WEYCO GROUP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-Q)


FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.  These statements represent our good faith judgment with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially. Such statements can be identified by the use of
words such as "anticipate," "believe," "estimate," "expect," "forecast,"
"intend," "likely," "plan," "predict," "project," "should," "will," or
variations of such words, and similar expressions. Forward-looking statements,
by their nature, address matters that are, to varying degrees, uncertain.
Therefore, the reader is cautioned that these forward-looking statements are
subject to a number of risks, uncertainties or other factors that may cause
actual results to differ materially from those described or implied in the
forward-looking statements. Such factors include, but are not limited to, the
impact of inflation generally and, specifically, increases in our costs for
materials, labor and other manufacturing inputs, increased interest rates, a
slow down or contraction in the overall U.S. or Australian economies, the
uncertain impact of the war in Ukraine and the related economic and other
sanctions imposed by the U.S. and European Union, the continuing efforts to
address the COVID-19 pandemic, our ability to successfully market and sell our
products in a highly competitive industry and in view of changing and
unpredictable consumer trends, consumer acceptance of products and other factors
affecting retail market conditions generally, our ability to successfully
procure our products from independent manufacturers on a timely basis, and other
factors detailed from time to time in our filings made with the Securities and
Exchange Commission, including the risk factors described under Item 1A, "Risk
Factors," of our Annual Report on Form 10-K for the year-ended December 31, 2021
filed on March 11, 2022.  We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise.

GENERAL

The Company designs and markets quality and innovative footwear principally for
men, but also for women and children, under a portfolio of well-recognized brand
names including: Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Forsake.
Inventory is purchased from third-party overseas manufacturers. The majority of
foreign-sourced purchases are denominated in U.S. dollars.

We have two reportable segments, North American wholesale operations
("Wholesale") and North American retail operations ("Retail").  In the wholesale
segment, the Company's products are sold to leading footwear, department, and
specialty stores, as well as e-commerce retailers, primarily in the United
States and Canada. We also have licensing agreements with third parties who sell
our branded apparel, accessories and specialty footwear in the United States, as
well as our footwear in Mexico and certain markets overseas. Licensing revenues
are included in our wholesale segment. Our retail segment consists of e-commerce
businesses and four brick and mortar retail stores in the United States. Retail
sales are made directly to consumers on our websites, or by our employees.

The Company's "other" operations include our wholesale and retail businesses in
Australia, South Africa, Asia Pacific (collectively, "Florsheim Australia") and
Europe ("Florsheim Europe").  However, as previously disclosed, we have closed
Florsheim Europe. As a result, the 2022 operating results of the "Other"
category reflect only that of Florsheim Australia. The majority of our
operations are in the United States and our results are primarily affected by
the economic conditions and retail environment in the United States.

EXECUTIVE OVERVIEW

We experienced significant growth in our wholesale segment in the third quarter
of 2022, leading us to our fourth straight quarter of record consolidated sales.
Our wholesale net sales were up 63% over last year's third quarter. Our
performance resulted from the strong demand for our footwear at both the
retailer and consumer levels. Our strong inventory position allowed us to
fulfill demand on a timely basis in 2022, compared to the third quarter of 2021
when our shipments were constrained due to supply chain issues. In comparison to
the pre-pandemic third quarter of 2019, our wholesale sales were up 20%. As a
company, we achieved record profitability for the quarter.

Our legacy brands, Florsheim, Stacy Adams, and Nunn Bush, registered gains of
82%, 68%, and 50% respectively, for the quarter. Both Florsheim and Nunn Bush
had significant increases over 2019, and Florsheim had its largest third quarter
on record. The footwear market continues to cycle away from the in-home casual
lifestyle that prevailed during the pandemic and toward more of a dress-up
aesthetic. The changeover has boosted demand for work-oriented and
occasion-oriented footwear resulting in strong sales across all our traditional
legacy brands. We also benefitted from less competition in dress and
dress-casual footwear, as certain brands pulled back from this space during the
pandemic. Over the last few years, we have expanded our casual range and
experimented in different

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categories of footwear. While we believe the market for refined footwear will
remain a growth opportunity for us in the near to mid-term, we remain focused,
long-term, on strengthening our casual assortment for all brands.

