Weyco Group Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, and the six-month period ended on that date. Weyco Group Inc. is a distributor of men's casual, dress, and fashion shoes, primarily under the brands Florsheim, Nunn Bush, and Stacy Adams. The company operates through North American wholesale and retail divisions, as well as foreign operations. A significant event during this period was the acquisition of a majority interest in Florsheim Australia Pty Ltd. on January 23, 2009, which consolidated wholesale and retail businesses in Australia, South Africa, and Asia Pacific.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $50.1 million | $109.0 million |
| Gross Earnings | $18.9 million (37.8% margin) | $38.6 million (35.4% margin) |
| Operating Earnings | $2.2 million | $5.5 million |
| Net Earnings (Weyco Group) | $2.2 million | $4.7 million |
| Diluted EPS | $0.19 | $0.41 |
| Cash from Operations (6mo) | $20.8 million | |
| Cash & Marketable Securities | $63.3 million (as of June 30, 2009) | |
| Debt | $0 (No outstanding borrowings) |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased 6% in Q2 and 5% year-to-date compared to 2008. North American wholesale sales dropped 19% in Q2 and 14% year-to-date due to reduced consumer demand and retailer inventory pullbacks. Retail same-store sales declined 10%.
- Profitability Compression: Operating earnings fell 63% in Q2 ($2.2M vs. $5.9M) and 59% year-to-date ($5.5M vs. $13.5M). This was driven by lower sales volumes and reduced gross margins in the wholesale division caused by higher product costs and pricing pressures.
- Foreign Growth: Foreign operations sales increased significantly due to the Florsheim Australia acquisition, contributing $7.7 million in Q2 and $12.1 million year-to-date.
- Expense Increases: Selling and administrative expenses rose primarily due to the inclusion of the new Australian business and one-time acquisition costs of $370,000.
- Balance Sheet Strength: Cash and cash equivalents increased to $21.1 million from $11.5 million at year-end 2008. The company paid down all short-term borrowings, leaving $0 debt outstanding.
Outlook, Risks, and Management Commentary
- Acquisition Outlook: Management expects consolidated sales for Florsheim Australia to be between $20 million and $25 million for the full year 2009.
- Capital Allocation: The company increased its quarterly dividend to $0.15 per share (a 7% increase). It continues to repurchase common stock, having spent $2.4 million in the first half of 2009. Capital expenditures for 2009 are expected to range between $1 million and $2 million.
- Liquidity: The company maintains a $50 million revolving credit facility with no outstanding borrowings and is in compliance with all covenants. Management believes current cash, marketable securities, and operating cash flow are sufficient for 2009 needs.
- Risks: The company cites the challenging retail environment, reduced consumer spending, and the shift toward moderately priced goods as primary headwinds. There have been no material changes to risk factors from the 2008 10-K.
Investor Verification Checklist
- Acquisition Integration: Verify the performance of the newly acquired Florsheim Australia business against the $20M-$25M sales guidance.
- Wholesale Margin Pressure: Monitor if gross margins in the wholesale division stabilize as product costs and retailer pricing pressures evolve.
- Inventory Levels: Confirm that inventory reductions continue to align with retailer demand to prevent future write-downs.
- Dividend Sustainability: Assess the impact of the increased dividend rate on free cash flow given the decline in net earnings.
- Stock Repurchase Activity: Track the remaining authorized shares (approx. 1.4 million) and the company's willingness to deploy cash for buybacks in a volatile market.