Q3 2021 WEYCO Group Inc Earnings Call

November 3, 2021

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Good day, and thank you for standing by and welcome to the Waco Group's third quarter 2021 earnings 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 to ask a question. During this session you will need to press star one on your telephone please be advised that today's conference call.

Morning.

Thank you for any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today.

John with calcium Chief Financial Officer. Please go ahead.

Thank you good morning, everyone and welcome to our third quarter Conference call on this call with me today is Tom Florsheim, Jr. Our chairman and CEO.

Before we begin to discuss the results I will read a brief cautionary statement.

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 these 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 well as the security and exchange commit excuse me as filed with the Securities and Exchange Commission as well as its other filings with the SEC.

The Form 10-K identifies important factors and risks that could cause the companys actual results to differ materially from our projections with respect to this 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.

The extent and duration of the negative impacts on our supply chain.

Actions taken by governments, such as stay at home or similar orders that among other 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 and the health and welfare of the company's employees.

Net sales for the third quarter of 2021 were $61 8 billion up from third quarter 2020, net sales of $53 2 million.

Operating earnings totaled totaled $6 7 million for the quarter compared with operating losses of $3 $8 million last year net.

Net earnings rose to $5 $1 million or <unk> 52 per diluted share.

From net losses of $5 9 million or <unk> 60 per diluted share in 2020.

Last year's third quarter operating results were significantly impacted by the COVID-19, pandemic and included nonrecurring charges totaling $7 $4 million.

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

Overall net sales for the quarter rose to approximately 75% of third quarter 2019 sales levels.

And the Companys operating earnings for the quarter recovered to 80% of 2019 levels.

In the North American wholesale segment.

Net sales for the third quarter of 2021 were $50 2 million compared with $44 million last year with sales up across all of our legacy brands.

Bogs sales were down 8% for the quarter, mainly due to production and shipping is.

Related to disruptions in the global chain.

There was a significant pickup in demand across all of our brands during the quarter.

However, bottlenecks in the global supply chain caused delays in the receipt of finished goods from our suppliers, which constrained our third quarter shipments.

We began to see increased deliveries from our suppliers in October and we expect this improvement to continue through the rest of the quarter, which should help us meet the increased demand for our products.

Wholesale gross earnings were 34, 6% of net sales in the third quarter compared to 35, 7% of net sales in 2020.

The decrease in gross margins was largely caused by the increase in shipping costs that we're currently paying to bring product information.

Due to a shortage of capacity in the supply chain, we are often paying premiums in order to get space on container ships.

Last year's gross margin also included $500000 in nonrecurring charges.

Selling and administrative expenses were $11 3 million for the quarter compared with $13 million in 2020, and $14 $9 million in 2019.

Third quarter 2021 expenses were reduced by approximately $1 $9 billion.

Of wage subsidies received from the U S and Canadian governments it.

It is not known at this time, whether those wage subsidies in the U S will be available in the fourth quarter of 2021.

Third quarter 2020 expenses included $1 $5 million and nonrecurring charges.

Wholesale operating earnings were $6 million in the third quarter of 2021 up from operating earnings of $2 8 million in last year's third quarter due to higher sales and lower selling and administrative expenses.

Net sales of the North American retail segment were $6 $3 million in the third quarter of 2021 up from $4 4 million in the third quarter of 2020.

Same store sales rose, 49% for the quarter due to a 33% increase in ecommerce sales and higher brick and mortar sales.

Last year's brick and mortar same store sales were down significantly as a result of the pandemic.

The company closed three unprofitable retail stores in the third quarter of 2020, and currently has just four active U S brick and mortar locations.

Retail net sales for the third quarter surpassed second third quarter 2019 levels by 22%.

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

The retail segment had operating earnings of $1 4 million for the quarter up from operating losses of $2 $8 billion last year and earnings of $365000 in 2019.

Last year's losses included $2 6 million of nonrecurring charges.

Retail earnings have improved due to the benefit of closing unprofitable stores and improved performance at active brick and mortar locations and higher E Commerce earnings.

Our other operations, which include the wholesale and retail businesses of Florsheim, Australia and Florsheim Europe.

$5 3 million for the quarter compared to $4 $8 million in 2020, and $9 $5 million in 2019.

