Weyco: Fairly Valued Dividend Stock With Strong Balance Sheet (NASDAQ:WEYS)

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Weyco Group, Inc. (NASDAQ:WEYS) has many characteristics of a Peter Lynch type of a business. Weyco is a small-cap family-owned company which has no analyst following. The company has proved its resiliency since its inception in 1892. The company has a strong balance sheet, well-covered dividend and high insider ownership. Although the company has experienced a lack of growth in the past decade, it’s continuing to recover fast from the Covid-19 sales slump.

After the recent market-wide selloff, the company has returned back to fair value, which represents a good entry point for a long-term dividend investor. Even if the company designs and sells nice-looking shoes, the industry characteristics should limit the weighing of the stock in a balanced portfolio.

Company overview

The net sales of Weyco were $268 million in 2021. Weyco designs and sells shoes under six different brands: Florsheim, Stacy Adams, Nunn Bush, Bogs, Rafters and Forsake.

Most of its sales (77%) are generated through a wholesale channel in 10,000 points of sale. The company also engages in retail sales (12%) mainly through e-commerce. In 2013, the company operated 23 brick-and-mortar stores, and last year the number was reduced down to four.

Online transactions account for the vast majority of the Company’s retail sales. The Company’s online businesses are trending well above industry e-commerce growth numbers, which speaks to both the strength of its brands as well as its execution in this space. The Company continues to invest resources in marketing and analytical tools to build its e-commerce platform. – Weyco, Annual report 2021

Weyco operates almost entirely in North America, where it generates 88% of the net sales. The rest is generated mainly in Australia (8%) and on a small scale in South Africa and Asia. The company sources its products from over 60 suppliers in China, India, Cambodia, Vietnam and Dominican Republic. The sourcing is mainly nominated in dollars.

The two sons of the founder, Thomas W Jr Florsheim (Chairman and CEO) and John W Florsheim (COO), own close to 32% of the shares outstanding. Both brothers have been executive officers in the company since 1996.

Taking a look at the rearview mirror

The company reports its performance under three segments: North American Wholesale, North American Retail, and Others, meaning its international sales. North American Wholesale has been historically a steady performer despite the difficulties of its brick-and-mortar customers.

Despite the downfall of its own brick-and-mortar business, the North American Retail segment seems to be doing the best job in terms of growth and profitability. The company is taking advantage of its brands and e-commerce.

The Other segment appears to be in a terminal decline and a burden to the profitability of the company. Weyco seems to be lacking a competitive power internationally. For the well-being of the company, it is crucial that Weyco finds a solid profitable strategy and position for its international businesses.

Financials 2012-2021.

Financials 2012-2021. (Weyco 10-Ks.)

In the H1 2022, total sales increased by 49%. North American Wholesale increased its sales by 67% and operating earnings 125%, North American Retail 29% and 1%, respectively, and finally the Other segment continued its decline by -17% and -49%, which was still impacted by the closing of the business in Europe. In 2021, the company exited its business in Europe. The revenue in Europe was only less than 1% of the total. Overall, in 2022 the company’s margins are on the path to normalization.

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Data by YCharts

A dividend play

For a small company, Weyco has paid a steady dividend. From 2006 until 2018 the company had a long streak of modest dividend increases by a cent or a two. From 2019, the dividend has remained flat at a quarterly dividend of $0.24 per share, translating to an annual dividend of $0.96 and a dividend yield of 4.3% and a payout ratio of 39%.

Valuing the company based on a dividend discount model gives us a fair value of $23.17 when applying a realized historical CAGR of 4.1% and an 8% discount rate.

Dividend discount valuation.

Dividend discount valuation. (Author’s own calculation, model by Lynn Schwartz Alder.)

In addition to the dividend, Weyco repurchases shares under favorable market conditions. Over the past 10 years, the company has reduced its share count by nearly 12%. This component would add approximately one percentage point of shareholder yield on top of the dividend.

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Data by YCharts

Fairly valued and backed by current assets

Weyco stock is trading around its fair value, based on the trailing 12-month earnings per share of $2.48 and the dividend of $0.96. The model assumes extrapolation of historical EPS growth rate of 2.3% to the following 5 years and a lower rate of 2% to the years between 5-10 years. The model assumes that the company would return to increase its dividend by a cent per year. By applying an 8% discount rate and a P/E of 13, we arrive at a fair value of $25.24.

Simple two stage model valuation.

Simple two stage model valuation. (Author’s own calculation, model by Lynn Schwartz Alder.)

The company is financially well positioned for the current market environment of increasing interest rates. Weyco carries no long-term debt. Its total current assets and PP&E less current liabilities are worth $16.2 per share. This is a high proportion considering that the company only engages in capital-light activities of design, sales and distribution. Company’s current market cap is close to its total book value.

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Data by YCharts

Weyco has a new growth platform, but inventory levels raise a question

The shoe industry is highly competitive and driven by rapidly changing fashion trends. On the other hand, people always need shoes and Weyco has been operating in the industry for well over a century. In the challenging times, strong companies tend to get stronger as demonstrated by an interesting comment from the members of the founding family:

During the pandemic, many competitors pulled back or exited the dress shoe business, leaving us with a tremendous opportunity to be the leader in a still sizeable category in our industry. We are also excited about our recent success in introducing products in the casual and athleisure vein. The level of consumer acceptance of our current casual collections would have been unimaginable just a few years ago. – Thomas Florsheim Jr and John Florsheim, Annual Report 2021

On 7th of June 2021, Weyco added Forsake to its portfolio of brands. Forsake was founded in 2012 by Jake Anderson and Sam Barstow who launched the company through a couple of successful Kickstarter campaigns. Forsake shoes combine design and performance for travel and adventure purposes – meaning hiking boots that look like sneakers.

In the H1 2022, the net sales of Forsake were only $574 000 and in 2021 Weyco reported sales of $1.2 million. It is unclear if the sales are temporarily affected by supply chain interruptions where the management refers to, especially together with the Forsake brand in the latest quarterly report. Nevertheless, the total estimated purchase price of $3.9 million seems quite steep in relation to the sales the brand is generating. However, one-third of the purchase price is tied to contingent payments over a five-year period.

Weyco is not an active acquirer. Last time, in 2011 Weyco acquired a brand called Bogs. At the time the revenue of Bogs was $27 million and at the end of 2021 revenue of the Bogs segment was $57 million and $49 million in 2020. The growth translates to a CAGR of 7.7%. In 2010 the company acquired a children’s shoe brand called Umi and wrote it down seven years later after a downfall of sales from $4.5 million to a mere $1.3 million. At the time, Weyco paid for these two acquisitions approximately a P/S multiple of 0.5x for Umi and 1.5x for Bogs.

Due to the supply chain challenges, at the end of June, the company held $95.5 million worth of inventory, 44% of the market capitalization. The inventory level decreased compared to the end of 2021 but was still 20% higher than at the end of 2020. If the consumer demand rapidly decreases after the held back demand is cleared, the company could end up with too much inventory to be sold at discounted prices.

Conclusion

Based on history, there’s not much to expect from Weyco. However, the interests of the shareholders and the management are well aligned, conservative balance sheet helps to keep the company afloat during turbulent times and the dividend and stock repurchases provide a solid yield. A successful integration of Forsake, a turnaround in the profitability of international sales and continued success in e-commerce could help to build shareholder value on top of the steady wholesale business.



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