Q2 2022 WEYCO Group Inc Earnings Call

August 3, 2022

Okay.

Good day and thank you for standing by welcome to the second quarter 2022 earnings 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 to ask a question. During this session you will need to press star one one on your telephone please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to Judy Anderson Waco Group Chief Financial Officer. Please go ahead.

Thank you Amy.

Good morning, and welcome to Waco Group's conference call to discuss second quarter 2022 earnings.

This call with me today is Tom Florsheim Junior Chairman and CEO .

Before we begin to discuss the results for 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 events or 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 include.

<unk> the uncertain impact of inflation on our cost and consumer demand for our products.

The continuing direct and indirect effects of COVID-19 pandemic.

Pandemic in the U S and Asia.

Yeah.

Overall net sales were a second quarter record of $74 $4 million up 29% compared to $57 $6 million in 2021 consolidated gross earnings were 40% of net sales compared to 39, 4% of net sales in last years.

<unk> quarter with gross margins up in both our north American wholesale and retail segments.

Earnings from operations Rose, 25% to $5 7 million from $4 $5 million in the second quarter of 2021.

Quarterly net earnings rose to a second quarter record of $4 $5 million or <unk> 47 per diluted share from $3 8 million or 39% per diluted share in 2021.

Net sales in the North American wholesale segment were a second quarter record of $59 million up 41% from net sales of $41 9 million in 2021.

Robust demand fueled the growth in our wholesale segment with all of our brands posting sizable gains over last year.

Wholesale gross earnings were 33, 7% of net sales in the second quarter of 2022 compared to 32, 4% of net sales in 2021.

Gross earnings improved as spring 2022 price increases took effect and due to lower inbound freight costs as overall demand for container space from China eased during the quarter.

Wholesale selling and administrative expenses were $15 $7 million or 27% of net sales for the quarter compared to $10 $9 million or 26% of net sales last year.

The increase was largely due to higher employee costs associated with the company's increased sales volumes.

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

Wholesale operating earnings rose to $4 $2 million in the second quarter of 2022.

58% from $2 $7 million last year, mainly due to higher sales volumes and gross margin.

Yeah.

Net sales of the North American retail segment, where a second quarter record of $7 4 million up 20% from $6 2 million in the second quarter of 2021.

The increase was primarily due to higher sales volumes across all our e-commerce websites or E. Commerce businesses continue to reflect the strength of our brands.

Retail gross earnings as a percent of net sales were 67, 4% and 65, 6% in the second quarters of 2022 and 2021, respectively.

Retail gross margins benefited from higher selling prices and lower inbound freight costs. This year.

Selling and administrative expenses for the retail segment totaled $3 $9 million for the quarter compared to $2 $9 million last year.

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

Retail operating earnings were $1 1 million for the quarter down 5% compared to $1 $2 million last year. The decrease was primarily due to lower earnings from our e-commerce businesses as higher sales were offset by higher selling and administrative expenses.

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

As a result, the 2022 operating results of the other category reflect only that a poor shame Australia.

Other net sales for the second quarter totaled $8 million down 16%.

Compared to $9 $5 million in the second quarter of 2021. The decrease was largely due to the closing of Florsheim Europe , but also due to a 4% decline in net sales at Florsheim Australia.

The weakening of the Australian dollar relative to the U S. Dollar led to this decrease as florsheim Australia's net sales in local currency were actually up 4% for the quarter due to higher sales in its retail businesses, partially offset by lower sales in its Holt Holt.

Sales division.

Yeah.

Other operating earnings were $365000 for the quarter versus $718000 last year. The decrease was primarily due to lower operating earnings in Australia wholesale division.

At June 32022, our cash short term investments and marketable securities totaled $17 million and we had $5 4 billion outstanding on our $40 million revolving line of credit.

During the first six months of 2022, we drew five $4 million on our line of credit and liquidated $8 $1 million of investment Securities. We used funds to pay $4 6 million in dividends and to repurchase $2 $5 million of our company stock.

In addition, our operations resulted in a net $18 7 million use of cash mainly to fund inventory purchases.

We also had approximately $722000 of capital expenditures.

We estimate that 2022 annual capital expenditures will be between $1 million and $2 billion.

We have further drawn on our line of credit since June 30, and we expect our borrowings to peak over the next several months as we continue to build inventories.

However, we anticipate a busy shipping season in the third and fourth quarters, which should then cause our cash collections to exceed cash outlays and bring our borrowing balances back down to more normal levels.

On August 2nd two.

2022, our board of directors declared a cash dividend of 24 per share to all shareholders of record on.