The increase was at Florsheim, Australia, where sales were up in both its wholesale and retail businesses, partially offset by lower sales at Florsheim Europe as the company is in the final stages of winding down this business.

Last year's third quarter sales were down significantly.

As a result of Covid related.

Business recovery in Australia has been hindered by a large number of florsheim Australia's retail stores being closed for a majority of the quarter due to lockdowns imposed in new South Wales, and Victoria Sta.

Stores in New South Wales have begun to reopen in October and we currently expect that all of our stores in Australia will be allowed to reopen during the fourth quarter absent adverse COVID-19 developments.

Collectively Florsheim, Australia, and Florsheim Europe had operating losses of 682000 for the quarter.

Appeared to operating losses of $3 $8 million.

In the third quarter of 2020 and.

And losses of $1 $4 million in 2019.

Last year's third quarter losses included $2 8 million of nonrecurring charges.

The improvement in 2021 was largely due to improved performance in Australia.

The company's income tax provision totaled $1 9 million for the quarter compared with $2 $1 million in the third quarter of 2020.

Last year's tax provision included $2 million of tax expense related to the write off of deferred tax assets.

The company's foreign subsidiaries.

At September 32021, our cash short term investments and marketable securities totaled $45 $4 million and there were no amounts outstanding on our revolving line of credit.

During the first nine months of 2021, we generated $9 $7 million of cash from operations.

We invested $15 2 million and short term investments.

Page $6 $9 million in dividends and repurchased $1 $5 million of our company stock.

We also spent $2 $6 million to acquire the forsake brand and had approximately 670000 of capital expenditures.

We estimate that 2021 annual capital expenditures will be between $1 1 million and $1 5 million.

On November <unk> 2021, our board of directors declared a cash dividend of 24 per share to all shareholders of record on November 29th payable on December 31.

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

Thanks, John and good morning, everyone.

We are excited about the trajectory of our business and we are seeing record demand across all brands, while wholesale sales were down versus 2019 due to the bottlenecks throughout the supply chain. The fundamentals of our business are quite strong we anticipate improved inventory flow.

Through the fourth quarter, it should be well positioned to end 2021 with good momentum.

Excuse me our box wholesale business was down 8% for the quarter.

The decrease entirely reflected production and shipping delays from our factory base in Asia.

Sales across.

Okay.

Our robust as we enter the principal selling season for box at retail.

While deliveries are later than originally planned our retail partners are working with us and we expect to be in a much better inventory situation as we head towards the holidays.

The outdoor boot category has been a bright spot throughout the pandemic.

<unk> benefited from increased consumer interest in the brand.

Our bogs classic weather boot sales remain the foundation of the business.

We are enthused about the significant progress we have made toward developing a successful casual lifestyle business, which will offer additional growth opportunities moving forward.

Regarding our legacy brands Florsheim Nunn Bush's tcm's, all experienced strong performance at the retail level.

Early in the pandemic there was a spike in demand for athletic rugged casual and comfort casual footwear, but substantially reduced demand for dress and dress casual shoes.

With the rollout of vaccines in March and subsequent loosening of social and other restrictions we began to see a shift back toward more refined footwear categories as consumers evaluate their closets for return to the office and more formal social occasions retailers and brands are unprepared for the subsequent surge in demand and.

We have been working to fill the pipeline and restock to normal inventory levels.

The situation has been exacerbated by supply chain issues, especially in regard to transportation of finished product.

We are working through delays in chasing demand. We believe we have been a been in a relatively better inventory position that our competitors.

And have gained market share within the category.

We anticipate strong demand within the dress and dress casual market well into 2022, although unpredictable pandemic developments could impact demand.

While we are pleased with the resurgence of the traditional more refined footwear market. We're also encouraged by the ability of our legacy brands to expand into the casual the true casual market with.

With wider offerings of athletic inspired and outdoor oriented shoes, our design and selling focus throughout the pandemic has been towards casuals and our brands and we're having success both in getting new categories placed as well as with sell throughs at the consumer level as.

As we move forward, our legacy business will have a more balanced ratio between dress footwear and truly casual reflecting the changing lifestyle trends.

Post pandemic world.

In terms of our U S retail segment, our third quarter sales were up 44% as John mentioned.

Our for brick and mortar stores in the U S who are performing well exceeding sales from the same period in 2019. The majority of our growth Robert was driven by the strong performance of our e-commerce sites with sales up 33% versus last year.