BOGS third quarter sales were up 52% versus 2021, and it was a record quarter
for BOGS' shipments. The outdoor business took off during the height of the
pandemic, and we spent much of 2020 and 2021 navigating supply chain issues to
try to meet the heightened consumer demand. In 2022, we are in a much better
inventory position allowing us to deliver on our strong backlog of orders. In
addition, we have expanded our BOGS sales beyond our classic styles, and have
picked up market share with more casual and lifestyle products, particularly in
the women's category. As we head into the fourth quarter, it has become clear
that the outdoor market is over-saturated with product, and consumer demand has
softened somewhat relative to last year. We believe we are in a good position to
navigate these changes, as most of our BOGS inventory is in styles that we
believe will have validity well into the future.

The onboarding of the Forsake brand has been slower than anticipated due to
supply chain challenges. We are in the process of introducing several new styles
for Fall of 2023, and believe the brand will be well-positioned for a relaunch
in the back half of next year.

Our retail sales were up 13% for the quarter, mainly driven by strong e-commerce
sales. We are pleased by this solid growth, as industry statistics indicate that
footwear e-commerce sales are largely flat year over year. However, our
e-commerce profitability is down due to higher selling and administrative costs,
primarily related to shipping and advertising. Shipping expense increases track
the surge in fuel costs while the digital advertising space has become more
competitive and, in some respects, less efficient with new privacy settings
limiting the advertiser's ability to target consumers effectively in comparison
to prior years. As we move forward, we are focused on getting our costs in line
while maintaining our growth trend.

Third quarter sales at Florsheim Australia were up 71% versus 2021 in local
currency, with higher sales in both its wholesale and retail businesses. Last
year, the Florsheim Australian markets were significantly impacted by COVID-19
shutdowns. With the opening of the Australian markets, both our Florsheim and
BOGS businesses are exhibiting strong momentum. We expect that BOGS will have
its third straight year of record sales in Australia, and it has become an
important part of our business model in this market.

We are entering a period of heightened macroeconomic uncertainty. As inflation
continues and the pace of consumer spending changes, the near-term outlook for
the overall retail environment remains unclear. A sustained downturn in retail
sales, whether because of consumer uncertainty, higher prices, increasing
unemployment or otherwise, could materially and negatively impact our sales and
results of operations. If we misjudge expected demand for our products, we could
experience higher inventory levels which would increase our costs and reduce
capital available for other purposes. We expect to monitor these macroeconomic
developments closely.

Third Quarter Highlights
Consolidated net sales were a third-quarter record of $97.0 million, up 57%
compared to $61.8 million in the third quarter of 2021. Consolidated gross
earnings increased to 40.6% of net sales compared to 40.0% of net sales in last
year's third quarter, due mainly to higher gross margins in our wholesale
segment. Quarterly operating earnings were a record $14.2 million, more than
double last year's third quarter operating earnings of $6.7 million. Quarterly
net earnings were a record $10.8 million, or $1.12 per diluted share, up more
than 100% from $5.1 million, or $0.52 per diluted share, last year.

Highlights since the beginning of the year

Consolidated net sales for the first nine months of 2022 were a record $252.7
million, up 52% from net sales of $166.3 million in the first nine months of
2021. Consolidated gross earnings were 38.9% of net sales in the first nine
months of 2022 versus 40.1% of net sales in the same period one year ago. The
decrease was due to lower gross margins in our wholesale segment. Year-to-date
consolidated operating earnings totaled $25.3 million in 2022, up 96% compared
to $12.9 million in 2021. Our net earnings totaled $19.3 million, or $2.01 per
diluted share, in the first nine months of 2022, up 89% versus $10.2 million, or
$1.05 per diluted share, in the same period last year.

Last year's first quarter results were significantly impacted by the effects of
the COVID-19 pandemic. As such, comparisons of year-to-date 2022 financial
performance to 2021 may have limited utility. Therefore, selected comparisons to
2019 (pre-COVID) are included. Consolidated net sales for the first nine months
of 2022 exceeded 2019 levels by 16%. Our operating earnings for the nine months
ended September 30, 2022 exceeded 2019 levels by 63%.

Highlights of the financial situation

At September 30, 2022, our cash, short-term investments, and marketable
securities totaled $18.7 million and we had $34.7 million outstanding on our
$50.0 million revolving line of credit. During the first nine months of 2022, we
drew $34.7 million on our line of credit and liquidated $8.1 million of
investment securities. We paid $6.9 million in dividends and repurchased $3.3
million of our

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common stock. In addition, our operations resulted in a net $42.1 million use of
cash, mainly to fund inventory purchases. We also had $1.5 million of capital
expenditures during the period.

