Weyco Group, Inc.

Good day and thank you for standing by. Welcome to the Waco Group third 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, John Woodkowski. Chief Financial Officer, please go ahead.

Thank you. Good morning, everyone, and welcome to our third quarter conference call. On this call with me today is Tom Florsheim, Jr., our Chairman and CEO. Before we begin to discuss the results, 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 Waco Group's most recent Form 10-K, as well as 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 this 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. The extent and duration of the negative impacts on our supply chain, 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, and the health and welfare of the company's employees. Net sales for the third quarter of 2021 were $61.8 million, up from third quarter 2020 net sales of $53.2 million. Operating earnings totaled $6.7 million for the quarter, compared with operating losses of $3.8 million last year. Net earnings rose to $5.1 million or 52 cents per diluted share from net losses of 5.9 million or 60 cents per diluted share in 2020. Last year's third quarter operating results were significantly impacted by the COVID-19 pandemic and included non-recurring charges totaling $7.4 million. As such, Comparisons to 2020 may have limited utility, and therefore we are including selected comparisons to 2019 as appropriate. Overall net sales for the quarter rose to approximately 75% of third quarter 2019 sales levels, and the company's operating earnings for the quarter recovered to 80% of 2019 levels. In the North American wholesale segment, Net sales for the third quarter of 2021 were $50.2 million compared with $44 million last year, with sales up across all of our legacy brands. BOG sales were down 8% for the quarter, mainly due to production and shipping related to disruptions in the global supply chain. There was a significant pickup in demand across all of our brands during the quarter. However, bottlenecks in the global supply chain caused delays in the receipt of finished goods from our suppliers, which constrained our third quarter shipments. We began to see increased deliveries from our suppliers in October, and we expect this improvement to continue through the rest of the quarter, which should help us meet the increased demand for our products. Wholesale gross earnings were 34.6% of net sales in the third quarter, compared to 35.7% of net sales in 2020. The decrease in gross margins was largely caused by the increase in shipping costs that we are currently paying to bring product in from Asia. Due to a shortage of capacity in the supply chain, we are often paying premiums in order to get space on container ships. Last year's gross margin also included $500,000 in non-recurring charges. Selling and administrative expenses were $11.3 million for the quarter. compared with $13 million in 2020 and $14.9 million in 2019. Third quarter 2021 expenses were reduced by approximately $1.9 million of wage subsidies received from the U.S. and Canadian governments. It is not known at this time whether those wage subsidies in the U.S. will be available in the fourth quarter of 2021. Third quarter 2020 expenses included $1.5 million in non-recurring charges. Wholesale operating earnings were $6 million in the third quarter of 2021, up from operating earnings of $2.8 million in last year's third quarter due to higher sales and lower selling and administrative expenses. Net sales of the North American retail segment were $6.3 million in the third quarter of 2021, up from $4.4 million in the third quarter of 2020. Same store sales rose 49% for the quarter due to a 33% increase in e-commerce sales and higher brick-and-mortar sales. Last year's brick-and-mortar same store sales were down significantly as a result of the pandemic. The company closed three unprofitable retail stores in the third quarter of 2020 and currently has just four active U.S. brick-and-mortar locations. Retail net sales for the third quarter surpassed third quarter 2019 levels by 22%. 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 $1.4 million for the quarter, up from operating losses of $2.8 million last year and earnings of $365,000 in 2019. Last year's losses included $2.6 million of non-recurring charges. Retail earnings have improved due to the benefit of closing unprofitable stores, improved performance at active brick and mortar locations, and higher e-commerce earnings. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $5.3 million for the quarter, compared to $4.8 million in 2020 and $9.5 million in 2019. The increase was at Florsheim Australia, where sales were up in both its wholesale and retail businesses, partially offset by lower sales at Florsheim Europe, as the company is in the final stages of winding down this business. Last year's third quarter sales were down significantly as a result of COVID-related retail lockdowns. Business recovery in Australia has been hindered by a large number of Florsheim Australia's retail stores being closed for a majority of the quarter due to lockdowns imposed in New South Wales and Victoria. Stores in New South Wales have begun to reopen in October and we currently expect that all of our stores in Australia will be allowed to reopen during the fourth quarter absent adverse COVID-19 developments. Collectively, Florsheim Australia and Florsheim Europe had operating losses of $682,000 for the quarter compared to operating losses of $3.8 million in the third quarter of 2020 and losses of $1.4 million in 2019. Last year's third quarter losses included $2.8 million of non-recurring charges. The improvement in 2021 was largely due to improved performance in Australia. The company's income tax provision totaled $1.9 million for the quarter, compared with $2.1 million in the third quarter of 2020. Last year's tax provision included $2 million of tax expense related to the write-off of deferred tax assets of the company's foreign subsidiaries. At September 30th, 2021, our cash, short-term investments, and marketable securities totaled $45.4 million and there were no amounts outstanding on our revolving line of credit. During the first nine months of 2021, we generated $9.7 million of cash from operations. We invested $15.2 million in short-term investments, paid $6.9 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 $670 of capital expenditures. We estimate that 2021 annual capital expenditures will be between $1 million and $1.5 million. On November 2nd, 2021, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on November 29th, payable on December 31st. I would now like to turn the call over to Tom Smosh, our Chairman and CEO.