54% versus 2019 in the U S.

We continue to invest in building out our ecommerce platform to maintain our growth momentum.

With the reduction in unprofitable brick and mortar stores an increase in our ecommerce sales are direct to consumer business is becoming a more important profit driver and the Waco business model.

Turning to our international performance renewed Lockdowns in Australia, and New Zealand impacted both retail sales and wholesale shipments in the third quarter.

Resulting in a temporary setback in our overseas business as mentioned in prior conference calls we have made good headway towards reestablishing profitability in our portion of Australia business.

Which encompasses the markets.

Australia, New Zealand, the Pacific Rim, and South Africa.

Since the beginning of the pandemic, we have been focused on shutting or renegotiating unfavorable leases and leveraging our e-commerce platform.

Fortunately the zero case tolerance policy in Australia in Auckland, and the subsequent shutdown of stores in these markets resulted in a loss for the quarter. While we are disappointed with this development. The Australia market is now reopened in stages.

And we remain confident that we will ultimately reap the benefits of the changes made over the past year.

Our inventory.

Was $52 9 million at September 30, compared to $33 6 million at June 30.

These numbers.

<unk> inventory that has left the supplier is paid for and is in transit to our distributions.

Historically with transit times being approximately four to six weeks.

The percentage of entrance it versus on hand inventory has typically been between 10 and 20% of our total wholesale inventory.

With current transit times now running in excess of eight weeks and the large amount of inventory we have on order and transit inventory was 56% of total inventory as of September 30th.

<unk> is beginning to loosen up and we are now receiving a much greater number of containers than normal. This is welcome news and we are encouraged that we will be in a position to fulfill much of the increased demand we are seeing in the fourth quarter.

Our margins currently are currently being impacted by both higher factory costs, resulting from raw material increases and higher freight expense.

As John discussed our wholesale gross margins were down 110 basis points from 35, 7% in the third quarter of 2020 to 34, 6% for the same period this year.

Much of our backlog for fall was covered and factory prices prior to the price increases, but we were unable to cover the large increases in freight as we move into 2022, we have raised our prices to mitigate impact on our margins, but expect that we will continue to have some margin pressure.

Through the first half of the year.

As we move into the final stretch of 2021, we are encouraged that the strong demand for all of our brands continues and that our strategy to aggressively build our inventories are starting to pay off we continue to move the timeline up on placing our factory orders to try to offset both longer lead times and longer tranche.

At times.

So we continue to place larger than normal buys to cover both our increased backlog and builder inventory levels for in season.

This concludes our formal remarks. Thank you for your interest in Waco group and I would now like to open the call to your questions.

Sure.

Thank you as a reminder.

Question, you will need to press star one on your telephone.

Draw your question press the pound key.

Please standby alloy from public Tony roster.

Once again my Star one to ask a question at this time.

Our first question comes from Louis Moser with manufacturing.

Your line is open.

I was just wondering it's a good report and.

You seem to be failure optimistic about.

Next year.

A lot of people don't realize you paying 4%, which I assume will continue.

Cash.

And the book value of $20.

Which makes the company very financially strong.

You mentioned.

I haven't been to shareholder up until recently.

You mentioned buybacks are buybacks still.

Progress on the consideration where do you stand in that manner.

There is still under consideration.

We bought back stock earlier in 2021, and the most recent quarter, we did not buy back stock our position on that is when we feel that the stock is underpriced, we buyback I mean, clearly we believe in the third quarter. It was under <unk>.

And we're looking at that again right now as far as what our our buybacks are going to be in the fourth quarter.

So we're going to continue to buyback stock we have authorization to buy something like 250000 shares of stock back and so we will be we will be in the market buying from time to time.

In terms of the retail stores, how many retail stores do have.

Left in terms of brick and mortar.

Well.

In the U S. We only have four.

The biggest presence that we have for brick and mortar stores is in Australia, where we have over 30 30 stores.

And then we have.

Store shop in shops in Asia, mostly in Hong Kong.

And one brick and mortar store in South Africa.

Wanted to Auckland.

And thats pretty much it so the total number of brick and mortar stores is less than 50 today.

And while we had a big presence of brick and mortar in the U S.

