Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company is a distributor of men’s casual, dress and fashion shoes under the Florsheim, Nunn Bush, Nunn Bush NXXT, Brass Boot, Stacy Adams and SAO by Stacy Adams brand names. Inventory is purchased from third party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars. 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 March 31, 2006, consisted of 32 Company-owned retail stores in the United States, three 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.
Consolidated net sales in the first quarter of 2006 increased 2.5% over the prior year period. Sales were up in both the wholesale and retail divisions. Net earnings for the three months ended March 31, 2006 were $5.3 million, or $.44 per diluted share compared with $5.2 million, or $.43 per diluted share in 2005. A more detailed analysis of operating results follows.
Consolidated net sales in the first quarter of 2006 were $59.29 million, 2.5% above the prior year’s $57.83 million. Sales in the Company’s wholesale division, which includes both wholesale sales and licensing revenues, were up 2.3% reaching $52.3 million in 2006 compared with $51.1 million in 2005. Wholesale sales were $51.2 million in 2006 as compared with $49.9 million in 2005. Licensing revenues were $1.1 million in 2006 and $1.2 million in 2005.
Retail net sales in the current quarter were $7.00 million, up 3.9% from last year’s $6.74 million. The increase was primarily attributable to the inclusion of four additional stores in the first quarter of 2006 compared with last year’s first quarter. Same store sales were flat in comparison to the first quarter of 2005.
Wholesale sales by brand for the three-month periods ended March 31, 2006 and 2005 were as follows:
Wholesale Sales
| | Three months ended March 31, | |
| |
| |
| | 2006 | | 2005 | | % change | |
| |
|
| |
|
| |
|
| |
Stacy Adams | | $ | 16,846,812 | | $ | 17,147,179 | | | -1.8 | % |
Nunn Bush | | | 18,358,484 | | | 17,781,087 | | | 3.3 | % |
Florsheim | | | 14,324,581 | | | 13,336,562 | | | 7.4 | % |
Foreign | | | 1,676,055 | | | 1,618,807 | | | 3.5 | % |
| |
|
| |
|
| |
|
| |
Total | | $ | 51,205,932 | | $ | 49,883,635 | | | 2.7 | % |
The decline at Stacy Adams as compared with the first quarter 2005 was primarily in the SAO sub-brand, as the casual streetwear market continues to be challenging. Sales of other Stacy Adams products were flat between first quarter of 2005 and 2006.
Nunn Bush net sales in the first quarter of 2006 were solid, with good performance by the brand’s Comfort Gel products. This is in comparison with first quarter 2005, which was down in part due to some product transitions with some of its major accounts. By the third quarter of 2005, the transitions were complete, and business had stabilized.
Florsheim sales increased 7.4% this quarter, despite the loss of approximately $1 million in sales of the FLS sub-brand following the Company’s decision last year to discontinue FLS in the United States. Sales of other Florsheim products were up 16%. This increase was across a range of accounts and over several product categories. In total, the Company expects to lose approximately $2.8 million in sales volume during 2006 compared with 2005 due to the discontinuation of FLS, so another $1.8 million of lost sales volume is expected in future quarters.
The acquisition of one of the Company’s major customers by another retailer in 2005 has resulted in sales volume losses at Nunn Bush and Florsheim in the first quarter of 2006. The acquiring company has decided not to go forward with either the Nunn Bush or the Florsheim product lines. Total sales to this customer in 2005 were approximately $12.0 million. Through March 31, 2006, business with this customer was down $1.4 million.
Overall gross earnings as a percent of net sales in the three months ended March 31, 2006 was 35.5% compared with 35.7% in the prior year period. Gross earnings as a percent of net sales in the wholesale division decreased slightly to 31.6% in 2006 from 32.0% in 2005. In the retail division, gross earnings as a percent of net sales was 64.8%, as compared with 63.7% in the first quarter of 2005.
The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). The Company’s distribution costs for the three months ended March 31, 2006 and 2005 were $1,642,000 and $1,567,000, 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. The Company’s selling and administrative expenses also include, and are primarily related to, salaries and commissions, advertising costs, employee benefit costs, rent and depreciation.
-9-
Selling and administrative expenses as a percent of net sales were 21.6% for the first quarter of 2006 versus 21.1% in 2005. Wholesale selling and administrative expenses as a percent of net wholesale sales were 18.3% in both 2006 and 2005. Retail selling and administrative expenses as a percent of net sales were 49.6% in 2006 and 46.1% in 2005. The increase in retail selling and administrative expenses as a percent of net sales was due to higher expenses in relation to sales in the four new stores. These stores are not yet bringing in enough volume to cover expenses in the same relation to sales as our existing stores.
Interest income in the current quarter was $462,000 compared with $145,000 last year. The increase was attributable to higher marketable securities at March 31, 2006 which are primarily invested in municipal bonds. The interest income earned on these municipal bonds is tax-exempt which lowered the Company’s effective tax rate in the first quarter of 2006 to 37.4% from 38.5% in the first quarter of 2005.
