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Sheldon Shi

A Good Pair of Shoe Companies

November 21, 2005 | About:

I don't have eyes for fashions. But a pair of shoe companies recently caught my attention. They are not exactly mirror images of each other, but I think they make a good pair in a value investor's portfolio.

The shoe biz is no show biz, especially the Men's dressing shoe category. Men's dressing shoes look today just like they looked a generation ago. But that is exactly what Weyco Group (WEYS) is counting on - the staying power. Weyco has been making men's dressing shoes for more than 100 years. Its main brand, Florsheim, dated back to 1892, and enjoys the No. 1 brand-name awareness in its category. Weyco bought Florsheim in 2002 when the latter went into bankruptcy. History ran in full circles - The Florsheim family sold the Florsheim business in the 50s, and later brought interests of Weyco. Now the family runs Weyco, and Florsheim again.

Weyco has a balance sheet as solid as the sole of its shoes, with a strong cash position and very little debt. Its sales took off after acquiring the Florsheim brand. So were the earnings. GAAP earnings shot up more than 50% since 2002. It looked like the $48.5M spent on the Florsheim acquisition was well spent. Based on the trailing 12 month earnings, The price to owner's earning ratio of the company is 12, in the middle of its historical range.

Besides the balance sheet, what I like about the company is its steadily growing operating margins. Steady growth is a quality not often seen in the corporate landscape, and is highly valued by Warren Buffett and his followers. The company has been outsourcing its manufacturing in China, India, Branzil and Europe for years. It is both experienced and efficient in the logistics of the globalized supply chain. Even though the Men's shoe business is a staggering one in U.S., Weyco is in a good position to grab more shares of the market by leveraging its efficiency and its scales. (By my rough estimate, Weyco has about 10% of the Men's nonrubber shoe market in U.S.) Furthermore, the company is selectively expanding its retail presence which carries a higher margin than wholesale. The international market, which carries a tiny percentage in Weyco's sales, offers another opportunity.

WEYS: market cap $240M (11/11/2005)
  Q3′05 Q2′05 Q1′05 2004 2003 2002 2001 2000
Revenue ($M) 55.2 44.7 57.8 223 215.8 181.2 131.7 148.2
  - Wholesale 48.3 37.2 49.9 192.6 187.3 163.6 126.6 142
  - Licensing 0.9 1 1.2 3.9 3.6 1.7    
  - Retail 6 6.5 6.7 26.4 24.9 15.9 5.1 6.2
Gross Margin 35.5% 35.8% 35.6% 37.2% 35.4% 32.6% 28.5% 27.4%
Operating Margin 13.9% 10.3% 14.5% 14.8% 12.7% 11.8% 10.1% 10.8%
  - Wholesale + Licensing 13.8% 9.1% 14.1% 14.6% 12.3% 11.7% 10.5% 11.0%
  - Retail 13.3% 17.5% 17.6% 16.7% 15.7% 13.2% 2.0% 4.8%
Tax Rate 38.7% 36.7% 38.5% 38.4% 35.8% 37.2% 35.4% 35.5%
Net Income ($M) 4.8 3 5.2 20.3 17.1 13.2 9.5 10.6
Owner’s Earning ($M) 5.1 2.9 5.6 21.7 9.6(a) 7.1(a) 8.6 10.9
Cash & Marketable Securities ($M) 13.5 22 19 10.7 13.3 9.4 20.1 N/A
Long-term Debt ($M) 8.5 8.7 3.4 3.3 3.1 3.0 0 N/A
Shareholders’ Equity ($M) 130.7 126.3 124.9 119.7 98.8 84.8 73.6 N/A
Number of Diluted Shares (M) 12.0 12.0 12.0 11.8 11.8 11.5 11.6 12.3
Number of Shares Brought Back (M) 0.007 0.054 0.013 0 0.22 0.015 0.73 0.82

(a): reflects significant capital expenditure in 2002 and 2003 from expansion and reconfiguration of a distribution center.

When Warren Buffet was asked about why he invested in Anheuser-Busch (BUD, see our related article Gan Bei with Bud in China), he answered, "The decision to buy the stock took about 2 seconds the business is easy to understand, and Anheuser's business in particular is still extremely strong" I feel Weyco is in the same shoe as BUD. Men wear shoes like they drink beers. As long as the shoes are comfortable, durable, and look like the ones they wore before, they will buy them. It is as simple as that.

One thing to note is that the company only has about 12M diluted shares, 2.6M of which are unlisted class B shares. It is thinly traded, but that shouldn't make any difference to a long term investor.

The other shoe company of the pair is as different from Weyco as it can be. Deckers Outdoor Corp. (DECK) designs and sells outdoor oriented shoes that blend fashion, comfort, and utility. It has two major brands, Teva, which targets the outdoor adventurous crowd and is sold in stores like REI and Sports Authority, and UGG, which is more fashion oriented and appeals to audiences of Oprah. Like Weyco, it too made a strategic acquisition in 2002, acquiring all the rights to Teva which it had previously licensed. Since the acquisition, Teva sales had increased a third, and its operating margins jumped from single digits to 20%. That is about $12M each year, making the $63M price tag of the acquisition a fair price to pay.