Going back over the last decade, and we've slowly been closing them as leases have come up.

We actually feel very good about where we stand today.

With the number of total brick and mortar stores, where it's really a struggle.

Profitable in the U S. We have reduced that number all four stores. We have right now are profitable and our focus is on web on our web site consumer direct.

The financial model is different and Australia, we're still able to make money in brick and mortar and the business that we have in Australia is very retail deliver driven so we're going to continue.

To grow that business and possibly open additional stores.

So.

Does that answer your question.

Basically.

So perhaps you could too.

And then treat discontinue.

Failure stores.

Apparently what Youre seeing now is that's not going to be the case that is not going to be the case. The florsheim brand has very dominant in Australia.

We feel that the work that we did.

Over the past year during the pandemic, where we got out of stores that were unprofitable renegotiated leases.

Has put us in a much better position going forward and we're still looking at opportunities to open additional stores there.

And then Australia.

It's a very different market from the standpoint of wholesale versus retail for us I mean, there is limited number of wholesale accounts. There. There's a couple of large department store type accounts, but people still go to our stores to buy our product. That's really one of the main places so we're focusing on that and supplementing that with our <unk>.

Site down there, which is starting to take off a little bit as well. So we really think that in Australia retail is the is really the way the distribution is going to be in the long term down there for us.

How do you feel about.

Your online sales I know you're increasing them.

How do you go about.

Making them more dynamic.

When you say, making them more dynamic what are you what are you in other words, if you are increasing 20% a year.

Do you get to 50% online.

How do you get your exposure.

Yes, I mean, we have been investing a lot.

And our website.

And the way that you get more customers through different tools and we're investing in those tools.

The growth that we've had.

On the web over the past few years has actually been.

That strong and we think that it is.

Hardware harder as you grow the base to have the big percentages.

Percentage increases, but we did grow 33% versus last year and 54%.

Versus 2019.

And.

We continue to hire people and analytics and front end and backend web development and that really is where we're investing.

A lot of our resources right now because we see the consumer direct model through the web in the U S has been very critical.

To our future.

We're pleased to see that our profitability.

And retail has grown and we had operating earnings of $1 4 million.

In retail in the U S.

This past quarter, which is a record for us. This is kind of amazing when you think about it because that comparison goes back to when we had 39 stores in the U S.

And our website. So the website has really grown.

It's very profitable and we've reduced the brick and mortar count to four stores.

Because the brick and mortar was less profitable that's really helped our overall profitability. So to answer. Your question. We are going to just continue to invest in it and we're committed to trying to drive continue to drive that growth. We think that there is still a lot of room for growth.

In terms of.

Subject to growth.

$5 in cash at least.

<unk>.

They can see online.

Is there any thoughts to any additional.

Activity in the acquisition area.

John do you want to sure.

A couple of things on the cash balance just I mean, it's maybe a little bit of a roundabout way to answer your question.

In a nutshell, yes.

Yes, we're always looking for acquisitions, and we think that as a result of call. It the pandemic and everything Thats happened some of those might.

Some things might come available over the next year or two we don't know we believe.

As you pointed out earlier, we're in very strong financial shape on the balance sheet. So we.

Number one been able to withstand the last year and a half and come out of it we think stronger.

So we're always looking we're not going to frivolously gold purchase something that will hurt us, but we are we are always in the market for that we think that that type of growth is there.

And as far as the cash balance.

It's a little it's a little misleading in a sense that if you look at our inventories you can see that.

We've had some <unk>.

Decline in inventory because of the way the pandemic now we're building our inventory back up and so that cash balances fluctuating a little bit and we're certainly over the next six to nine months going to be probably increasing our inventories because there's a lot of demand as Tom mentioned, it's been hard to get product in so a lot of our product is.

Coming in and sold right away. So we want to build those inventories up.

But.

In a nutshell.

We are always in the market for acquisitions, because we do think that we have a very good platform here.

A lot of leverage that if we get the right acquisitions, we can we can make a lot of money.

Your activity.

You said.

And in Europe.

Yes.

And the information you've given us so far.

In the case.

<unk>.

It's doing very very well now is your main concentration going to be on.

In that area or it just happens to be anomaly.

Because of the pandemic, maybe more people outside.

Are you asking.

About future acquisitions or.

What we were seeing in the cause the bogs business.

