Q2 2025 Weyco Group Inc Earnings Call

Speaker #2: Good day, and thank you standing by. Welcome to the WEYCO Group second quarter 2025 earnings release conference call. At this time, all participants are in a listen-only mode.

Speaker #2: 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-one on your telephone.

Speaker #2: You will then hear an automated message advising your hand is raised. To withdraw your estion, please press star one-one again. Please be advised that today's conference is being recorded.

Speaker #2: I would now like to hand the conference over to your first speaker today, Judy Anderson, Chief Financial Officer. Please go ahead.

Speaker #3: Thank you. Good morning and welcome to WEYCO Group's conference call to discuss second quarter 2025 results. On the call with me today are Tom Florsheim Jr., Chairman and Chief Executive Officer, and John Florsheim, President and Chief Operating Officer.

Speaker #3: Before we begin to discuss the results for the quarter, I will read a brief cautionary statement. During 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.

Speaker #3: 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 10K, which provides a discussion of important factors and risks that could cause our actual results to differ materially from our projections.

Speaker #3: These risk factors are incorporated herein by reference. They include in part the uncertain impact of US trade and tariff policies, which remain highly dynamic and unpredictable.

Speaker #3: The impact of inflation on our costs and consumer demand for our products, increased interest rates, and other macroeconomic factors that may cause a slowdown or contraction in the US or Australian economies.

Speaker #3: Overall net sales for the second quarter of 2025 were 58.2 million dollars, down 9% compared to 63.9 million dollars in the second quarter of 2024.

Speaker #3: Consolidated gross earnings were 43.3% of net sales, compared to 43.9% of net sales in last year's second quarter. Earnings from operations were $3.9 million for the quarter, down 42% from $6.7 million in the second quarter of 2024.

Speaker #3: Net earnings totaled 2.3 million dollars for the quarter, down 60% from 5.6 million dollars last year. Our net earnings were negatively impacted by lower operating earnings and a 1.1 million dollar adjustment to our quarterly income tax provision.

Speaker #3: Diluted earnings per share were 24 cents per share in the second quarter of 2025, and 59 cents per share in last year's second quarter.

Speaker #3: Net sales in our North American wholesale segment totaled 45.6 million dollars for the quarter, down 9% from 50.3 million dollars last year. Sales were down across all our brands and in most major categories.

Speaker #3: A slowdown in consumer spending amid economic uncertainty has prompted retailers to take a more cautious approach with buying and managing their inventories. Wholesale gross earnings as a percent of net sales were 37.6% and 38.2% in the second quarters of 2025 and 2024 respectively.

Speaker #3: Gross margins were negatively impacted by the effects of incremental tariffs. Wholesale selling and administrative expenses totaled 13.1 million dollars for the quarter, and 13.4 million dollars last year.

Speaker #3: As a percent of net sales, wholesale selling and administrative expenses were 29% and 27% in the second quarters of 2025 and 2024 respectively. The increase in expenses as a percentage of net sales was because many of our operating costs are fixed and do not vary with sales.

Speaker #3: Wholesale operating earnings totaled 4.1 million dollars for the quarter, down 30% from 5.8 million dollars in 2024, due mainly to lower sales and gross margins.

Speaker #3: Earlier this year, the US government enacted reciprocal and retaliatory tariffs collected to be referred to as incremental tariffs. On goods imported into the United States, the incremental tariff on goods sourced from China - which is where we source most of our products - reached a high of 145% in April, but was temporarily reduced to 30% on May 12th, 2025, for a 90-day period ending August 12th, 2025.

Speaker #3: It has not yet been announced if the China tariff will change at that time. The incremental tariff on goods we source from other countries, excluding China, were 10% throughout the second quarter 2025.

Speaker #3: Effective August 7th, 2025, the tariffs of three of those countries will increase to between 19 and 25 percent. We have taken various measures to minimize the impact of the incremental tariffs on our gross margins.

Speaker #3: These measures included proactively bringing in a large amount of inventory ahead of the tariff effective date, enabling us to temporarily halt our China imports while the incremental tariff rate was 145%.

Speaker #3: We negotiated factory cost reductions with several of our Chinese suppliers. We moved sourcing of certain footwear styles out of China and are continuing our efforts to diversify sourcing.

