GENERAL
We design and market 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. The majority
of 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. Our
"other" operations include our wholesale and retail businesses in Australia,
South Africa, Asia Pacific (collectively, "Florsheim Australia"), and Europe
("Florsheim Europe," which closed in 2021). 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.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial position, and liquidity of our company for the
two-year period ended December 31, 2022. This discussion should be read in
conjunction with Item 8, "Financial Statements and Supplementary Data" below.
KNOWN TRENDS IMPACTING OUR BUSINESS
Global supply chain disruptions and inflation impacted our operating results in
2021 and 2022. During 2021, disruptions in the supply chain affected the flow of
our inventory into the U.S. due mainly to container shortages and port
congestion. In response, in 2022 we planned receipt of inventory based on the
continuation of extended inventory transit times throughout the year. By the end
of 2022, inventory transit times improved and supply chain issues had subsided.
As a result, our inventories were at peak levels at December 31, 2022, and are
expected to come down in the first half of 2023.
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We incurred higher freight costs as a result of the supply chain disruptions,
which negatively impacted our gross margins in 2021. In 2022, we implemented
selling price increases to address the higher costs. By the end of 2022, freight
rates had come down and gross margins returned to pre-pandemic levels, due
mainly to the higher selling prices this year.
The effects of continuing inflation, a potential recession, or a resurgence of
the COVID-19 pandemic, on our future operating results cannot be reasonably
estimated but could be material.
EXECUTIVE OVERVIEW
We experienced a record year in 2022 for our company, in both sales and
earnings. Part of our strong volume this year had to do with pipeline fill, as
many retailers needed to get shoes back on their shelves in the first half of
the year. We also experienced strong consumer demand across our brands,
especially with our more traditional footwear, which experienced a resurgence in
2022.
Our legacy brands, comprised of Florsheim, Stacy Adams and Nunn Bush, posted
strong results in 2022. Florsheim's net sales were up 43% for the full year,
compared to 2021, making it a record year for the brand. Stacy Adams and Nunn
Bush net sales were up 49% and 40%, respectively, for the year. Our legacy
brands benefitted from the strength of the men's dress and refined casual
business, as consumers were once again updating their wardrobes for social
occasions as well as the return to the office work environment. While the dress
footwear market reverted to more normalized sell-throughs late in the year, the
category is healthy and we expect to see a steady performance throughout 2023.
Net sales at BOGS were up 23% for the year, leading the brand to a record year
of sales. In 2022, we delivered on a strong backlog of orders as BOGS continued
to broaden its mix of footwear into less seasonal lifestyle product. Late in the
year, the outdoor category became oversaturated with product due to the
unwinding of supply chain issues and we saw a more promotional environment along
with a softness in consumer demand reflecting mild winter weather in certain
parts of the U.S. and Canada. Despite the changes in the market, we remain
enthused about the overall performance of the BOGS brand. As we progress through
2023, we are mindful of the more challenging environment in the outdoor
category, but are confident in our ability to navigate these changes and
continue to move the brand forward and evolve its product offering.
In our Retail segment, net sales were up 16% for the year. Given the promotional
environment and some of the weather challenges impacting BOGS, we were pleased
with our double-digit growth for the year. We believe this reflects the strength
of our e-commerce platform and the appeal of our brands. From a bottom-line
perspective, the promotional environment negatively affected our gross margins
and we incurred higher e-commerce expenses this year, primarily outbound freight
and advertising.
Florsheim Australia's net sales in local currency were up 22% for the year.
Australia was a bright spot among our overseas businesses this year as we saw
growth across retail, e-commerce, and wholesale for Florsheim, as well as
increases for BOGS via wholesale and e-commerce. This resulted in greater
profitability for the division. A portion of the increase was related to
comparisons with pandemic-related shutdowns in 2021, but a good part of our
success had to do with our management team's strong execution in 2022, including
a warehouse move and opening several new stores.
