Q1 2022 WEYCO Group Inc Earnings Call

May 4, 2022

Thank you for standing by and welcome to Waco Group's first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker 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 todays call maybe recorded.

Should you require any further assistance. Please press star zero I would now like to turn the call over to your host John Makowski CFO . Please go ahead.

Thank you and good morning, everyone welcome to Waco Group's conference call to discuss our first quarter 2022 results.

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

In addition.

As previously announced.

I will be retiring on basics, which is Friday.

So with US today is also Judy Anderson, who is our current vice president of finance and Treasurer, and who will be the CFO effective on Friday.

Before we begin to discuss the results of the quarter 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 results may differ materially.

We refer you to the section entitled Risk factors in our most recent annual report on Form 10-K and to our other filings with the Securities and Exchange Commission for a discussion of important.

Factors and risks that could cause our actual results to differ materially from our projections, including the uncertain impact of inflation on our cost and consumer demand for our products and the continuing direct and indirect effects of the COVID-19 pandemic in the United States and Asia.

Overall net sales were first quarter record of $81 $4 million compared to $46 9 billion in 2021.

Consolidated gross earnings were 35, 8% of net sales for the quarter compared with 41, 2% of net sales in last year's first quarter.

The decrease in gross margins was due to lower wholesale margins, earning.

Earnings from operations totaled $5 $4 million compared with $1 $6 million in the first quarter of 2021.

Quarterly net earnings rose to $4 1 million or <unk> 42 per diluted share up $1 3 million or <unk> 14 per diluted share.

Last year's first quarter results continued to be impacted by the effects of the COVID-19 pandemic.

As such comparisons of first quarter 2022 financial performance to 2021 May have may have limited utility.

Therefore selected comparisons to 2019 are included as appropriate.

Net sales for the first quarter of 2022 exceeded 2019 levels by 10% our operating earnings also improved beating 2019 levels by 6%.

Net sales in the North American wholesale segment were a first quarter record of $67 $1 billion compared with $33 4 million in 2021.

With sales up across all of our brands.

Last year's first quarter sales of our legacy brands were lower than normal because of the pandemic.

Excuse me because of the pandemic significantly impacted demand for dress and dress casual footwear.

The wholesale segment experienced significant growth in the first quarter of 2022 with net sales, surpassing 2019 levels by 13%.

Wholesale gross earnings were 30% of net sales in the first quarter of 2022, compared with 34, 5% of net sales in 2021.

The decrease in gross margins was primarily due to higher inbound freight costs as we continued to pay premium rates during the quarter.

Wholesale gross margins are expected to improve in mid to late 2022, as the supply chain stabilizes and negotiated price increases with customers go into effect.

Sure.

Wholesale selling and administrative expenses were $15 3 million for the quarter compared with $10 2 million in last year's first quarter.

The increase was largely due to higher employee costs as the company sales volumes have increased.

Additionally, last year's first quarter expenses were reduced by $1 $8 billion in government wage subsidies.

As a percent of net sales selling and administrative expenses were 23% in 2022 and 31% in 2021.

Expenses were down relative to sales because many of our costs do not vary directly with sales.

Wholesale earnings from operations Rose to $4 8 million for the quarter up from $1 $4 billion in the first quarter of 2021 due to higher sales, partially offset by lower gross margins and higher selling and administrative expenses.

Net sales of our North American retail segment, where a first quarter record of $7 9 billion compared with $5 $6 million in 2021.

Same store sales rose, 39% due to a 38% increase in ecommerce sales with sales up on all brands websites and higher brick and mortar sales.

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

Retail net sales in the first quarter of 2020 to surpass the 2019 levels by 41%.

While most of the increase was driven by e-commerce growth brick and mortar sales at our four remaining locations also collectively exceeded 2019 levels.

Retail gross earnings as a percent of net sales were 65, 9% and 65, 3% in the first quarter of 2022 and 2021, respectively selling.

Selling and administrative expenses for the retail segment were $4 4 million for the quarter compared with $2 9 million last year.

