Weyco Group - 10-Q quarterly report FY

FORM 10-Q

SECURITIES & EXCHANGE COMMISSION

Washington, D. C. 20549

(Mark One)

Or

(Exact name of registrant as specified in its charter)

333 W. Estabrook Boulevard

P. O. Box 1188

(Address of principal executive offices)

(Zip Code)

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

As of July 31, 2008 there were 11,385,952 shares of common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.

NOTES:

In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three months or six months ended June 30, 2008 are not necessarily indicative of results for the full year.

Diluted weighted average shares outstanding for the three and six months ended June 30, 2008 exclude outstanding options to purchase 6,640 shares of common stock at a weighted average price of $30.12, as they were antidilutive. Diluted weighted average shares outstanding for the three and six months ended June 30, 2007 include all outstanding options, as none were antidilutive.

 

    

The components of the Company’s net pension expense were:

During the three and six months ended June 30, 2008, the Company recognized approximately $148,000 and $293,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in 2006 and 2007. During the three and six months ended June 30, 2007, the Company recognized approximately $74,400 and $148,400, respectively, of compensation expense associated with stock option and restricted stock awards granted in 2006.

The following table summarizes the stock option activity under the Company’s plans for the six-month period ended June 30, 2008:

* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between market value at June 30, 2008 of $26.53 and the exercise price.

The following table summarizes stock option activity for the three and six months ended June 30, 2008 and 2007:

 

 

As of June 30, 2008, the Company had a total of $50 million available under its borrowing facility, under which total outstanding borrowings were $2 million. The facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at June 30, 2008. The facility expires on April 30, 2009.

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157) which provides a single definition of fair value and a common framework for measuring fair value, as well as new disclosure requirements for fair value measurements used in financial statements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurements. The SFAS 157 requirements for certain non-financial assets and liabilities have been deferred until January 1, 2009 for the Company in accordance with Financial Accounting Standards Board (FASB) Staff Position 157-2. The adoption of SFAS 157 has not had a material effect on the Company’s consolidated financial statements.

 

The Company is a distributor of men’s casual, dress and fashion shoes. The principal brands of shoes sold by the Company are “Florsheim,” “Nunn Bush,” and “Stacy Adams.” Inventory is purchased from third-party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars. In the wholesale division, the Company’s products are sold to shoe specialty stores, department stores and clothing retailers primarily in North America, with some distribution in Europe. The Company also has a retail division, which as of June 30, 2008, consisted of 39 Company-owned retail stores in the United States, two in Europe, and an Internet business. Sales in retail outlets are made directly to consumers by Company employees. The Company also has licensing agreements with third parties who sell its branded shoes overseas, as well as licensing agreements with apparel and accessory manufacturers in the United States. As such, the Company’s results are primarily affected by the economic conditions and the retail environment in the United States.

Second quarter consolidated net sales in 2008 were $53 million, up 9.6% compared with last year. Wholesale sales were up 12%, and retail sales were down 4%. Consolidated net earnings and diluted earnings per share for the quarter were level with last year at $4.1 million and $.34, respectively.

Wholesale Sales

Sales in the Company’s wholesale division for the three- and six-month periods ended June 30, 2008 and 2007 were as follows:

Stacy Adams sales for the second quarter of 2008 were up 35% compared with last year’s second quarter. The growth was driven by an increase in sales of contemporary footwear to national accounts. Stacy Adams recently expanded its array of denim-friendly footwear, and these styles shipped to many of its major accounts in the second quarter. In addition, Stacy Adams sells a lot of seasonal product, and because of tight budgets, many retailers brought in seasonal styles later. This caused some volume to shift from the first quarter to the second. Year-to-date sales of Stacy Adams were up 11% over last year.

The new Dynamic Comfort line of slip resistant footwear at Nunn Bush helped deliver a solid second quarter for the Nunn Bush brand. The quarter and year-to-date increases at Nunn Bush also reflect the brand’s solid performance at retail.

The second quarter increase in Florsheim sales was primarily attributable to increased sales of its Comfortech shoes. Year-to-date Florsheim sales were down compared to last year due to the timing of new programs. In the first quarter of 2007, Florsheim rolled out a number of new shoe programs introducing contemporary and casual styles. In 2008, there were no new product introductions of a similar scale.

Licensing revenues were up compared with last year for the second quarter and first six months of 2008. Licensee sales of Stacy Adams branded products were down for the quarter and six months, as the independent clothing retailers continue to face a challenging retail environment. However, Stacy Adams royalties increased this year because the Company terminated its agreement with its licensing agent, to whom the Company previously paid a percentage of the royalties. The services performed by the licensing agent are now handled in house, and the related costs are included in selling and administrative expenses and offset a portion of the royalty gain. Licensing revenues from the sales of Florsheim footwear overseas and branded products in the US were consistent for the quarter and up year-to-date.