SECTOR ANALYSIS

Net sales and operating profit of our segments for the three and nine months ended September 30, 2022 and 2021, were as follows:

                                     Three Months Ended September 30,        %         Nine Months Ended September 30,          %
                                        2022                 2021          Change         2022                  2021          Change

                                                                        (Dollars in thousands)
Net Sales
North American Wholesale           $        81,637      $        50,166        63 % $        207,719      $        125,453        66 %
North American Retail                        7,129                6,307        13 %           22,409                18,127        24 %
Other                                        8,205                5,325        54 %           22,562                22,682       (1) %
Total                              $        96,971      $        61,798        57 % $        252,690      $        166,262        52 %

Earnings from Operations
North American Wholesale           $        12,906      $         6,027       114 % $         21,939      $         10,041       118 %
North American Retail                          825                1,401      (41) %            2,766                 3,326      (17) %
Other                                          476                (682)       170 %              598                 (445)       234 %
Total                              $        14,207      $         6,746       111 % $         25,303      $         12,922        96 %

North American wholesale segment

Net sales

Net sales of our wholesale segment for the three and nine months ended September 30, 2022 and 2021, were as follows:

North American wholesale segment Net sales

                                            Three Months Ended September 30,        %         Nine Months Ended September 30,          %
                                               2022                 2021          Change         2022                  2021          Change

                                                                               (Dollars in thousands)
North American Net Sales
Stacy Adams                               $        14,544      $         8,652        68 % $         47,131      $         27,322        73 %
Nunn Bush                                          13,824                9,202        50 %           40,001                26,650        50 %
Florsheim                                          24,463               13,442        82 %           70,505                39,255        80 %
BOGS/Rafters                                       27,735               18,248        52 %           47,607                30,909        54 %
Forsake                                               617                  279       121 %            1,191                   281       324 %
Total North American Wholesale            $        81,183      $        

49,823 63% $206,435 $124,417 66% Licenses

                                             454                  343        32 %            1,284                 1,036        24 %

Total North American Wholesale Segment $81,637 $50,166 63% $207,719 $125,453 66%

Net sales in our wholesale segment were a record $81.6 million in the third
quarter of 2022. While part of the sales increase was due to strong consumer
demand and higher selling prices, last year's third quarter sales were
abnormally low due to supply chain delays which caused some third quarter orders
to ship in the fourth quarter. Both Florsheim and BOGS achieved record
third-quarter sales this year, on top of a record first half for the two brands.

This quarter our wholesale business experienced peak demand, and our inventory
levels supported record shipments. Looking forward to the fourth quarter, we
anticipate that our sales will fall short of 2021 due to last year's shift in
third quarter sales to the fourth quarter, but overall, the second half of 2022
is expected to outpace the same period of 2021.

For the nine months ended September 30, 2022wholesale net sales increased significantly in the first nine months of 2021. Last year’s first quarter sales of our legacy brands (Stacy Adams, Nunn Bushand Florsheim) were lower than normal because the pandemic

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significantly impacted sales of dress and dress-casual footwear in that period.
Sales of the BOGS outdoor brand, which were less affected by the pandemic, rose
54% for the year-to-date period, with sales up across all major distribution
channels. Wholesale net sales for the first nine months of 2022 surpassed 2019
levels by 20%, driven by the strong consumer demand this year.

Licensing revenues consist of royalties earned on the sales of branded apparel,
accessories, and specialty footwear in the United States and on branded footwear
in Mexico and certain overseas markets.

Operating result

Wholesale gross earnings were 36.3% of net sales in the third quarter of 2022
compared to 34.6% of net sales in the third quarter of 2021. Gross margins
improved as a result of higher selling prices and lower inbound freight costs,
as freight rates on containers coming from China declined during the quarter.
While inbound freight costs currently remain above pre-pandemic levels, we are
continuing to see freight costs move downward which helped to drive our
increased margins for the quarter. For the nine months ended September 30,
wholesale gross earnings were 33.5% of net sales in 2022 compared to 33.8% of
net sales in 2021.  The decrease in gross margins for the year-to-date period
was primarily due to higher inbound freight costs incurred in the first quarter.

Wholesale selling and administrative expenses include, and are primarily related
to, distribution costs, salaries and commissions, advertising costs, employee
benefit costs and depreciation. Wholesale selling and administrative expenses
were $16.7 million, or 21% of net sales, in the third quarter of 2022 compared
to $11.3 million, or 23% of net sales, in the third quarter of 2021. For the
nine months ended September 30, wholesale selling and administrative expenses
were $47.7 million, or 23% of net sales, in 2022 versus $32.4 million, or 26% of
net sales, in 2021.  Expenses were up for the quarter and year-to-date periods
due largely to higher employee costs associated with our increased sales volumes
this year. Additionally, last year's third quarter and year-to-date expenses
were reduced by approximately $1.9 million and $5.5 million, respectively, in
government wage subsidies. Third quarter and year-to-date 2022 expenses were
down relative to sales because many of our costs do not vary directly with
sales.