The increase was primarily due to higher e-commerce expenses, primarily freight and advertising.

Retail operating earnings were $828000 for the quarter compared with 756000 last year.

The increase was primarily due to improved performance at active brick and mortar locations.

Earnings from our E Commerce businesses were down slightly for the quarter as increased sales were offset by the higher expenses.

Our other operations have historically included the wholesale and retail businesses of Florsheim, Australia and Florsheim Europe . However, as previously disclosed the company has closed florsheim Europe and is in the final stages of winding down this business.

As a result of 2022 operating results of the other category reflect only that of Florsheim Australia.

Other net sales for the first quarter totaled $6 4 million compared to $7 $9 million in 2021.

The decrease was due to the closing of Florsheim, Europe and lower sales in Florsheim, Australia.

Australia net sales fell 8% for the quarter with sales down in both its wholesale and retail businesses the.

The weakening of the Australian dollar relative to the U S. Dollar also contributed to the decrease as Florsheim Australia's net sales in local currency were only down 2%.

Retail sales in Australia, which account for a majority of Florsheim, Australia sales were up 7% for the quarter in local currency, but these results were offset by lower sales in Asia due to the additional lockdowns imposed in Hong Kong during the quarter.

Florsheim Australia's net sales for the first quarter of 2012, 2022 reached 89% of 2019 levels.

Other operating losses totaled $243000 for the quarter versus operating losses of 481000 last year.

The improvement between periods was primarily due to the shedding of losses at Florsheim Europe .

At March 31, 2022, our cash short term investments and marketable securities totaled $34 $34 million and there were no amounts outstanding on our revolving line of credit.

During the first three months of 2022, we generated $231000 of cash from operations and liquidated $8 $1 million of investment securities.

We used funds to pay $2 3 million in dividends and repurchased $1 $8 million of our company stock.

We also had $352000 of capital expenditures.

We estimate that our 2022 annual capital expenditures will be between two and $3 million.

On May three 2022, our board of directors declared a cash dividend of <unk> 24 per share to all shareholders of record on May 27th 2022 payable on June 32022.

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

Thanks, John and good morning, everyone.

We continue to be very pleased with the strong results of our wholesale business with a 13% gain over 2019. This.

This performance resulted in first quarter wholesale sales for the company.

As two of our brands I'm sorry. This performance resulted in record first quarter wholesale sales for the company as two of our brands portion of that box registered individual record first quarter sales.

<unk> sales rose, 72% for the quarter, which is on top of a 17% annual increase last year.

Part of the reason for the strong increase as we were in a much better overall inventory position on classic bonds product versus 2021.

Sales would actually have been higher if not for some supply chain delays on lighter weight spring products.

<unk> has been on a very strong run and we feel good about the mix of classic and lifestyle products in our backlog and look forward to a strong second half of the year.

We are very excited about our momentum and the additional opportunities that retailers big box to expand their room.

This bodes well for the future.

Regarding the legacy brands the.

Comparison to last year is not relevant since much of the country was still restricted from a social event work perspective.

However in comparison to 2019 two of our three legacy brands had strong increases.

The aforementioned record for florsheim with a 17% increase over 2019 as well as a 24% increase for Nunn Bush.

<unk> sales were 80% of 2019 levels in many instances we are still filling the pipeline with our major retail partners and we anticipate we'll be chasing inventory due to supply chain disruptions with certain footwear packages into the second half of 2022, the good news.

Is that we continue to experience strong sell throughs at high average unit retails.

Even as the inventory at retail works back toward more normalized levels.

The dress and refined casual markets remain particularly robust with record social events on the calendar and the gradual return to in office work environment.

While we are selling a significant amount of dress shoes, we realized that eventually the market will return to a more normalized level as med restock their closets.

Excuse me as mentioned in previous conference calls are designed emphasis during the pandemic has been to further develop the casual side or legacy business in keeping with the particular DNA of each brand.

We are encouraged by our progress to date and very much has a casual profile.

