Weyco Group, Inc.

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.

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.

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.