<unk> 2006, 2022 payable September 30th 2022, I would now like to turn the call over to Tom Florsheim, Jr. Our chairman and CEO .

Thanks, Judy and good morning, everyone. We continue to be very happy with the strength of our wholesale business, which had an overall sales increase of 41% versus last year and a gain of 28% over 2019, while a portion of our large wholesale increase was the result of a pipeline fill overall consumer.

Demand in retail sell throughs remain robust, especially when compared to 2019 levels. While we are mindful of possible changes in the consumer mindset due to macroeconomic pressures. We are confident in the position of our branded portfolio as we head into the back half of 2022.

Additionally, we are pleased to report that the lion's share of supply issues are behind us as we move into our important shipping period.

The necessary inventory to meet our backlog.

Our <unk> sorry, our legacy Division.

Posted significant increases in shipments with bulk portion of a sushi items up 47%.

And Doug Busch of 25% over 2021.

All three brands are sort of child gains over the second quarter of 2019.

We continue to experience strong demand for dress shoes, and refine casuals with the normalization of social grants and a gradual return to the office.

The dress category has been primarily responsible for increasing volume. We're also excited about the progress we've made in the casual area.

Half of what we saw today and Doug Busch, our true casuals and the new casual offerings, we have sold at Florsheim Stacy Adams.

<unk> to pick up more closet share as a company.

It is clear.

With the increase of pricing across many basic consumer goods. There is more competition for discretionary household income. Nevertheless, so far the dress category is a bright spot in the apparel world and we are optimistic that this trend will continue throughout the year.

In our outdoor division bogs sales were up 35% and 59% over 2021 and 2019, respectively.

We entered the second quarter at a much stronger inventory position in comparison to 2021, which helped US realize higher shipments were also continued to expand our assortment of <unk> and <unk> products to increase market penetration during the spring season.

While we hit our fair share of supply chain delays in 2021 during the final quarter of 2021 box was able to ship well compared to competitors many of which delivered very late in the season.

The end result is that many accounts rewarded bonds with large Paul with large orders for fall 'twenty two.

As well as an expanded product range, especially in more lifestyle oriented footwear.

We currently have a record backlog for bogs and we expect strong shipments in the back half of this year with the caveat that box shipments are still somewhat dependent on favorable winter weather.

Regarding our other outdoor division brand for sake, we're still in the process of evolving the product and positioning the brand supply chain issues have slowed the process and we do not expect significant progress into the back half of 2023 at the earliest.

Retail sales were up 20% for the quarter. The increase in retail sales was driven primarily by e-commerce, although our brick and mortar stores were also up versus last year volume.

We were happy about the strong consumer demand, but we were disappointed about the 5% decrease in profitability due mainly to higher outbound freight and advertising costs, we are taking steps to better manage our retail SG&A, while balancing the current momentum we haven't with our E Commerce platform.

Sales or portion of Australia were down 4% for the quarter, but local currency sales were up 4% in May we began the transition to a new warehouse and office space in Melbourne.

Interrupted our wholesale shipments retail store stocks and limited our available ecommerce inventory for a good part of May or June and a portion of July .

Our Australia team excellent work planning and executing the move is reflected in the fact that we were able to increase sales in local currency terms and be profitable for the quarter.

We are very pleased with the resiliency of this business, especially given that Australia is in the midst of a significant uptick in Covid cases.

With the move now largely behind US we feel we're in a good position to grow this market for the long term.

Our overall inventory level was $95 $5 million as of June 32022, compared to 39 billion.

$4.

At the end of June 2021.

We're making good progress building our inventory back after reducing it during the pandemic as we've explained in previous Investor calls.

For the supply chain issues, only about 10% to 20% of our inventory was in transit. So historically, we did not describe the portion of our inventory.

That was a transit of the $95 $5 million of approximately 40% or one 9 million peers was in transit.

While our.

Approximately 60% or $2 7 billion peers was on hand in our distribution Center Transit times remained very inconsistent containers from Asia. So it is necessary to have our factory ship, our shoes and boots earlier than usual for the fall season.

You will see our inventory continue to grow through the second half of the year to meet increased demand for our products as we build our inventory levels, we are focusing on greater and our core carryforward product is this is the product that retailers replenish on a weekly basis and expect us to have a strong in stock position.

Our overall gross margin for the quarter was 40% compared to 39, 4% in the second quarter of 2021 gross margin improved due to price increases and lower inbound freight costs the longer term outlook for freight costs remains unclear.

We instituted another price increase in July which will move us toward our goal of returning gross margins to our historical levels. This.

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.

As a reminder to ask a question you will need to press star one one on your telephone.

Yes.