Wholesale operating earnings rose to $12.9 million in the third quarter of 2022,
up 114% from $6.0 million in last year's third quarter, due to higher sales
volumes and gross margins. For the nine months ended September 30, 2022,
wholesale operating earnings were $21.9 million, up 118% over $10.0 million in
the same period of 2021. The year-to-date earnings increase was primarily due to
higher sales volumes, partially offset by lower gross margins.

The Company's cost of sales does not include distribution costs (e.g.,
receiving, inspection, warehousing, shipping, and handling costs, which are
included in selling and administrative expenses).  Wholesale distribution costs
were $4.1 million in the third quarter of 2022 and $3.0 million in the same
period of 2021.  For the nine-month periods ended September 30, wholesale
distribution costs were $11.3 million in 2022 and $7.5 million in 2021.
Distribution costs were up in 2022 in line with higher sales volumes.
Additionally, last year's third quarter and year-to-date distribution costs were
reduced by $513,000 and $1.5 million, respectively, in government wage
subsidies. Our gross earnings may not be comparable to other companies, as some
companies may include distribution costs in cost of sales.

North American retail segment

Net sales

Net sales in the retail segment were a third quarter record of $7.1 million in
2022, up 13% compared to $6.3 million in the third quarter of 2021. The increase
was primarily due to higher sales volumes across our major brands' websites.
Sales were also up at our four domestic brick and mortar stores.

For the nine months ended September 30, retail net sales were a record $22.4
million in 2022, up 24% from $18.1 million in 2021. The increase was due to
higher sales volumes on all our brands' websites and higher brick-and-mortar
sales. Last year's first quarter brick-and-mortar sales were down significantly
as a result of the pandemic. 2022 retail net sales surpassed the 2019 level by
39%, due primarily to growth in e-commerce.

Operating result

Retail gross profit as a percentage of net sales was 66.3% and 68.4% in the third quarters of 2022 and 2021, respectively. For the nine months ended
September 30, 2022 and 2021, gross retail revenue as a percentage of net sales remained stable at 66.5% in both periods.

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Selling and administrative expenses for the retail segment consist primarily of
freight, advertising expense, employee costs, and rent and occupancy costs.
Retail selling and administrative expenses were $3.9 million, or 55% of net
sales, in the third quarter of 2022 versus $2.9 million, or 46% of net sales, in
the third quarter of 2021. For the nine months ended September 30, retail
selling and administrative expenses were $12.1 million, or 54% of net sales, in
2022 and $8.7 million, or 48% of net sales, in 2021. The increases in 2022 were
mainly due to higher e-commerce expenses, primarily outbound freight and
advertising.

Retail operating earnings were $825,000 for the quarter, down 41% compared to
$1.4 million in last year's third quarter. For the nine months ended September
30, retail operating earnings were $2.8 million in 2022, down 17% from $3.3
million in 2021. The decreases for the quarter and year-to-date periods were
primarily due to lower earnings from our e-commerce businesses, as higher sales
were offset by higher selling and administrative expenses.

Other

Our other businesses include our wholesale and retail operations of Florsheim
Australia and Florsheim Europe (which closed in 2021). Other net sales for the
third quarter of 2022 were $8.2 million, up 54% compared to $5.3 million in the
third quarter of 2021, due to higher sales at Florsheim Australia. In local
currency, Florsheim Australia's net sales were up 71% for the quarter, due to
higher sales in both its retail and wholesale businesses. Last year's third
quarter results were negatively impacted by COVID-19 related lockdowns which
resulted in a large number of Florsheim Australia's stores being closed for a
majority of the quarter.

For the nine months ended September 30, 2022, other net sales were $22.6
million, down 1% compared to $22.7 million in the same period one year ago. The
decrease in 2022 was due to the closing of Florsheim Europe, mostly offset by
higher sales at Florsheim Australia. Florsheim Australia's net sales for the
first nine months of 2022 were up 11% compared to the same period in 2021. In
local currency, Florsheim Australia's net sales were up 19% for the year-to-date
period, with sales up in both its retail and wholesale businesses. Florsheim
Australia's sales for the first nine months of 2022 rebounded to 100% of 2019
levels.

