Q3 2020 WEYCO Group Inc Earnings Call

November 4, 2020

[music].

Ladies and gentlemen, thank you for standing by and welcome to <unk> third quarter 2020, <unk> earnings release Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference may be.

Recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to one of your speakers today Mr. John Wittkowske. Sir. Please go ahead.

Thank you good morning, welcome to Weyco groups conference call to discuss our third quarter 2020 earnings on this call with me today are Tom Florsheim Junior, our chairman and CEO and John Florsheim, our president and COO.

Before we begin to discuss the results for the quarter I will read a brief disclaimer.

During the course of this call we may make projections or other forward looking statements regarding our current expectations concerning future events and the future financial performance of the company.

We wish to caution you that such statements are just bins and that actual events or we may differ materially.

We refer you to Weyco groups. Most recent form 10-K as filed with the Securities and Exchange Commission as well as its other filings with the SEC.

The form 10-K as well as our most recent form 10-Q.

Identify important factors and risks that could cause the companys actual results to differ materially from our projections.

With respect to the ongoing COVID-19 pandemic.

Numerous factors will determine the extent and length of the impact on the company, including the extent and duration of the pandemic and its impact on the global economy.

Actions taken by governments, such as stay at home can similar orders that among other things or effects require retail store closures.

Or limit foot traffic, the financial health of the company's customers and business partners, including the effects of any bankruptcy proceedings by such parties, but.

The performance of the company supply chain and the health and welfare of the company's employees a day.

Additionally, some comparisons refer to non-GAAP measures.

Our SEC filings may contain additional information about these non-GAAP measures and why we use them.

During this call we will discuss some of our financial results on an adjusted basis.

Amounts referred to as adjusted exclude the following items recognized during the quarter.

$3.1 million for the impairment of a retail store fixed assets and operating lease rate of use assets.

$1.7 million in employee costs relating to restructuring and temporary closures.

$1.5 million in early lease termination charges.

$1.1 million from a customer receivable write off due to a bankruptcy filed during the pandemic.

$1 million in reserves for obsolete and slow moving inventory due to cope in 19 related impacts.

And $300000 in other charges, partially offset by $1.4 million of income from government wage subsidies.

Additionally.

Adjusted amounts exclude $2 million of tax expense related to deferred tax assets at the company's foreign subsidiaries.

Reconciliations to the most directly comparable GAAP financial measurements are contained within our earnings release.

Net sales for the third quarter of 2020 were $53.2 million compared to third quarter 2019, net sales of $82.5 million.

Operating losses totaled $3.8 billion for the quarter compared to operating earnings of $8.5 million in the third quarter of 2019.

Adjusted earnings from operations were $3.6 million for the third quarter.

The company's net loss totaled $5.9 million for the quarter or 60 cents per diluted share compared with net earnings of $6.6 million or 66 cents per diluted share in last year's third quarter.

Adjusted net earnings were $1.5 million or 16 cents per diluted share for the third quarter.

In the North American wholesale segment net sales for the third quarter of 2020 or $44 million compared with $67.8 million last year.

Bogs third quarter net sales rose, 6% for the quarter due to higher sales in the farm service and industrial trade channel.

And higher ecommerce are and with E commerce retailers.

Net sales of the Florsheim Stacy Adams and number two pounds were down 50, 855, and 32% respectively for the quarter due mainly to the current decrease in demand for dress and dress casual footwear as a result of the ongoing pandemic.

Licensing revenues were $224000 in the quarter compared with $630000 last year down in line with reductions in licensee sale of branded products.

Wholesale gross earnings were 35.7% of net sales.

In the third quarter of 2020, compared with 35.9% of net sales in 2019.

Earnings from operations for the wholesale segment were $2.8 million in the third quarter compared with $9.5 million in the same period, one year ago.

Adjusted earnings from operations for the wholesale segment were $4.7 million in the third quarter.

Net sales of the North American retail segment, which include both our retail stores and use E. Commerce sales were $4.4 million in the third quarter compared with $5.2 million in last years third quarter.

The decrease between periods was partly due to closing three unprofitable stores during the quarter.