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

Okay.

And again it'll be press star one one.

Okay.

All right. Our first question comes from the line of.

John <unk> from Pinnacle.

Good morning, everyone.

Good morning, Hi, John .

Just curious.

We're approaching.

Key.

Back to school season, and I know, that's not a big part of your business, but I guess overall what are you hearing from your retail.

Base in terms of yield.

People are burdened with high inflation for just about everything and Im just wondering what feedback you're getting from retailers.

Now as it applies to the shoe category.

Yes, I mean, your first statement was correct Jon.

Our business is not really driven by back to school and so I don't have a lot of information regarding that.

What I've heard.

And the conversations that I've had with our people about what retailers are telling us that it has been a mixed back to school season. It has not been great.

<unk>.

I'm not sure really what's causing that.

It's been awfully hot across the country and I think that the other four.

Factor that influenced back to school selling over the last.

Several back to school seasons.

Is that it used to be that you would have to go out and buy your kids.

Whatever they need for score early because you were fearful that you wouldn't get it today with Amazon.

And all of the online.

The ability to buy everything I lied.

I think that that.

At.

People don't worry as much about not being able to get the products. They need so I think thats pushed back the timing a little bit. So I think to answer your question, but I've heard is it's been mixed.

Okay are you hearing anything about.

Holiday sales.

Come pretty quickly after back to school.

Any feedback from retailers regarding our holiday sale.

Yes, yes.

Yes, I think that in general retailers are very optimistic still about holiday and just in general about the second half of the year.

Okay. That's helpful.

Quick question on.

For sake.

What glitches occur there, we were hoping to see an impact sooner than the second half of 2023.

What exactly is happening with per se right.

For sake manufactured most of their product at one factory.

And we have diversified the factory base.

Going forward.

But for the spring season.

We're largely still.

Still at the original factory and the original factory shipped weight both for fall.

<unk> 21 in spring 'twenty two.

And so there really was very little new product in the market.

AD.

We are still having some issues.

With with.

Getting the product in here on time.

And we're we're going to be in a better shape for fall 'twenty two.

But the other thing that.

We are doing with the brand John is that were really retooling the bread.

Had a lot of platforms that were several years old and so.

What we're doing is we're running the forsake brand out of the same office in Portland.

Our buyers brand at our bogs merchandise people are very very good at product I think you've seen that in the results that we've shown with <unk> over the last basically decade and so.

We're doing some of the same type of work that we've done with Bob's with for sake, and we're broadening the product assortment.

Basically retooled the brand ad.

It has taken us a little more time honestly than we expected, but but we are going to have some new product out there for fall 'twenty two.

We're introducing some sandals for spring 'twenty, three and then youre going to see.

A big change as far as their assortment.

Being more a broader assortment going into the fall 'twenty three so we're really.

That is really when we're re launching the brand ad.

So unfortunately, it's just taken us longer than we expected and a lot of that is due to the supply chain and just Doug.

Issues, we've had getting in some of the product to market okay.

Are those supply chain slashed factory issues behind you at this point.

I would say that we've made progress they're not 100% behind us Okay, Alright fair enough.

And just a housekeeping question on the buyback of $2 $5 million during the quarter, how many shares was up.

Okay.

One second Judy will get that debt number.

Okay.

Yeah.

There was.

29 point.

<unk> Im sorry, 29000, 629600, sorry, the $2 5 million.

Okay great.

Alright, that's all I have thanks and good luck.

Alright, Thanks John .

As a reminder to ask a question you will need to press star one one on your telephone.

Showing no further questions at this time I would now like to turn the conference back to Judy Anderson for closing remarks.

Just like to say, thank you everyone for participating in our call today and I Hope you have a good day.

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

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Good day and thank you for standing by welcome to <unk> second quarter 2022 earnings 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 to ask a question. During this session you will need to press star one one on your telephone please be.

Advised that today's conference is being recorded I would now like to hand, the conference over to Judy Anderson Waco Group Chief Financial Officer. Please go ahead.

Okay.

Thank you Amy.

Good morning, and welcome to Waco Group's conference call to discuss second quarter 2022 earnings.

This call with me today is Tom Florsheim Junior Chairman and CEO .

Before we begin to discuss the results for 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.

<unk> performance of the company.

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

<unk> the uncertain impact of inflation on our cost and consumer demand for our products and the continuing direct and indirect effects of COVID-19 pandemic.

Pandemic in the U S and Asia.

Okay.

Overall net sales were a second quarter record of $74 4 million up 29% compared to $57 6 million in 2021 consolidated gross earnings were 40% of net sales compared to 39, 4% of net sales in last years.