Speaker #3: Finally, as we mentioned in our previous call, we raised US selling prices effective July 1st, 2025. US trade and tariff policies currently remain fluid and unpredictable, and the specific tariff rates applicable to goods imported by our company continue to evolve.

Speaker #3: Therefore, despite our mitigation efforts on uncertainty still exists regarding the potential near-term impacts of incremental tariffs on our gross margins. We remain committed to adapting to changes in tariff policies and will adopt further mitigation strategies as needed.

Speaker #3: Net sales in ur North American retail segment were 6.8 million dollars for the quarter, down 11% from 7.6 million dollars in 2024. The decrease was primarily due to lower sales on our Florsheim and Stacey Adams websites, a result of lower consumer demand for footwear.

Speaker #3: Retail gross earnings as a percent of net sales were 66.6% and 67.5% in the second quarters of 2025 and 2024 respectively. Retail operating earnings totaled 100,000 dollars for the quarter versus 700,000 dollars in last year's second quarter.

Speaker #3: The decrease was due to lower sales and gross margins. Our other operations historically included our retail and wholesale businesses in Australia, South Africa, and Asia Pacific, collectively referred to as Florsheim Australia.

Speaker #3: We seized operations in the Asia Pacific region in 2023 and completed the wind-down of that business in 2024. Accordingly, second quarter 2025 results of the other category only reflect the operations of Australia and South Africa.

Speaker #3: Net sales of Florsheim Australia were 5.8 million dollars, down 4% from 6.1 million dollars in the second quarter of 2024. The weaker Australian dollar relative to the US dollar contributed to the decrease, as Florsheim Australia's net sales in local currency were down 2% for the quarter, driven by lower wholesale shipments.

Speaker #3: Florsheim Australia's gross earnings as a percent of net sales were 60.9% and 62% in the second quarters of 2025 and 2024 respectively. Florsheim Australia generated operating losses of 200,000 dollars for the quarter versus operating earnings of 200,000 dollars last year.

Speaker #3: Our consolidated effective tax rate was 51.1% for the quarter, versus 25.1% in last year's second quarter. The increase was due to the establishment of a 1.1 million dollar valuation allowance on deferred tax assets at Florsheim Australia, as it was determined more likely than not that these assets would not be realized.

Speaker #3: As June 30th, 2025, our cash and marketable securities totaled 83.8 million dollars, and we had no debt outstanding on our 40 million dollar revolving line of credit.

Speaker #3: During the first six months of 2025, we generated $14.4 million of cash from operations and used funds to pay $5 million in dividends.

Speaker #3: We also repurchased 3.1 million dollars of company stock and had 700,000 dollars of capital expenditures. We estimate that 2025 annual capital expenditures will be between 1 and 2 million dollars.

Speaker #3: On August 5th, 2025, our board directors declared a cash dividend of 27 cents per share to all shareholders of record on August 18th, 2025, payable September 30th, 2025.

Speaker #3: I would now like to turn the call over to Tom Florsheim Jr., Chairman and CEO.

Speaker #4: Thanks, Judy. And good ning, everyone. As Judy outlined, the tariff environment created headwinds that impacted both the top and bottom lines of our business.

Speaker #4: Excuse me. Coming into 2025, consumers were already feeling squeezed by affordability issues. Now the uncertainty around potential tariff-related price increases only added to their concerns about being able to cover everyday expenses.

Speaker #4: The end result is that people are pulling back from discretionary purchases and footwear is one of the areas where that shows up. At the same time, our wholesale customers are staying cautious with their inventory buys to avoid being caught with excess product and a shaky retail environment.

Speaker #4: It all adds up to a more hesitant and unpredictable market, which puts pressure on a business like ours and we're seeing that across all brands.

Speaker #4: The additional tariffs and the ongoing uncertainty around future tariff negotiations have impacted our short-term pricing model. Prior to 2025, 75% of our factory base was located in China.

Speaker #4: We are actively working to further diversify our supply chain while staying true to our company's reputation for delivering exceptional footwear that dollar for dollar represents one of the best values in the market.

Speaker #4: We are proud of the quality and value we provide across all of our brands, and our focus is squarely on maintaining that winning combination, which has been essential to our long-term success.

Speaker #4: Our combined legacy business was down 8% compared to last year's second quarter, with none bush off 11%, Stacey Adams down 10%, and Florsheim down 5%.

