Q2 2021 WEYCO Group Inc Earnings Call

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Good day, and thank you for standing by and welcome to the Waco Group the second quarter 2021earnings release conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. The asking the questions during the session.

You will need the press star and then the number 1 on your telephone keypad. If you require any further assistance. Please press star zero and.

I would now like to hand, the conference over the your speaker today, Mr. John Rykowski, Sir Please go ahead.

Thank you and good morning, and welcome to Waco Group's conference call to discuss our second quarter of 2021 earnings and.

This call with me today are Tom Florsheim, Jr, Our chairman and CEO and John Florsheim, our President and C O.

Before we begin to discuss the results of 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 predictions and that actual events or results may differ materially.

We refer you to Waco groups. Most recent form 10-K as filed with the Securities and Exchange Commission.

As well as its other filings with the SEC the.

The form 10-K identifies important factors and risks that could cause the company's actual results to differ materially from our projections with.

With respect to the ongoing COVID-19 pandemic.

Humorous 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 or similar orders that among other effects require retail store closures or limit foot traffic and 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 Companys supply chain, and the health and welfare of the company's employees.

Net sales for the second quarter of 2021 were $57.6 million up from second quarter 2020, net sales of $16.6 million.

Operating earnings totaled $4.5 million per the quarter compared to operating losses of $13 million last year.

The company's net earnings rose to $3.8 million or <unk> 39, 3.

<unk> 39 per diluted share for the quarter compared to net losses of $8.9 million or <unk> 91 per.

Per diluted share in 2020.

And last year's second quarter results were significantly impacted by the COVID-19 pandemic as most retailers, including the Companys retail stores were closed for a majority of the quarter.

As such comparisons to 2020 May have limited utility and therefore, we will include selected comparisons to 2019 as appropriate.

Overall sales for the quarter of growth to approximately 95% of second quarter 2019 sales levels, demonstrating a strong recovery to near pre pandemic levels. The.

The company's earnings also rebounded exceeding second quarter of 2019 levels.

And the North American wholesale segment net sales for the second quarter of 2021 were $41.9 million compared.

Compared to $9.3 million last year with sales up across all 4 brands.

Wholesale sales for the second quarter reached 91% of 2019 levels.

Wholesale gross earnings were 32, 4% of net sales and the second quarter of 2021 compared to 34, 7% of net sales in 2020.

The decrease in gross margin was largely caused by the increase and shipping costs.

We are currently facing to bring product and from Asia.

Due to the bottlenecks and the supply chain, we are often paying premiums in order to get bookings on container ships.

Selling and administrative expenses were $10.9 million for the quarter compared to $13.4 million and 2020.

Second quarter of 2021 expenses included approximately $1.8 million of wage subsidies received from the U S and Canadian governments.

Second quarter 2020 expenses included the write off of approximately $3.3 million and receivables as the result of the Jcpenney bankruptcy filing.

Offset by a $1.4 million of income from U S and Canadian government wage subsidies.

Driven by higher sales volumes wholesale operating earnings were $2.7 million per the quarter.

From operating losses of $10.2 million last year.

Second quarter wholesale operating earnings also exceeded the 2019 levels due in part to government wage subsidies recognized during the period and as a result of cost saving measures implemented over the past 12 months.

While gross margins have been impacted by the increased freight costs the cost savings implemented by the company have helped mitigate that impact.

Net sales of the North American retail segment were $6.2 million and the second quarter of 2021 versus $3.6 million and the second quarter of 2020.

Same store sales rose, 73% for the quarter.

Due to a 43% increase and e-commerce sales and higher brick and mortar same store sales.

Last year's brick and mortar same store sales were unusually low due to temporary store closures as a result of the pandemic.

And also there were 4 fewer brick and mortar stores operating at June 32021, as compared to last June 32020.

The company currently has just 4 active U S brick and mortar locations.

Retail net sales for the second quarter surpassed second quarter 2019 levels by 15%.

While most of this increase was driven by e-commerce growth brick and mortar sales of the company's 4 remaining locations also exceeded their 2019 levels.

The retail segment had operating earnings of $1.2 million for the quarter up from operating losses of $856000 and last year's second quarter and earnings of $400000 and 2019.

Retail operating earnings have improved due largely to growth and the company is more profitable e-commerce business and the shedding of unprofitable stores.