Which is really our only outdoor business really held up well during the pandemic because people were getting out and doing more outdoor.

Outdoor activities that business has remained strong.

As people have come out of hibernation and.

And so we do have interest in expanding our outdoor portfolio, which was.

Drove it which partly driven drove us to buy the forsake brand, which is in that same category. That's a brand that we purchased earlier this year.

A much smaller brands, but we're going to continue to look at acquisitions in the outdoor space because that is a growing area of the business.

The USA invested in companies such as yours.

It's very low cap companies.

Many of them.

Actually happened, sometimes there's no trading at all in the stocks. However.

What I have noted.

That.

Every company that has that type of position.

Once they start to really move along in terms of increasing the earnings and sales.

Has been discovered.

If I look at your company.

Youre trading maybe 10000 share volume a day.

And I wonder if there's any possibility that you could increase your interest in <unk>.

And your company by.

Trying to find additional.

Some analysts it will.

Help out in terms of giving you more exposure to the financial community.

Yes, we're open to suggestions in that area in the past what we've found is that the stock just doesn't trade enough to really get much attention from analysts because.

It just doesn't have.

Theyre going to cover companies that have the big Big trading volume.

Daily basis, and so it's just hard to get.

Get their attention basically, but we're open to suggestions there.

Okay.

That would certainly help.

Somebody is covering the company in terms of.

Some analysts.

Was projecting sales, but not earnings.

If you look at the board, that's where I saw that.

And.

Hopefully youll be able to move.

Do you do any.

Any type of Investor.

Relations in terms of conferences that you attend.

There are opportunities in your industry to get exposure through that message there or some of those opportunities that have been out there, we decided or we decided not to do those as being not really valuable we did do that we do.

Did do that after we purchased florsheim, which was a significant acquisition for us a while ago.

I think if the opportunity arose where we had something to really talk about.

I'll say, a large acquisition or something that really materially changed our company I think that there would be an opportunity to do that.

We're not sure on the on a.

On an ongoing basis, if it makes sense to do that but.

The next time those things arise we will take a look at that but it might be a way to.

Get a little bit of exposure to some other some other people but.

Right now with our float being sold so low percentage wise and volume wise as Tom mentioned, we haven't really found that much interest in and covering our company.

Okay. Thanks, very much appreciate the answers.

Thank you for your questions.

Thank you and as a reminder, task. Please press star one at this time.

And I'm currently showing no.

Further questions at this time I'd like to turn the call back over to John.

Okay.

Yes.

Thank you very much for your interest in Waco group.

And we will talk with you after the end of the year have a great day.

Today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Good day, and thank you for standing by and welcome to the Waco Group third quarter 2021 earnings conference call at.

At this time all participants are in a listen only mode.

After the speaker's 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 is being recorded.

Have you planned further assistance please press star zero.

I'd now like to hand, the conference over to your speaker today.

John with calcium Chief Financial Officer. Please go ahead.

Thank you good morning, everyone and welcome to our third quarter Conference call on this call with me today is Tom Florsheim, Jr. Our chairman and CEO.

Before we begin to discuss the results I will read a brief cautionary statement.

We wish to caution you that these statements are just predictions and that actual events or results may differ materially.

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

The extent and duration of the negative impacts on our supply chain.

Actions taken by governments, such as stay at home or similar orders that among other 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 and the health and welfare of the company's employees.

Net sales for the third quarter of 2021 were $61 8 billion up from third quarter 2020, net sales of $53 2 million.

Operating earnings totaled totaled $6 $7 million for the quarter compared with operating losses of $3 $8 million last year net.

Net earnings rose to $5 $1 million or <unk> 52 per diluted share.

From net losses of $5 9 million or <unk> 60 per diluted share in 2020.

Last year's third quarter operating results were significantly impacted by the COVID-19, pandemic and included nonrecurring charges totaling $7 4 million.

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

Overall net sales for the quarter rose to approximately 75% of third quarter 2019 sales levels.

And the Companys operating earnings for the quarter recovered to 80% of 2019 levels.

In the North American wholesale segment.

Net sales for the third quarter of 2021 were $50 $2 million compared with $44 million last year with sales up across all of our legacy brands.

Bogs sales were down 8% for the quarter, mainly due to production and shipping is related to disruptions in the global chain.