Sales and Earnings Highlights
Consolidated net sales for 2022 were a record $351.7 million, up 31% compared to
$267.6 million in 2021. Consolidated gross earnings as a percent of net sales
were 41.1% and 40.1% in 2022 and 2021, respectively. Operating earnings were a
record $40.4 million, up 57% over 2021 operating earnings of $25.7 million. Net
earnings were a record $29.5 million, or $3.07 per diluted share, in 2022, up
44% compared to $20.6 million, or $2.12 per diluted share, in 2021.
Financial Position Highlights
At December 31, 2022, our cash, short-term investments, and marketable
securities totaled $25.5 million and we had $31.1 million outstanding on our
$50.0 million revolving line of credit. During 2022, we drew $31.1 million on
our line of credit and liquidated $8.0 million of investment securities. We used
funds to pay $7.0 million in dividends and to repurchase $4.2 million of our
stock. In addition, our operations resulted in a net $29.9 million use of cash,
mainly to fund inventory purchases. We also had $2.3 million of capital
expenditures.
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SEGMENT ANALYSIS
Net sales and earnings from operations for our segments, as well as our "other"
operations, in the years ended December 31, 2022 and 2021, were as follows:
Years ended December 31,
2022 2021 % Change
(Dollars in thousands)
Net Sales
North American Wholesale $ 283,235 $ 205,386 38 %
North American Retail 36,694 31,595 16 %
Other 31,808 30,660 4 %
Total $ 351,737 $ 267,641 31 %
Earnings from Operations
North American Wholesale $ 32,641 $ 19,455 68 %
North American Retail 6,058 6,651 (9) %
Other 1,666 (404) NM
Total $ 40,365 $ 25,702 57 %
NM - Not meaningful
North American Wholesale Segment
Wholesale Net Sales
Net sales in our Wholesale segment for the years ended December 31, 2022 and
2021, were as follows:
Years ended December 31,
2022 2021 % Change
(Dollars in thousands)
North American Wholesale Net Sales
Stacy Adams $ 62,284 $ 41,750 49 %
Nunn Bush 54,882 39,209 40 %
Florsheim 91,682 63,980 43 %
BOGS/Rafters 70,572 57,534 23 %
Forsake 1,718 1,176 46 %
Total North American Wholesale $ 281,138 $ 203,649 38 %
Licensing 2,097 1,737 21 %
Total North American Wholesale Segment $ 283,235 $ 205,386 38 %
2022 net sales were up across our brands. While part of the increase was due to
pipeline fill, sales were also up due to robust consumer demand and higher
selling prices this year. Both Florsheim and BOGS achieved record annual sales
in 2022. Licensing revenues consist of royalties earned on sales of branded
apparel, accessories, and specialty footwear in the United States and on branded
footwear in Mexico and certain overseas markets.
Wholesale Earnings from Operations
Wholesale gross earnings as a percent of net sales were 35.6% in 2022 versus
33.8% in 2021. Gross margins returned to pre-pandemic levels as a result of
selling price increases implemented to address higher costs.
Selling and administrative expenses for the wholesale segment consist primarily
of distribution costs, salaries and commissions, advertising costs, employee
benefit costs, and depreciation. Wholesale selling and administrative expenses
were $68.2 million and $49.9 million in 2022 and 2021, respectively. 2021
expenses were reduced by $5.5 million in wage subsidies received from the U.S.
and Canadian governments. As a percent of net sales, wholesale selling and
administrative expenses remained flat at 24% of net sales in both 2022 and 2021.
Wholesale operating earnings reached a record $32.6 million in 2022, up 68%
over $19.5 million in 2021, due mainly to higher sales and gross margins this
year.
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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 $16.0
million and $10.8 million for the years ended December 31, 2022 and 2021,
respectively. Distribution costs in 2021 were reduced by $1.5 million as a
result of government wage subsidies. Our gross earnings may not be comparable to
other companies, as some companies may include distribution costs in cost of
sales.
North American Retail Segment
Retail Net Sales
Net sales were a record $36.7 million in 2022, up 16% compared to $31.6 million
in 2021. The increase was primarily due to higher sales across all our brands'
websites, fueled by strong consumer demand. Sales were also up for the year at
our four domestic brick and mortar stores.