LIQUIDITY & CAPITAL RESOURCES
The Company’s primary source of liquidity is its cash and short-term marketable securities, which aggregated approximately $14.1 million at March 31, 2006 as compared with $23.7 million at December 31, 2005. In the first quarter of 2006, cash and cash equivalents decreased approximately $9.6 million principally due to the investment of cash in long-term marketable securities during the current quarter.
Net cash provided by operating activities for the first quarter of 2006 was down $11.1 million compared with the same period in 2005. The decrease was primarily due to changes in accounts receivable, inventory, accounts payable and accrued liabilities balances.
The increase in accounts receivable was due to differences in the timing of sales and collections between years, as well as the increase in sales year-over-year. The decrease in inventories and accounts payable was largely due to differences in the timing of inventory purchases between years. The change in accrued liabilities for the quarter ended March 31, 2005, included a $1.6 million deferred compensation payment representing the final payment made to a former executive under a deferred compensation arrangement.
Net cash used for investing activities increased $7.3 million mainly due to purchases of marketable securities during the first quarter of 2006, as compared with 2005. At December 31, 2005, there was a significant amount of cash on the Company’s balance sheet. A large portion of the excess cash was subsequently invested in marketable securities in the first quarter of 2006.
As of March 31, 2006, the Company had a total of $50 million available under its existing borrowing facility, of which total borrowings were $9.5 million. This facility includes certain financial covenants, including minimum net worth levels, minimum levels of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and a maximum ratio of funded debt to EBITDA. As of March 31, 2006 the Company was in compliance with all covenants. The facility expired on April 30, 2006 at which time the Company entered into a new $50 million 364-day borrowing facility. This new facility includes only a minimum net worth covenant and expires April 30, 2007.
-10-
The Company’s Board of Directors declared a quarterly dividend of $.09 per share to shareholders of record June 1, 2006, payable July 1, 2006. This represents an increase of 29% in the quarterly dividend rate. The impact of this will be to increase cash dividends paid annually by approximately $900,000.
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 2006.
FORWARD-LOOKING STATEMENTS
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, 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
| There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. |
Item 4. Controls and Procedures
| The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company’s 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, the Company’s 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 the Company’s periodic filings under the Exchange Act. Such officers have also concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in accumulating and communicating information in a timely manner allowing timely decisions regarding required disclosures. |
-11-
| There have not been any 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 the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
| There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| In April 1998, the Company first authorized a stock repurchase program to purchase 1,500,000 shares of its common stock in open market transactions at prevailing prices. In April 2000 and again in May 2001, the Company’s Board of Directors extended the stock repurchase program to cover the repurchase of 1,500,000 additional shares. Therefore, 4,500,000 shares have been authorized for repurchase since the program began. The Company also buys back shares of its Common Stock from time to time in private transactions at prevailing prices. The table below presents information pursuant to Item 703(a) of Regulation S-K regarding the repurchase of the Company’s Common Stock by the Company in the three-month period ended March 31, 2006. |
Period | | Total Number of Shares Purchased | | Average Price Paid
Per Share | | Total Number of
Shares Purchased as
Part of the Publicly
Announced Program | | Maximum Number
of Shares that May
Yet Be Purchased
Under the Program | |
| |
|
| |
|
| |
|
| |
|
| |
3/1/06 – 3/31/06 | | | 23,750 | | $ | 19.86 | | | 23,750 | | | 1,505,586 | |
There were no repurchases of stock from January 1 through February 28, 2006.
-12-
Item 4. Submission of Matters to a Vote of Security Holders
| The Annual Meeting of Shareholders was held April 25, 2006 to elect three members to the Company’s Board of Directors. |
| |
| John W. Florsheim, Cory L. Nettles and Frederick P. Stratton, Jr. were nominated for election to the Board of Directors for terms of three years. A total of 30,793,639 votes were cast for the nominees, with 30,614,658 votes cast “for” and 178,981 votes “withheld” for Mr. Florsheim, with 30,681,903 votes cast “for” and 111,736 votes “withheld” for Mr. Nettles, and 30,669,726 votes cast “for” and 123,913 votes “withheld” for Mr. Stratton. Thomas W. Florsheim and Leonard J. Goldstein continue as Directors of the Company for a term expiring in 2007. Thomas W. Florsheim, Jr. and Robert Feitler continue as Directors of the Company for a term expiring in 2008. |
| |
Item 6. Exhibits |
| |
| See the Exhibit Index included herewith for a listing of 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. |
| | |
| | |
May 4, 2006 | | /s/ John F. Wittkowske |
| |
|
Date | | John F. Wittkowske |
| | Senior Vice President and |
| | Chief Financial Officer |
-13-
WEYCO GROUP, INC.
(THE “REGISTRANT”)
(COMMISSION FILE NO. 0-9068)
EXHIBIT INDEX
TO
CURRENT REPORT ON FORM 10-Q
DATE OF March 31, 2006
-14-