 

Retail Sales

Gross Earnings

Overall gross earnings were 37.2% of net sales in the three months ended June 30, 2008 compared with 38.6% of net sales in the prior year period. Approximately half of the decrease in overall margins was due to a change this quarter in the mix of wholesale and retail sales, with wholesale sales making up a higher percentage of total sales than last year. Because wholesale sales carry lower margins than retail sales, the increase in wholesale sales resulted in a decrease in overall gross margins. Additionally, wholesale and retail gross margins decreased 80 and 50 basis points, respectively. Wholesale gross earnings were 31.0% of net sales in the current quarter compared with 31.8% in the second quarter 2007. The decrease in wholesale gross earnings for the quarter as a percent of net sales was a reflection of cost increases from the Company’s overseas vendors which have been partially offset by wholesale price increases. In the retail division, gross earnings were 66.8% of net sales compared with 67.3% in the second quarter of 2007.

Overall gross earnings as a percent of net sales for the six months ended June 30, 2008 was 36.7% compared with 37.2% of net sales last year. Wholesale gross earnings were 31.1% of net sales to date this year compared with 31.3% last year. Retail gross earnings in the first six months of 2008 were 66.4% of net sales compared with 66.5% last year.

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs for the three months ended June 30, 2008 and 2007 were approximately $1,873,000 and $1,728,000 respectively. The Company’s distribution costs to date in 2008 and 2007 were approximately $3,906,000 and $3,578,000, respectively. These costs were included in selling and administrative expenses. Therefore, the Company’s gross earnings may not be comparable to other companies, as some companies may include distribution costs in cost of sales.

Selling and Administrative Expenses

The Company’s selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs, rent and depreciation. In the current quarter, selling and administrative expenses were 26.1% of net sales versus 26.4% of net sales in 2007. Wholesale selling and administrative expenses were 20.8% of net wholesale sales in 2008 compared with 22.3% in 2007. The current quarter decrease in wholesale selling and administrative expenses as a percent of net sales reflects the fixed nature of many wholesale selling and administrative expenses. Retail selling and administrative expenses were 61.9% of net sales in 2008 and 50.8% of net sales in 2007.

For the six months ended June 30, 2008, selling and administrative expenses were 25.0% of net sales versus 24.2% of net sales in 2007. Wholesale selling and administrative expenses to date were 20.1% of net sales versus 20.2% in 2007. Retail selling and administrative expenses to date this year were 61.4% of net sales compared with 52.9% of net sales last year. The increase in retail selling and administrative expenses as a percent of sales for both the quarter and six months ended June 30, 2008 reflects the impact of lower sales volume in the current year on fixed selling and administrative costs. Additionally, the Company continues to experience higher rent and occupancy costs.

 

Interest and Taxes

Interest expense during the three-month periods ended June 30, 2008 and 2007 was $20,000 and $85,000, respectively. For the six-month periods ended June 30, 2008 and 2007, interest expense was $30,000 and $208,000, respectively. The quarter and year-to-date decreases this year were due to lower average short-term borrowings this year compared with last year. The Company’s effective tax rate in the second quarter of 2008 was 36.2% compared with 36.5% in the second quarter of 2007. The effective tax rate for the six months ended June 30, 2008 was 36.5% compared with 36.9% in the prior year.

The Company’s primary source of liquidity is its cash and short-term marketable securities. During the first half of 2008, the Company’s primary source of cash was from operations while its primary use of cash was repurchases of the Company’s stock. The Company also spent $1.8 million on capital expenditures in the first half of 2008 of which approximately $1.4 million was related to retail store remodeling projects. Capital expenditures are expected to be approximately $2-$3 million for the full year of 2008.

The Company generated $12.1 million in cash from operating activities in the first half of 2008, compared with $19.3 million in the prior year period. This decrease was primarily due to changes in operating assets and liabilities.

The Company paid cash dividends of $2.5 million and $2.1 million in the six months ended June 30, 2008 and 2007, respectively. On April 29, 2008, the Company’s Board of Directors declared a quarterly dividend of $.14 per share to shareholders of record June 2, 2008, payable July 1, 2008. This represents an increase of 27% in the quarterly dividend rate. The impact of this will be to increase cash dividends paid annually by approximately $1.4 million.

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. In the first half of 2008, the Company repurchased 219,518 shares for a total cost of $6.2 million. The Company currently has 697,389 shares available under its previously announced buyback program.

As of June 30, 2008, the Company had a total of $50 million available under its borrowing facility, under which total outstanding borrowings were $2 million. The facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at June 30, 2008. The facility expires on April 30, 2009.

The Company will continue to evaluate the best uses for its free cash, including continued increased dividends, stock repurchases and acquisitions.

The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business in 2008.

This report contains certain forward-looking statements with respect to the Company’s outlook for the future. These statements represent the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially. The reader is cautioned that these forward-looking statements are subject to a number of risks, uncertainties or other factors that may cause (and in some cases have caused) 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WEYCO GROUP, INC.

(THE “REGISTRANT”)

(COMMISSION FILE NO. 0-9068)

EXHIBIT INDEX

TO

CURRENT REPORT ON FORM 10-Q

DATE OF June 30, 2008