By Linda McDonough

Don’t get bogged down by a shoe slowdown at footwear firm Weyco Group (Nasdaq: WEYS).   While a few older brands are down at the heel, the company’s BOGS boots are marching off the shelves. Growth in this hot category should help earnings pick up again. Already, revenue from these quirky but popular boots grew 33% in the last year.

Declining revenue in the company’s Florsheim and Nunn Bush brands is a temporary growth cramp due to a few mid-tier department store customers cutting back orders. Tough times for department stores have forced them to reduce the amount of inventory they are willing to hold. Instead of happily piling up boxes of shoes in advance of demand, stores are timing orders more closely to customer purchases. Masked by the drop in these two brands is the BOGS Boom.  

Weyco’s flagship Nunn Bush brand declined 9% year-over-year for the first nine months of 2014, and its Florsheim brand declined 4% during the same period.  As these two brands make up almost 40% of total sales, the slump in demand has weighed down overall results.

No discussion about the meteoric rise of boot popularity is complete without a comparison to Ugg boots. BOGS boots are eerily similar to Ugg boots.  First of all, Uggs are well, ugly.  The same can be said for the bulky, rubber, pull-on BOGS boots splattered with colorful and exotic patterns.

Just like Uggs were born to serve the demands of Australian shepherds, BOGS were invented to keep the feet of farmers clear and dry of the muddy fields in which they worked. Weyco acquired BOGS in March 2011 and has grown sales every year since.  Recently, BOGS sales’ growth has accelerated as the company has extended the line with new silhouettes, such as lower-cut ankle boots, more patterns and warmly lined winter options.

Inventory last winter couldn’t keep up with demand, so sales suffered. This year the company has increased inventory levels of BOGS heading into the winter months to accommodate demand.  Because BOGS are waterproof and warm, their seasonality tilts heavily towards the winter quarters.

BOGS revenue was $39.7 million in 2013 and is well on its way to greater than $50 million in 2014.  Compare this to Uggs, whose wholesale revenue exploded to $818 million in 2013, up from $15 million in 2000.

While it would be herculean to replicate Uggs’s tremendous success, Weyco is taking a page out of Deckers’ (Ugg’s owner) playbook by expanding the product line into street shoes and flip-flops.  Not only do these products introduce the brand to new customers, they spread sales over all four seasons, making the company less susceptible to earnings drops from mild winters.  If ever there were a group cheering for more snow and slush, it would be WEYS management and shareholders.

If BOGS continues blossoming at current mid-30% growth rates, the brand will soon eclipse Florsheim revenues, which were $52 million in 2013, and quite possibly eventually beat out Nunn Bush, which sported sales of $69 million in 2013, as the largest brand within the Weyco franchise.

The success of BOGS allows Weyco to branch out to new outlets, particularly sports stores that have been riding the wave of sports fashion creeping into everyday wear.  Look no further than the corner grocery store to see how yoga pants have become the new standard for everyday apparel.

Despite the hiccup in Weyco’s legacy brands, the company has weathered the storm by keeping expenses low and maintaining stable profits on each pair of shoes sold.  Although 2013 earnings declined 6% year-over-year, earnings for the first nine months of 2014 were $1 per share, flat compared with the previous year’s period.  Earnings growth should rekindle once the legacy brands become steady.

Chairman and CEO Tom Florsheim Jr. was optimistic about the health of the legacy brands on the company’s November third-quarter earnings call, saying they  “are off to a solid start in the fourth quarter.”  He then continued with the prediction that sales from these brands will be flat to slightly up in the final quarter of the year.

Regarding BOGS’ momentum, John Florsheim, brother of Tom, added that they feel “very, very, positive about it (BOGS) being a nice growth vehicle in 2015.”  The Florsheim brothers, great grandsons of Florsheim’s founder, bought the company out of bankruptcy in 2002.  Apollo Management had purchased the company from the Florsheim family and over time left it gasping under a heap of debt and dwindling sales of stale, stodgy shoes.

The brothers revamped the product line to a degree where traditional shiny cordovan loafers sit alongside blue suede oxfords with colored gum soles.  With a stabilizing of the legacy brand sales, the additional fuel from BOGS’ growth should be more readily apparent in the top and bottom line.

At its current price of $28, WEYS stock has remained range-bound from $25 to $29 for the past year as investors digested the impact of customers cutting back on purchases. A quick glance at the near demise of J.C. Penney and Sears illustrates how difficult the environment has been for Weyco as its customers reduced the amount of inventory they hold in the back room.

Weyco’s fourth quarter should be announced before the end of February and will likely reflect the positive trends noted above.  In the meantime the company’s dividend has been creeping up and now amounts to 76 cents, a 2.7% annual yield.

Although the company’s free cash flow was negative for the first nine months of this year, this was due to increased BOGS inventory in preparation for the winter quarters.  The company’s operating structure requires little investment in factories as all shoes are made by third parties in Asia. This leaves cash generated from operations available to pay the dividend.

The stock trades at a multiple of 17 times the single estimate of $1.64 for 2014 and 15 times the $1.85 estimate for 2015.   The average price-to-earnings multiple for a group of shoe manufacturers is 17 times future or 2015 earnings.  The $1.85 estimate for Weyco in 2015 assumes only 12% earnings growth, a conservative assumption.

If BOGS continue to sell well and Weyco’s legacy brands return to growth, earnings will likely be higher.  Either way, Weyco’s stock is undervalued based on its earnings potential and as valued relative to its peers. Weyco’s stock price will likely move higher as the company regains its footing in the footwear aisle.

Weyco is a Buy up to $31.50.

Linda McDonough is a contributor to Roadrunner Stocks.