And both Stacy Adams Florsheim are increasing their casual mix. This period of time has allowed us to move down the learning curve and expand our casual range with the realization that the post pandemic world will likely embrace a more relaxed lifestyle. We know we're picking up market share of the tailored side of the business and our objective is to.

Also increase our penetration of men's casual business over time.

We had strong growth in the retail business driven by a 38% increase in our E. Commerce segment, while we are up significantly in sales one caveat is that higher ecommerce shipping and advertising cost reduced our profitability. We are working to mitigate these cost increases these cost increases while maintaining a solid growth.

Factory as Internet sales are an important piece of our future business model. We are very pleased that our four remaining brick and mortar stores had solid performances with an increase versus 2019.

Regarding <unk>, Australia, which includes New Zealand the Pacific brand in South Africa, our sales were down 8% the amacrinal outbreak in Hong Kong and the Pacific rim significantly reduced both wholesale and retail sales in that region. However.

However, our business in Australia, and New Zealand markets was actually up slightly in local currency, even with the increased case count versus nearly zero case level for the same period in 2021.

We are encouraged that retail traffic increased as the quarter progressed, and we believe that our position is strengthening in this market.

As mentioned previously the pandemic has enabled us to reset our business model on the Australian continent.

A combination of more manageable leases ecommerce growth and the continued growth of our bogs, Australia business puts us in a much better position to achieve a profitable year profitable year in that region.

Our overall inventory levels were $62 1 million as of March 31, 2022, compared to 47 three at the end of March 2021.

We are continuing to build our inventory levels as required to support the increased demand for our products. Our total gross margins for the quarter.

35, 8% down from 41, 2% in 2021, our North American wholesale gross margin for the quarter was 30% down from 34, 5% a year ago shipping costs continue to put pressure on our margins. However, as discussed during last quarters call. We have another price increase.

Taken effect in July , which will help our margins Fortunately.

Our revenues for the quarter were high enough to produce an increase in total gross margin dollars compared to 2019.

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.

Thank you again as a reminder to ask a question you will need to press star one on your telephone again Thats Star one and you touched on telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster once again Thats star one on you touched on.

Telephone.

And our first question.

It comes from the line of David Wright of Henry investment.

Your line is open.

Hi, Ed good morning.

Can you talk about.

Size of the price increases that you're.

Youre implementing percentage wise.

Sure I mean, we've had a few.

Two different price increases we started raising our prices.

In the fall of 'twenty, one and have continued throughout this year. So we've had.

A number of price increases the first one was in the range of 8%.

The second I would say that to give you a ballpark number all in we've probably raised our prices in total around 15%.

Okay.

And just in terms on the input side. So freight rates are up can you put any context on that.

It used to cost is $2 to get a pair of shoes to the stage now where cost is $3 surely content that way, yes, yes, yes.

We spend a lot of time looking at that.

And basically pre pandemic.

Freight from from Asia.

Cost roughly $1 10 up here that was what we used as an accounting cost today freight from Asia.

As roughly $3 75 prepare.

From India.

It's been a little bit higher it was $1 15.

Pre pandemic has probably gone up closer to $4 and so those numbers are pretty close to what we're paying right now and we're hoping eventually that goes down but right now that's that's where it stands and so they've quadrupled.

Okay and then my last question again kind of around the inflation seen.

In terms of.

The raw materials to have your shoes made any.

Any particular pressure points with particular materials.

As far.

I mean, I don't think so you were asking.

Our shirt materials coronale more drastically.

I'm sorry.

Inflation affecting.

What it cost you to making sure the way its effective way to cause somebody to build something.

As you know other raw materials like steel et cetera.

Absolutely I mean, we're seeing raw material increases.

Across the board that situation has stabilized I mean, the big increases were really.

In the middle of 2021, and we've had some subsequent increases, but it's stabilized quite a bit and so we're not getting a lot of increase increases today on raw materials, but.

When you go back to last year.

We had increases on the chemicals that we use for finishes we had increases on the materials that we use for bottoms and foot beds and mid <unk> you had labor increases overseas.

Which had an impact and so it was really it was really pretty much across the board and Fortunately.

The increases.

