2023-05-03 18:12:29 ET
Summary
- Weyco posted record-breaking sales and earnings for the first quarter. Earnings per share increased by 84%.
- The company finally increased its dividend by 4% after a long period of steady dividend payments.
- The balance sheet is robust and the inventory levels are going in the right direction. The value of the inventory is 43% of the market cap.
- With updated figures, Weyco is still trading below its fair value, if the shoe sales do not dramatically fade away.
Weyco Group ( WEYS ) is a portfolio of shoe brands the company sells through wholesale, e-commerce and own stores primarily in North America. The company recently posted a record high quarterly revenue and earnings per share, which increased by 84%.
In my first article about Weyco in September 2022 I considered the sell-off of the stock a buying opportunity due to the strong balance sheet, strong operational momentum and fair valuation. The stock has since returned 28% while S&P 500 has delivered 12%. Although the stock has run up nicely, the stock is still trading under its fair value in my view.
Record sales and profits in the first quarter
On top of an excellent performance in 2022, in the first quarter the company beat its previous quarterly sales record by 6% and increased sales by 4% compared to a year before. Its gross margin increased significantly from 35.8% to 43.1% driven by the wholesale channel, which has been fluctuating in the past (historical figures are available below in the table). The negative development was the increase of S&A expenses from 23% to 26%, which according to the company was due to the higher wages.
Year 2022 was already a record year for Weyco's e-commerce. The retail segment increased its sales in Q1 by 14% to $8.9 million. The gross margin increased to 66.3% from 65.9%. In the retail segment the company was able to decrease S&A expenses by 3 %-points down to 52% from 55%, which is encouraging development after the declining profitability last year.
The international sales, Australia, South-Africa and Asia Pacific, performed very well. The company increased its sales by 17% with improving margins. The turnaround of international sales seems to be proceeding, which is not crucial but beneficial for the investment thesis helping to lift the profitability of the whole company and not dragging it down as in many previous years.
As a whole, the earnings per share rose by 84% from $0.42 to $0.78. The company's portfolio of brands, a good mix of office shoes and outdoor shoes, seem to be performing very well.
Inventory levels are going in the right direction
In Q1 the company's cash position was enhanced from $16.9 million to $22.6 million. Last year the company had to utilize the line of credit to finance its rather massive inventory. At the time of the first article the total current assets and PP&E less current liabilities were worth 77% of its market cap. Back then the increasing and massive inventory was a big risk.
The company was able to reduce its inventory from $128 million to $107 million. Now, the previous figure, current assets and PP&E less current liabilities stands at 68%. The market cap is $251 million so the company still has 43% of its market cap in inventory. At the same time the borrowings of the company went down by over $10 million to $20.6 million.
Finally, there's a dividend increase
For a long time Weyco paid a steady quarterly dividend of $0.24 but now the company finally increased its payout by one cent to $0.25, translating to a 4% increase. Against last year's earnings per share of $3.07 the payout ratio is only 32.6%.
By the dividend discount model the current stock price is slightly above where I would like to purchase the stock. As a conservative investors we would keep the assumed growth rates the same as before, although the company just returned to increasing its dividend.
Valuation based on dividend discount model. (Author, model by Lyn Alden Schwartzer)
Based on earnings and modest historical growth rates, as outlined in the first article, the stock was a buy at around $25 per share. Now, when the company has picked up growth a higher price could be justified. The caveat here is that last year I was applying an 8% discount rate or target rate of return, which might be low with the current interest rates and unsteady performance of Weyco in the past. Below in the table, there's a historical view of the financial performance of the company and its different segments.
Historical sales, margins and growth rates. (10-Ks, Author)
Let's leave the first quarter's good development as our margin of safety and look at the valuation based on the figures of previous year. Compared to the last article, I have made the following changes. We take last year's earnings per share of $3.07, apply 2%-points lower growth rate than the historical CAGR for the first five years and previous historical growth rate of 2.3% for the following years.
We have now more confidence on the dividend growth so we assume it's growing in line with the earnings. Applying the same terminal multiple of 13 as last time and increasing the discount rate to 10% from 8% would still make the stock a buy at around $27.6. The major risk here of course is that the last year earnings are not suitable, but still the model includes several conservative assumptions.
Updated valuation. (Author, model by Lyn Alden Schwarzter)
Conclusion
Despite record sales and earnings a conservative investor should remain cautious as excellent performance might not continue for long. Nevertheless, Weyco still has a robust balance sheet, tremendous business performance and now even an increased dividend. The international segment is contributing to the performance and the company still has the newly acquired brands to boost its sales and margins in the future. Under the ownership of the founding family, the company seems to be going in the right direction.
For further details see:
Weyco Group: The Shoe Sales Are Shining