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spk00: Ladies and gentlemen, thank you for standing by, and welcome to the Waco Group first quarter 2021 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 the question during this session, you will need to press star then one on your telephone. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, John Witkowski, Chief Financial Officer. You may begin.
spk02: Thank you. Good morning, everyone, and welcome to Waco Group's conference call to discuss our first quarter 2021 results. On this call with me today are Tom Florsheim, Jr., our Chairman and CEO, and John Florsheim, our President and COO. Before we begin to discuss the results, I will read a brief disclaimer. During the course of this call, we may make projections or other forward-looking statements regarding our current expectations concerning future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to Waco Group's most recent Form 10-K, 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 company's actual results to differ materially from our projections. With respect to the 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. Actions taken by governments, such as stay-at-home and similar orders that, among other effects, require retail store closures or limit foot traffic, the financial health of the company's customers and the business partners, including the effects of any bankruptcy proceedings by such parties, the performance of the company's supply chain, and the health and welfare of the company's employees. Additionally, some comparisons may refer to non-GAAP measures. Our SEC filings may contain additional information about these non-GAAP measures and why we use them. Net sales for the first quarter of 2021 were $46.9 million compared with first quarter 2020 net sales of $63.6 million. Operating earnings increased to $1.6 million in 2021 from $1.3 million in the first quarter of 2020. Net earnings were $1.3 million this quarter and $1.2 million last year. Diluted earnings per share were 14 cents per share in the first quarter versus 12 cents per share in the first quarter of 2020. In the North American wholesale segment, net sales for the first quarter of 2021 were $33.4 million compared to $52.7 million last year. Last year's first quarter included approximately two and one-half months of sales that occurred before the pandemic struck the U.S. In mid-March 2020, much of the country shut down which resulted in a sharp drop off in sales during the last few weeks of the quarter. Our first quarter 2021 sales continue to be impacted by the effects of the ongoing pandemic, resulting in lower demand for dress and dress casual footwear. However, sales of the Boggs outdoor brand rose 32% in the first quarter of 2021, as consumers continue to spend more time outdoors during the pandemic. Wholesale gross earnings were 34.5% of net sales in the first quarter of 2021, compared with 31.8% of net sales in 2020. Last year's gross margins were negatively impacted by a 15% tariff on certain footwear imported from China beginning in September of 2019. The tariff was later reduced to 7.5% in February of 2020. Our gross margins improved in the first quarter of 2021 because the company has sold through much of the high tariff inventory during 2020. Wholesale selling and administrative expenses were $10.2 million, or 31% of net sales for the quarter, compared to $14 million, or 27% of net sales in last year's first quarter. First quarter 2021 expenses were reduced by approximately $1.8 million due to government wage subsidies. Additionally, wages and advertising costs were down for the quarter as a result of the company's cost-cutting measures. Wholesale earnings from operations were $1.4 million compared to $2.8 million in the first quarter of 2020. The decrease was due to lower sales, partially offset by the higher gross margins and lower selling and administrative expenses. Net sales of our North American retail segment which includes sales from both our U.S. e-commerce business and retail stores, were $5.6 million for the quarter, compared to $4.8 million in last year's first quarter. Same-store sales were up 32% for the quarter due to a 36% increase in e-commerce sales, mainly bogs, offset by a 5% decline in brick-and-mortar same-store sales. There were four fewer brick-and-mortar stores operating at March 31, 2021 than at March 31, 2020. Retail operating earnings were $756,000 compared to operating losses of $89,000 last year. The improvement was due to the benefit of closing unprofitable stores and higher earnings from the company's e-commerce business. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $7.9 million in the first quarter, up from $6.1 million last year. The increase was due to higher net sales at Florsheim Australia. Florsheim Australia's net sales were up 39% for the quarter, with sales up in both its wholesale and retail businesses. The stronger dollar relative to the US dollar also contributed to the increase, as Florsheim Australia's net sales in local currency were up 19%. Collectively, Florsheim Australia and Europe had operating losses totaling $481,000 compared with operating losses of $1.3 million last year. The reduction in operating losses was due to the improved performance at Florsheim Australia. At March 31st, 2021, our cash, short-term investments, and marketable securities totaled $58.2 million, and there were no amounts outstanding on our revolving line of credit. During the first three months of 2021, we generated $14.2 million of cash from operations. We purchased $20 million of short-term investments, used funds to pay $2.3 million in dividends, and repurchased $1.1 million of our company stock. We also had $73,000 of capital expenditures. We estimate that 2021 annual capital expenditures will be between $1 and $2 million. On May 4, 2021, our Board of Directors declared a cash dividend of $0.24 per share To all shareholders of record on May 28th, 2021, payable on June 30th, 2021. I would now like to turn the call over to Tom Florsheim Jr., our chairman and CEO.
