenue-recognition standard, ASU 2014-09; the filing did not provide a quantified impact.
Investor Verification Priorities
- Verify whether BOGS growth and backlog conversion met management’s Q4 expectations, and whether increased inventory levels translated into sales without elevated markdowns.
- Monitor Canadian and Australian currency movements and their effects on wholesale margins, reported sales, and foreign-exchange gains or losses.
- Reconcile operating cash use with the growth in accounts receivable and inventory, particularly after the seasonal BOGS selling period.
- Review the renewal terms and future utilization of the revolving credit facility, including the increase in borrowings from year-end.
- Track the March 2016 BOGS contingent-consideration payment and changes in its fair value estimate.
- Assess the effect of store closures and internet-sales growth on retail profitability and comparable-store performance.