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spk01: Good day and thank you for standing by. Welcome to the Waco Group second 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 a question during the session, you will need to press star and then the number one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. John Witkowski, sir, please go ahead.
spk00: Thank you. Good morning and welcome to Waco Group's conference call to discuss our second quarter 2021 earnings. 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 of the quarter, 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 or similar orders, that among other effects require retail store closures or limit foot traffic, the financial health of the company's customers and 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. Net sales for the second quarter of 2021 were $57.6 million, up from second quarter 2020 net sales of $16.6 million. Operating earnings totaled $4.5 million for the quarter, compared to operating losses of $13 million last year. The company's net earnings rose to $3.8 million or 39 cents per diluted share for the quarter compared to net losses of $8.9 million or 91 cents per diluted share in 2020. Last year's second quarter results were significantly impacted by the COVID-19 pandemic. as most retailers, including the company's retail stores, were closed for a majority of the quarter. As such, comparisons to 2020 may have limited utility, and therefore we will include selected comparisons to 2019 as appropriate. Overall sales for the quarter rose to approximately 95% of second quarter 2019 sales levels. demonstrating a strong recovery to near pre-pandemic levels. The company's earnings also rebounded, exceeding second quarter 2019 levels. In the North American wholesale segment, net sales for the second quarter of 2021 were $41.9 million compared to $9.3 million last year, with sales up across all four brands. Wholesale sales for the second quarter reached 91% of 2019 levels. Wholesale gross earnings were 32.4% of net sales in the second quarter of 2021, compared to 34.7% of net sales in 2020. The decrease in gross margin was largely caused by the increase in shipping costs that we are currently facing to bring product in from Asia. Due to the bottlenecks in the supply chain, we are often paying premiums in order to get bookings on container ships. Selling and administrative expenses were $10.9 million for the quarter compared to $13.4 million in 2020. Second quarter 2021 expenses included approximately $1.8 million of wage subsidies received from the U.S. and Canadian governments. Second quarter 2020 expenses included the write-off of approximately $3.3 million in receivables as a result of the JC Penney bankruptcy filing, offset by a $1.4 million of income from U.S. and Canadian government wage subsidies. Driven by higher sales volumes, wholesale operating earnings were $2.7 million for the quarter, up from operating losses of $10.2 million last year. Second quarter wholesale operating earnings also exceeded in 2019 levels due in part to government weight subsidies recognized during the period and as a result of cost saving measures implemented over the past 12 months. While gross margins have been impacted by the increased rate costs, the cost savings implemented by the company have helped mitigate that impact. Net sales of the North American retail segment were $6.2 million in the second quarter of 2021. versus $3.6 million in the second quarter of 2020. Same store sales rose 73% for the quarter due to a 43% increase in e-commerce sales and higher brick and mortar same store sales. Last year's brick and mortar same store sales were unusually low due to temporary store closures as a result of the pandemic. Also, there were four fewer brick and mortar stores operating at June 30, 2021, as compared to last June 30, 2020. The company currently has just four active U.S. brick-and-mortar locations. Retail net sales for the second quarter surpassed second quarter 2019 levels by 15%. While most of this increase was driven by e-commerce growth, brick-and-mortar sales at the company's four remaining locations also exceeded their 2019 levels. The retail segment had operating earnings of $1.2 million for the quarter, up from operating losses of $856,000 in last year's second quarter and earnings of $400,000 in 2019. Retail operating earnings have improved due largely to growth in the company's more profitable e-commerce business and the shedding of unprofitable stores. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $9.5 million for the quarter compared to $3.7 million last year and $9 million in 2019. The increases were primarily due to Florsheim Australia where sales were up in both its wholesale and retail businesses as the business environment in Australia improved during the quarter. Collectively, Florsheim Australia and Florsheim Europe had operating earnings of $718,000 for the quarter compared to operating losses of $2 million in the second quarter of last year. The improvement between periods was largely due to improved performance at Florsheim Australia. Second quarter 2021 operating earnings from the company's other operations also beat the comparative 2019 levels due again largely to improved performance at Florsheim Australia. On June 7th, 2021, the company acquired substantially all of the operating assets and certain liabilities of Forsake, a distributor of outdoor footwear under the brand name Forsake. The principal assets acquired were inventory, accounts receivable, and intellectual property, including the brand name. The aggregate purchase price was approximately $2.6 million plus contingent payments to be paid annually over a period of five years depending on Forsake achieving certain performance measures. The company's estimate of the discounted fair value of the contingent payments is approximately $1.4 million in total. The transaction was funded with the company's available cash. At June 30, 2021, our cash, short-term investments, and marketable securities totaled $65.2 million, and there were no other amounts outstanding on our revolving line of credit. During the first six months of 2021, we generated $27.1 million of cash from operations. We purchased $30 million of short-term investments, used funds to pay $4.6 million in dividends, and repurchased $1.5 million of our company stock. We also spent $2.6 million to acquire the Forsake brand and had approximately $400,000 of capital expenditures. We estimate that the 2021 annual capital expenditures will be between $1 and $2 million. On August 3rd, 2021, our board of directors declared a cash dividend of $0.24 per share to all shareholders of record on August 27th, 2021, payable on September 30th, 2021. I would now like to turn the call over to Tom Florsheim, our chairman and CEO.
spk02: Thanks, John, and good morning, everyone. We are extremely happy with how our wholesale business opened up in the second quarter. In fact, we have never really seen demand go from lackluster to supercharged in such a short period of time. Credit vaccinations, stimulus checks, pent-up demand for restocking wardrobes, return to the office and social events, or a combination of all of the above, the end result is we feel much more positive about the fundamentals of our business. Our legacy brands, Florsheim, Nunn-Bush, and Stacey Adams, all bounced back strongly this spring, with Florsheim being the outstanding performer. With events such as weddings and formal gatherings on the calendar, we saw renewed demand for more refined footwear. While at the same time, retailers had reduced both their dress and dress casual style offerings and inventory levels. Florsheim, Nunn-Bush, and Stacey Adams all were able to address this void in the market as Waco Group was one of the few footwear wholesalers that stocked significant inventory. We saw both unprecedented sell-throughs at the retail level and corresponding orders at the wholesale level as retailers pivoted strongly back to the refined footwear category. We should see continued pipeline film to our retailers throughout the back half of 2021. We are very pleased with the performance of our legacy brands We are also excited about the breakthroughs that we had this spring with casual footwear. The pandemic pushed the company to accelerate development, delivery, and selling of more casual, athletic-inspired footwear to fit the more relaxed lifestyle trend in apparel that we believe, over the long term, will continue to grow in importance. Florsheim, Nunn-Bush, and Stacey Adams all significantly increased the percentage of purely casual shoes. The consumer has responded well, with certain styles being among our top sellers in our direct-to-consumer business. It is our expectation that we will continue to grow our casual mix, which will complement our strong position in the more refined footwear segment. Boggs also had an excellent spring. While second typically our lowest volume shipping period, sales were up significantly over both 2020 and 2019. The outdoor footwear market has been robust through the pandemic, And we continue to see strong retail performance across trade channels. Given the shortages in the outdoor boot market in fall 2020, Boggs is positioned to have a strong second half of the year as retailers are taking a more aggressive inventory position on the Boggs brand and the outdoor boot category. As John mentioned in June, we acquired the Persake brand, which is a pioneer in the sneaker boot category. Forsake will be headquartered in Portland and leverage our back office and distribution infrastructure in Milwaukee. We are very excited to welcome Forsake and its two founders, Jake Anderson and Sam Barstow, to Waco Group. The brand further expands our reach into the outdoor category, which we believe will be a growth avenue for the company. While Forsake is currently small in volume, it can be found in a range of important outdoor retailers and has a growing direct-to-consumer web business that we can leverage using our successful e-commerce platform. As far as our overall direct-to-consumer retail business, we saw our same-store sales jump 73% in the second quarter. From a volume perspective, the increase was driven by a 43% increase in e-commerce sales with all of our legacy brands registering strong double-digit gains. We reduced our brick-and-mortar store count as we