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Weyco Group: Good Brands, Family Management, Growing Business

12 Mar

About: WEYS (Weyco Group, Inc.)

Disclosure: I 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.

Weyco Group (WEYS), incorporated 1906, designs and markets footwear of the mid-priced men’s leather dress shoe variety. The company purchases finished shoes from third-party manufacturers, located in China and India, and sells them wholesale, retail and over the Internet. The company has been successfully acquiring brands and growing revenues, all while maintaining a solid balance sheet with no long-term debt (albeit with some short-term debt representing about 15% of total assets).

The company looks well positioned to prosper in the future, and while the market price is not necessarily discounted, the company is attractive for the following reasons:

1. Safe capital structure with liabilities less than current assets alone
2. Growing revenue and brands
3. It is still reducing its retail store count which has been a drag on performance until recently
4. Family ownership
5. Growth is not (completely) priced into the stock
6. Has never had a loss in the last 10 years

Brands

When Warren Buffett’s Dextor Shoe investment didn’t work, it was because Dextor Shoe was a manufacturer located in the United States. Labor costs made the business uncompetitive in short order and it was deemed his “worst mistake.” Weyco, however, is different and avoids the problems of shoe manufacturing. It, therefore, is mainly a steward of its brands, its marketing and its distribution (and, to a small and continuously decreasing extent, its retail stores).

Therefore the brand portfolio is the most important thing about this business, although it is basically impossible to value brands with any amount of precision. The company sports the following brands:

1. Florsheim (see at Nordstrom (JWN))
2. Nunn Bush (see at Kohls (KSS), official site)
3. Stacy Adams (see at Zappos (AMZN))
4. BOGS (see at Amazon, or at the official site)
5. Rafters (see at Planetshoes.com, or at the official site)
6. Umi – children’s shoe (see at the official site)

As the CEO Tom Florsheim Jr. noted, “all the brands in our portfolio had sales increases in 2012.” One can see this below in wholesale segment year-over-year revenue growth for the full year 2012:

Brand    |    Year-Over-Year Wholesale Sales Dollar Growth

Florsheim    |        8%

Nunn Bush    |    1%

Stacy Adams   |     10%

BOGS & Rafters [1]  |      7%

Umi [2]    |        19%

Total Average   |     10%

The wholesale segment, representing 74% of revenue, sells to over 10,000 clothing, shoe and department stores. JCPenney (JCP) was the only major customer representing greater than 10% of sales before 2010 – it has since fallen below the 10% threshold. If growth continues, the current market price of the company is very attractive.

The company’s management believes that BOGS, a branded purchase a little over two years ago, presents very favorable opportunities as they believe they can increase sales faster than the category will grow. They also believe it will have a presence in the industrial use market – although they note that such uses will take a long time to grow and develop.

In addition to the opportunities provided by BOGS, the company also launched a “successful kids business in the fall” which they see as “avenue of expansion in 2013.” Of all the brands above, I personally like Florsheim, Stacy Adams and BOGS the most (and Nunn Bush the least).

Ownership

There is significant family ownership with the father and son Florsheim owning together some 824,490 shares, or 7.6% of the company. It is worthy of note, I think, that the Florsheims are the descendants of the original founding family of the Florsheim shoe brand (read about Florsheim’s shoes here). So, in essence, their 2002 takeover of the company was essentially a recapturing of an old family heirloom. Given that they are minority shareholders, like the other shareholders, they will not be able to tyrannize the business. Also, I personally like the families’ involvement because both men want, I assume, their namesake brand to be successful and therefore neither have a reason for letting the long-term business down. This is to say, that I believe both men are more likely to have a long-term time horizons. If true, this would be unlike most corporate cultures whose emphasis is on meeting near-term goals – since, of course, that is how managers are evaluated [3].

Valuation

For the full year 2012, the company earned approximately $20.4m. Over the current market capitalization of $256m, they earned a yield of 7.9%. This, by itself, is not enough to justify purchase.

Because current cash flow is squeezed due to increased levels of working capital (to deal with growth) and due to some large one time capital expenditures, let us assume that GAAP net income is a good approximation of the company’s future cash generating abilities, rather than, say, the free-cash-flow metric.

If we assume a discount rate of 11%, the company will need growth at a rate of at least 3% going forward for a purchase at today’s prices to be worth it. If it can achieve rates higher than 3% the company is undervalued. This is by no means certain, but given the company’s plans, it would seem probable that such rates could be achieved going forward. After all, they just launched their children’s shoe line and most recent growth in their wholesale segment was about 10% year-over-year, as seen above. If we look at the company’s recent revenue growth we see the contribution of the BOGS and Rafters brand acquisitions, but we also see the trajectory maintained in other brands after the acquisitions were fully consummated:

Also, the company reported “comps” in its retail segment of around 8%. They state, however, that the retail segment includes e-commerce and Internet sales. Further, management states that Internet sales are expanding rapidly and that they expect further improvements in the future. These facts combine to suggest that Internet is pulling the retail segment along (currently at 8.2% of revenues) — hopefully Internet sales continues to increase in the future.

Conclusion

This company is fairly valued if it never grows at all. Essentially, that would mean that the stock would have average returns over time. However, with the recent launch of the child’s line and their expansion of BOGS and Rafter brands in Canada, the company is clearly trying to grow revenues. In the midst of this, the company has no long-term debt and is well capitalized. The most attractive feature, however, is that the downside is limited since the shoe industry is unlikely to disappear. Stability and sureness of future returns are rare and attractive features. Provided the company can keep its brands in style, it is unlikely that demand for men’s dress shoes – and shoes in general – will face any substantial declines.

The most conservative move would be to watch the company and wait for a better price to off-set the risk that future growth is nonexistent. However, it seems more likely than not that the brands will continue to grow and therefore increase revenues going forward.

Therefore, one finds that we are in the position where the future is the vindication for the investment – which is not my preferred method of approach. In this case, however, I believe the downside is quite limited if one has a sufficiently long time horizon.

Please see my securities disclosure.

Notes:

1.    Year-over-year sales were up 28% actually, but that only counted 10 months of sales in 2011. My figure is an estimated growth figure taking into account the period-to-period discrepancy.
2.    This is an estimate from the nine-month results released September 2012. All other percentage figures are from the December 2012 numbers.
3.    This sentence was written with the book Moral Mazes in mind.

Originally Published at SeekingAloha

Author: Intangible Valuation

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