WEYCO GROUP INC quarterly report, Q1 FY2023

Weyco Group, Inc. 10-Q Summary

Reporting period: Three months ended March 31, 2023; comparative period is the three months ended March 31, 2022. The interim financial statements are unaudited. Weyco designs and markets branded footwear, principally through North American wholesale and retail operations, with additional operations in Australia, South Africa, and Asia Pacific.

Financial Performance and Position

Metric	Q1 2023	Q1 2022	Change
Net sales	$86.3 million	$81.4 million	6%
Gross earnings	$37.2 million	$29.1 million	28%
Gross margin	43.1%	35.8%	Up 730 basis points
Earnings from operations	$10.4 million	$5.4 million	91%
Operating margin	12.0%	6.7%	Up 530 basis points
Net earnings	$7.4 million	$4.1 million	84%
Diluted EPS	$0.78	$0.42	86%
Operating cash flow	$23.0 million	$0.2 million	Significant increase

Net margin was approximately 8.6%, compared with approximately 5.0% in the prior-year quarter. The effective tax rate declined to 25.6% from 26.5%. Interest expense increased to $385,000 from $1,000 because of higher borrowings and interest rates.

At March 31, 2023, cash and cash equivalents were $22.6 million, short-term investments and marketable securities totaled approximately $8.1 million, and total liquidity in those categories was approximately $30.7 million. Inventory was $106.7 million, down from $128.0 million at December 31, 2022. Total assets were $307.7 million and total equity was $227.7 million.

Short-term borrowings were $20.6 million under a $50.0 million revolving credit facility bearing interest at one-month SOFR plus 145 basis points; the reported rate at quarter-end was 6.26%. The facility expires September 28, 2023, is secured by general business assets, and includes customary covenants. The company was in compliance with its covenants.

Cash Flow, Capital Allocation, and Liquidity

Operating cash flow was $23.0 million, primarily reflecting higher earnings and favorable inventory and working-capital movements.
The company repaid $10.5 million of revolving debt on a net basis during the quarter, paid $4.6 million of dividends, repurchased 62,352 shares for $1.5 million, and incurred approximately $660,000 of capital expenditures.
Investing cash flow was negative $149,000, including $659,000 of property, plant, and equipment purchases.
Management estimates 2023 capital expenditures of $2.0 million to $4.0 million.
On May 2, 2023, the board declared a $0.25 per-share dividend payable June 30, 2023, a 4% increase from the prior quarterly dividend of $0.24.
Approximately $4.1 million of cash and cash equivalents was held by foreign subsidiaries.

Material Changes Versus the Prior Comparable Period

North American wholesale sales increased 4% to $69.9 million, while wholesale operating earnings increased 82% to $8.8 million. Higher unit selling prices and lower inbound freight costs materially improved gross margin.
Wholesale pairs shipped decreased 5%, indicating that sales growth was driven by pricing rather than volume.
North American retail sales increased 14% to $8.9 million, and retail operating earnings increased 55% to $1.3 million, aided by internet sales and lower e-commerce expenses as a percentage of sales.
Other operations sales increased 17% to $7.5 million, and operating earnings improved to $275,000 from a $243,000 operating loss, partly reflecting the prior-year COVID-related disruption in Asia.
Brand sales varied: Florsheim increased 15%, Nunn Bush increased 1%, Stacy Adams declined 3%, and BOGS/Rafters declined 2%.
Inventory declined as supply-chain conditions normalized and the company moved receipts closer to expected shipment requirements.
Interest expense and non-service pension costs increased materially, partially offsetting operating improvement.
The company adopted ASU 2016-13, the expected credit loss standard, in the first quarter; adoption had no material financial statement impact.

Outlook, Commentary, Risks, and Unusual Items

Management described the quarter as a record first quarter for sales, operating earnings, and net earnings. It remains optimistic about the long-term prospects of its brands but noted cautious wholesale accounts, uncertainty surrounding consumer spending, higher interest rates, and a challenging footwear retail environment.

Management expects BOGS wholesale sales weakness to continue into the fall as retailers right-size outdoor footwear inventories. It expects BOGS inventory to return to more normalized levels in the fourth quarter of 2023 and sales growth to rebound in 2024.
BOGS inventory was described as higher than normal but manageable, with investment concentrated in evergreen styles.
The company expects to renew its revolving credit facility later in 2023 but provided no assurance that renewal will occur.
Management believes available cash, investments, operating cash flow, and borrowing facilities will support business needs for at least one year, subject to the stated uncertainties.
Results for the quarter may not be indicative of full-year results. Key estimates include inventory reserves, deferred tax asset realizability, goodwill, and trademarks.
Foreign currency exposure remains relevant; Florsheim Australia had contracts to purchase $3.2 million of U.S. dollars for approximately $4.5 million Australian dollars, with all contracts expiring in 2023.
Operating lease liabilities totaled $15.2 million at quarter-end, and the long-term pension liability was $15.7 million.
The filing reports no legal proceedings and states that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.

Important Facts for Investors to Verify

Whether wholesale demand and unit volumes remain resilient after Q1 price-driven sales growth and the 5% decline in pairs shipped.
Whether BOGS inventory can be reduced to normalized levels by Q4 2023 without increased markdowns or margin pressure.
The renewal terms, pricing, and availability of the $50.0 million revolving credit facility before its September 28, 2023 expiration.
Whether elevated gross margins are sustainable as freight costs normalize and consumer and retailer demand remain uncertain.
Progress in retail e-commerce expense control and the durability of retail sales growth.
Foreign exchange, pension, lease, and other obligations, including the $15.7 million pension liability and $15.2 million of operating lease liabilities.
The effect of continued dividends, share repurchases, and potential acquisitions on liquidity and leverage.