Weyco Group, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Weyco designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Operations comprise North American wholesale, North American retail, and other international businesses, primarily Florsheim Australia and Europe.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $69.1 million | $78.9 million | Down 12% |
| Gross earnings | $25.2 million | $27.1 million | Down 7% |
| Gross margin | 36.5% | 34.4% | Up 210 bps |
| Earnings from operations | $3.5 million | $4.2 million | Down 18% |
| Operating margin | 5.0% | 5.3% | Down 40 bps |
| Net earnings attributable to Weyco | $2.2 million | $2.7 million | Down 17% |
| Diluted EPS | $0.21 | $0.25 | Down $0.04 |
| Operating cash flow | $17.2 million | $13.5 million | Up $3.7 million |
- Wholesale sales declined 15% to $52.9 million, retail sales declined 3% to $4.9 million, and other sales declined 2% to $11.3 million.
- Wholesale operating earnings fell 15% to $3.2 million. Retail operating earnings fell 83% to $43,000; other operating earnings increased 6% to $250,000.
- Cash and marketable securities totaled $45.5 million at March 31, 2017, compared with $39.4 million at December 31, 2016.
- The Company had no borrowings outstanding under its $60 million unsecured revolving credit facility at quarter-end. The highest balance during the quarter was $4.3 million, and the facility expires November 3, 2017.
- Total assets were $252.4 million and total equity was $207.1 million at March 31, 2017. The long-term pension liability was $27.7 million.
- Cash flow included $4.6 million of dividends, $2.4 million of share repurchases and $416,000 of capital expenditures. Net cash increased $7.8 million to $21.5 million.
Material changes versus the prior comparable period
- Sales volumes declined across all wholesale brands, particularly in department stores and other brick-and-mortar channels. The Company attributed the weakness to reduced store traffic and continued growth in online retailing.
- North American wholesale brand sales decreased as follows: Stacy Adams 16%, Nunn Bush 18%, Florsheim 9%, BOGS/Rafters 21%, and Umi 12%. Licensing revenue increased 15% to $701,000 following a licensee transition.
- Retail same-store sales, including internet sales, declined 7%. Management noted that the later Easter holiday shifted some sales into April 2017.
- Gross margin improved primarily in wholesale, where gross earnings were 30.8% of sales versus 29.2% in the prior-year quarter. However, operating leverage weakened as fixed costs represented a larger percentage of lower sales.
- Selling and administrative expense declined to $21.8 million from $22.9 million, reflecting lower commissions, advertising costs and pension expense, but was insufficient to offset the sales decline.
- The effective tax rate increased to 39.5% from 35.8%; the prior-year rate benefited from footwear donations.
- The Company retrospectively adopted ASU 2017-07, moving non-service pension costs from selling and administrative expense to other expense. The prior-year presentation was reclassified by $392,000 with no impact on net earnings or equity.
Guidance, outlook, risks and unusual items
- No formal revenue or earnings guidance was provided. Management estimates 2017 capital expenditures of $2 million to $3 million.
- Management expects cash, marketable securities, operating cash flow and available borrowing capacity to support business needs for at least one year, subject to the stated risks and uncertainties.
- Management may use available liquidity for capital expenditures, share repurchases and potential acquisitions. The Company repurchased 87,886 shares for $2.4 million during the quarter, with 477,289 shares remaining available under the program.
- Key operating risks include weak brick-and-mortar retail traffic, continued online-channel migration, lower wholesale demand, international and foreign-currency exposure, and dependence on third-party overseas manufacturers.
- The Company had foreign-exchange contracts covering Canadian dollars, U.S. dollars, Australian dollars and euros; no significant unrealized gains or losses were reported at quarter-end.
- No material changes to contractual obligations or previously reported risk factors were disclosed. No legal proceedings were reported.
- The pension plan freeze effective December 31, 2016 reduced pension expense. Accumulated other comprehensive loss was $16.1 million, including a $11.0 million pension-related component.
Important facts for investors to verify
- Whether wholesale order volumes and department-store demand stabilize, particularly for Stacy Adams, Nunn Bush, Florsheim and BOGS/Rafters.
- Whether retail same-store sales recover after the Easter timing impact and whether online sales offset brick-and-mortar weakness.
- The renewal or replacement status of the $60 million revolving credit facility before its November 3, 2017 expiration.
- The sustainability of the improved gross margin amid lower sales and the fixed-cost impact on operating margins.
- Progress against the $2 million to $3 million capital-expenditure estimate and the continuation of dividends, share repurchases and potential acquisitions.
- Foreign-currency movements, international business performance and the adequacy of hedging arrangements.