E Commerce sales were up 16% for the quarter, but were offset by a significant decline in brick and mortar same store net sales due to reduced foot traffic as a result of the ongoing pandemic.

The retail segment had operating losses totaling $2.8 million for the quarter.

Down from earnings of 365000 last year.

The adjusted loss from operations for the retail segment.

It was $184000 of earnings for the quarter for the third quarter of 2020.

Our other operations, which include the wholesale and retail businesses of Florsheim, Australia, and Florsheim Europe had net sales of $4.8 billion in the third quarter down from $9.5 million last year.

This decrease was due to retail shutdowns and stay at home orders in both Australia and Europe.

Collectively Florsheim, Australia, and Florsheim, Europe had operating losses totaling $3.8 million for the quarter compared to operating losses of $1.4 million in last years third quarter.

The adjusted loss from operations for the company's other businesses was $1 million for the third quarter.

Our balance sheet and overall financial position have remained strong throughout the pandemic.

As of September Thirtyth, 2020, our cash and marketable securities totaled $22.5 million and we have $5.2 million of debt outstanding on our revolving line of credit.

Subsequent to quarter end, our debt was repaid and we currently have no amounts outstanding on our line of credit.

In October we also started repurchasing our company stock again under our current stock buyback program.

During the first nine months of 2020.

We generated $6.8 million of cash from operations.

We used funds to pay $9.4 million in dividends pay down $1.9 billion on our line of credit and repurchased $1.3 million of our company stock.

Additionally, we had $3.2 million of capital expenditures.

We estimate that 2020 annual capital expenditures will be between 3.5 and $4 million and our 2021 expenditures will be between one and $2 million.

On November Threerd 2020, our board of directors declared a cash dividend of 24 cents per share to all shareholders of record on November Thirtyth 2020 payable January four 2021.

I would now like to turn the call Tom Florsheim here, our chairman and CEO.

Thanks, Dan.

Thanks, John and good morning, everyone.

Well call good 19 countries.

Continues to impact our business we.

We are pleased with the upward trend in the third quarter, our revenues return to sustainable levels and as John discussed our efforts to reduce expenses resulted in operating profit on an adjusted basis.

Our bogs wholesale business accelerated throughout the third quarter and finished with a 6% increase versus last year. This.

The strength of the bogs business reflects increased demand in the outdoor footwear market as consumers continue to spend more time outdoor.

Doors during the pandemic.

We opted to maintain significant inventory levels in our core bonds programs for fall 2000, twentys, while some of our competitors appear to have taken a more conservative approach.

This decision has helped the box business and we expect this trend will continue throughout the balance of the year as there was a shortage of boots in the marketplace.

The bogs business has also been driven by increased sales of more lifestyle oriented footwear that is not as dependent on inclement weather.

We see lifestyle casual opportunity.

As a key component to future box growth and are excited by the positive consumer reception during the third quarter, our barge online business was up over 100% in the us in over 85% worldwide.

This increase was driven.

In part by the outdoor footwear trend. However, we're also we also believe that the online growth of box indicates increased consumer recognition and excitement regarding the brand's expanded product choices are.

Uncertainty remains regarding expected due to the pandemic. We're currently we're bullish on bonds ability to maintain its momentum in 2021.

Skews me Rick.

Regarding our legacy brands.

As we discussed last quarter, our product has historically been focused on go to work from shoes.

And while we are seeing some pick up.

We expect dresses business came over footwear to remain under pressure.

So a higher percentage of people, our banking offices and normal social activities are resumed.

This fall, we delivered new product that is more casual.

Both in the boot category as well as sport casual and casual.

We are seeing strong sell throughs on boots across all three legacy brands.

In our casual product is also performing well.

We have increasingly focused on pivoting toward more casual product for several years now as it was clear before the pandemic that lifestyles were becoming more casual.

While the pandemic accelerated this trend.

Because our product pipeline was already headed in this direction, we were able to react quickly. We are very encouraged to see the strong retail performance in casual products as it shows that our brands resonate with consumers in this area who.

Florsheim, Stacy Adams, and Nunn Bush or brands that are well known and trusted and well we expect to continue to reduce the percentage of our dressier footwear.