Thanks, John, and good morning, everyone. We are excited about the trajectory of our business, and we are seeing record demand across all brands. While wholesale sales were down versus 2019 due to the bottlenecks throughout the supply chain, the fundamentals of our business are quite strong. We anticipate improved inventory flow through the fourth quarter and should be well positioned to end 2021 with good momentum. Excuse me. Our BOGS wholesale business was down 8% for the quarter. The decrease entirely reflected production and shipping delays from our factory base in Asia. Sales across all BOGS category segments are robust as we enter the principal selling season for BOGS at retail. While deliveries are later than originally planned, our retail partners are working with us and we expect to be in a much better inventory situation as we head toward the holidays. The outdoor boot category has been a bright spot throughout the pandemic, and Boggs has benefited from increased consumer interest in the brand. While our Boggs classic weather boot sales remain the foundation of the business, we are enthused about the significant progress we have made toward developing a successful casual lifestyle business, which will offer additional growth opportunities moving forward. Regarding our legacy brands, Floresheim, Nunn-Bush, and Stacey Adams all experienced strong performance at the retail level. Early in the pandemic, there was a spike in demand for athletic, rugged casual, and comfort casual footwear, but substantially reduced demand for dress and dress casual shoes. With the rollout of vaccines in March and subsequent loosening of social and other restrictions, we began to see a shift back toward more refined footwear categories as consumers evaluated their closets for a return to the office and more formal social occasions. Retailers and brands were unprepared for the subsequent surge in demand, and we have been working to fill the pipeline and restock to normal inventory levels. The situation has been exacerbated by supply chain issues, especially in regard to transportation of finished product. While we are working through delays and chasing demand, we believe we have been in a relatively better inventory position than our competitors and have gained market share within the category. We anticipate strong demand within the dress and dress casual market well into 2022, although unpredictable pandemic developments could impact demand. While we are pleased with the resurgence of the traditional more refined footwear market, we are also encouraged by the ability of our legacy brands to expand into the true casual market with wider offerings of athletic-inspired and outdoor-oriented shoes. Our design and selling focus throughout the pandemic has been towards casualizing our brands, and we are having success both in getting new categories placed as well as with sell-throughs at the consumer level. As we move forward, our legacy business will have a more balanced ratio between dress footwear and truly casual, reflecting the changing lifestyle trends in a post-pandemic world. In terms of our U.S. retail segment, our third quarter sales were up 44%. As John mentioned, our four brick and mortar stores in the U.S. were performing well, exceeding sales from the same period in 2019. The majority of our growth forever was driven by the strong performance of our e-commerce sites with sales up 33% versus last year and 54% versus 2019 in the U.S., We continue to invest in building out our e-commerce platform to maintain our growth momentum. With the reduction in unprofitable brick and mortar stores and the increase in our e-commerce sales, our direct-to-consumer business is becoming a more important profit driver in the Waco business model. Turning to our international performance, renewed lockdowns in Australia and New Zealand impacted both retail sales and wholesale shipments in the third quarter. resulting in a temporary setback in our overseas business. As mentioned in prior conference calls, we have made good headway towards reestablishing profitability in our Fortune Australia business, which encompasses the markets in Australia, New Zealand, the Pacific Rim, and South Africa. Since the beginning of the pandemic, we have been focused on shedding or renegotiating unfavorable leases and leveraging our e-commerce platform. Unfortunately, The zero-case tolerance policy in Australia and Auckland and the subsequent shutdown of stores in these markets resulted in a loss for the quarter. While we are disappointed with this development, the Australia market is now reopening stages, and we remain confident that we will ultimately reap the benefits of the changes made over the past year. was $52.9 million at September 30th, compared to $33.6 million at June 30th. These numbers include inventory that has left the supplier, is paid for, and is in transit to our distribution facility. Historically, with transit times being approximately four to six weeks, The percentage of in-transit versus on-hand inventory has typically been between 10% and 20% of our total wholesale inventory. With current transit times now running in excess of eight weeks and the large amount of inventory we have on order, in-transit inventory was 56% of total inventory as of September 30th. The bottleneck is beginning to loosen up, and we are now receiving a much greater number of containers than normal. This is welcome news and we are encouraged that we will be in a position to fulfill much of the increased demand we are seeing in the fourth quarter. Our margins are currently being impacted by both higher factory costs resulting from raw material increases and higher freight expense. As John discussed, our wholesale gross margins were down 110 basis points from 35.7% in the third quarter of 2020 to 34.6% for the same period this year. Much of our backlog for fall was covered at factory prices prior to the price increases, but we were unable to cover the large increases in freight. As we move into 2022, we have raised our prices to mitigate impact on our margins, but expect that we will continue to have some margin pressure at least through the first half of the year. As we move into the final stretch of 2021, we are encouraged that the strong demand for all of our brands continues and that our strategy to aggressively build our inventories is starting to pay off. We continue to move the timeline up on placing our factory orders to try to offset both longer lead times and longer transit times. Also, we continue to place larger-than-normal buys to cover both our increased backlog and build our inventory levels for in-season business. 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.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Once again, that's star 1 to ask a question at this time. Our first question comes from Louis Moser with Mayfax Investors. Your line is open.

