Weyco Group Inc: Form 10-Q for the period ended Sep 30, 2023

FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements represent our good faith judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially. Such statements can be identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “likely,” “plans,” “predicts,” “projects,” “should,” “will,” or variations of such words, and similar expressions. Forward-looking statements, by their nature, address matters that are, to varying degrees, uncertain. Therefore, the reader is cautioned that these forward-looking statements are subject to a number of risks, uncertainties or other factors that may cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors described under Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year-ended December 31, 2022, filed on March 13, 2023, which information is incorporated herein by reference. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

GENERAL

The Company designs and markets quality and innovative footwear principally for men, but also for women and children, under a portfolio of well-recognized brand names including: Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. Inventory is purchased from third-party overseas manufacturers. Almost all of these foreign-sourced purchases are denominated in U.S. dollars.

We have two reportable segments, North American wholesale operations (“Wholesale”) and North American retail operations (“Retail”). In the Wholesale segment, our products are sold to leading footwear, department, and specialty stores, as well as e-commerce retailers, primarily in the United States and Canada. We also have licensing agreements with third parties who sell our branded apparel, accessories, and specialty footwear in the United States, as well as our footwear in Mexico and certain markets overseas. Licensing revenues are included in our Wholesale segment. Our Retail segment consists of e-commerce businesses and four brick and mortar retail stores in the United States. Retail sales are made directly to consumers on our websites, or by our employees in our stores. Our “other” operations include our wholesale and retail businesses in Australia, South Africa, and Asia Pacific (collectively, “Florsheim Australia”). The majority of our operations are in the United States and our results are primarily affected by the economic conditions and retail environment in the United States.

EXECUTIVE OVERVIEW

Sales in our North American wholesale segment were down 15% for the quarter, compared to a record third quarter last year. Wholesale sales in 2022 reflected strong consumer demand, but also significant pipeline fill as many accounts were replenishing stock depleted due to pandemic-related supply chain delays. This quarter was our second most profitable third quarter in terms of wholesale operating earnings, second only to last year. This year, the retail environment is more challenging due to macro-economic pressures, and consumers are being cautious in terms of expenditures on footwear and apparel. With demand softening, retailers are being conservative with at-once and future orders at the wholesale level.

The change in retail dynamics is most apparent in the outdoor market. Given the spike in demand in 2021 and the first half of last year, retailers placed heavy orders with the expectation of strong consumer sell-throughs. Sales did not keep pace in the back half of last year, and the outdoor trade channel entered 2023 with an inventory glut. The situation has been exacerbated by unseasonably warm weather in early Fall. As a result, sales of the BOGS brand declined 42%, compared to record sales last year, with retailers placing fewer orders due to the current saturation of product in the market. While the majority of our BOGS’ inventory is in core product that remains valid from year to year, we are also taking steps to reduce inventory of slower moving styles. We anticipate that the inventory backlog in the outdoor footwear category will not normalize until the second half of 2024. While the market is challenging, we are optimistic about the brand’s long-term growth prospects given BOGS’ strong consumer loyalty. We continue to develop new BOGS product with a special focus on less insulated footwear with a longer selling season.

In our legacy business, Florsheim net sales were down 7%, compared to record sales for the brand in last year’s third quarter. Sales of Stacy Adams were down 1%, and sales of the Nunn Bush brand were up 11%, with the increase driven in part by incremental sales in the casual and hybrid categories, and sales of new programs to a few large retailers. All three brands maintained solid retail sell-throughs during the quarter despite a general slowdown in the more refined footwear category. We are encouraged by our progress in selling hybrid footwear that is more casual in nature but can be worn across a variety of settings from office to social occasions. Consumers are gravitating towards this category of footwear, and we see this as an important growth area for our Legacy business. From a product development perspective, we are expanding our range of hybrid footwear while selectively adding to our true casual and refined footwear assortment.

Retail sales were up 6% for the quarter with the increase driven primarily by our e-commerce business. Footwear industry statistics indicate the e-commerce sales channel is down year-to-date, so it is encouraging that we continue to grow our e-commerce platform in a very competitive environment.

