Weyco Group Inc: Form 10-Q for the period ended Sep 30, 2024

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, 2023, filed on March 14, 2024, 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, markets, and distributes 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”). We ceased operations in the Asia Pacific region in 2023 and have substantially completed the wind down of that business. The majority of our operations are in the United States and our results are primarily affected by the economic conditions and the retail environment in the United States.

EXECUTIVE OVERVIEW

Third quarter 2024 net sales in our Wholesale segment were down 12% compared to last year’s third quarter. The decrease was a result of the challenging economic environment, in which consumers have limited discretionary funds, and footwear market sales are being impacted accordingly.

BOGS net sales were down 18% for the quarter. The outdoor category, particularly the weather boot market, has been under pressure for the better part of two years. During the pandemic, retailers and consumers alike loaded up on outdoor gear, resulting in record sales for many brands, including BOGS. Since then, the industry has been working through excess inventory, and we believe we have finally reached an equilibrium for the remainder of 2024. However, many retailers are taking a wait-and-see approach regarding orders, operating under the premise that if they need inventory, it will be available in the market. The result is that we have seen demand impacted by the mild and dry weather throughout the country, which has negatively affected our wholesale sales. The adverse effects of the weather extended to our BOGS e-commerce business, which was down 31% for the quarter.

While our success for the remainder of 2024 depends on Fall and Winter weather returning to normal, for the long-term, we are focused on reducing the weather sensitivity of the BOGS business. Towards that goal, we have increased our sales efforts in the Farm & Agriculture trade channel with the introduction of our Seamless Construction collection, which is 30% lighter and twice as durable as the vulcanized construction more commonly used in our category. The Farm & Agriculture trade channel is less weather-dependent and utilizes BOGS products year-round. We are making progress in this category, but it will take time to expand our penetration in retailers that cater to this market. We are also introducing Seamless Construction and lighter, less-insulated products to our Kids and Women’s lifestyle collections, which will help us make BOGS more of a three-season brand for this customer base. It has been a challenging stretch for the BOGS brand. We expect that having our retail partners with right-sized inventory will help move BOGS forward.

Our combined legacy business was down 10% for the quarter, with Florsheim up 1%, Stacy Adams down 17%, and Nunn Bush down 20%. As a category, dress footwear has been trending down for some time, except for a brief period emerging from the pandemic when there was a burst of weddings and more dressy occasions. This downtrend resulted in retailers shifting funding away from dress footwear and toward other categories. Given this context, Florsheim’s performance over the last few years, including this quarter, is very solid. Florsheim continues to pick up market share in the refined footwear category and has made good progress in the hybrid and true casual segments of the market.

Our Stacy Adams brand had a difficult quarter. The brand remains the market leader in accessible fashion in the contemporary dress footwear segment and is performing well, especially with accounts that maintain dress-oriented footwear as an important part of their retail assortment. The challenge is evolving the product lineup so that Stacy Adams is in consideration for hybrid and more refined casual footwear. While it will take time, we are getting traction at retail with casual lifestyle product, particularly in the hybrid category.

Our Nunn Bush brand caters to a more value-oriented, price-sensitive consumer. We saw reduced demand in the third quarter, as these consumers cut back on discretionary purchases. In addition, a significant portion of Nunn Bush’s sales decrease in the third quarter was due a shift in timing of shipments to a large retailer from third to second quarter. Despite the volume drop, we feel good about the future trajectory of the Nunn Bush business. We have reinvented Nunn Bush as the most casual brand within our legacy portfolio. Nunn Bush is also well-positioned in the market with its strong value proposition and innovative comfort technology.

Retail sales were down 5% for the quarter. The decline in retail sales was driven primarily by the decrease in BOGS e-commerce sales. Overall, our direct-to-consumer business has been more price-sensitive and promotionally oriented.

Sales at Florsheim Australia were down 15%. The decrease in sales at Florsheim Australia was mainly the result of our closing operations in the Asia-Pacific region. Sales in Australia were down 1%, with same-store sales up 1%. We are finding the economic environment in Australia to be very similar to that of North America, with consumers under pressure and very conservative in their approach to discretionary purchases.

Third Quarter Highlights

Consolidated net sales were $74.3 million, down 12% compared to net sales of $84.2 million in the third quarter of 2023. Consolidated gross earnings increased to 44.3% of net sales compared to 43.0% of net sales in last year’s third quarter, due mainly to higher gross margins in our Wholesale segment. Earnings from operations totaled $10.2 million for the quarter, down 18% from $12.4 million last year. Third quarter net earnings were $8.1 million, or $0.84 per diluted share, in 2024, versus $9.3 million, or $0.98 per diluted share, in 2023.

