WEYCO GROUP INC (WEYS) FY 2024 MD&A

ITEM 7     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We design, market, and distribute 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, and Forsake.  Inventory is purchased from third-party overseas manufacturers. Almost all of these 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, our 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 in our stores.  Our “other” operations included our wholesale and retail businesses in Australia, South Africa, and Asia Pacific (collectively, “Florsheim Australia”). We ceased operations in the Asia Pacific region in 2023 and completed the wind down of that business in 2024. The majority of our operations are in the United States, and our results are primarily affected by the economic conditions and the retail environment in the United States.

This discussion summarizes the significant factors affecting the consolidated operating results, financial position, and liquidity of our Company for the two-year period ended December 31, 2024. This discussion should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” below.

KNOWN TRENDS IMPACTING OUR BUSINESS

​

The retail landscape was challenged in 2024 due to economic uncertainties and inflation. These factors created an environment in which price-sensitive consumers limited their discretionary spending on non-essential goods, and footwear market sales were impacted accordingly. The footwear sector was further challenged by a warmer Fall season, which dampened sales of seasonal footwear. From a style perspective, consumers are increasingly gravitating toward casual shoes in lieu of traditional dress footwear. These broader industry headwinds and trends impacted our Wholesale business in 2024.

10

Table of Contents

​

In early 2025, the U.S. government imposed additional tariffs on goods sourced from China. These tariffs will increase our costs of goods across all brands. In an effort to mitigate the impact of the tariffs, we have already begun negotiating price reductions with a number of our Chinese suppliers and are in the process of reviewing our wholesale pricing for Fall.

​

EXECUTIVE OVERVIEW

2024 was a difficult year for our Wholesale segment, with sales down 9% compared to 2023, due to reduced consumer demand amid ongoing economic uncertainty and a challenging outdoor footwear market. Despite these challenges, we are navigating short-term pressures and evolving our portfolio of brands to position the Company for future growth.

​

BOGS sales declined 27% in 2024, compared to the prior year. The brand was impacted by reduced retailer orders early in the year due to an inventory glut in the outdoor market, which has since eased.  BOGS was further challenged in the second half of the year by mild Fall and Winter weather, which reduced consumers' urgency to purchase new boots. Consequently, pre-holiday demand for insulated and waterproof footwear was softer than anticipated. However, winter weather did eventually arrive across much of the U.S. in January and February 2025, and retailers are now moving through inventory. With leaner stock levels, our retail partners are in a better position to bring in fresh assortments, and we are starting to see renewed interest in the category for Fall 2025. The last two years have been challenging for BOGS, and we are focused on reenergizing the brand through product innovation and expanding its retail presence in the Spring/Summer selling season.

​

Net sales of our legacy businesses (comprised of the Florsheim, Stacy Adams and Nunn Bush brands) were collectively down 4% for the year. At the brand level, Florsheim’s sales were up 2%, while Stacy Adams and Nunn Bush were down 13% and 6%, respectively, for the year. The dress footwear category faced challenges in 2024 as retailers prioritized other segments. Despite this trend, Florsheim’s sales improved as a result of increased market share in the refined dress footwear category and expanded sales of hybrid and casual footwear.

​

Stacy Adams had a difficult 2024, reflecting broader challenges in the dress footwear market. The brand remains a leader in contemporary dress footwear and continues to perform well in retail accounts that emphasize dress shoes. Future growth depends on the brand diversifying its product assortment to capture demand for hybrid and refined casual styles. While it will take time, we are getting traction at retail with casual lifestyle product, particularly in the hybrid category.

​

Nunn Bush sales were down 6% for the year. We saw reduced demand for the brand in the first nine months of 2024, with sales improving in the final quarter. With a strong value proposition and innovative comfort technology, Nunn Bush has evolved beyond the dress shoe category and is experiencing retail success in the casual, hybrid, and soft-toe work categories. Over the last few years, Nunn Bush has built a meaningful presence in the work shoe category, which we believe will help drive sales growth in future years.

​

In our Retail segment, sales were up 2% for the year, driven by higher direct-to-consumer sales of Florsheim and BOGS footwear. We continue to invest in our e-commerce platform as we believe it is a key driver of profitable growth.