exited our most unprofitable locations last year. Sales at our four remaining stores are registered significant increases over the same period last year when the malls were largely closed. Our business model for direct-to-consumer is greatly improved. We are less promotional versus the prior year period and the increase in e-commerce allows us to leverage the fixed cost investment we have made in past years to grow this area of our business. Our international business greatly improved against 2020 when we were experiencing store closings across our key markets in Australia, New Zealand, and the Pacific Rim. We saw the business rebound from a sales and profitability perspective. In Australia, which is a significant market for us, the pandemic has allowed us to reset the business model as we exited unprofitable stores and renegotiated leases that allow for greater profit potential. In addition, our e-commerce business in these markets continues to grow nicely for both Forsheim and Boggs. However, recent developments related to the Delta variant in Australia have led to renewed lockdowns in key provinces and now create an uncertain outlook for the balance of the year. As John discussed, our North American wholesale gross margins were down in the quarter, mainly as a result of the problems in the supply chain. We believe this is a temporary situation. While we believe this is a temporary situation, we do see the challenges in the supply chain continuing into at least the beginning of 2022. We also continue to face price pressure from increased factory costs. We have covered much of what we will ship this year at factory costs prior to these increases, and we are raising prices for new customer orders for the second half. The customer orders we've received for the first quarter of 2022 are at higher prices, which will protect our margins. In general, our retail partners understand the increases in factory prices and have accepted the new higher prices. The demand for our product across brands and categories is currently greater than the supply, which continues to put pressure on our inventories. Our inventory balance at June 30th was 33.5%. compared to $47.3 million at March 31st. We have aggressively placed factory orders to cover our increased backlog and also greater at-once demand. The longer time it is taking to bring goods in from Asia is causing delays in receiving needed merchandise, although we believe we will start to see a good flow of shoes and boots beginning to arrive toward the end of August. We expect that by the end of the third quarter, we will see a much improved inventory situation that will continue through the end of the year. 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.
spk01: Thank you. As a reminder, to ask a question, just press star and then the number one on your telephone keypad. Again, just press star and then the number one on your telephone keypad. And if you want to withdraw your question, just press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of J.W. Milligan from Woodworth. Sir, your line is open.
spk03: Thank you very much for taking the question. Can you expand on what, on your balance sheet, or cash flow, the, where is it, the investments there of about $30 million?
spk00: Yeah, this is John. We, as Tom mentioned, our inventories have been getting lower recently. variety of issues, and we knew that we would have to, we were going to generate a lot of cash early on in the year. And with the delay in some of the purchases, we've been able to build up our cash balance, as you saw, to like $65 million. The $30 million represent very short-term liquid investments that we wanted to be able to earn something on until that cash will likely be used in the third and fourth quarter to purchase these inventories that are going to be coming in. As you saw, our inventories are low, and they are going to be building up. And we just needed a holding place for that cash. So these are short-term liquid investments, very low risk, just to generate some added income.
spk03: Thank you. We have some shipping companies. Why do you think that the backlog on shipping will change later in the year?
spk00: Well, I think we have our people working all the time on trying to get space on containers. We are working with our factories who are having success in booking some space on containers outside of our freight contracts. We do have quite a bit more in transit right now that are actually on boats. So we do know that things are going to be coming in later in the month and throughout the rest of the year. Now, you're right. There's no absolute guarantee, but we're working diligently to get as much space as we can to get those product in.
spk02: Thank you. Thank you for the questions.
spk01: Thank you. Once again, to ask your question, just press star and then the number one on your telephone keypad. There are no questions on the queue at this time. Presenters, please continue.
spk00: We'd like to thank everyone for their attention this quarter, and have a good day, and we'll talk to you next quarter. Thank you.
spk01: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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