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.