spk06: Thanks, John. Excuse me. And good morning, everyone. After a tough January and February, business opened up in March across all of our brands, a trend that continued through April. We believe that there are a number of factors behind the improved trajectory, including stimulus checks, pent-up demand, the gradual reopening of offices, as well as planning for events such as weddings and graduations. While the market remains hard to predict, we are encouraged by the demand we are seeing at retail for a more traditional dress and dress casual footwear. Bog sales rose 32% for the quarter. Throughout the pandemic, our BOGS sales have been strong, reflecting the trend toward more time outdoors. We benefited from late winter weather in February as BOGS was one of the few weather boot brands to have adequate inventory. Meanwhile, we have enjoyed a solid start to spring with our lightly insulated lifestyle and garden-oriented products. Bookings for fall are significantly up for the brand, and we anticipate a good year for BOGS. Since the beginning of the pandemic, demand for our legacy brands, Foreshine, Nunn-Bush, and Stacey Adams, has been limited as consumers spent discretionary dollars on more relaxed and athletic footwear and apparel. While demand improved slightly in the fall of 2020, we did not anticipate significant interest in our dress and dress casual styles until the second half of this year, when offices were more fully reopened and consumers were likely returning to social events that required more formal or fashionable attire. However, we experienced rising demand across all of our brands for dress and dress casual footwear in the last month of the quarter earlier than anticipated. We also saw good sell-through performance for this category in the weekly data sent to us by our key retailers. While demand is still not at 2019 levels, it is higher than we anticipated. Fortunately, we were in a relatively good inventory position and were able to ship a good portion of these orders. We believe that we are one of the few companies to maintain a significant inventory of more traditional footwear, and we are well positioned to pick up market share as this segment of the footwear business rebounds. We are also pleased with the progress we're making in placing and selling more casual, relaxed footwear as part of the merchandise mix for all of our legacy brands. Over the past 18 months, we devoted the majority of our design work toward developing a broad range of casual footwear in line with the respective DNA and aesthetic of Forsheim, Nunn-Bush, and Stacey Adams. Even with the resurgence of our traditional business, we see the investment in the casual lifestyle category as critical to our future success. We continue to see good growth in our e-commerce business, Our first quarter web sales increase was driven by bogs. We also started to see significant e-commerce growth for our legacy brands in March, which continued through April. We see investment in our web business as a key part of our strategy and business model moving forward. We are extremely pleased with the turnaround we saw in Australia and New Zealand this quarter. Both markets have largely opened up and are steadily returning to a pre-pandemic lifestyle. we are starting to see retail numbers compare favorably to 2019 sales levels. At the same time, we have exited unprofitable stores and renegotiated leases on more favorable terms, which we expect will create a healthier business for us in this important market. Our Australian wholesale business was also boosted by a significant increase in our Boggs wholesale business, which is off to a strong start in 2021 on the heels of solid growth last year. As mentioned in our prior conference call, we decided to wind down our foreshadowing wholesale and retail business in Europe. Our European business has been unprofitable the last few years and the situation worsened with the onset of the pandemic. On a positive note, we reached a long-term licensing agreement with Alba Moda, a manufacturer and marketer of footwear based in Florence, Italy. Elba Moda will begin selling Foreshine men's and women's shoes in Europe and other select markets beginning in November of this year. We are excited about our partnership with Elba Moda and look forward to growing the Foreshine brand in Europe through this new relationship. In the last few conference calls, we have talked about bringing our inventories down to align with lower sales in the legacy brands. Our ending inventory at March 31st was $47.3 million compared to $59 million at the end of 2020. With increased demand for dress and business casual shoes, we have started the process of rebuilding our inventories. Many of our large accounts are requesting delivery for as soon as possible to replenish the dress shoe inventories in order to meet current higher consumer demand. Our backlog has grown for the third and fourth quarters. However, forecasting is still challenging as retailers remain somewhat cautious. Given the long lead times out of Asia, we are bringing in extra inventory on our core styles as well as some of the new casual product where we are seeing strong retail selling to position ourselves for a stronger second half as the U.S. economy opens up. The increased demand for BOGS is also contributing to our plan for higher inventories. Lastly, we are currently experiencing price pressure due to increases in freight costs as well as increases in the cost of materials. We are trying to cover as much of our needs as possible for this year at current prices, but we are planning to increase our selling prices in the second half of the year to maintain our margins. This concludes our formal remarks. Thank you for your interest in Waco Group, and I'd now like to open the call to your questions.