​

Florsheim Australia’s sales declined 20% for the year. The decline in 2024 was largely due to the closure of our Asia Pacific operations, as the division had historically not been profitable. We are now managing our Asia-Pacific wholesale customers through our Melbourne, Australia office. While 2024 was a challenging year for Florsheim Australia, we are pleased with the increase in same-store retail sales in Australia. Our focus for 2025 is growth of Florsheim Australia’s wholesale business.

​

Sales and Earnings Highlights

Consolidated net sales for 2024 were $290.3 million, down 9% compared to $318.0 million in 2023.  Consolidated gross earnings as a percent of net sales were 45.3% and 44.9% in 2024 and 2023, respectively. Operating earnings were $36.6 million, down 11% compared to $41.0 million in 2023, because of lower sales.  Net earnings were a record $30.3 million, or $3.16 per diluted share, in 2024, up slightly over our previous record of $30.2 million, or $3.17 per diluted share, in 2023.

Financial Position Highlights

At December 31, 2024, our cash and marketable securities totaled $77.3 million and we had no debt outstanding on our $40.0 million revolving line of credit. During 2024, we generated $37.7 million of cash from operations. We used cash to prefund our $21.6 million regular fourth quarter and one-time special dividend, which were paid to shareholders on January 2, 2025; pay $9.7 million in dividends; and repurchase $0.6 million of our common stock during the year. We also had $1.4 million of capital expenditures.

11

Table of Contents

​

SEGMENT ANALYSIS

Net sales and earnings from operations for our segments, as well as our “other” operations, in the years ended December 31, 2024 and 2023, were as follows:

​

​

North American Wholesale Segment

Wholesale Net Sales

Net sales in our Wholesale segment for the years ended December 31, 2024 and 2023, were as follows:

​

​

Wholesale net sales were collectively down in 2024 due mainly to lower consumer demand. Our BOGS brand experienced the largest decrease, with orders down early in the year because of an inventory glut in the outdoor market, which has since eased, and due to mild weather across the northern U.S. in the final months of 2024. Licensing revenues consist of royalties earned on sales of branded apparel, accessories, and specialty footwear in the United States and on branded footwear in Mexico and certain overseas markets. Licensing revenues decreased in 2024, compared to 2023, in line with decreased licensees’ sales of branded products.

Wholesale Earnings from Operations

Wholesale gross earnings as a percent of net sales were 40.2% in 2024 and 39.7% in 2023. Gross margins improved because of lower inventory costs, primarily inbound freight. Selling and administrative expenses for the Wholesale segment consist primarily of distribution costs, salaries and commissions, advertising costs, employee benefit costs, and depreciation. Selling and administrative expenses totaled $60.1 million in 2024 compared to $66.0 million in 2023. The decrease in 2024 was due to lower employee costs, mainly commission-based compensation, as well as lower advertising costs (primarily due to the reallocation of certain costs to the Retail segment, described below). As a percent of net sales, wholesale selling and administrative expenses were flat at 26% in both 2024 and 2023. Wholesale operating earnings were $31.5 million in 2024, down 5% from record operating earnings of $33.3 million in 2023, mainly as a result of lower sales.

​

Our costs of sales do 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 $14.4 million and $15.5 million for the years ended

12

Table of Contents

​

December 31, 2024 and 2023, respectively. 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

Retail Net Sales

Retail net sales were a record $38.7 million in 2024, up 2% over our previous record of $38.0 million in 2023. The increase was primarily due to higher direct-to-consumer sales of Florsheim and BOGS footwear. Sales at our four domestic brick and mortar stores were down 4% for the year.

​

Retail Earnings from Operations

Retail gross earnings as a percent of net sales were flat at 65.9% in both 2024 and 2023. Selling and administrative expenses for the Retail segment consist primarily of freight, advertising expense, employee costs, rent and occupancy costs. Retail selling and administrative expenses totaled $20.2 million, or 52% of net sales, for the year compared to $18.3 million, or 48% of net sales, in 2023.  The increase in expense was primarily due to higher advertising costs. This year’s web advertising costs were up largely due to the reallocation of certain expenditures historically charged to our Wholesale segment that primarily benefit our websites. Retail operating earnings were $5.3 million in 2024, down 21% compared to record operating earnings of $6.8 million in 2023, mainly due to higher retail selling and administrative expenses in 2024.