Speaker #4: While our brands are holding their own at retail, the overall men's dress, dress casual, and basic casual markets are under pressure. The traditional men's business is typically one of the first categories impacted in a slowing footwear market, as consumers delay replacement purchases and important part of our business.

Speaker #4: This category's softness, combined with retailers' cautious approach to inventory management, made for a tough quarter. Given current consumer sentiment, and the continued uncertainty around tariffs, we expect the challenging environment to persist through the second half of the year.

Speaker #4: In regards to our box business, the second quarter is typically our lowest volume period. Sales for the brand were down 14% compared to the second quarter of 2024, as consumer demand remained sluggish in the outdoor category.

Speaker #4: We are gearing up for a number of new fall product introductions including an expansion of our seamless construction, which is lighter than and more durable than traditional vulcanized rubber boot construction.

Speaker #4: In addition to diversifying box manufacturing away from reliance on China, we are also expanding the product line to be less dependent on cold weather demand.

Speaker #4: We now offer an enhanced assortment of lightly insulated styles as well as newly engineered products in the work category, which is a year-round business.

Speaker #4: Retail retailer inventories for outdoor footwear are now very clean, and we are cautiously optimistic that brand will gain traction in the second half of the year.

Speaker #4: Net sales in our retail segment were down 11% for the quarter, reflecting the tepid consumer environment. E-commerce site traffic for the majority of our brands increased year to date, but we're seeing a decrease in conversion rates.

Speaker #4: We believe consumers are more value-conscious than ever and increasingly focused on finding deals. As brand owners, we believe it's important to maintain pricing integrity and refrain from being overly promotional on our respective sites.

Speaker #4: In today's price-sensitive environment, consumers tend to comparison shop, and we may lose a purchase to a more promotional retailer. We are investing in tools to drive consumer engagement and reduce shopping cart abandonment in this competitive landscape.

Speaker #4: In terms of our international business, Florsheim Australia which includes Asia and South Africa, we saw net sales decline 4% for the quarter and 2% in local currency.

Speaker #4: Retail same-store sales were flat, and we fell short in our wholesale business. Our focus for our overseas division is getting is on getting our wholesale business back on track as well as finding efficiencies to reduce our SG&A.

Speaker #4: Our overall inventory as of June 30th, 2025 was 71.3 million compared to 74 million at December 31st, 2024. As discussed in previous calls, we brought our ventory levels up going into 2025 and anticipation of higher tariffs.

Speaker #4: With higher tariff levels currently in place, we are bringing our inventories down to normal level normal levels in terms of pairs. However, with the tariffs the dollar value of our inventory may increase.

Speaker #4: Our overall gross margins were 43.3% for the quarter compared to 43.9% last year. Until the US trade agreements are finalized, it's impossible to forecast the margin impact of the tariffs.

Speaker #4: As we get more information, we will continue to work continue our work to mitigate the impact of the tariffs by moving our supply chain and adjusting our prices.

Speaker #4: That concludes our formal remarks. Thank you for our interest in WEYCO Group, and I'd now like to open the call to your questions.

Speaker #1: Thank you.

Speaker #3: Thank ou.

Speaker #1: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one-one on your telephone and wait for your name to be announced.

Speaker #1: To withdraw your estion, please press star one-one again. Our first question: will come from the line of David Wright. Of Henry Investment Trust, your line is now open.

Speaker #5: Tom, John, Judy, good morning.

Speaker #4: Good morning, David.

Speaker #3: Thank you.

Speaker #5: I have, I have, two questions. can you at all quantify you ow the change in inventory as a result of the pre-purchasing that you did?

Speaker #5: We see where it is, where would it have been, and maybe, add a little more on what your inventory purchase plans are for the immediate future.

Speaker #4: So, I think that what what, what I was saying in the in the in conference call is that that that the inventory that we brought in, the extra inventory that we brought in, we've basically gone through a lot of that inventory.

Speaker #4: And so our inventories are getting back to normal levels in terms of pairs. I would expect that in terms of dollars, we're going to be in the 70 to 75 billion dollar range.

Speaker #4: You know, which when you look at historically at our ventory levels, you know, it ranges, I an, when you go back to that when the when we had the supply chain issue, it ballooned to 120 million.