spk00: Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Deicher. Your line is open.
spk03: Good morning, everyone. Good morning, John. Good solid quarter. I'm impressed that earnings were up, even though sales were down. So that's a healthy sign. I was just curious, a couple things. One, What are your retailers, are your retail customers giving you firm commitments for the second half yet? I know the last conference call they hadn't really done anything yet, but what are they telling you for the second half? I know you mentioned Boggs is up, but what about the legacy brands?
spk06: We're starting to see that change in a positive way. Our orders come in in two different forms. One are hard orders that retailers commit to typically for new product that's being delivered in the fall. And then we have orders that we call bulks. And we work with the large retailers to plan out their inventory needs, you know, in advance so that we'll have the product that they need. And then the orders come in against those bulks through EDI each week. And we've seen a change in attitude, let me put it that way, from the large retailers over the last few weeks as they've seen their dress and dress casual business pick up. And so we've had much more collaboration in bulks and planning out business for the fall. We've also, as I mentioned in the call, John, we've seen a big increase in at-once business, where orders just come in because they, you know, retailers, the big ones, tend to replenish what they sell. And, you know, it's too early, it's too early to call this a trend, and after what we've been through the last year, you know, you want to still be a little bit cautious, but it's exciting to see what we're seeing right now in retail sell-throughs. And like in this past week, we get... data from most of our key retailers. And in some cases, retailers beat their sales numbers for 2019 with our brands on inventory that was down, say, 40%, in some cases, 50%. And it just seemed too good to be true. And some of that is definitely... positively impacted by the stimulus checks. And so that's going to wear off, that effect will wear off eventually. But, you know, there's also been a lot written in the Wall Street Journal recently about how people are out shopping for clothes, shopping for shoes, planning for events. And so, you know, basically, I think retailers are feeling more confident and we're having more success getting backlog in for the second half. We still have work to do. with the legacy brands, but it is coming in.
spk03: Okay, that's good to hear. So back to school and holiday orders, when do you anticipate to see those one way or the other?
spk07: Well, for blogs, we already have them. And, you know, we get hard orders for blogs. I think the fact that there's a shortage of In Boots last year, many brands were sold out. Our inventories were relatively good, but we still ran out of some key styles. Really incentivized retailers to give us orders well in advance to cover themselves for the back half of the year. So we're seeing large increases in our backlog for bogs. For our legacy brands, we're starting to get more hard orders, but it's not at the level that we would like. But the reality is, in most of our accounts, the majority of the backlog is done for key styles through, as Tom mentioned, bulk orders. And so we've already put those in. you know, well into the fourth quarter. Yeah, recover through the fourth quarter. We're more confident based on demand. So, you know, we're probably getting smaller hard orders than we normally would get for the back half of the year. But the majority of our business is through, you know, planned inventory that we fill in from week to week. And we're feeling a lot better, you know, about being able to cover that inventory and that there would be demand there from retailers to bring that inventory in.