Retail Earnings from Operations
Retail gross earnings as a percent of net sales were 65.7% in 2022 and 66.4% in
2021. 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 totaled $18.1
million in 2022, or 49% of net sales, for the year compared to $14.3 million, or
45% of net sales, in 2021. The increase was mainly due to higher e-commerce
expenses, primarily outbound freight and advertising.
Other
Our other operations have historically included the wholesale and retail
businesses of Florsheim Australia and Florsheim Europe, but we closed Florsheim
Europe in 2021. As a result, the 2022 operating results of the "other" category
reflect only that of Florsheim Australia.
Other net sales totaled $31.8 million in 2022 up 4% from $30.7 million in 2021.
Sales in U.S. dollars were up $3.5 million, or 12%, at Florsheim Australia. In
local currency, Florsheim Australia's net sales were up 22% for the year, with
sales up in both its retail and wholesale businesses. Last year's sales at
Florsheim Australia were negatively impacted by COVID-related lockdowns that
existed throughout much of 2021. Florsheim Europe was closed and had no sales in
2022 versus $2.3 million in 2021.
Other gross earnings were 61.1% of net sales in 2022 versus 55.8% of net sales
in 2021. Other operating earnings recovered to $1.7 million in 2022, up from
operating losses of $404,000 in 2021. The improvement in 2022 was due to
stronger performance at Florsheim Australia and the shedding of losses at
Florsheim Europe.
OTHER INCOME AND EXPENSE AND TAXES
Most of our interest income is generated by investments in marketable securities
and highly liquid taxable bond funds. Interest income totaled $361,000 and
$641,000 in 2022 and 2021, respectively. The decrease in 2022 was primarily due
to less earnings on the lower investment balances this year. Interest expense
was $710,000 in 2022 and $81,000 in 2021. The increase was due to interest
incurred on the higher debt balances this year. Other (expense) income, net,
totaled expense of $277,000 in 2022 versus income of $1.1 million in 2021. This
year's expense included a $894,000 pension settlement charge recorded in
connection with a lump-sum benefit payment to a former executive of the Company.
Our effective tax rate was 25.7% in 2022 versus 24.8% in 2021. The current tax
rate differs from the U.S. federal statutory rate of 21% due mainly to the
impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash, short-term investments, and
short-term marketable securities, which aggregated $18.4 million and $28.1
million at December 31, 2022 and 2021, respectively, and our revolving line of
credit. We used $29.9 million in cash from operations in 2022, and generated
$6.4 million of cash from operations in 2021. Fluctuations in net cash from
operating activities mainly resulted from changes in net earnings and operating
assets and liabilities, most significantly, the year-end inventory and accounts
receivable balances. Our inventory levels increased to $128.0 million at
December 31, 2022 from $71.0 million at December 31, 2021. We have been building
our inventories and, due to supply chain issues, we brought in much of our
inventory for Spring 2023 early. We are currently at peak inventory levels and
expect levels come down as we move through the first half of 2023. The supply
chain at this
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point is back to normal which will make it easier for us to plan our inventory
levels and bring product in closer to the season that is being targeted.
Our capital expenditures were $2.3 million and $1.0 million in 2022 and 2021,
respectively. In 2023, we plan to finalize an investment in our distribution
center which will enable us to process and ship more efficiently the large
increase in e-commerce orders experienced over the past several years. Including
these costs, we expect capital expenditures will be between $2.0 million and
$4.0 million in 2023.
We paid cash dividends of $7.0 million and $9.3 million in 2022 and 2021,
respectively. The decrease in 2022 was due to a shift in timing of our
quarterly dividend payment schedule; 2022 included three quarterly dividend
payments, as our fourth quarter 2022 dividend was paid in early January 2023.
2021 included four quarterly dividend payments, as our fourth quarter 2021
dividend payment was paid in December 2021.
In December 2022, in accordance with the terms of our supplemental pension plan,
we made a lump-sum benefit payment of $4.3 million to a former executive of the
Company.
We repurchase our common stock under our share repurchase program when we
believe market conditions are favorable. In 2022, we purchased 171,397 shares at
a total cost of $4.2 million through our share repurchase program. In 2021, we
purchased 125,204 shares at a total cost of $2.5 million through our share
repurchase program. As of December 31, 2022, there were 1,039,179 authorized
shares remaining under the program.