Speaker #4: But it's it's gone typically between 65 and 75 million. The thing that we the thing that, is a little bit uncertain is you know, you add a 30% tariff to the goods that we're bringing into China, and that increases the the value of the inventory because it's in the cost of the inventory.

Speaker #4: And so that is the big unknown. So I'm not sure if I'm really answering your question with all that, but so I'm happy to elaborate if there's something I missed.

Speaker #5: Yeah, I think what you said basically is that I, and you're likely right, Judy?

Speaker #3: That is correct.

Speaker #5: Yeah. So what you're basically saying is the pre-purchasing that you did, the the benefit of that kind of is in your first six months results.

Speaker #5: And you know, we'll kind of in Brave New World here. Your inventory is kind of where you'd want it to be, at around $70 million, and not quite sure what's going to happen because no one's quite sure what's going to happen.

Speaker #5: I kind of that's what I take way from it. Does that sound right?

Speaker #4: That's correct. That's a good interpretation. Yes.

Speaker #5: Okay. Okay.

Speaker #4: And then my second question is you know, you you started this diversification away from China. when tariffs started on China, and if I'm not mistaken, you went to India.

Speaker #4: And and if if I'm not mistaken, that's kind of a tough place to be in right now. That is correct. we we didn't just go to India, though.

Speaker #4: we we we diversified to Vietnam, Cambodia, and India. and so you know we're we're we're going to have to wait and see what happens with India.

Speaker #4: Right before we got on this call, Trump, President Trump, announced extra 25% penalty for for buying Russian oil. So that increases the tariff in India to 50%, which is is is not easy to manage.

Speaker #4: but what we have been able to do, is really decrease our reliance on China. So when we look at our open order today, where we were 75% China, we're down to about 60% China.

Speaker #4: India represents about 14%. Vietnam is about 10%. Cambodia is about 10%. And then we have a little bit from other countries like the Dominican Republic.

Speaker #4: And you know we're really taking kind of a methodical approach to this because you know as I talked about in the conference call, we want to make sure that we protect the quality and also the delivery of our product.

Speaker #4: And so you know we've expanded to some new factories. We've increased our production in some existing factories in places like Cambodia. And now we want to keep an eye on how things progress, and then we'll shift production accordingly.

Speaker #4: But we're definitely we've made definitely made good progress in establishing a bigger footprint outside of China. That we can then grow. And so we're going to do this over the next year or two.

Speaker #4: You know it's going to take some time, and as far as India goes, you know a lot of that product is dual-sourced. And so we're making the same product in China as we're making it in India.

Speaker #4: And so if the Indian tariffs get unmanageable, we're going to to shift more product back to China, and those particular shoes. So I think that, David, we know as well as anybody, I guess, how to navigate this situation.

Speaker #4: You know we've been importing for a long time. We have good relationships overseas. And we're just kind of doing this as the tariff situation evolves, we're going to continue to make changes.

Speaker #4: But you know, our feeling is that we're in a good position to navigate through this. You know, we know what we're doing.

Speaker #4: From the standpoint of importing and we've got such a strong balance sheet that we can we can weather the storm.

Speaker #5: Well, that's a really helpful explanation. And you know whenever this is over, it'll just be another chapter in the long book of the history of the company and its ability to operate through all kinds of circumstances.

Speaker #5: Great to talk to you all, and thanks for taking my estions.

Speaker #4: Thank you.

Speaker #5: Thanks, David.

Speaker #3: Thank you.

Speaker #1: Thank you. Our next question comes from John Dasher of Pinnacle. Your line is now open.

Speaker #6: Good morning. Thanks for taking my estion.

Speaker #4: Hi, John.

Speaker #6: Yeah. Hi. You mentioned the wholesale customers are reticent about ordering too much inventory. I was just curious about the quality of the wholesale customers' the creditworthiness of them.

Speaker #6: Are you seeing anything at this point in terms of distress or anything like that for any of your wholesale customers?

Speaker #4: Yeah. I think John's going to take that question. We're going to have to be a ittle careful about naming not naming specific retailers, but John, why don't you?

Speaker #5: Yeah. In general, I mean, we're I mean, our antenna is up. You know given the shaky retail environment, but at this as well and we can keep very close track of this.

Speaker #5: At the moment, none of our major customers are you know in an immediate danger from a credit you know a creditworthiness standpoint. But it's something that we're ching.

