Business Overview and History

Weyco Group, Inc. (NASDAQ:WEYS) is a global marketer and distributor of high-quality footwear brands catering to men, women, and children. With a rich history spanning over a century, the company has established a strong portfolio of well-recognized brands, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake. As Weyco navigates the current macroeconomic landscape, its diversified brand offerings, strategic initiatives, and focus on operational efficiency position it to weather the storm and emerge stronger.

Weyco Group's roots trace back to 1913 when it was founded as the Wisconsin Shoe Manufacturing Company in Milwaukee, Wisconsin. Initially focused on producing shoes and other footwear, the company began expanding its product offerings and distribution channels in the 1930s, selling its shoes through leading footwear retailers across the United States.

A significant milestone in Weyco's history came in the 1960s with the acquisition of the Florsheim Shoe Company, a well-known men's dress shoe brand. This acquisition marked a turning point for Weyco, substantially expanding its product portfolio and customer base. Throughout the 1970s and 1980s, the company continued to grow by adding other popular footwear brands to its lineup, including Nunn Bush and Stacy Adams.

The 1990s and 2000s presented challenges for Weyco as consumer preferences shifted away from traditional dress shoes towards more casual and athletic-inspired footwear. In response, the company diversified its brand offerings, acquiring outdoor brands like BOGS to cater to the changing market. Weyco also invested in building out its own direct-to-consumer e-commerce capabilities to better reach customers.

Today, Weyco Group operates as a global marketer of quality footwear, with a diverse portfolio of well-recognized brands. The company sells its products through leading footwear retailers, department stores, and its own e-commerce platforms. Weyco's ability to navigate industry shifts and leverage its diversified brand lineup and multichannel distribution strategy has allowed it to maintain its position as a respected player in the footwear market.

Financial Performance and Ratios

Over the past three years, Weyco has demonstrated a solid financial performance, despite the challenges posed by the COVID-19 pandemic. In fiscal year 2023, the company reported net sales of $318.05 million, a 10.3% increase from the previous year. Net income for the same period was $30.19 million, with a net profit margin of 9.5%. Operating cash flow reached $98.63 million, while free cash flow was $95.32 million.

However, the most recent quarter (Q3 2024) showed some headwinds, with revenue decreasing 12% year-over-year to $74.33 million. Net income for the quarter was $8.06 million, while operating cash flow was negative $374,000 and free cash flow was negative $930,000. The decline in revenue was primarily due to a 12% decrease in North American Wholesale segment sales, with the BOGS brand experiencing an 18% sales decline due to mild and dry weather conditions.

Weyco's financial ratios further illustrate its financial health. As of the most recent quarter (Q3 2024), the company's current ratio stood at 8.62, indicating a strong ability to meet its short-term obligations. The quick ratio was 5.47, further emphasizing the company's liquidity. The debt-to-equity ratio was 0.00, reflecting a debt-free capital structure. The company's return on equity (ROE) and return on assets (ROA) for fiscal year 2023 were 12.33% and 9.76%, respectively, highlighting its efficient use of capital and assets.

Operational Highlights and Challenges

Weyco's diversified brand portfolio has been a key strength, allowing the company to navigate shifts in consumer preferences and market conditions. However, the company has not been immune to the broader macroeconomic headwinds impacting the footwear industry.

The North American Wholesale segment, which accounted for 79.8% of total net sales in the first nine months of 2024, faced significant challenges. In the third quarter of 2024, Wholesale net sales were $61.08 million, a 12% decrease compared to the same period in 2023. This decline was driven by lower sales across most of the company's brands, reflecting the challenging economic environment and reduced consumer discretionary spending.

The BOGS brand, in particular, faced challenges as the outdoor category and weather boot market experienced pressure. Sales for BOGS decreased by 18% for the quarter and 31% for the first nine months of 2024, primarily due to mild and dry weather conditions negatively impacting demand. The company's legacy brands, including Florsheim, Stacy Adams, and Nunn Bush, also saw sales declines ranging from 1% to 20% for the quarter, as the dress footwear category continues to face headwinds.

Despite these challenges, Wholesale gross earnings as a percentage of net sales improved to 40.1% in the third quarter of 2024, compared to 38.6% in the same period of 2023. This increase was primarily due to lower inbound freight costs, as the company was able to sell through inventory with higher freight costs and start realizing the benefits of stabilizing freight rates.