Our other operations, which include the wholesale and retail businesses of Florsheim, Australia, and Florsheim Europe had net sales of $9.5 million for the quarter compared to $3.7 million last year and $9 million and 2019.

The increases were primarily due to the Florsheim, Australia, where sales were up and both its wholesale and retail businesses as the business environment and Australia improved during the quarter.

Collectively Florsheim, Australia, and Florsheim Europe had operating earnings of $718000 per the quarter compared to operating losses of $2 million and the second quarter of last year.

The improvement between periods was largely due to improved performance at Florsheim, Australia.

Second quarter 2021 operating earnings from the company's other operations also beat the comparative 2019 levels do again largely to improved performance at Florsheim, Australia.

On June 7th 2021, the company acquired substantially all of the operating assets and certain liabilities of forsake a distributor of outdoor footwear under the brand name forsake.

The principal assets acquired were inventory accounts receivable and intellectual property, including the the brand name.

The aggregate purchase price was approximately $2.6 million plus contingent payments to be paid annually over a period of 5 years, depending on forsake achieving certain performance measures.

The company's estimate of the discounted fair value of the contingent payments is approximately $1.4 billion and total debt.

<unk> transaction was funded with the companies available cash.

At June 32021, our cash short term investments and marketable securities totaled $65.2 million and there were no other amounts outstanding on our revolving line of credit.

During the first 6 months of 2021, we generated $27.1 million of cash from operations, we purchased $30 million of short term investments used funds to pay $4.6 million and dividends and repurchased $1.5 million of our company stock.

We also spent $2.6 million to acquire the forsake brand and had approximately $400000 of capital expenditures.

And we estimate that the 2021 annual capital expenditures will be between 1 and $2 million.

On August 3.2021 of our board of directors declared a cash dividend of <unk> 24 per share to all shareholders of record on August 27, 2021 payable on September 30 of 2021.

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

Thanks, John and good morning, everyone.

We are extremely happy with how our wholesale business opened up and the second quarter.

We have never really seen demand go from lackluster to supercharged and such a short period of time.

Credit vaccinations stimulus checks pent up demand for restocking wardrobes returned to the office and social events or a combination of all of the above the.

And the end result is we feel much more positive about the fundamentals of our business our.

Our legacy brands portion of non abortion of Stacy Adams bounced back strongly this spring with florsheim being the outstanding performer.

And with events, such as weddings and formal gatherings on the calendar, we saw renewed demand for more refined footwear.

At the same time retailers had reduced both the dress and dress casual style offerings and inventory levels.

A portion of him Nunn Bush and Stacy Adams of already able to address this point and the market is Waco group.

It was 1 of the few footwear wholesalers that stock significant inventory, we saw both unprecedented precedented sell throughs of the retail level and corresponding of orders at the wholesale level as retailers pivoted strongly back to the refined footwear category.

We should see continued pipeline film tour of retailers throughout the back half of 2021.

Yes.

We are we are very pleased with the performance of our legacy brands. We are also excited about the breakthroughs that we had the spring with casual footwear the <unk>.

Pandemic pushed the company to accelerate development delivery and selling of more casual athletic inspired footwear day.

Fit the more relaxed lifestyle trend and apparel that we believe over the long term, we will continue to grow in importance.

And I am the unfortunate TCE Adams, all significantly increase the percentage of purely casual shoes and the consumer has responded well with certain styles being among our top sellers and our direct to consumer business.

It is our expectation that we will continue to grow our casual and mix, which will complement our strong position and the more refined footwear segment Bob.

<unk> also had an excellent spring while the second typically our lowest volume shipping period.

Sales were up significantly over both 2020 and 2019.

The outdoor footwear market has been robust through the pandemic.

And we continue to see strong retail performance across trade channels.

Given the shortages and the outdoor boot market and fall 2020 bonds is positioned to have a strong second half of the year as retailers are taking a more aggressive inventory position on the bogs brand and the outdoor boot category as John mentioned in June we acquired the per sake brand, which is a pioneer.

And the sneaker boot category for <unk> will be headquartered in Portland, and leverage our back office and distribution infrastructure and Milwaukee.

We are very excited to welcome per sake, and its 2 founders Jake Anderson and Sandpiper Stowe to Waco group. The brand further expands our reach into the outdoor category, which we believe will be of growth Avenue for the company.