Other operating earnings recovered to $476,000 for the quarter from operating
losses of $682,000 in last year's third quarter. This increase was due to
improved performance of our retail and online businesses in Australia. For the
nine months ended September 30, 2022, other operating earnings totaled $598,000
compared to operating losses of $445,000 in the same period last year. The
year-to-date increase was primarily due to improved performance in Australia,
but also due to the shedding of losses at Florsheim Europe.

Other income and expenses

Interest income was $86,000 and $186,000 for the three months ended September
30, 2022 and 2021, respectively. For the nine months ended September 30,
interest income was $266,000 in 2022 and $505,000 in 2021. The decreases in 2022
were due to less interest earned on the lower cash and investment balances this
year. Interest expense increased $197,000 and $128,000 during the three and nine
months ended September 30, 2022, compared to the same periods of 2021, due to
the higher debt balance this year.

Other income, net, was $141,000 for the quarter compared to $76,000 in the third quarter of last year. For the period since the beginning of the year, other income, net, totaled
$316,000 in 2022 and $403,000 in 2021.

Our effective income tax rates for the three months ended September 30, 2022 and
2021 were 24.4% and 27.7%, respectively. Our effective income tax rates for the
nine months ended September 30, 2022 and 2021 were 24.8% and 25.7%,
respectively. The 2022 and 2021 effective tax rates differed from the federal
rate of 21% primarily because of state taxes and the benefit of tax-free
municipal bond income.

CASH AND CAPITAL RESOURCES

Our primary sources of liquidity are our cash, short-term investments,
short-term marketable securities, and our revolving line of credit. During the
first nine months of 2022, our operations resulted in a net $42.1 million use of
cash, mainly to fund inventory purchases. Our overall inventory balance was
$112.0 million at September 30, 2022, up from $52.9 million at September 30,
2021. We have been building our inventories to meet the increased demand for our
products. The supply chain continues to improve and delivery times have become
shorter and more consistent. For Fall 2022 and Spring 2023 product, we planned
our receipt of inventory to be earlier than normal to ensure on-time delivery to
our customers. As we plan for Fall 2023, our lead times with manufacturing have
returned closer to historical norms which will allow us to bring in product
closer to the season.

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In the first nine months of 2022, we liquidated $8.1 million marketable securities and drew $34.7 million on our line of credit, primarily to finance inventory purchases.

We paid dividends totaling $6.9 million in both the first nine-month periods of
2022 and 2021. On November 1, 2022, our Board of Directors declared a cash
dividend of $0.24 per share to all shareholders of record on November 28, 2022,
payable January 3, 2023.

We repurchase our common stock under our share repurchase program when we
believe market conditions are favorable. During the first nine of 2022, we
repurchased 133,526 shares for a total cost of $3.3 million. As of September 30,
2022, the Company had the authority to repurchase approximately 1.1 million
shares under our previously announced stock repurchase program. This total
includes the additional 1.0 million shares that were authorized for repurchase
by our Board of Directors on May 3, 2022. See Part II, Item 2, "Unregistered
Sales of Equity Securities and Use of Proceeds" below for more information.

Capital expenditures totaled $1.5 million in the first nine months of 2022.

Management estimates that total capital expenditures for 2022 will be between
$2.0 million and $2.5 million.

On September 28, 2022, we amended our line of credit agreement. The amendment
extended the maturity of our credit facility to September 28, 2023, increased
our available borrowing limit from $40.0 million to $50.0 million, and replaced
the LIBOR benchmark used for determining the interest rate on outstanding
advances. Under the terms of the amended credit agreement, amounts outstanding
bear interest at the one-month term SOFR plus 145 basis points. The amended
credit agreement is secured by a security interest in our general business
assets, and contains customary representations, warranties and covenants
(including a minimum tangible net worth financial covenant) for a facility of
this type. At September 30, 2022, outstanding borrowings on the line of credit
were approximately $34.7 million at an interest rate of 4.49%, and we were in
compliance with all financial covenants.

From September 30, 2022approximately $3.8 million cash and cash equivalents were held by our foreign subsidiaries.

We continue to evaluate the best uses for our available liquidity, including,
among other uses, capital expenditures, continued stock repurchases and
acquisitions. The Company believes that available cash, short-term investments,
marketable securities, cash provided by operations, and available borrowing
facilities will provide adequate support for the cash needs of the business for
at least one year, although there can be no assurances.

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