Year-To-Date Highlights

Consolidated net sales for the first nine months of 2024 were $209.8 million, down 12% from $237.5 million in 2023. Consolidated gross earnings increased to 44.3% of net sales in the first nine months of 2024 compared to 43.1% 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 2024 earnings from operations totaled $25.1 million, down 15% from record operating earnings of $29.5 million in 2023. To date in 2024, our net earnings totaled $20.3 million, or $2.12 per diluted share, down from record net earnings of $21.6 million, or $2.27 per diluted share, in the first nine months of 2023.

Financial Position Highlights

At September 30, 2024, our cash and marketable securities totaled $81.8 million and we had no debt outstanding on our $40.0 million revolving line of credit. During the first nine months of 2024, we generated $17.3 million of cash from operations and used funds to pay $9.6 million in dividends. We also repurchased $0.6 million of our common stock and had $0.9 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, 2024 and 2023, were as follows:

(Dollars in thousands)

NM – Not meaningful

North American Wholesale Segment

Net Sales

Net sales in our Wholesale segment for the three and nine months ended September 30, 2024 and 2023, were as follows:

(Dollars in thousands)

Wholesale net sales for the three and nine months ended September 30, 2024, were down 12% in both periods, compared to the same periods one year ago. This year, all our wholesale brands have been impacted by soft consumer demand resulting from reductions in discretionary spending. Our BOGS brand was down 18% for the quarter and 31% for the year-to-date period, compared to the same periods of 2023. While outdoor retailer inventory levels have normalized which positively impacted BOGS third-quarter performance relative to the first half of 2024, BOGS at-once orders did not reach their expected potential during the third quarter due to unseasonably warm and dry weather throughout the country. BOGS fourth-quarter 2024 sales will largely depend on colder weather to bolster its growth.

Earnings from Operations

Wholesale gross earnings were 40.1% of net sales in the third quarter of 2024 compared to 38.6% of net sales in last year’s third quarter. For the nine months ended September 30, wholesale gross earnings as a percent of net sales were 39.4% in 2024 and 38.0% in 2023. Gross margins improved for both the quarter and year-to-date periods as a result of lower inventory costs, primarily inbound freight. Freight costs stabilized beginning in the first half of 2022, but because of the large buildup of inventories in 2022, it was not until late 2023 that we sold through inventory with higher freight costs and were able to begin realizing the full benefit of the lower freight costs.

Wholesale selling and administrative expenses consist primarily of distribution costs, salaries and commissions, advertising costs, employee benefit costs, and depreciation. Wholesale selling and administrative expenses totaled $15.1 million for the quarter compared to $15.6 million in last year’s third quarter. For the nine months ended September 30, wholesale selling and administrative expenses were $43.4 million in 2024 versus $47.1 million in 2023. The quarter and year-to-date decreases were largely due to lower employee costs, including commission-based compensation. As a percent of net sales, wholesale selling and administrative expenses were 25% and 22% in the third quarters of 2024 and 2023, respectively, and 26% and 25% in the first nine months of 2024 and 2023, respectively. The increases as a percent of net sales were because many of our costs are fixed in nature and do not vary with sales.

Wholesale operating earnings totaled $9.4 million for the quarter, down 16% from $11.3 million in last year’s third quarter. For the nine months ended September 30, 2024, wholesale operating earnings were $22.6 million, down 11% from $25.4 million in the same period of 2023. The quarter and year-to-date decreases were a result of lower sales.

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 totaled $3.8 million in both the third quarters of 2024 and 2023. For the nine-month periods ended September 30, wholesale distribution costs were $10.8 million in 2024 and $11.5 million in 2023, down in line with lower distribution activities this year.

North American Retail Segment

Net Sales

Net sales in our Retail segment, which were generated mainly by our e-commerce websites, were $7.2 million for the quarter, down 5% from $7.6 million in the third quarter of 2023. Lower sales on our BOGS website, a result of the mild Fall, were partially offset by higher sales on our Florsheim and Stacy Adams websites this quarter. For the nine months ended September 30, retail net sales were a record $24.6 million in 2024, up 2% over our previous record of $24.1 million in 2023. The year-to-date increase was driven by higher sales on the Florsheim website. Brick-and-mortar sales were down slightly for both the three and nine-month periods.

Earnings from Operations

Retail gross earnings as a percent of net sales were 66.9% and 65.4% in the third quarters of 2024 and 2023, respectively. For the nine months ended September 30, retail gross earnings were 66.4% and 66.0% of net sales in 2024 and 2023, respectively.

Selling and administrative expenses for the Retail segment consist primarily of freight, advertising expense, employee costs, rent and occupancy costs. Retail selling and administrative expenses totaled $4.0 million in both the third quarters of 2024 and 2023. As a percent of net sales, retail selling and administrative expenses were 56% and 53% in the third quarters of 2024 and 2023, respectively. For the nine months ended September 30, Retail selling and administrative expenses totaled $13.6 million, or 55% of net sales, in 2024 versus $12.6 million, or 52% of net sales, in 2023. The year-to-date increase was primarily due to higher web freight and advertising costs in the first half of the year. This year’s web advertising expenses increased largely due to the reallocation of certain expenditures historically charged to our Wholesale segment that primarily benefit our websites.