Speaker #5: You know because there's a lot of unknowns in this market.

Speaker #6: Okay. And what's the approach should warning flags start to fly? Do ou cut them off immediately, or gradually phase them out, what's your approach to

Speaker #4: It depends upon the ation. I mean, we try work as best we can with our retailers. But we also are cognizant of realities that are out there.

Speaker #4: You know so in conjunction with Tom said about navigating our manufacturing base, it's the same thing. In terms of looking at the credit landscape, you ow we've been doing this a long time, and you just you know, you don't want to ut off your business.

Speaker #4: You want to keep it going, but you also have to be realistic about any changes there on the marketplace.

Speaker #6: Okay. Fine. That's helpful. The second question, from a bigger picture standpoint, what's the strategic importance of Florsheim Australia at this point? My understanding is it's a handful of retail stores.

Speaker #6: It's mostly retail-oriented. It's not wholesale-oriented. Why is that important to the business going forward? I mean, the last few years have been profitable, but there's been some years where it's not profitable.

Speaker #6: And I'm just wondering you know is that a long-term business you want to be in going forward?

Speaker #4: I think that it is, John. We've been in Australia for 50-plus years. And we really dominate that market. We have about 30, Florsheim stores in Australia and one in Auckland, New Zealand.

Speaker #4: And over the history, we've made we've made a profit. You're correct that the last the last several years have been choppy. But we have right before the pandemic, we hired a new president.

Speaker #4: He was doing an excellent job. We have a strong team down there. They face some of the same issues we've had with consumer sentiment, inflation, and everything else down there.

Speaker #4: But we think that we have a a good a really good base. And I think that we're doing things in s of of the wholesale business, which is a leg of the business that we need, and we've we've backtracked a bit.

Speaker #4: But we think if we can get the wholesale business going, and continue to to grow the retail business in a in a in a moderate way because we're we're we're we're we you have to be careful that you don't get too many stores in a market like that, we're going to have decent profitability.

Speaker #4: I mean, that's our expectation. And if you go down to Australia, if you ever have a chance to visit country, you're going to e that Florsheim shops really are the main shoe shops in our segment of the market.

Speaker #4: And so I think that we just want to you know we want to protect that business because have such a great market share.

Speaker #6: That's interesting. Okay. So most of the revenues from Australia, or retail-oriented this 30 or so stores that you own and operate in Australia.

Speaker #4: And we have an SG e-commerce business as well as well that we're that we're growing. So there's you know there it's a you know it's like as Tom said, it's a the market has its challenges, but we do have a really strong brand name, and there's you know certain areas of the business that we feel that we can continue to grow.

Speaker #6: Okay. That's helpful. And is there what's the presence in South Africa? I don't see much about that.

Speaker #4: It's mostly a wholesale it's it's mostly a wholesale business. We one retail store. It's a profitable business for us. Again, it's a situation where we've been in the market a long time.

Speaker #4: It's a y strong brand name. And you know we want to continue to hold onto our market share there.

Speaker #6: Okay. And what's the percentage that comes from South Africa of revenues?

Speaker #4: Of the percentage of the total business would probably be about 10%, right? Of. Percentage of Australia business, it's probably actually more like 20%.

Speaker #6: 20%. And 80% from Australia. Okay. All right.

Speaker #4: Yeah. Well, and also, you ow John, just one other clarification. We've talked this in previous calls, but when we closed our Asia Pacific business, we we have maintained one piece of that business, which is is the wholesale piece.

Speaker #4: And so we have some good accounts. We have very good count in the Philippines. We have some good accounts in Hong Kong. And we are continuing to maintain and try to grow that business.

Speaker #4: Instead doing that from our office in that used to be in Hong Kong, we're doing that from our office in Melbourne. So that's another piece of that business that we see opportunity in.

Speaker #4: We have a very good Florsheim business in the Philippines, for ample.

Speaker #6: Okay. Okay. Okay. Good. That's good color. I reciate the comments.

Speaker #4: Sure.

Speaker #1: Thank you. Again, as a reminder, to ask a question, you'll need to press star one-one on your telephone. One moment, please. I am showing no further questions at this time.

Speaker #1: I would now like to turn it back to Judy Anderson for closing remarks.

Speaker #3: Just wanted to say thank you, everyone, and I hope you have a great day.