Weyco Group, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K, not a standalone fourth-quarter report. Comparative information is for fiscal 2018.
Business Context
Weyco designs and distributes footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS and Rafters brands. Operations include North American wholesale, North American retail, and other businesses in Australia, South Africa, Asia Pacific and Europe. Wholesale represented 80% of total sales, retail 8%, and other operations 12% in 2019. The Company employed 654 people worldwide and operated eight U.S. retail stores plus e-commerce businesses at year-end.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $304.0 million | $298.4 million | Up 2% |
| Gross earnings | $124.0 million | $120.1 million | Up 3% |
| Gross margin | 40.8% | 40.3% | Up approximately 50 bps |
| Earnings from operations | $27.0 million | $25.5 million | Up 6% |
| Operating margin | 8.9% | 8.5% | Improved |
| Net earnings attributable to Weyco | $20.9 million | $20.5 million | Up 2% |
| Diluted EPS | $2.10 | $1.97 | Up 7% |
| Effective tax rate | 22.9% | 22.5% | Up 40 bps |
| Cash flow from operations | $9.4 million | $13.1 million | Down $3.7 million |
| Capital expenditures | $7.4 million | $1.4 million | Increased materially |
Year-end cash and cash equivalents were $9.8 million, and marketable securities totaled $21.7 million, including $5.9 million classified as current. Management reported total cash and marketable securities of $31.5 million. The Company had $7.0 million outstanding on its $60 million unsecured revolving credit facility, which expires November 5, 2020 and bears interest at daily LIBOR plus 0.75%.
Inventories increased to $86.7 million from $72.7 million, primarily because the Company built inventory ahead of anticipated China tariffs. Accounts receivable were essentially unchanged at $51.5 million. Total assets were $296.9 million and total equity was $210.0 million at December 31, 2019.
Segment Results and Material Changes
- North American wholesale: Sales increased 4% to $242.1 million and operating earnings increased 20% to $27.8 million. Wholesale gross margin improved to 36.6% from 35.6%. Florsheim sales rose 17%, BOGS/Rafters rose 8%, while Stacy Adams declined 3% and Nunn Bush declined 9%.
- North American retail: Sales increased 11% to $25.2 million, driven primarily by e-commerce and investments in e-commerce marketing software. Same-store sales increased 10%. Operating earnings increased 2% to $2.8 million, while retail gross margin declined to 64.7% from 65.5%.
- Other businesses: Sales declined 13% to $36.7 million, principally because of weaker conditions in Australia and Asia. Operating losses increased to $3.5 million from $0.4 million. Florsheim Australia incurred $940,000 of store-exit costs, including a $259,000 impairment charge.
- Cash deployment: The Company paid $9.4 million in dividends, repurchased 222,740 shares for $5.6 million, and spent $7.4 million on capital expenditures. Remaining repurchase authorization was 442,270 shares at year-end.
- Accounting change: Adoption of ASC 842 increased the balance sheet through recognition of operating lease right-of-use assets and liabilities. At December 31, 2019, right-of-use assets were $18.8 million and lease liabilities were $20.6 million. Comparative 2018 information was not restated.
Outlook, Risks and Unusual Items
Management expected 2020 capital expenditures of approximately $3.0 million to $4.0 million, with headquarters expansion expected to be completed in the first quarter of 2020. Management stated that cash, securities, operating cash flow and available borrowing capacity should support business needs for at least one year, although no assurance was provided.
- A 15% tariff on Chinese leather footwear became effective September 1, 2019 and was reduced to 7.5% on February 14, 2020. Management negotiated customer price increases and supplier price reductions to mitigate the expected impact. The tariff did not materially affect 2019 results, but future effects remain uncertain.
- The coronavirus outbreak had reduced customer traffic in China beginning in January 2020. The filing warned that prolonged effects could reduce sales and profits in China, Australia and North America, weaken wholesale customers, and disrupt production and supply chains.
- The Company relies on independent manufacturers primarily in China and India, with long production lead times and no long-term manufacturing contracts. Risks include tariffs, freight disruptions, raw-material costs, production delays, foreign exchange movements and excess or insufficient inventory.
- Consumer discretionary spending, retailer consolidation or bankruptcy, e-commerce competition, fashion changes and intense footwear-industry competition could pressure sales and margins.
- The Company had a $28.0 million unfunded benefit obligation at year-end, compared with $23.5 million in 2018. Pension results remain sensitive to discount rates, asset returns and other actuarial assumptions.
- The Company held $21.7 million of primarily investment-grade municipal bonds, exposing liquidity and financial results to potential deterioration in municipal bond values.
- There were $41.2 million of inventory purchase commitments due within one year. No legal proceedings or off-balance-sheet arrangements were reported.
Important Facts to Verify
- Whether tariff mitigation measures offset higher China-sourced product costs in 2020 and beyond.
- The duration and financial impact of coronavirus-related store traffic, supply-chain and wholesale-customer disruptions.
- Inventory levels, markdown risk and working-capital conversion following the tariff-related inventory build.
- Performance and profitability of Florsheim Australia and Europe, including the results of store closures.
- Availability and renewal terms of the $60 million revolving credit facility expiring November 5, 2020, including exposure to LIBOR transition.
- Future pension funding requirements and sensitivity to discount-rate and investment-return changes.
- Execution and returns from the headquarters expansion and planned 2020 capital expenditures.
- Auditor Baker Tilly issued an unqualified opinion, and management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2019.