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Weyco Group: Put Your Best Foot Forward

December 10, 2012 | About:
Weyco Group Inc. (WEYS) designs and markets quality and innovative footwear for men, women and children under a portfolio of well-recognized brand names including: Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Its products can be found in leading footwear, department and specialty stores worldwide. WEYS also operates Florsheim concept stores in the U.S. and Australia, as well as in a variety of international markets. WEYS' business is separated into two reportable segments — the North American wholesale segment and the North American retail segment. Sales for the North American wholesale segment accounted for 74% and 72% of its total sales in 2011 and 2010, respectively.

On March 2, 2011, WEYS acquired 100% of the outstanding shares of The Combs Company, the owner of the BOGS and Rafters brands, to diversify its product mix and enhance its share of the casual footwear market. The Combs Company designs and markets boots, shoes, and sandals for men, women and children under the BOGS and Rafters brand names. These products are sold across the agricultural, industrial, outdoor specialty, outdoor sport, lifestyle and fashion markets.

Valuation

WEYS currently trades at a trailing 12 months P/E of 15.34 and a trailing 12 months EV/EBITDA of 9.83. Its current P/E valuations are at a 17% discount to its five-year average P/E of 18.50. WEYS achieved a 9.9% ROE for the past 12 months and a five-year average ROE of 10.0%.

Financial and Business Risks

WEYS has a low gross debt-to-equity ratio of 26% and a net gearing of 17%. This does not include off-balance sheet liabilities such as operating leases and purchase obligations amounting to $45 million and $50 million respectively.

WEYS purchases its finished shoes entirely from independent foreign manufacturers, primarily in China and India, and this results in long production and delivery lead times. WEYS needs to forecast demand at least five months in advance to cope with the long lead times; if there is a huge variance between actual demand and forecasts, it may lead to either the loss of sales if there is not sufficient inventory to meet customer demand, or reduced margins if there is excess inventory that needs to be sold at discounted prices. Management noted that there have been upward cost pressures from its suppliers since 2007, due to a variety of reasons including higher labor, materials and freight costs and changes in the strength of the U.S. dollar.

The nature of the industry requires WEYS to carry large amounts of inventory to meet customer delivery requirements and periodically provides extended payment terms to customers. While inventory days have remained stable around four months, receivables days have increased from an historical average of 50 days to about 68 days for the trailing 12 months period.

WEYS does not face significant customer concentration risk. Its shoes are marketed throughout the United States and Canada in more than 10,000 shoe, clothing and department stores. No single customer accounted for more than 10% of its sales in 2011; while its largest customer JCPenney accounted for 12% and 13% of WEYS' sales in 2010 and 2009

There has been significant insider selling for the past twelve months, with 68,688 shares being sold by five insiders for approximately $1.58 million.

Business Quality and Capital Allocation

I am not familiar enough with the brands that WEYS carries to make a judgement on the popularity of its brands. However, management does claim in its 10-K: "Price, quality, service and brand recognition are all important competitive factors in the shoe industry and the Company has been recognized as a leader in all of them." And this is backed by a long history of profitability and free cash flow generation across different market cycles. WEYS is profitable in every single year for the past decade and generated positive free cash flows in 9 out of the last 10 years.

WEYS has paid dividends in every single year since 1995 and currently sports a dividend yield of 2.8% with a 42% dividend payout ratio. Dividends are paid quarterly. Management has grown dividends by a five-year CAGR of 14% and a ten-year CAGR of 15.1%.

Conclusion

Balance sheet strength and dividends are satisfactory but not outstanding. Valuations are not enticing either.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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