An increase the casual segment, we believe that we will be able to maintain our market share once white normalizes.

With most of our customers stores reopening in July we started to see our revenues increased although.

Although retail stores continue to face challenges with respect of foot traffic.

As we move through the quarter, our shipments increased each month some of this growth through attribute to seasonality as we ship new fall product in August and September so those months historically experienced higher volumes. Nevertheless, we are pleased to see significantly improved revenues.

Which allow us to show and operating profit within North American wholesale segment in the quarter.

Our fill on at once type business is not as robust as 2019.

Our getting revenue our orders each week for most of our New Jersey accounts.

In terms of our us retail segment.

Our third quarter sales were down 15%.

However, our ecommerce business was up 16% during the same time period as.

As indicated earlier in the call, we decided to close three unprofitable us retail stores in the third quarter, which leaves us with five brick and mortar stores in this country with.

With the reduction of our store base ecommerce, who represent the vast majority of our retail sales.

We see momentum in this area of the business.

And they are committed to investing in our ecommerce platform. Our strategy is to continue examining our brick and mortar stores both in the us in overseas for potential for there were further reductions and leverage our strength in digital sales to grow our direct to consumer business.

Our October.

Commerce sales were strong given our positive start to the fourth quarter and our exit from the worst performing brick and mortar stores, we anticipate renewed profitable growth.

In our us retail business.

Our overseas business continues to be impacted by COVID-19.

Due to the government mandates in Australia up much of the country.

Has been subject for long shutdowns in Victoria right.

For many of our Florsheim stores are located non us central Commerce has been closed for most of the time period between April in October.

The good news is that our stores in Victoria reopened last week and thus far.

Sales are encouraging.

Another high point point in Australia is the growth of our box business year to date or partial show business is up 32%. Our web business is also showing strong growth in Australia with an increase of 20% for the quarter.

And for the year.

As of September Thirtyth 2020, our inventory is at $76.2 million versus $81.3 million.

At the same time last year.

Our inventories remain high in dress and dress casual product, but the excesses in core carry forward product.

Which continues to sell but at a slower pace.

Compared to last year, we expect our inventories to come down.

And we believe that within the next three to six months or inventory will be at the appropriate level relative to sales.

We made the decision in April to bring in for our products such as boots. Despite all the uncertainty and that decision has paid off as we.

Forecast spring 21 were being conservative on seasonal product, but bringing in additional inventory in the casual area. As we are encouraged by the momentum we're seeing for these products.

As John said earlier in this call we were fortunate that our balance that are we're fortunate that our strong balance sheet.

Has given us the ability to take the actions necessary to move forward in ways that we anticipate will allow our brands to be successful in a retail landscape, where consumer preferences are evolving at a fast pace. We believe the changes we have taken this year will benefit our profitability once the impact of the pant.

Democrats over that concludes our formal remarks. Thanks for your interest in Weyco group and I would now like to open up the call to any questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered your question look yourself from the queue. Please press the pound.

Again, if you have a question at this time. Please press Star then one.

Hi, I'm showing no questions at this time and.

I'm, sorry, I can show a question from the line of.

John Treasurer with Pinnacle. Your line is open. Please go ahead.

Im glad I made it onto the call. How are you guys Hi, John we're doing okay higher yield good. Thanks.

A couple of quick questions, one Tom or all of your wholesale customers open at this point.

Essentially.

They are I would say that as you probably are aware many of them have are are.

Making their footprint smaller so there are fewer actual stores, but offer offer major accounts at least are opened there are some smaller independent accounts.

In certain areas that have yet to reopened but for the most part our retailer customers are open.

Okay Thats Good news, you mentioned spring and.

Spring 2021.

How does the order book look now verse.

Versus a year ago.

Im guessing its probably down but.

Down significantly from a year ago for spring of 21, well, we have a combination of two different types of orders carry forward orders on ongoing product. We're still in the process actually entering those orders for first and second quarter of 2021 as far as new product sales.

Our business is down and I think it's not because I don't want to but I don't have the exact percentage, but retailers are being more conservative about their placements of new shoes.

And so that business is down but the positive thing I would say is that as I mentioned.