spk03: Okay, good. That's encouraging. Speaking about bringing inventory in, what's the status of the supply chain? Are there still bottlenecks in the ports? How is that shaping up at this point?
spk06: Yeah, there are still bottlenecks in the ports. In that situation, actually has gotten a little bit worse, not better. I think it's probably because of just the volume of imports coming into this country. But we're seeing two issues. We're seeing delays in getting containers out of the ports, particularly in China. And then once the containers hit the West Coast, there are delays there that can take another one week, two weeks. And so We're trying to plan as much of that in as possible, but we are anticipating some late deliveries as we move into fall. The retailers seem very aware of the situation because everybody's faced with it. They're faced with it with their own private label brand, so they're working with us. But that is a challenge. The actual supply chain from the standpoint of manufacturing footwear is not a problem, but getting them here is still a problem.
spk03: Okay, okay. All right, so you just have to deal with that. Okay. A couple of financial questions. You bought back $1.1 million of stock. How many shares was that, or what was the average price of that stock?
spk02: We bought back about 62,000 shares at an average price of about $1,750 for the quarter. That'll be in the 10-Q. And we have... authorized 275,000 remaining shares yet to buy back, or that we at least have authorized at this time.
spk03: Okay. Can you tell us if you're active currently?
spk02: We're always active based upon what we feel the pricing is. We haven't bought much back in the last month or so, but we're always looking at it and always evaluating it.
spk03: Okay, fair enough. And then the first quarter 2021 expenses were reduced by approximately $1.8 million due to government wage subsidies. Is that continuing? What does that mean? The government is subsidizing your payroll?
spk02: Yes, that is true. There's a thing called the earned retention or employee retention credit. that was in place for 2021. The credit says that if you are more than 20, it used to be you had to be 50% down to qualify. They changed it for 2021 for the first two quarters and then extended it for the last two quarters. So the entire year, if you qualify, you have to be 20% down in gross receipts compared with 2019. So if you do, you're eligible for a credit equal to approximately, I'm not ball parting, I'm giving you the round numbers, a maximum of $7,000 per employee for wages for each quarter up to $10,000 in wages. So it's maximum of $7,000 per full-time employee effectively for each quarter. So if you continue to show sales lower than 80% of 2019, you qualify for the credit. You can also use a prior year quarter. So we know we're going to qualify for the second quarter, so we will have that subsidy in quarter two. We do not know if we will qualify for that credit yet for quarter three and four. It depends on the results on how we're doing based on what I just said, 80% down on 2019, 80% of 2019, 20% down. So we did get the credit in the first quarter. We will get the credit in the second quarter. Unknown yet on three and four.
spk03: And Q2, you anticipate to be similar to Q1 in amount?
spk02: Yes, because it's based upon employee wages. It's 70% of employee wages up to $10,000 in wages. That's the credit. So you can do the quick math. If your people are making $40,000 a year, you will get $7,000 a quarter for those employees.
spk03: Okay, fair enough. Good. And then my final question is, Florsheim Europe, was there any shutdown expenses or extraordinary expenses? in Q1 from shutting that down?
spk02: No. Most of those costs were put through in the fourth quarter last year, or third and fourth quarter last year when we had those one-time charges. We had much of that. Now, I can't guarantee that there won't be some shutdown costs, but we don't believe those are going to be material to our numbers.
spk03: Okay. Got it. Great. Thanks, and good luck going forward. Thanks, John. Thanks, John.
spk00: Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Steve Rudd with Blackwall. The line is open.
spk05: Hi. So can you break out for me what percentage of total sales are BOGS sales?
spk02: Yes, we can. That is disclosed in the 10Q for first quarter. And I assume you're talking about the first quarter?
spk05: Correct.
spk01: Let me kind of take a quick peek. The quarter will be out. We're filing it.
spk06: You know, and Steve, while John is getting that number, just a little bit of context. BOGS is still pretty heavily weighted toward the second half of the year. So the first and second quarter are smaller quarters for BOGS. And so the numbers vary by quarter, essentially.
spk02: I'll do the math for you real quick here. And again, these are North American wholesale segment sales for blogs. And this will be disclosed in the 10Q, so I'm not giving any information that is not public. 23% in the first quarter of 2021 of wholesale was blogs. Okay.