We're somewhat manageable I would say compared to what we've seen in other industries and really when you analyze it the freight increase.

As the most problematic.

Interesting well.

Lippo group results and so coming out of the Port then there is a small store.

Paul.

Stable.

Too many negative surprises so.

Thanks for taking my questions. Thanks for your questions and your nice comments. Thank you.

Thank you once again to ask a question. Please press star one on your touched on telephone again Thats Star one on your Touchtone telephone to ask a question.

Next question comes from John <unk> of Pinnacle. Your line is open.

Good morning, everyone.

Hi, John .

Solid quarter and I just have a couple of quick questions regarding the.

Prior discussion of price increases, we're reading a lot about.

Consumers and therefore, some retailers pushing back against.

Nice increases.

I'm just wondering if youre seeing any of that yet amongst your customer base.

No we really arent.

Really we are not feeling pushback for the reason that when you look at.

What the retailers are selling our product for their margins are better than ever and we.

John We get reports every week from all our major customers and we're able to look at our sell throughs on each individual shoe that we have and those retailers as well as what the sell through percentages and what the out the door prices are.

And so right now retailers are reached the retailers that we saw at least in the channels that we sell are healthier than ever from the standpoint of what the margin is that they're getting even with some of the higher prices that we're charging and so I think.

The general realization in our industry is that there is a lot of inflation.

They are accepting the higher prices, they're raising their retails and it's working out now.

The question in the back of everybody's mind is what is the consumer going to say I'm not going to pay X Y Z for a pair of shoes and so we're trying to be as cautious as we can we're fighting back at all the price increases we're doing whatever we can to mitigate those but so far we have not had a problem.

Passing on price increases, which I think is the main question alright, Okay and the price increase you mentioned that occurs in July how much will that be.

For one the what the exact percent it's difficult for me to give you, but I would say.

It's roughly in the.

The 5% range and then we actually are raising prices again as we saw in spring and so we've been doing this in a.

Gradual way I guess and part of that is because our lead times for selling and are so long that it takes us a while to catch up but.

I would say is the one for falls in the neighborhood of 5%. Okay. Thanks, that's helpful.

<unk> is doing very well as you mentioned.

I would guess those shoes are in transit for the fall.

I'm just curious.

The anticipated bottlenecks.

For bogs.

Youre going to have full representation on the shelves by the time the fall comes.

We hope so.

We we buy bonds very early and so in fact, whereby all of the brands early anticipating that there will be bottlenecks.

The situation I would say with the supply chain.

As a little bit better, but thank you always have new things that pop up I mean, right now in China as I'm sure you've been reading, they've got pretty bad Covid and some of the larger cities and so that's impacting some of the ports right now all of our factories are still making shoes in China, but it's more challenging.

LNG to get the shoes to the port in some ports in some areas. So we're monitoring that very carefully but.

I think.

The key thing is.

We've gotten much better as a company at navigating all of this and we've pulled all of our timelines for buying footwear forward a lot of the retailers are working with us and giving their orders earlier and if theyre not well, we're speculating a little bit more than normal, but the only way you can really ensure that youre going to have shoes.

Ty.

For the seasons in this case Paul.

By really early anticipating that.

Transit times are going to be double because thats, what they are bad and that you could have other things pop up and so we're just trying to just bring in product as soon as possible and where we have the pipeline very full between the factories in Asia, and Milwaukee and we're still getting in a lot of contain.

<unk> every day and building our inventories here.

Okay. So.

So you are confident that there won't be any issues.

Getting the shoes in time for fall at this point in time.

Yes.

I feel that we've done everything possible, John but there are some uncertainties still because obviously if China.

If China is they have the zero tolerance policy, which with Abercrombie just hasn't worked very well.

If things get a lot worse over there they start shutting down cities, where we make shoes.

Could have an impact we're really hoping that doesn't happen.

We've got a great flow of shoes write downs boots right now so.

I would say.

Pretty confident but I can't give you a 100% on that okay.

I understand.

Q1 2022 WEYCO Group Inc Earnings Call

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