Sales at Florsheim Australia were down 14%, and in local currency, were down 10%. The Australian market is facing some of the same challenges as in the U.S. regarding softness in the footwear and apparel category. We also lost a sizeable wholesale account that impacted our wholesale shipments for the quarter. Going forward, we believe that we will make up some of this deficit in the Australian market through other accounts as well as the transfer of the Asia-Pacific wholesale business to the Florsheim Australia office.

Third Quarter Highlights

Consolidated net sales were $84.2 million, down 13% compared to record third-quarter sales of $97.0 million in 2022. Consolidated gross earnings increased to 43.0% of net sales compared to 40.6% of net sales in last year’s third quarter, due mainly to higher gross margins in our Wholesale segment. Earnings from operations were $12.4 million, down 12% compared to record operating earnings of $14.2 million in 2022. Quarterly net earnings totaled $9.3 million, or $0.98 per diluted share, compared to record net earnings of $10.8 million, or $1.12 per diluted share, last year.

Year-to-Date Highlights

Consolidated net sales for the first nine months of 2023 were $237.5 million, down 6% compared to record sales of $252.7 million in the first nine months of 2022. Consolidated gross earnings were 43.1% of net sales in the first nine months of 2023 versus 38.9% of net sales in the same period one year ago. The increase was primarily due to higher gross margins in our Wholesale segment. Year-to-date consolidated operating earnings were a record $29.5 million in 2023, up 17% over our previous record of $25.3 million in 2022. Our net earnings reached a record $21.6 million, or $2.27 per diluted share, in the first nine months of 2023, up 12% over our previous record of $19.3 million, or $2.01 per diluted share, in 2022.

Financial Position Highlights

At September 30, 2023, our cash, short-term investments, and marketable securities totaled $41.0 million and we had no debt outstanding on our $40.0 million revolving line of credit. During the first nine months of 2023, we generated $62.9 million of cash from operations, due mainly to reductions in inventory levels. We paid off $31.1 million on our line of credit, paid $9.3 million in dividends, repurchased $3.4 million of our common stock, and we had $2.6 million of capital expenditures during the period.

SEGMENT ANALYSIS

Net sales and earnings from operations for our segments for the three and nine months ended September 30, 2023 and 2022, were as follows:

(Dollars in thousands)

North American Wholesale Segment

Net Sales

Net sales in our Wholesale segment for the three and nine months ended September 30, 2023 and 2022, were as follows:

(Dollars in thousands)

Wholesale sales for the quarter and year-to-date periods were down across most of our major brands (Stacy Adams, Florsheim, and BOGS/Rafters) due to reduced demand in 2023 following record growth in 2022. Last year’s sales were up significantly due to post-pandemic retailer pipeline fill and strong consumer demand. So far in 2023, most of our brands experienced decreases in pairs sold, as the footwear industry returned to its normal cycle, and as many retailers in the U.S. and Canada continue to pare back higher levels of inventory. BOGS has been particularly impacted by this slowdown due to the current saturation of product in the outdoor footwear market, and due to the mild start to Fall. Nunn Bush sales rose 11% and 4% for the quarter and year-to-date periods, respectively, due mainly to new programs with a few large retailers that performed well in the third quarter.

Licensing revenues consist of royalties earned on the sales of branded apparel, accessories, and specialty footwear in the United States and on branded footwear in Mexico and certain overseas markets.

Earnings from Operations

Wholesale gross earnings were 38.6% of net sales in the third quarter of 2023 compared to 36.3% of net sales last year. Quarterly gross margins improved as a result of lower inventory costs compared to last year, primarily related to inbound freight costs. For the nine months ended September 30, wholesale gross earnings were 38.0% of net sales in 2023 and 33.5% of net sales in 2022. The increase in gross margins for the year-to-date period was due to higher selling prices and lower inbound freight costs. In the first half of last year, gross margins were negatively impacted by inflated inbound freight costs as a result of the global supply chain issues at that time, which have since eased.