spk04: So a dollar amount that's about, let me, I got to just, maybe you'll do the math first.
spk02: A dollar amount is about $7.6 million. Okay. For BOGS.
spk04: And then that ramps up as a percentage as we get to three and four, right?
spk02: That is correct. BOGS is a little seasonal. And yes, I do not have right in front of me the percentage from last year, but you can get that in the 10K. And it's right in the MD&A section. So it's out there.
spk04: So is the plan, it certainly would be my plan, going forward, you know, you've got this growth brand of bogs, which has better margins and a business model that's designed for better margins. Also, with quarter-to-quarter, year-to-year growth, I mean, it's a fabulous brand attached to this legacy brand. I think all of you see where I'm headed. Isn't the plan then to spin that off and get a real multiple on it? I mean, you could probably get a multiple that would exceed our current share price.
spk06: Yeah, that's not really the plan. I mean, one of the things that you have to consider... is that the legacy brands have been depressed in sales. We had 20% growth in Florsheim two years in a row.
spk07: It was our fastest growing brand.
spk06: Yeah, prior to the pandemic. So that was actually our fastest growing brand.
spk07: Yeah, our largest brand.
spk06: You know, but to your point, you know, we're very focused on growing the outdoor business in our portfolio. And, you know, we've stated this previously, we're looking for other acquisitions. So it's kind of the opposite of actually what you're suggesting. We're going to beef up that area of our portfolio.
spk07: It diversifies our portfolio in terms of the range of products that we are offering. And, you know, while we're actually seeing now a nice surge in our traditional business, especially online, as we start to cycle against big numbers for blogs from last year. So it's, you know, it actually, it balances out.
spk04: So your sense is, I mean, we're growing, Boggs is growing, what, roughly, so far the last few quarters, about 35% is our growth rate?
spk07: From a wholesale perspective, and I don't have the number by quarter, Boggs was more or less flat last year. Where we're seeing, where we saw very strong growth was in e-commerce. Our e-commerce direct-to-consumer business was up significantly last year, and that continued through the first quarter. I think we were up over 30% in the first quarter of e-commerce. Right. I mean, listen...
spk04: Yeah, from an investor point of view, right? People love to have the growth story because there's, I don't have to tell you guys. I mean, you've been around long enough. You know that how, you know, these days it's hard to call folks analysts, but you know how analysts will project things out. I mean, it's growing 35%, 40%. Oh, now it'll be 400% in 10 years. And you get these wild multiples based on growth, which may or may not occur. And in the meantime, if you have a separate company, it doesn't have to have its own management infrastructure. You can pay for floor shine management.
spk07: It's something to think about because you can really get... Yeah, but BOGS benefits... I don't mean to interrupt, but BOGS benefits... No problem. ...the infrastructure out here that we leverage that allows BOGS to be a very profitable brand. Right. And so... That's really the key point. And, you know, so it all sort of works together. And I think you're going to see, you know, our legacy business bounce back, and we're going to continue to have strong growth for blogs. Certainly, you know, the back half of this year we feel very confident about. Yeah, you should do very well. We're always kind of looking out there for ways to further diversify our business from a portfolio standpoint, more on the casual outdoor thing.
spk04: Okay, and just lastly to this point, just for your further consideration, you don't need to set up a complete separate infrastructure to be running BOGs effectively independently or to be reporting them out independently. You could always pay, right?
spk07: That would be correct, but it's not in our plans to set up BOGs.
spk04: All right, I guess, you know, keep executing, and I think the market will, the retail market will lift, you know, will lift us up without a doubt.
spk06: We agree.
spk04: Yeah, no question.
spk06: Yeah, no, it's, you know, it was, the pandemic was hard for a lot of apparel and footwear brands, and we did not escape that, and we're looking forward to, you know, a much better year this year.
spk04: Yeah, okay, thanks.
spk06: Thank you.
spk00: Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing comments.
spk02: Thanks for your attention today, and we will talk with you next quarter. Have a great day.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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