In the conference call that almost all of the new product that we're showing for spring is casual and the reception to that product has been good from the retailers is just the orders themselves are smaller than in previous years, because the retailers have been.

Acting in a very conservative way due to the environment and all the uncertainty.

Right, Okay, that's understandable.

And on your retail stores you closed three you have five left in the U.S., how many retail stores that we have.

Still on Australia, and Europe at this point.

Well Theres 33 in Australia I believe.

That's roughly the number in Europe, there's two.

And then we have some shop in shops.

And saw some stores in Hong Kong, there's probably between a shop in shops.

And the stores there is about seven right John Yes, yes.

Seven and Thats debt for all short term leases, yes, there are short term leases.

Okay. So you can get out of those if you need to but the other 33 into to our.

Are any of those stores that you can vacate soon if they're not profitable, yes, I mean, we the leases.

Come up they're not on the same schedule. So we have leases in Australia. For example come up all the time and what we've been doing as the leases come up.

His renegotiating lower rents.

And if we can get a deal that we think will be profitable we are walking away from those stores too.

But and Australia most of the leases are much shorter term than the U.S. The typical lease there I would say is three years.

And and.

Well in the U.S, it's usually five years or more.

Our strategy is a bit different though john than our us business because while you know our US business is focused on wholesale our distributor markets very different and while we do have a wholesale business there the bulk of our business is retail and historically.

We've been able to make good money in retail that wasn't true in 2019, but.

But we feel that we're we actually.

You've heard us talk about.

Our new management down there and some of the other things that we're doing so we still feel that we have an opportunity to do well and in the retail brick and mortar business in Australia with that said, we're also very focused on growing our wealth business. Yeah. I mean, John just added at I mean, I think what you're going to see.

Over the next.

Year to date.

As of the reset in terms of retail.

Retail leases length of leases our leases are structured.

Just based upon the realities of marketplace.

So there's going to be.

You are seeing a calling a retail stores right now that is going on is ultimately going to impact you know Doug.

The structure.

The relationship between landlords and tenants within within the sector and we're kind of in the beginning of that.

And our feeling is we.

Where appropriate we'll see in retail is important for us furnaces in Australia, and China, but.

But you have to structure deals that are.

Our sustainable that in our profitable that are good for both parties and so you're kind of in this process right now where rents are sort of feeling it out.

Okay, well, that's encouraging and does the same hold true for Europe.

In terms of leases, there and resets there.

Hello.

Cash.

Ladies and gentlemen, your conference will resume momentarily.

Hi, Ken ladies and gentlemen, one moment teleconference reasons.

And Mr. Mccaskey, you can continue sir.

And again, ladies and gentlemen, if you do have a question at this time. Please press Star then one.

And Im showing no further questions on the phone lines at this time I would like to turn the conference back over to Mr. John Wittkowske.

For any further remarks.

Ladies and gentlemen, please standby your conference will resume momentarily.

All right. Mr. Mccaskey, you can go ahead and continue Sir.

Hello, John are you still there.

Hello.

I can hear you can you hear me. Okay. Now we can hear you sorry about that John we haven't announced yet technical.

Technical difficulties, but we're back okay. Good I just wanted to follow up you talked about Australia, what about Europe is there.

Reset going on there in terms of the relationship between.

Landlords and retailers I know you only have two stores there, but maybe there is an opportunity for more stores.

Yes, we are not really looking at expanding.

Retail in Europe.

We we are evaluating Europe overall, it's been a small division.

For us and one of the things that we're doing from an expense standpoint is looking at every single different piece of our business and Thats one that has been.

Very moderately profitable some years some years, it's lost a little bit of money and so we're studying the viability of Europe and whether that's really something that we're going to go forward with okay. Do you think that decision will be made by year end.

Yes, okay. Good to hear all right good and then.

Just a couple of financial questions. One you bought you resume buybacks.

In October can you share with us how many shares you bought in October.

We just we went back into the market.

About a week ago, when the stock went down and we bought back.

As the total amount.

2025 36000 shares.

Okay and how much.

Dollar wise do you have left on the repurchase authorization.

You know what that number is.

We get there.

Got it is.