I was just wondering, it's a good report, and you seem to be fairly optimistic about next year. A lot of people don't realize you're paying over 4%, which I assume will continue. You've got $5 in cash and a book value of about $20. which makes the company very financially strong. You mentioned, and I haven't been a shareholder up until recently, you mentioned buybacks. Are buybacks still in progress, under consideration, or where do you stand in that matter?

They're still under consideration. We bought back stock earlier in 2021. In the most recent quarter, we did not buy back stock Our position on that is when we feel that the stock is underpriced, we buy it back. And, I mean, clearly, we believe in the third quarter it was underpriced. And we're looking at that again right now as far as what our buybacks are going to be in the fourth quarter. So we're going to continue to buy back stock. We have authorization to buy something like 250,000 shares of stock back. And so we will be in the market buying from time to time.

In terms of the retail stores, how many retail stores do you have left in terms of brick and mortar?

Well, in the U.S., we only have four. The biggest presence that we have for brick and mortar stores is in Australia, where we have over 30 stores. And then we have... shop and shops in Asia, mostly in Hong Kong, and one brick-and-mortar store in South Africa, one in Auckland, and that's pretty much it. So the total number of brick-and-mortar stores is less than 50 today. And while we had a big presence of brick-and-mortar in the U.S. going back over the last decade, and we've slowly been closing them as leases have come up, We actually feel very good about where we stand today with the number of total brick and mortar stores. It's really a struggle to be profitable in the U.S. We've reduced that number. All four stores we have right now are profitable, and our focus is on our website, Consumer Direct. The financial model is different in Australia, and we're still able to make money in brick and mortar, and the business that we have in Australia is very retail-driven, so we're going to continue to grow that business and possibly open additional stores. Does that answer your question?

Basically, because I had the thought that perhaps you're going to eventually discontinue your Australia stores, and apparently what you're saying now is that's not going to be the case.

That is not gonna be the case. The foreshore brand is very dominant in Australia. We feel that the work that we did over the past year during the pandemic, where we got out of stores that were unprofitable, renegotiated leases, has put us in a much better position going forward, and we're still looking at opportunities to open additional stores there.

Yeah, and in Australia, it's a very different market from the standpoint of wholesale versus retail for us. I mean, there's a limited number of wholesale accounts there. There's a couple of large department store type accounts, but people still go to our stores to buy our product. That's really one of the main places. So we're focusing on that and supplementing that with our website down there, which is starting to take off a little bit as well. So We really think that in Australia, retail is really the way the distribution is going to be in the long term down there for us.

How do you feel about your online sales? I know you're increasing them. How do you go about making them more dynamic?

When you say making them more dynamic, what do you mean?

In other words, if you're increasing 20% a year, how do you get to 50% online? I mean, how do you get your exposure?