​

Other

Our other operations consisted of our retail and wholesale businesses in Australia, South Africa, and Asia Pacific (collectively, “Florsheim Australia”). We ceased operations in the Asia Pacific region in 2023 and completed the wind down of that business in 2024. Accordingly, 2024 results of the “other” category primarily reflect the operations of Australia and South Africa.

Net sales at Florsheim Australia totaled $23.6 million in 2024, down 20% from $29.6 million in 2023. The decrease was primarily due to closing our Asia Pacific operations, as the division had historically not been profitable. Sales in Australia were down 10% for the year, due mainly to the impact of six fewer retail stores operating compared to last year. Australia’s same store sales were up 2% for the year. Florsheim Australia’s gross earnings were 61.0% of net sales in 2024 versus 62.5% of net sales in 2023. Florsheim Australia generated operating losses of $0.2 million in 2024 compared to operating earnings of $1.0 million in 2023. The decrease was a result of lower sales.

​

OTHER INCOME AND EXPENSE AND TAXES

Most of our interest income is generated by investments in money market mutual funds and marketable securities. Interest income totaled $3.7 million in 2024 compared to $1.1 million in 2023. The increase was due to higher cash balances in the U.S. and Canada this year. Interest expense was nominal in 2024 and $0.5 million in 2023. Last year’s interest expense was on outstanding debt balances during the first half of 2023, which have since been paid off. Other expense, net, totaled $0.4 million in 2024 and $0.7 million in 2023. Other expense was down in 2024 due mainly to a decrease in the non-service cost components of pension expense.

Our effective tax rate was 23.9% in 2024 versus 26.1% in 2023. The 2024 effective tax rate differed from the U.S. federal statutory rate of 21% due mainly to the impact of state income taxes partially offset by income tax benefits from share-based compensation. The 2023 effective tax rate differed from the U.S. federal statutory rate of 21% due mainly to the impact of state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash and short-term marketable securities, which aggregated $71.8 million and $69.5 million at December 31, 2024 and 2023, respectively, and our revolving line of credit. We generated $37.7 million of cash from operations in 2024 compared to $98.6 million in 2023. Fluctuations in net cash from operating activities mainly resulted from changes in operating assets and liabilities, most significantly, inventory. The significant cash from operations in 2023 was caused by reductions in inventory from peak levels at the end of 2022.

​

Our capital expenditures totaled $1.4 million and $3.3 million in 2024 and 2023, respectively. Last year’s capital expenditures included costs related to equipment installed in our Glendale distribution center that automates the packing and labeling process of single pair orders. Looking ahead, we expect capital expenditures will be between $1.0 million and $3.0 million in 2025.

​

13

Table of Contents

​

We paid cash dividends totaling $9.7 million and $9.3 million in 2024 and 2023, respectively. Additionally, in 2024 we prefunded our regular fourth quarter dividend of $0.26 per share as well as a one-time special cash dividend of $2.00 per share, for a total of $21.6 million; this dividend was paid to shareholders on January 2, 2025. We resumed our regular quarterly dividends in the first quarter of 2025. On March 4, 2025, our Board of Directors declared a quarterly cash dividend of $0.26 per share to all shareholders of record on March 14, 2025, payable March 31, 2025.

We repurchase our common stock under our share repurchase program when we believe market conditions are favorable. In 2024, we repurchased 19,841 shares for a total cost of $0.6 million through our share repurchase program. In 2023, we repurchased 170,422 shares for a total cost of $4.3 million through our share repurchase program.  As of December 31, 2024, there were 848,916 authorized shares available for repurchase under the program.