It's significant I don't know the exact number.

Right now all right.

One second bill.

Do you want to join the queue.

John did you have any other questions Dan I did that's okay I can look at the Q, but the.

The most important one for me.

Is the adjustments that were made and they were.

String of them, which is fine, but tell us which which of those.

Seven or eight items impacted SGN I and will assume the remainder impacted gross margins I'm trying to get to where we are.

Where we are on a normalized basis. So maybe you could just tell me.

Which of those specific items impacted us DNA, John do you want to answer that yes, absolutely.

All in all of them.

It is in a with the exception.

All the inventory $1 million of inventory.

And.

Of course, the 2 million dollar cap expense number.

Okay.

So the 1 million of inventory was at the gross add to Cogs level cost of goods sold that's correct. Okay.

And the rest are all.

As DNA.

Okay, So and if we adjust that.

Does that give us a good run rate for EPS, you know going forward.

We believe it does we.

We have made operational changes obviously in when we talk about employee cost for restructuring and closures.

Yes, we've made we've made adjustments to our cost structure, we have looked at our advertising.

Numbers. So we believe that our third quarter adjusted gets us close I'm not saying, it's perfect at the third quarter. We still are going to continue to evaluate our SGN, AE and make adjustments where needed and where appropriate but I think it's it's certainly much it's certainly much closer okay.

Because I mean, the adjustments that you mentioned.

Second as you know we are like $9.2 million.

In total and if we reduce EPS DNA by that amount that gets us to 15 million.

It seems low, but maybe you have a comment on that.

Well you just mentioned a 9 million I don't know if that's quite a number.

If you look in the press release, you can see back in the in the back where we've got earnings loss from operations adjusted.

And.

We have $7.4 million of adjustments for the third quarter.

$1 million of that was.

Gross margin so.

So $6.4 million would be as DNA of the total 7.4.

Yes, I think what youre going after adding back any fed.

We only ever Max.

The tax number.

Or maybe that the other wage in rent subsidies, which is a positive number.

The one Oh Wow I excluded that let me follow up with you offline because I want to get this reconciliation right.

Okay. That's fair, it's Chuck I'll call you after the call and we can go through it sure. That's fine yes, Okay. That's all we have.

All right. Thanks, John Yes.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to John.

Asking for any further remarks.

Well, we just.

Thank you for joining us on our call today, and we look forward to talking with you.

After our fourth quarter.

And we're all hoping for good news every.

Have a great day.

Okay.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2020 earnings release Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.

Today's conference maybe recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to one of your speakers today Mr. John.

ASCII Sir please go ahead.

Before we begin to discuss the results of the quarter I will read a brief disclaimer.

We wish to caution you that such statements are just since and that actual events or <unk> may differ materially.

We refer you to Weyco groups. Most recent form 10-K as filed with the Securities and Exchange Commission as well as its other filings with the SEC.

The form 10-K as well as our most recent form 10-Q I'd.

Identify important factors and risks that could cause the companys actual results could differ materially from our projections.

With respect to the ongoing COVID-19 pandemic.

Numerous factors will determine the extent and length of the impact on the company, including the extent and duration of the pandemic and its impact on the global economy.

Actions taken by governments, such as stay at home and similar orders that among other things our effects require retail store closures.

Our limit foot traffic the financial health of the company's customers and business partners, including the effects of any bankruptcy proceedings by such parties.

The performance of the company supply chain and the health and welfare of the company's employees.

Additionally, some comparisons refer to non-GAAP measures.

Our SEC filings may contain additional information about these non-GAAP measures and why we use them.

During this call we will discuss some of our financial results on an adjusted basis.

I'm also referred to as adjusted to exclude the following items recognized during the quarter.

$3.1 million for the impairment of retail store fixed assets and operating lease rate of use assets.

$1.7 million in employee costs relating to restructuring and temporary closures.

$1.5 million in early lease termination charges.

$1.1 million from a customer receivable write off due to a bankruptcy filed during the pandemic.

$1 million in reserves for obsolete and slow moving inventory due to COVID-19 related impacts.

And $300000 and other charges, partially offset by $1.4 million of income from government wage subsidies, but.