The North American Retail segment, which consists of the company's e-commerce businesses and four brick-and-mortar retail stores in the United States, also experienced some challenges. Net sales for this segment were $7.22 million during the third quarter of 2024, a 5% decrease compared to the same period in 2023. The decline was primarily driven by lower sales on the BOGS website, which was partially offset by higher sales on the Florsheim and Stacy Adams websites.

To navigate these challenges, Weyco has implemented strategic initiatives to diversify its product offerings and reduce its weather-sensitivity. The company has increased its focus on the farm and agriculture trade channel for its BOGS brand, introducing a new seamless construction collection that is more durable and less weather-dependent. Additionally, Weyco is expanding its casual and hybrid product lines across its legacy brands to capture evolving consumer preferences.

Liquidity and Capital Allocation

Weyco's balance sheet remains strong, with a healthy cash position and minimal debt. As of September 30, 2024, the company had $81.8 million in cash and marketable securities, with no outstanding debt on its $40 million revolving credit facility. This robust liquidity allows Weyco to fund its ongoing operations, invest in strategic initiatives, and return capital to shareholders.

In the first nine months of 2024, Weyco generated $17.3 million in operating cash flow and used $9.6 million to pay dividends to shareholders. The company also repurchased $0.6 million worth of its common stock during the period, demonstrating its commitment to enhancing shareholder value.

The company expects annual capital expenditures for 2024 to be between $1 million and $2 million, which can be comfortably funded given its strong liquidity position.

Outlook and Risks

Looking ahead, Weyco's management has expressed cautious optimism, acknowledging the ongoing challenges posed by the macroeconomic environment. The company's success for the remainder of 2024 will largely depend on the return of more favorable weather patterns to support its outdoor and weather-related product lines.

Risks facing Weyco include continued uncertainty in consumer spending, intensifying competition in the footwear industry, and potential supply chain disruptions. The company's heavy reliance on overseas manufacturing and the potential for tariff fluctuations also present risks that require careful monitoring.

The footwear industry has faced challenges recently, with the outdoor/weather boot category, which includes the company's BOGS brand, being under pressure for the past two years. The company is working to reduce the weather sensitivity of the BOGS brand by expanding into the less weather-dependent farm and agriculture trade channel and introducing new product lines. The company's legacy dress footwear brands like Florsheim, Stacy Adams, and Nunn Bush have also been impacted by the overall decline in the dress footwear category, though Florsheim has gained market share.

Despite these challenges, Weyco's diversified brand portfolio, strategic initiatives, and strong financial position provide a solid foundation for navigating the current market conditions. The company remains comfortable with its current gross margin levels, which were 44.3% in Q3 2024 compared to 43% in Q3 2023. As the company continues to adapt to evolving consumer preferences and market dynamics, investors will closely watch Weyco's ability to execute its strategy and deliver sustainable growth.

Geographic Performance

Weyco Group primarily operates in the United States and Canada, which form the core of its North American market. The company also maintains a presence in Australia and South Africa through its Florsheim Australia operations. However, this segment faced challenges in the third quarter of 2024, with net sales for the Florsheim Australia business decreasing by 15% to $6.0 million, compared to $7.1 million in the same quarter of 2023. This decline was primarily attributed to the closure of the Asia Pacific operations.

The performance of the Florsheim Australia business reflects the broader challenges faced by the company in international markets. Gross earnings as a percentage of net sales for Florsheim Australia were 59.2% in the third quarter of 2024, compared to 61.6% in the prior year period. Operating earnings for Florsheim Australia were breakeven in the third quarter of 2024, down from $0.3 million in the same quarter of 2023.

Conclusion

Weyco Group's long-standing history, diverse brand offerings, and focus on operational efficiency make it a compelling investment opportunity in the footwear industry. While the company faces near-term headwinds, its strategic initiatives and financial strength position it to weather the storm and capitalize on potential opportunities as the market conditions improve. The company's debt-free status, strong liquidity, and commitment to shareholder returns through dividends and share repurchases provide a solid foundation for long-term value creation.

Investors should closely monitor Weyco's progress in diversifying its product mix, reducing weather-sensitivity, and driving profitability across its segments. The company's ability to navigate the challenges in the dress footwear category while expanding its presence in more resilient market segments will be crucial for its future success. As Weyco continues to adapt to changing consumer preferences and market dynamics, its strong balance sheet and established brand portfolio provide a platform for potential growth and market share gains in the evolving footwear industry.