Weyco Group: 2020 Was A Perfect Storm But It's A Buy
Summary
- Weyco Group is a Dividend Champion with 39 years of dividend growth.
- The stock is currently yielding over 5%, but the dividend is not covered by earnings and free cash flow in the last two quarters.
- Weyco has a fortress balance sheet with a net cash position allowing it to pay the dividend.
- The COVID-19 pandemic is having a large adverse effect on sales and earnings.
- Rising vaccine distribution should mean better times for Weyco in 2021.
Weyco Group (NASDAQ:WEYS) is a stock that I have written positively about in the past. But the stock did not do well in 2020 due to the impact that COVID-19 had on the company's business. This was on top of tariffs and the trade war effects on shoes imported from China. Weyco faced a perfect storm in 2020. Sales were down in by well over -50% in the second quarter and the third quarter was not too much better. That said, rising vaccine distribution in the U.S. and elsewhere portend better times ahead. Weyco's business will likely recover as offices reopen and life returns to a more normal basis, but it will take time. The new administration has not yet moved to remove tariffs on shoes, but it is now a better possibility. For now, though, Weyco is yielding over 5% and importantly the dividend has not yet been cut or suspended thanks to the fortress balance sheet. In addition, Weyco is a Dividend Champion with 39 years of dividend growth. There is still risk here and the dividend could be cut. But unless 2021 is worse than 2020 from the perspective of COVID-19, Weyco should recover. I view Weyco as a buy.
Source: Weyco Group
Impact of COVID-19 on Weyco Group
The COVID-19 pandemic has impacted business around the world but some more than others. The pandemic is having an outsize impact on Weyco. The company mostly sells business and modern casual men's footwear through department stores, national shoe chain retailers, and its own stores. Obviously, this was not a great business to be in during the COVID-19 pandemic. Sales were punished across all channels and all brands as state and local governments closed malls. Furthermore, many customers that would buy business shoes were working from home as offices were closed or operated at reduced staffing on site. Lastly, men who wear casual shoes for everyday use and social gatherings were probably not buying too many shoes as old ones did not wear out. The full scope of the adverse effects of COVID-19 are seen in lower sales by brand, revenue, and earnings in the tables below.
Sales Decline by Brand
Brand | Q1 2020 | Q2 2020 | Q3 2020 |
BOGS | -22% | -30% | +6% |
Florsheim | +4% | -90% | -58% |
Stacy Adams | -23% | -89% | -55% |
Nunn Bush | -8% | -68% | -32% |
Source: Weyco Group 10-Q for Q1, Q2, and Q3 2020
Revenue Decline by Segment
Segment | Q1 2020 | Q2 2020 | Q3 2020 |
North American Wholesale | -11% | -80% | -35% |
North American Retail | -15% | -33% | -15% |
Other | -32% | -59% | -50% |
Source: Weyco Group 10-Q for Q1, Q2, and Q3 2020
Diluted Earnings Per Share
Q1 2020 | Q2 2020 | Q3 2020 |
$0.12 | ($0.91) | ($0.60) |
Source: Weyco Group 10-Q for Q1, Q2, and Q3 2020
Based on the above data it looks like Q2 2020 was the bottom for sales and earnings for Weyco. Clearly, though, revenue and earnings are still far from normal.
Impact of Tariffs and Trade War on Weyco
Weyco does not manufacture its own footwear. Instead, the company designs and distributes footwear while outsourcing manufacturing to contract manufacturers mostly in China. The 15% tariff on leather footwear took effect on September 1, 2019 and this was reduced to 7.5%. The tariff on rubber shoes would have adversely affected the BOGS brand but was never implemented as intended on December 15, 2019. Overall, Weyco has dealt with tariffs by negotiating price reductions from suppliers and price increases with wholesalers. Weyco also built-up inventory levels in anticipation of tariffs. However, the COVID-19 pandemic resulted in lower purchases and higher than needed inventory levels.
Weyco's Dividend Safety
The steep drop in revenue and sequential quarterly losses clearly means that the dividend is under pressure and dividend safety is a concern. Both earnings and free cash flow have not covered the dividend in Q2 2020 and Q3 2020. The dividend is $0.24 per share quarterly. Cash from operations was ($2.35M) and ($5.81M) in Q2 2020 and Q3 2020. However, Weyco has a fortress balance sheet with a net cash position even through the depths of COVID-19.
Weyco's Balance Sheet (Select Data)
Q1 2020 | Q2 2020 | Q3 2020 | |
Cash, Equivalents, and Marketable Securities | $31,391 | $25,877 | $22,516 |
Short-Term Debt | - | - | $5,180 |
Long-Term Debt | - | - | - |
Source: Weyco Group 10-Q for Q1, Q2, and Q3 2020
Granted, the company is using cash and its revolving credit line to pay the dividend. But the dividend required $9.36 million in the TTM meaning that the dividend is covered for at least 2021 with just cash, equivalents, and marketable securities on hand. According to the CFO:
In October, we also started repurchasing our company's stock again under our current stock buyback program. During the first nine months of 2020, we generated $6.8 million of cash from operations. We used funds to pay $9.4 million in dividends paid on $1.9 million on our line of credit, and repurchased $1.3 million of our company's stock.
There is risk here to the dividend, but I think it is manageable. The short-term debt from the credit line was repaid by end of Q4 2020. Weyco's management has restarted share repurchases in October. In my opinion, they would not have done so if they felt the dividend was at risk. The shoe company is cutting operating expenses and lowering capital expenditures for 2021 so even if revenue is does not recover fully losses per share should trend down.
Weyco's Valuation
From a valuation perspective, Weyco is undervalued at least based on normalized earnings. In 2019, Weyco earned $2.06 per share. Weyco will obviously have a loss in 2020. But if earnings are estimated at ~$1.10 per share in 2021, Weyco should trade at a fair value of about $16.50 based on an earnings multiple of 15X. However, Weyco's earning are hard to estimate since COVID-19 had a material impact on the company's business. Another way to look at valuation is to compare the current yield with average trailing yield. Weyco is yielding consistently over 5% and was even yielding over 6% for a short period of time. This is much higher than the trailing average in the past decade, which is close to 3%.
Source: Portfolio Insight
Final Thoughts on Weyco
Weyco is a small-cap dividend growth stock with a 39-year history of raising the dividend. The stock is not on the radar of many dividend growth investors due to its small size and business. The company has had a difficult two years due to tariffs and then the COVID-19 pandemic. But this may be an opportunity to buy a dividend grower yielding over 5% that has so far reliably paid the divided in what is arguably a perfect storm. The strong balance sheet and net cash position has let the company pay the dividend despite a severe drop in sales and earnings in a very short span of time. Looking forward, rising vaccine distribution should mean a better 2021 than 2020. I view the stock as a buy.
This article was written by
Analyst’s 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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Comments (6)
1) The family has been selling in 2021, not a great sign they think things are about to get a lot better. Both Thomas and John are selling.
2) 2020 cash flows were heavily dependent on the drawdown of Net Working Capital and to the extent they have to replenish inventories this will draw capital and reduce cash over the next 12 months. It reduces the potential for other uses of cash.