Wholesale selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs and depreciation. Wholesale selling and administrative expenses were $15.6 million for the quarter compared to $16.7 million last year. The decrease was primarily due to lower employee costs, mainly commission-based compensation. As a percent of net sales, wholesale selling and administrative expenses were 22% and 21% of net sales in the third quarters of 2023 and 2022, respectively. For the nine months ended September 30, wholesale selling and administrative expenses were $47.1 million, or 25% of net sales, in 2023 versus $47.7 million, or 23% of net sales, in 2022.

Wholesale operating earnings totaled $11.3 million for the quarter, down 13% from $12.9 million in last year’s third quarter, due primarily to lower sales. For the nine months ended September 30, wholesale operating earnings reached a record $25.4 million in 2023, up 16% over our previous record of $21.9 million in 2022. The year-to-date earnings increase was primarily due to higher gross margins.

Our cost of sales does not include distribution costs (e.g., receiving, inspection, warehousing, shipping, and handling costs) which are included in selling and administrative expenses. Wholesale distribution costs were $3.8 million in the third quarter of 2023 and $4.1 million in the same period of 2022. For the nine-month periods ended September 30, wholesale distribution costs were $11.5 million in 2023 and $11.3 million in 2022.

North American Retail Segment

Net Sales

Net sales in our retail segment were a third-quarter record of $7.6 million in 2023, up 6% compared to our previous record of $7.1 million last year. The quarterly increase was due to higher sales across all our domestic e-commerce websites, with the largest increases at BOGS and Florsheim. For the nine months ended September 30, retail net sales reached a record $24.1 million in 2023, up 8% over our previous record of $22.4 million in 2022. The year-to-date increase was due to higher sales volumes across all our e-commerce websites, with the largest increase at Florsheim. Brick-and-mortar sales for the first nine months of 2023 were relatively flat compared to last year.

Earnings from Operations

Retail gross earnings as a percent of net sales were 65.4% and 66.3% in the third quarters of 2023 and 2022, respectively. For the nine months ended September 30, 2023, retail gross earnings were 66.0% of net sales, compared to 66.5% of net sales in the same period of 2022.

Selling and administrative expenses for the retail segment consist primarily of freight, advertising expense, employee costs, and rent and occupancy costs. Retail selling and administrative expenses were $4.0 million, or 53% of net sales, in the third quarter of 2023 versus $3.9 million, or 55% of net sales, in the third quarter of 2022. For the nine months ended September 30, retail selling and administrative expenses were $12.6 million, or 52% of net sales, in 2023 and $12.1 million, or 54% of net sales, in 2022.

Retail operating earnings rose to $926,000 for the quarter, up 12% compared to $825,000 in last year’s third quarter. For the nine months ended September 30, retail operating earnings were $3.3 million in 2023, up 18% over $2.8 million in 2022. The increases for the quarter and year-to-date periods were primarily due to higher earnings from our e-commerce businesses, driven by higher web sales.

Other

Operating results reported in the “other” category consist entirely of the operating results at Florsheim Australia. Third quarter 2023 net sales of Florsheim Australia totaled $7.1 million, down 14% compared to $8.2 million in the third quarter of 2022. In local currency, its net sales were down 10%, primarily in its wholesale businesses. For the nine months ended September 30, 2023, other net sales were $22.5 million, down slightly compared to $22.6 million in the same period one year ago. In local currency, Florsheim Australia’s net sales were up 5% for the year-to-date period, due to higher sales in its retail businesses partially offset by lower sales in its wholesale businesses. The weakening of the Australian dollar relative to the U.S. dollar led to the lower sales growth in U.S. dollars this year.

Florsheim Australia’s gross earnings were 61.6% of net sales for the quarter compared to 61.4% of net sales in last year’s third quarter. For the nine months ended September 30, its gross earnings as a percent of net sales were 61.5% and 60.9% in 2023 and 2022, respectively.

Other operating earnings totaled $256,000 for the quarter versus $476,000 last year. The decrease was primarily due to lower earnings in Australia’s wholesale businesses, as a result of lower sales. For the nine-months ended September 30, 2023, other operating earnings totaled $807,000, compared to $598,000 in the same period last year. The year-to-date earnings increase was largely due to improved results of the retail businesses in Australia.