On September 27, 2024, we amended our line of credit agreement to extend the maturity of our credit facility to September 26, 2025. Under the terms of the Amended Credit Agreement, there is a maximum available borrowing limit of $40.0 million, and amounts outstanding bear interest at the one-month term SOFR plus 125 basis points. The Amended Credit Agreement is secured by a lien against our general business assets, and contains representations, warranties and covenants (including a minimum tangible net worth financial covenant) that are customary for a facility of this type. At December 31, 2024 and 2023, there were no outstanding borrowings on the line of credit, and we were in compliance with all financial covenants.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes.  Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the consolidated financial statements. The following policies are considered by management to be the most critical in understanding the significant accounting estimates inherent in the preparation of our consolidated financial statements and the uncertainties that could impact our results of operations, financial position and cash flows.

BOGS Trademark

In evaluating the BOGS trademark for impairment, we estimated its fair value using the relief-from-royalty method which required key assumptions. We estimated future sales of the brand based on historical and forecasted sales growth. We estimated an implied royalty rate that would hypothetically be paid by a market participant for use of the trademark based on comparable industry royalty agreements and other market data. We applied a discount rate to the estimated future cash flows, which was based on the Company’s weighted average cost of capital (“WACC”), adjusted for a higher relative level of risk associated with intangible assets. The WACC includes assumptions such as market capital structure, market beta, risk-free rate of return, and estimated costs of borrowing. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair value. A number of factors, many of which we have no ability to control, could cause actual results to differ from the assumptions employed, including:

​

If there are changes to our assumptions due to these factors, the estimate of fair value may change significantly. Such change could result in an impairment charge in a future period, which could significantly impact our results of operations or financial condition. Based on the results of our assessment, we concluded that the estimated fair value of the BOGS trademark exceeded its carrying value as of December 31, 2024. Therefore, no impairment was recorded on the BOGS trademark in 2024.

Sales Returns, Sales Allowances and Doubtful Accounts

We record reserves and allowances (“reserves”) for sales returns, sales allowances and discounts, cooperative advertising, and accounts receivable balances that we believe will ultimately not be collected. The reserves are based on such factors as specific customer situations, historical experience, a review of the current aging status of customer receivables and current and expected economic conditions. The reserve for doubtful accounts includes a specific reserve for accounts identified as potentially uncollectible, plus an additional reserve for the balance of accounts, determined based on historical trends. We evaluate the reserves and the estimation process and adjust when appropriate.  Apart from unprecedented write-offs that occurred during the COVID-19 pandemic, our historical write-offs against the reserves have been within our expectations. Future changes in reserves may be required if actual returns, discounts and

14

Table of Contents

​

bad debt activity varies from the original estimates.  These changes could impact our results of operations, financial position, and cash flows.

Pension Plan Accounting

Our pension expense and corresponding obligation are determined on an actuarial basis and require certain actuarial assumptions.  We believe the two most critical of these assumptions are the discount rate and the expected rate of return on plan assets.  We evaluate actuarial assumptions annually on the measurement date (December 31) and make modifications based on such factors as market interest rates and historical asset performance.  Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

Discount Rate – Pension expense and projected benefit obligations both increase as the discount rate is reduced.  See Note 12 of the Notes to Consolidated Financial Statements for discount rates used in determining pension expense for the years ended December 31, 2024 and 2023, and the funded status of the plans at December 31, 2024 and 2023.  We use the spot-rate approach to determine the service and interest cost components of pension expense. Under the spot-rate approach, the service and interest costs were calculated by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of future service and interest costs. A 0.5% decrease in the discount rate would have a nominal impact on annual pension expense and would increase the projected benefit obligation by approximately $2.3 million.

Expected Rate of Return – Pension expense increases as the expected rate of return on pension plan assets decreases.  In estimating the expected return on plan assets, we consider the historical returns on plan assets and future expectations of asset returns.  We utilized an expected rate of return on plan assets of 6.75% for both 2024 and 2023. This rate was based on our Company’s long-term investment policy of equity securities: 20% - 80%; fixed income securities: 20% - 80%; and other, principally cash:  0% - 20%.  A 0.5% decrease in the expected return on plan assets would increase annual pension expense by approximately $0.2 million.

Our unfunded benefit obligation was $10.4 million and $14.0 million at December 31, 2024 and 2023, respectively.

Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements.

​