Teva is only half the story at Deckers. Its UGG brand enjoyed a even more impressive ascend, with sales tripled in one year from 2003 to 2004, from $34.6M to $101.8M. The sudden stardom stemed from increasing national media attention and celebrity endorsement. Operating margin increased more mildly from mid teens to low twenties.

Unlike Florsheim, it is unlikely UGG will have the same staying power. Its descend looks to me is a matter of when and how fast, instead of if. But the likely short-lived stardom may still turn out to be a boon to the UGG brand even after its light eventually fades. Because I think it will likely attain a sustainable sales that is still significantly higher than its pre-stardom level. Let’s use $85M for Teva and $50M for UGG as sales numbers, and assume an operating margin of 20%, the operating income will be $27M a year. The company has little debt and a tax rate around 40%, its earning would come up to $17M, yielding a PE of 15.

Besides the numbers, what Deckers has impressived me with is its management’s capability in turning a narrowly focused, little known brand into a more main-stream product. It has done so with Teva, which originated from the river guide community, and with UGG, which started from the California surfing community. The management’s resourcefulness may turn out to be the company’s biggest asset.

In the short term I’d pay close attention to UGG’s inventory level. Built up for the Q4 holiday season was $40M more investory compared to last year, primarily in UGG. If the holiday season is not meeting expectations and/or the fashion trend that favors UGG changes too soon, the danger of inventory write-down can be real and serious. That probably explains the low trailing PE of Deckers Outdoor.

DECK market cap $247M (11/11/2005)
  Q3′05 Q2′05 Q1′05 2004 2003 2002 2001 2000
Revenue ($M) 69.2 40.3 64.3 214.8 121.1 99.1 91.5 113.7
  – By Segment
     Teva Wholesale 9 22.9 38.4 83.5 72.8 64.8 61.2 79.7
     UGG Wholesale 54 12 18.8 101.8 34.6 23.5 19.2 15.3
     Simple Wholesale 2 1.9 2.1 9.6 7.2 10.2 10.9 16.3
     Internet/Catalog Retail 3.4 3.5 5 19.9 6.5 0.6 0 0
  – By Region
     Domestic 89.1% 76.5% 81.7% 81.5% 79.0% 76.9% N/A N/A
     International 10.9% 23.5% 18.3% 18.5% 21.0% 23.1% N/A N/A
Gross Margin 42.1% 39.7% 46.0% 42.1% 42.4% 41.9% 42.2% 44.2%
Operating Margin 20.3% 11.6% 22.4% 19.8% 16.0% 3.3%(a) 2.5%(b) 11.1%
     Teva Wholesale N/A 13.6% 25.3% 20.6% 19.7% 2.7% 5.0% N/A
     UGG Wholesale N/A 12.6% 21.7% 22.0% 18.7% 12.2% 4.0% N/A
     Simple Wholesale N/A -12.3% -0.1% -8.7% -26.8% -12.9% -13.5% N/A
     Internet/Catalog Retail N/A 7.8% 14.4% 18.5% 6.8% 17.5% N/A N/A
Tax Rate N/A 41.6% 38.6% 36.5% 38.5% 43.0% 42.2% 43.1%
Net Income ($M) 8.2 2.7 8.9 25.5 9.2 -7.4 1.6 7
Owner’s Earning ($M) N/A 2.2 8.1 25.6 10 -7.4 0.6 N/A
Cash & Marketable Securities ($M) 19 11 17.6 25.9 6.7 3.9 16.7 9.1
Long-term Debt ($M) 16 2.6 2.6 0 26.5 35.1 0.4 1.5
Shareholders’ Equity ($M) 162.4 154.1 151.2 141 70.5 65.2 66.5 64.1
Number of Diluted Shares (M) 12.9 12.9 12.9 12.1 11.9 9.8 9.7 9.5
Number of Shares Brought Back (M) 0 0 0 -1.5(c) 1.375 0 0 0

(a) Margin was negatively impacted by $3M litigation charge and $9M in write-down of goodwill.
(b) Margin was negatively impacted by $2M litigation charge.
(c) Issurance of 1.5M common shares for $38.5M.

In summary, I like Weyco for its staying power and efficiency, and I like Deckers for its resourcefulness in turning something small into a national brand. Although the two companies are at the opposite ends of shoe biz, they make a good pair in my star list portfolio.

Sheldon Shi, Ph.D., editor of Buffetteer.com, a site for intelligent investors.

Rating: 2.0/5 (4 votes)


Valuefan premium member - 14 years ago
You might be on to something. Owned by

First Eagle U.S. Value A 08-31-05 FEVAX

I hold and would still buy more SRR and DECK here as well.

Gellermonicabel - 2 months ago    Report SPAM

Great info! thanks. I want advise you too. If you need an a discount for shoe, visit https://alltopsiteslike.com/7-discount-shoe-sites-like-zappos-sites-like/ and check the best discount shoe sites like Zappos. Shoes are expencive nowadays, so it won't be bad to save a dollar.

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