Weyco Group: A Pricy Stock With Poor Business Fundamentals

| About: Weyco Group, (WEYS)

Summary

It is a matter of fact that the footwear company Weyco Group facing troubles with its business operations since last few years.

It is very clear that the Weyco’s business fundamentals are poor than the peer’s average fundamentals.

The valuation of the Weyco’s stock, along with business fundamentals analysis, suggests that the stock is just expensive at current level.

Investment Thesis

Despite the fact that the footwear company Weyco Group (NasdaqGS: WEYS) facing troubles with its business operations since last few years, the stock of the company is trading with some good performance as it returned 20.58% in the last one-year. However, I am not convinced with this type of performance knowing that the company's business fundamentals are poor at stand-alone basis as well as on relative basis. Additionally, the valuations of the Weyco's stock indicate that it is little overvalued; therefore, investors should avoid investing in the stock until it shows some kind of bargain to dictate investment in it.

Source: Bloomberg

Business Overview

Companies in the apparel industry are continuing to face lackluster business performance as the consumers have pulled themselves back due to the macroeconomic concerns prevailing in the global economy. However, some companies were resilient to perform well due to their economies of scale and brand equity. Weyco, unfortunately, is among the Laggards as its business performance has not been up to the mark since last few quarters.

Before discussing the Weyco's business fundamentals in detail, let's have a brief look at the company's most recent reported financial performance. According to the third quarter of 2016, the net sales declined 13% to$79.1 million from $91.2 million in the same period last year. Operating earnings dropped 20% to $7.3 million. Net earnings declined 16% to $4.6 million from $5.5 million, and diluted earnings per share dropped to $0.44 as compared to $0.51in the corresponding period last year. The company's wholesale segment proved to be a catalyst for this undesired performance because it represents the majority of the Weyco's revenues. The wholesale segment's sales declined 17% from the same period last year as the winter retailers ordered less due to the piling-up of inventories resulting from the weak consumer spending. Weyco's Chairman and CEO, Thomas W. Florsheim commented on the recent result as:

"This was a difficult quarter for our North American wholesale segment," stated Thomas W. Florsheim, Jr., the Company's Chairman and CEO. "Not only did we see a large reduction in BOGS orders following last year's mild winter, we were also affected by a soft retail environment and changes in consumer buying patterns which contributed to the loss of sales for two of our other major wholesale brands this quarter. While the retail landscape remains uncertain, we remain confident in the strength of our brands, and believe that each is well positioned in its respective market for growth when conditions improve."

Source: 10-Q

Source: Stockrow.com

Well, I have an objection to Mr. Chairman's comments over the results. First of all, this quarter is not the first one reporting bad performance of your business. Weyco's second quarter results were down 11% from the same period of previous year. The second quarter was even a bad reporting period because the earnings were down more than half as compared to the previous comparable period. It seems that the Weyco's brands are losing their recognition as consumers shifting their preferences to other brands. Secondly, the company's margins are depressed and showing a declining trend since last four-to-five years, as shown in the below table. It is obvious that the company has some serious problems from top line to bottom line; therefore, the capital providers should be careful before staking their funds with the Weyco's future.

Source: Morningstar

To dig deep further into the Weyco's business prospects, look at the company's some major fundamentals as compared to its peers, as shown in the below table. It is very clear that the Weyco's business fundamentals are poor than the peer's average fundamentals. I want to highlight here two of the most important measures the capital providers must be concerned about. These two measures are the return on equity (ROE) and the return on invested capital (ROIC). Unfortunately, both fundamental measures are almost half of the peer's averages. Weyco is not generating sufficient returns for its capital providers as compared to what industry peers are doing. Additionally, the company's ROIC is showing a declining trend, as shown in the ROIC graph below, indicating a deteriorating business condition of the Weyco, which is a bad news for the investors.

Source: Author Calculations/ Stockrow.com

Source: Stockrow.com

In addition to the management's ineffectiveness of utilization of company's assets in the best interest of its stakeholders, as indicated by low return on assets (ROA) of 5.48% as compared to average ROA of 9.29% for its peers (shown in the key fundamentals table above), the company is not efficient in its inventory management. In this regard, there are two things to not here. Firstly, the company's cash conversion cycle (CCC), which has been near 160 days, becoming a real challenge because it has crossed 200 days first time in the last 10 years, and now it is 220.62 days. Yes, this is a real challenge for Weyco because it is not converting its inventory into cash timely, and this situation is becoming even worse with every passing year. Secondly, the company has build-up the inventory to the record level since last five years. This indicates that the company is not going to respond to the changing trends in the consumers' shopping behavior because its products are becoming out-of-fashion.

Source: Nasdaq.com

Valuation

The discussion of Weyco's business fundamentals indicates that its stock is not worth to invest until it improves its business enough to convince investors to put their wealth in the company's prospects. Now look at the valuation of the company to further strengthen our study. First of all, I value the stock of the company using EV/EBITDA model which indicates that the stock of the Weyco is just overpriced. Using the industry's EBITDA multiple of 10.84x and Weyco's EBITDA of$27.79 million, the model derives the fair value of the company to $301.24 million. By applying further mathematics, the fair value of the company's stock comes to $28.33, which is about 5% discount to the current market price of the stock.

Source: Author Calculations/ Yahoo finance

Price-to-earnings (P/E) multiple is a widely used method of stock valuation in the investment community. The stock of the Weyco also looks expensive based on this model. Weyco is trading at 20.43x of forward earnings as compared to industry's multiple of 19.55x. This model, using 2016 expected EPS of$1.41, derives the fair value of the stock to $27.57, which is almost 8% discount to its current market price. Additionally, the P/E multiple of the company is trending higher, as shown in the PE Ratio graph below, which is not a good indicator for the shareholders.

Source: Author Calculations/ Yahoo finance

Source: Stockrow.com

In conclusion, the valuation of the Weyco's stock, along with business fundamentals analysis, suggests that the stock is just expensive at the current level, and the investors should avoid putting their hard-earned money in this stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Textile - Apparel Footwear & Accessories
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