On September 28, 2022, we amended our line of credit agreement. The amendment
("Amended Credit Agreement") extended the maturity of our credit facility to
September 28, 2023, increased our available borrowing limit from $40.0 million
to $50.0 million, and replaced the London Interbank Offered Rate ("LIBOR")
benchmark used for determining interest rate on outstanding advances. Under the
terms of the Amended Credit Agreement, amounts outstanding bear interest at the
one-month term secured overnight financing rate ("SOFR") plus 145 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 December 31, 2022, outstanding borrowings on the line
of credit were approximately $31.1 million at an interest rate of 5.77%, and we
were in compliance with all financial covenants. At December 31, 2021, there
were no amounts outstanding on our line of credit.
As of December 31, 2022, approximately $4.7 million of cash and cash equivalents
was held by our foreign subsidiaries.
We 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, 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.
Off-Balance Sheet Arrangements
We do not utilize any special purpose entities or other off-balance sheet
arrangements.
Critical Accounting Estimates
Our accounting policies are more fully described in Note 2 of the Notes to
Consolidated Financial Statements. As disclosed in Note 2, the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions about future events that affect the amounts reported in the
consolidated financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the consolidated financial statements. The following policies are
considered by management to be the most critical in understanding the
significant accounting estimates inherent in the preparation of our consolidated
financial statements and the uncertainties that could impact our results of
operations, financial position and cash flows.
Sales Returns, Sales Allowances and Doubtful Accounts
We record reserves and allowances ("reserves") for sales returns, sales
allowances and discounts, cooperative advertising, and accounts receivable
balances that we believe will ultimately not be collected. The reserves are
based on such factors as specific customer situations, historical experience, a
review of the current aging status of customer receivables and current and
expected economic conditions. The reserve for doubtful accounts includes a
specific reserve for accounts identified as potentially uncollectible, plus an
additional reserve for the balance of accounts, determined based on historical
trends. We evaluate the reserves and the estimation process and adjust when
appropriate. Apart from unprecedented write-offs that occurred during the
COVID-19 pandemic, our historical write-offs against the reserves have been
within our expectations. Future changes in reserves may be required if actual
returns, discounts and
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bad debt activity varies from the original estimates. These changes could
impact our results of operations, financial position, and cash flows.
Pension Plan Accounting
Our pension expense (benefit) and corresponding obligation are determined on an
actuarial basis and require certain actuarial assumptions. We believe the two
most critical of these assumptions are the discount rate and the expected rate
of return on plan assets. We evaluate actuarial assumptions annually on the
measurement date (December 31) and make modifications based on such factors as
market interest rates and historical asset performance. Changes in these
assumptions can result in different expense and liability amounts, and future
actual experience can differ from these assumptions.
Discount Rate - Pension expense and projected benefit obligation both increase
as the discount rate is reduced. See Note 13 of the Notes to Consolidated
Financial Statements for discount rates used in determining pension expense for
the years ended December 31, 2022 and 2021, and the funded status of the plans
at December 31, 2022 and 2021. We use the spot-rate approach to determine the
service and interest cost components of pension expense. Under the spot-rate
approach, the service and interest costs were calculated by applying specific
spot rates along the yield curve to the relevant projected cash flows, to
provide a better estimate of future service and interest costs. A 0.5% decrease
in the discount rate would have a nominal impact on annual pension expense, and
would increase the projected benefit obligation by approximately $2.9 million.
Expected Rate of Return - Pension expense increases as the expected rate of
return on pension plan assets decreases. In estimating the expected return on
plan assets, we consider the historical returns on plan assets and future
expectations of asset returns. We utilized an expected rate of return on plan
assets of 6.75% and 7.00% for 2022 and 2021, respectively. This rate was based
on our Company's long-term investment policy of equity securities: 20% - 80%;
fixed income securities: 20% - 80%; and other, principally cash: 0% - 20%. A
0.5% decrease in the expected return on plan assets would increase annual
pension expense by approximately $172,000.
Our unfunded benefit obligation was $16.1 million and $28.3 million at December
31, 2022 and 2021, respectively.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements.
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WEYCO GROUP, INC. 