Yeah, I mean, we have been investing a lot in our website. And the way that you get more customers is through different tools. And we're investing in those tools. And the growth that we've had on the web over the past two years has actually been strong. And we think that it's harder and harder as you grow the base to have the big percentages, big percentage increases. But we did grow 33% versus last year, 54% versus 2019. And we continue to hire people in analytics and front end and back end web development And that really is where we're investing a lot of our resources right now because we see the consumer direct model through the web in the U.S. as being very critical to our future. And we are pleased to see that our profitability in retail has grown. And, you know, we had operating earnings of $1.4 million in retail in the US this past quarter, which is a record for us. It's kind of amazing when you think about it, because that comparison goes back to when we had 39 stores in the US and a website. So the website has really grown. It's very profitable. And we've reduced the brick and mortar count to four stores. And because the brick and mortar was less profitable, that's really helped our overall profitability. So to answer your question, we're going to just continue to invest in it, and we're committed to trying to continue to drive that growth. We think that there's still a lot of room for growth.

In terms of the subject of growth, you've got $5 in cash, at least that's what I can see online. Is there any thought to any additional activity in an acquisition area?

John, do you want to answer that?

Sure. A couple of things on the cash balance. It's maybe a little bit of a roundabout way to answer your question. In a nutshell, yes, we're always looking for acquisitions, and we think that as a result of, call it the pandemic and everything that's happened, some things might come available the next year or two. We don't know. We believe As you pointed out earlier, we're in very strong financial shape on the balance sheet. So we've, number one, been able to withstand the last year and a half and come out of it, we think, stronger. So we're always looking. We're not going to frivolously go purchase something that will hurt us, but we are always in the market for that. We think that that type of growth is there. And as far as the cash balance goes, It's a little misleading in a sense that if you look at our inventories, you can see that we've had some decline in inventory because of the way the pandemic. Now we're building our inventory back up. And so that cash balance is fluctuating a little bit. And we're certainly over the next six to nine months going to be probably increasing our inventories because there's a lot of demand. As Tom mentioned, it's been hard to get product in. So a lot of our product is coming in and sold right away, so we want to build those inventories up. But in a nutshell, we are always in the market for acquisitions because we do think that we have a very good platform here and a lot of leverage that if we get the right acquisitions, we can make a lot of money.

Your activity, you said in your presentation, in the information you've given us so far, indicates that your boot business is doing very, very well. Now, is your main concentration going to be in that area, or it just happens to be an anomaly that because of the pandemic, maybe more people are outside?

Are you asking about future acquisitions or... What we were saying in the call is the Boggs business, which is really our only outdoor business, really held up well during the pandemic because people were getting out and doing more outdoor activities. The business has remained strong as people have come out of hibernation. And so we do have interest in expanding our outdoor portfolio, which was which partly drove us to buy the Forsake brand, which is in that same category. That's a brand that we purchased earlier this year that's a much smaller brand. But we're going to continue to look at acquisitions in the outdoor space because that is a growing area of the business.

For years, I've invested in companies such as yours, which are very low-cap companies. Many of them... Actually, sometimes there's no trading at all in the stocks. However, what I have noticed is that every company that is in that type of position, once they start to really move along in terms of increasing their earnings and sales, has been discovered. And, you know, if I look at your company, you're trading maybe 10,000 share volume a day. And I wonder if there's any possibility that you can increase your interest in your company by trying to find additional or some analysts that will help out in terms of giving you more exposure to the financial community.

Yeah, we're open to suggestions in that area. In the past, what we've found is that the stock just doesn't trade enough to really get much attention from analysts because it just doesn't have the They're going to cover companies that have the big trading volume on a daily basis, and so it's just hard to get their attention, basically. But we're open to suggestions there.

Okay, because that would certainly help. Somebody is covering the company in terms of there was some analyst that was projecting sales but not earnings. Okay. If you look at the Yahoo board, that's where I saw that. And hopefully you'll be able to move. Do you do any type of investor relations in terms of conferences that you attend or are there opportunities in your industry to get exposure through that method?

There are some of those opportunities that have been out there. We have decided or we decided not to do those as being not really valuable. We did do that after we purchased Florsheim, which was a significant acquisition for us a while ago. I think if the opportunity arose where we had something to really talk about, and I'll say a large acquisition or something that really materially changed our company, I think that there would be an opportunity to do that. We're not sure on an ongoing basis if it makes sense to do that. But the next time those things arise, we'll take a look at that. But it might be a way to get a little bit of exposure to some other people. But right now, with our float being so low percentage-wise and volume-wise, as Tom mentioned, we haven't really found that much interest in covering our company.

Okay. Thanks very much. I appreciate the answers.

Thank you for your questions.

Sure.

Thank you. As a reminder to ask a question, please press star 1 at this time. And I'm currently on no further questions at this time. I'd like to turn the call back over to John Wachowski.

Thank you very much for your interest in Waco Group. And we will talk with you after the end of the year. Have a great day.

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