Weyco Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
Weyco Group designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters. Its reportable segments are North American wholesale and North American retail; other operations include businesses in Australia, South Africa, Asia Pacific, and Europe. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $74.1 million | $69.5 million | Up 7% |
| Gross earnings | $28.8 million | $26.6 million | Up 8% |
| Gross margin | 38.8% | 38.3% | Up approximately 50 bps |
| Earnings from operations | $5.1 million | $3.6 million | Up 44% |
| Operating margin | 6.9% | 5.1% | Up approximately 180 bps |
| Net earnings attributable to Weyco | $4.0 million | $3.0 million | Up 33% |
| Diluted EPS | $0.40 | $0.29 | Up $0.11 |
| Cash flow from operations | $4.5 million | $8.4 million | Down $3.9 million |
Cash and marketable securities totaled $38.2 million at March 31, 2019. Cash and cash equivalents were $17.3 million, compared with $23.0 million at December 31, 2018. The Company had $3.7 million outstanding on its $60 million unsecured revolving credit facility, which expires November 5, 2019 and bears interest at LIBOR plus 0.75%; the quarter-end rate was 3.25%.
Total assets were $279.7 million and total equity was $206.0 million at March 31, 2019. Inventories declined to $65.8 million from $72.7 million at year-end 2018. The Company paid $4.6 million of dividends, repurchased $1.8 million of stock, and invested $981,000 in capital expenditures during the quarter. Management expects 2019 capital expenditures of approximately $3.5 million to $4.5 million.
Material Changes Versus the Prior Comparable Period
- North American wholesale sales increased 11% to $59.5 million, led by Florsheim, BOGS/Rafters, and Stacy Adams. Nunn Bush sales declined 6%, and licensing revenue declined 11%.
- North American wholesale operating earnings increased 54% to $5.2 million. Wholesale gross margin improved to 34.3% from 33.1%.
- North American retail sales increased 13% to $5.6 million, primarily from higher e-commerce sales. Retail operating earnings increased to $483,000 from $206,000.
- Other operations sales declined 16% to $9.1 million, primarily because of a weaker Australian currency and a challenging Australian retail environment. The segment’s operating loss increased to $543,000 from $29,000.
- Selling and administrative expenses increased to $23.6 million from $23.1 million, reflecting higher wages and benefits, although expenses declined as a percentage of sales.
- Operating cash flow decreased primarily because of changes in operating assets and liabilities, particularly inventory and accounts payable.
- Basic weighted-average shares declined to 9.949 million from 10.173 million, reflecting share repurchases and other equity activity.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash, marketable securities, operating cash flow, and available borrowing capacity should provide adequate liquidity for at least one year, although no assurance was given. Management will continue evaluating capital expenditures, share repurchases, and potential acquisitions.
On January 1, 2019, the Company adopted ASC 842, Leases, using the modified retrospective method. The adoption added operating lease right-of-use assets of approximately $26.0 million and lease liabilities of approximately $27.8 million at adoption, with $26.1 million of lease liabilities reported at March 31, 2019. The adoption materially affected the balance sheet but did not materially affect earnings, cash flows, or beginning retained earnings. Comparative periods were not restated.
The Company leases retail stores and office and distribution facilities worldwide. Operating lease costs were $2.2 million in the quarter, and future operating lease payments totaled $28.7 million before $2.7 million of imputed interest. The Company also had a $3.0 million Canadian-dollar foreign exchange contract with no significant unrealized gain or loss at quarter-end.
Management identified no material changes to the risk factors disclosed in the 2018 Form 10-K. Risks include the retail environment, foreign currency exposure, overseas sourcing, seasonal demand, and the ability to renew or replace the revolving credit facility. No material legal proceedings or commitments were reported.
Important Facts for Investors to Verify
- Verify whether wholesale sales momentum and the improved gross and operating margins continued after the first quarter.
- Monitor Florsheim Australia and other international operations, including currency effects and ongoing operating losses.
- Assess the decline in operating cash flow relative to earnings and the sustainability of inventory and working-capital improvements.
- Review the November 5, 2019 maturity of the $60 million revolving credit facility and subsequent refinancing or renewal terms.
- Reconcile the effects of ASC 842 on reported assets, liabilities, rent expense, and operating metrics.
- Track capital expenditures, dividends, share repurchases, and any acquisitions against available liquidity.