Retail operating earnings were $0.8 million for the quarter and $0.9 million in last year’s third quarter. For the nine months ended September 30, 2024, Retail operating earnings totaled $2.8 million, down 15% from $3.3 million last year. The nine-month earnings decrease was due to the higher web expenses this year.

Other

Operating results reported in the “other” category historically included our retail and wholesale businesses in Australia, South Africa, and Asia Pacific (collectively, “Florsheim Australia”). We ceased operations in the Asia Pacific region in 2023 and have substantially completed the wind down of that business. As a result, the year-to-date 2024 operating results of the “other” category primarily reflect that of Australia and South Africa.

Net sales of Florsheim Australia were $6.0 million in the third quarter of 2024, down 15% from $7.1 million in the third quarter of 2023. The quarterly decrease was almost entirely due to the closing of our Asia Pacific operations. Sales in Australia were down 1% for the quarter, due to the impact of four fewer retail stores operating compared to the same period last year. Australia’s same store sales were up 1% for the quarter. For the year-to-date period, Florsheim Australia’s net sales declined $4.9 million, or 22%, compared to the same period one year ago. The year-to-date decrease was largely due to the closing of our Asia Pacific operations. Sales in Australia were also down due to fewer retail stores operating, the mid-year 2023 loss of a sizeable wholesale customer, and a challenging environment at retail.

Florsheim Australia’s gross earnings were 59.2% of net sales for the quarter and 61.6% of net sales in last year’s third quarter. For the nine months ended September 30, Florsheim Australia’s gross earnings as a percent of net sales were 60.5% and 61.5% in 2024 and 2023, respectively.

Florsheim Australia’s operating earnings for the three-months ended September 30, were zero in 2024 and $0.3 million in 2023. For the nine months ended September 30, 2024, its operating losses totaled $0.3 million, down from operating earnings of $0.8 million in the same period one year ago. The nine-month earnings decrease was primarily due to lower sales this year.

Other income and expense

Interest income totaled $0.9 million in the third quarter of 2024 compared to $0.3 million in last year’s third quarter. For the nine months ended September 30, interest income was $2.8 million in 2024 and $0.6 million in 2023. The increases in 2024 were due to interest earned on higher cash balances in the U.S. and Canada. Interest expense was zero for both the third quarters of 2024 and 2023. For the nine-months ended September 30, 2024, interest expense decreased $0.5 million from the same period in 2023. Last year’s interest expense was incurred on outstanding debt balances during the first half of 2023, which has since been paid off.

Other expense, net, totaled $0.2 million and $0.1 million in the third quarters of 2024 and 2023, respectively. For the nine months ended September 30, other expense, net, totaled $0.4 million in both 2024 and 2023.

The effective income tax rate for the three months ended September 30, 2024 and 2023 was 25.7% in both periods. For the nine months ended September 30, 2024 and 2023, the effective tax rate was 25.8% in both periods. The 2024 and 2023 effective tax rates differed from the federal rate of 21% primarily because of state taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash and our revolving line of credit. During the first nine months of 2024, we generated $17.3 million of cash from operations compared $62.9 million in the same period one year ago. The decrease in 2024 was primarily due to changes in operating assets and liabilities, principally inventory.

We paid dividends totaling $9.6 million and $9.3 million in the first nine months of 2024 and 2023, respectively. On November 5, 2024, our Board of Directors declared a regular quarterly cash dividend of $0.26 per share to all shareholders of record on November 18, 2024, payable January 2, 2025. Additionally, on November 5, 2024, our Board of Directors also declared a special one-time cash dividend of $2.00 per share to all shareholders of record on November 18, 2024, payable January 2, 2025.

We repurchase our common stock under our share repurchase program when we believe market conditions are favorable. During the first nine months of 2024, we repurchased 19,841 shares for a total cost of approximately $0.6 million. As of September 30, 2024, there were 848,916 authorized shares available for repurchase under the program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.

Capital expenditures totaled $0.9 million in the first nine months of 2024. Management estimates that total capital expenditures for 2024 will be between $1.0 million and $2.0 million.

On September 27, 2024, we amended our line of credit agreement. The Amended Credit Agreement extends the maturity of our credit facility to September 26, 2025. Under the terms of the Amended Credit Agreement, there is a maximum available borrowing limit of $40.0 million, and amounts outstanding bear interest at the one-month term SOFR plus 125 basis points. The Amended Credit Agreement is secured by a lien against our general business assets, and contains representations, warranties and covenants (including a minimum tangible net worth financial covenant) that are customary for a facility of this type. At September 30, 2024, there were no outstanding borrowings on the line of credit, and we were in compliance with all financial covenants.

As of September 30, 2024, approximately $4.6 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. We believe that available cash, 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.