Business Context and Reporting Period
Weyco Group, Inc. designs and markets branded footwear, principally for men, under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. The Company operates through North American wholesale and retail segments, with additional operations in Australia, South Africa, Asia Pacific, and Europe. Inventory is sourced primarily from overseas manufacturers.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $76.9 million | $79.1 million | $203.5 million | $214.8 million |
| Gross earnings | $29.5 million | $29.3 million | $76.8 million | $78.7 million |
| Gross margin | 38.3% | 37.1% | 37.7% | 36.6% |
| Earnings from operations | $7.8 million | $7.8 million | $13.2 million | $14.0 million |
| Operating margin | 10.1% | 9.8% | 6.5% | 6.5% |
| Net earnings attributable to Weyco | $4.9 million | $4.6 million | $8.4 million | $8.3 million |
| Diluted EPS | $0.48 | $0.44 | $0.81 | $0.78 |
- Net margin improved to approximately 6.4% in the third quarter from 5.8% in the prior-year quarter.
- Operating results benefited from higher gross margins and lower wholesale selling and administrative expenses, partly offset by weaker retail and international results.
- Nine-month cash flow from operations was $16.4 million, compared with $27.8 million in 2016.
- At September 30, 2017, cash and cash equivalents were $6.7 million and marketable securities were $29.6 million, for total cash and marketable securities of approximately $36.3 million.
- Outstanding short-term borrowings were $4.8 million under a $60 million unsecured revolving credit facility. Total equity was $203.2 million.
- Inventories declined to $57.7 million from $69.9 million at December 31, 2016; accounts receivable increased to $56.3 million from $50.7 million.
- Cash dividends declared were $0.22 per share in the third quarter and $0.65 per share year to date.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 3%, primarily because of lower wholesale sales of Stacy Adams, Nunn Bush, and BOGS. Florsheim sales increased.
- Nine-month sales declined 5%; North American wholesale sales fell 6%, retail sales fell 4%, and other operations sales fell 2%.
- Wholesale gross margin increased to 33.9% from 32.2% in the third quarter and to 32.1% from 31.2% year to date, primarily because of lower closeout inventory sales.
- North American wholesale operating earnings rose 11% in the quarter to $7.4 million but were approximately flat at $11.9 million year to date.
- Retail same-store sales declined 10% in the quarter and 6% year to date. Management attributed part of the decline to hurricanes affecting stores concentrated in Florida and Texas. Retail operating earnings fell 95% in the quarter and 69% year to date.
- Other operations operating earnings declined 50% in the quarter and 21% year to date, primarily because of lower Florsheim Australia retail performance.
- Lower pension expense, following the freezing of pension benefits effective December 31, 2016, reduced other expense by approximately $316,000 in the quarter and $949,000 year to date.
- Weighted average diluted shares declined from 10.5 million to 10.2 million in the quarter and from 10.6 million to 10.4 million year to date, reflecting share repurchases and other equity activity.
Cash Flow, Capital Allocation, Outlook, and Risks
- During the first nine months, the Company generated $16.4 million from operations, paid $9.1 million in dividends, repurchased $11.6 million of common stock, purchased a net $4.0 million of marketable securities, and spent $1.4 million on capital expenditures.
- The Company repurchased 420,711 shares during the first nine months. The Board authorized an additional 1.0 million shares on October 31, 2017, increasing remaining authorization to approximately 1.1 million shares.
- Management stated that cash, marketable securities, operating cash flow, and available borrowing facilities should provide adequate liquidity for at least one year, although no assurance was given.
- The revolving credit facility was renewed after quarter end on substantially the same terms through November 4, 2018. The facility bears interest at LIBOR plus 0.75%.
- Management did not provide specific sales or earnings guidance. The filing states that results for the quarter and nine months may not be indicative of full-year results.
- Key business risks include U.S. economic and retail conditions, brand and product demand, wholesale customer performance, overseas sourcing, foreign currency exposure, inventory management, and competition. The filing reported no material changes to previously disclosed risk factors, contractual obligations, or market-risk disclosures.
- Foreign exchange contracts covered Canadian dollar, U.S. dollar, and euro exposures; no significant unrealized gains or losses existed at quarter end.
- The Company adopted pension-cost presentation changes and stock-compensation accounting changes in 2017. It expected the 2018 revenue-recognition standard to have no material impact based on its assessment to date, but the assessment was not complete.
- No material legal proceedings were reported, and management concluded that disclosure controls and procedures were effective.
Investor Verification Items
- Verify whether declining wholesale and retail sales, particularly in Stacy Adams, Nunn Bush, BOGS, and the retail channel, stabilize or continue.
- Assess whether improved wholesale gross margins are sustainable and sufficiently offset lower sales.
- Monitor retail performance after hurricane-related disruption and the effect of higher retail selling and administrative expenses.
- Reconcile operating cash flow, inventory changes, dividends, share repurchases, and marketable-securities activity to liquidity trends.
- Confirm the renewal terms and future utilization of the $60 million revolving credit facility.
- Evaluate the effect of pension-plan changes, foreign currency movements, and the pending revenue-recognition adoption.
- Track the expanded share-repurchase authorization and its effect on share count, equity, and future EPS.