For sake is currently small volume it can be found and a range of important outdoor retailers and has a growing direct to consumer web business that we can leverage using our successful e-commerce platform.

As far as our overall direct to consumer retail business. We saw our same store sales jumped 73% and the second quarter from a volume perspective, the increase was driven by 43% increase and ecommerce sales with all of our legacy brands registered strong double digit gains.

Do you sort of brick and mortar store count as we exited our most unprofitable locations last year.

Sales at our 4 remaining stores are registered significant increases over the same period last year. When the malls were largely closed our business model for direct to consumer is greatly improved we are less promotional versus the prior year period, and the increasing ecommerce allows us to leverage the fixed cost investment we have made.

And in past years to grow the series of our business.

Our international business greatly improved against 2020, when we're experiencing store closings.

Our key markets and Australia, New Zealand and of the Pacific Rim, we saw that business.

Rebound from a sales and profitability perspective, and Australia, which is of significant market for us. The pandemic has allowed us to reset the business model as we exited unprofitable stores and renegotiated leases that allow for greater profit potential.

In addition, our e-commerce business and these markets continues to grow nicely from both florsheim and bogs.

However, recent developments related to the Delta of variant and Australia have led to renewed Lockdowns and key provinces and now create and.

Uncertain outlook for the balance of the year.

And as John discussed, our North American wholesale gross margins were down.

And the quarter, mainly as a result of the problems and the supply chain.

We believe this is a temporary situation.

And while we believe this is a temporary situation, we do see the challenges and the supply chain, continuing and do at least the beginning of 2022.

We also continue to face price pressure from increased factory costs.

We have covered much of what we will ship this year and factory cost prior to these increases and we are raising prices for new customer orders for the second half the.

And the customer orders, we received for the first quarter.

Of 2022 are at higher prices, which will protect our margins and general our retail partners understand the increases and factory prices and of accepted the new higher prices the.

Demand for our product across brands and categories is currently greater than the supply.

Which continues to put pressure on our inventories our inventory balance at June 30 was $33 million compared to $43 million at March 31.

We are aggressively placed factory orders to cover our increased backlog and also greater at once demand the longer time. It has taken to bring goods and from Asia is causing delays in receiving needed merchandise. Although we believe we will start to see of good flow of shoes and boots.

Getting to arrive towards the end of August we expected by the end of the third quarter, we will see much improved and much improved inventory situation that will continue through the end of the year.

This concludes our formal remarks.

Thank you for your interest and Waco group and I'd now like to open the call to your questions.

Thank you as a reminder, the asked the question vis vis star and then the number 1 on your telephone keypad again, the press Star and then the number 1 on your telephone keypad and you wanted the draw your question Chris the pounds.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of GW Milligan from Wedbush.

Sir your line is open.

Thank you very much for taking the question.

Can you expand on what on your balance sheet the.

Cash flow the.

Whereas it.

And.

The investments there of about $30 million.

Yes.

Yes. This is John.

We.

As Tom mentioned our inventories.

I have been.

Getting lower.

We're also of a variety of issues and we knew that we would have to we were going to generate a lot of cash early on and the year and.

And with the <unk>.

Delay and some of the purchases.

We've been able to build up our cash balance as you saw at the like $65 million.

The $30 million represent very short term liquid investments that we wanted to be able to earn something on.

Until.

Net cash will likely be used and the third and fourth quarter to purchase these inventories that are going to be coming in as you saw our inventories are low and they are going to be building up and we just needed the holding place for that cash. So these are short term liquid investments.

Very low risk.

Just to generate some added income.

Thank you do you do you.

We have some shipping companies why do you think that youll be the backlog on shipping and will change later in the year.

Whats the well I think we of our people working all the time on trying to get space on containers. We are working with our factories, who are having success and booking some space on containers outside of our freight contracts.

Have been we do have a lot quite a bit more in transit right now that are actually on boats. So we do know that things are going to be coming in later in the month and throughout the rest of the year now Youre right. There is no absolute guarantee but we're working diligently to get as much space as we can think of those product in.

Thank you.

Thank you for the questions.

Thank you once again to ask a question just press Star and then the number 1 on your telephone keypad.

There are no questions on the queue at this time presenters. Please continue.

And we'd like to thank everyone for their attention this quarter and.

Have a good day and we'll talk to you next quarter.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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