Other income and expense

Interest income was $269,000 and $86,000 for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, interest income was $598,000 in 2023 and $266,000 in 2022. The increases in 2023 were due to more interest earned on the higher cash balances this year. Interest expense decreased $192,000 in the three months ended September 30, 2023, compared to the same period of 2022, due to less interest incurred as we paid off our debt in the 2023 quarter. Interest expense for the nine months ended September 30, 2023 was up $313,000 over the same period of 2022, due to interest incurred on the higher average debt balances earlier this year.

Other (expense) income, net, totaled ($133,000) for the quarter compared to $141,000 in last year’s third quarter. For the year-to-date period, other (expense) income, net, totaled ($431,000) in 2023 and $316,000 in 2022. The increases in expense for both the quarter and year-to-date periods was primarily due to an increase in the non-service costs components of pension expense this year. See Note 7 in the Notes to Consolidated Condensed Financial Statements (Unaudited) for additional details.

The effective income tax rates for the three months ended September 30, 2023 and 2022 were 25.7% and 24.4%, respectively. The effective income tax rates for the nine months ended September 30, 2023 and 2022 were 25.8% and 24.8%, respectively. The 2023 and 2022 effective tax rates differed from the federal rate of 21% primarily because of state and foreign taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash, short-term investments, short-term marketable securities, and our revolving line of credit. During the first nine months of 2023, we generated $62.9 million of cash from operations compared to a use of cash totaling $42.1 million in the same period one year ago. The increase in 2023 was primarily due to changes in operating assets and liabilities, principally inventory. Our inventory level was $79.6 million as of September 30, 2023 compared to $128.0 million at December 31, 2022. We believe our inventory is now at a normalized level, and we continue to review areas of slow-moving product.

We paid dividends totaling $9.3 million and $6.9 million in the first nine months of 2023 and 2022, respectively. The increase in 2023 was due to a shift in timing of our quarterly dividend payment schedule; the first nine months of 2023 included four quarterly dividend payments, as our fourth quarter 2022 dividend was paid in early January 2023. Conversely, the first nine months of 2022 only included three dividend payments, as our fourth quarter 2021 dividend was paid in December 2021. On November 7, 2023, our Board of Directors declared a cash dividend of $0.25 per share to all shareholders of record on November 27, 2023, payable on January 2, 2024.

We repurchase our common stock under our share repurchase program when we believe market conditions are favorable. During the first nine of 2023, we repurchased 135,513 shares for a total cost of $3.4 million. As of September 30, 2023, we had the authority to repurchase approximately 904,000 shares under our previously announced stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.

Capital expenditures totaled $2.6 million in the first nine months of 2023. Management estimates that total capital expenditures for 2023 will be between $3.0 million and $4.0 million.

On September 28, 2023, we amended our line of credit agreement. The amendment (“Amended Credit Agreement”) extended the maturity of our credit facility to September 28, 2024 and has a maximum available borrowing limit of $40.0 million. Under the terms of the Amended Credit Agreement, amounts outstanding bear interest at the one-month term secured overnight financing rate (“SOFR”) plus 125 basis points. The Amended Credit Agreement is secured by a security interest in our general business assets, and contains customary representations, warranties, and covenants (including a minimum tangible net worth financial covenant) for a facility of this type. At September 30, 2023, there were no outstanding borrowings on the line of credit, and we were in compliance with all financial covenants. At December 31, 2022, outstanding borrowings on the line of credit totaled $31.1 million at an interest rate of 5.77%. So far in 2023, our cash provided by operations exceeded cash outlays, which allowed us to repay outstanding borrowings under our line of credit.

As of September 30, 2023, approximately $4.5 million of cash and cash equivalents was held by our foreign subsidiaries.

We will continue to evaluate the best uses for our available liquidity, including, among other uses, capital expenditures, continued stock repurchases and acquisitions. The Company believes that available cash, short-term investments, marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business for at least one year, although there can be no assurances.

We maintain disclosure controls and procedures designed to ensure that the information we must disclose in our filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in our periodic filings under the Exchange Act. Such officers have also concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in accumulating and communicating information in a timely manner, allowing timely decisions regarding required disclosures.

There have been no significant changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.