Weyco Group, Inc.

Thank you for standing by, and welcome to Waco Group's fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker 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 may be recorded. Should you require any further assistance, please press star 0. I would now like to hand the call over to John Bukowski, Senior Vice President, Chief Financial Officer. Please go ahead.

Thank you. Good morning and welcome to Waco Group's conference call to discuss our fourth quarter and full year 2021 results. On this call with me today are Tom Florsheim, Tom Florsheim, Jr., our chairman and CEO, and John Florsheim, our president and COO. Before we begin to discuss the results for the quarter and for the year, 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 filed with the Securities and Exchange Commission, as well as our other filings with the SEC, The Form 10-K identifies important factors and risks that could cause our 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, 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 our customers and business partners, including the effects of any bankruptcy proceedings by such parties, and the health and welfare of our employees. Our net sales for the fourth quarter of 2021 were a record, $101.4 million, compared to last year's fourth quarter net sales of $62 million. Consolidated gross earnings were 40.2% of net sales for the quarter, compared to 44.5% of net sales in last year's fourth quarter. The decrease in gross margins was largely due to lower wholesale margins, partially offset by higher margins in our other businesses. Operating earnings were $12.8 million for the quarter, compared with $7.9 million in the fourth quarter of 2020. Quarterly net earnings rose to a record $10.3 million or $1.07 per diluted share, up from $5.1 million or $0.52 per diluted share last year. Last year's fourth quarter results were significantly impacted by the COVID-19 pandemic. As such, comparisons of 2021 financial performance to 2020 may have limited utility. and therefore we are including selected comparisons to 2019 as appropriate. Consolidated net sales for the quarter exceeded fourth quarter 2019 levels by 17%, and operating earnings beat 2019 levels by 11%. In the North American wholesale segment, net sales for the quarter were $79.9 million, compared with $46.2 million last year, with sales up across all of our brands. Last year's fourth quarter sales of our legacy brands were lower than normal because the pandemic significantly impacted sales of dress and dress casual footwear. Sales of the Boggs outdoor brand, which were less affected by the pandemic in 2020, rose 29%, with sales up across most distribution categories. The North American wholesale segment experienced significant growth in the fourth quarter, with net sales surpassing 2019 levels by 16%. Not only did Florsheim and Boggs achieve record fourth-quarter sales, but sales of the Stacey Adams and Nunn-Bush brands rebounded to near pre-pandemic levels. While part of the sales increase can be attributed to some third-quarter orders shipping in the fourth quarter due to delays in the supply chain, we also experienced strong demand across all of our brands as consumers continued to participate in normal activities and retailers worked to restock their shelves. Wholesale gross earnings were 33.7% of net sales for the quarter compared to 39.6% of net sales in last year's fourth quarter. The decrease in gross margins in 2021 was primarily due to higher inbound freight costs as we paid premium rates during the quarter. We believe that gross margins will improve in mid to late 2022 as the supply chain stabilizes and as negotiated price increases with our customers go into effect. Wholesale operating earnings rose to $9.4 million for the quarter, up from $5.6 million in 2020, due to higher sales partially offset by the lower gross margins. Operating earnings reached 87% of 2019 levels. Net sales of the North American retail segment were $13.5 million for the quarter, compared to $8.7 million last year. Same-store sales rose 57%, due to a 52% increase in e-commerce sales and higher brick and mortar sales. Last year's brick and mortar sales were down significantly as a result of the pandemic. We closed three unprofitable retail stores in the third quarter of 2020, and one in the first quarter of 2021, and currently have four active U.S. brick and mortar locations. Retail gross earnings as a percent of net sales were 66.2% and 66.7% in the fourth quarters of 2021 and 20, respectively. Retail operating earnings totaled $3.3 million, up from $2.7 million last year, with earnings up at brick and mortar locations and in e-commerce. The retail segment posted its highest ever quarterly sales and operating earnings results in the fourth quarter of 2021, significantly outpacing the comparative 2019 levels by 48 and 116% respectively. While most of the sales increase was driven by e-commerce growth, brick and mortar sales at our remaining locations also surpassed 2019 levels. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $8 million for the quarter, compared with $7.1 million in 2020. The 2021 increase was at Florsheim, Australia, with sales up in both its retail and wholesale businesses, partially offset by the lower sales at Florsheim Europe, which we are in the final stages of winding down. Gross earnings in our other businesses were 61.1% of net sales for the quarter, compared to 48.6% of net sales in the fourth quarter of 2020. Collectively, Florsheim Australia and Florsheim Europe had operating earnings totaling $41,000 for the quarter versus operating losses of $393,000 last year. The improvement between periods was primarily due to lower operating losses at Florsheim Europe. Other net sales for the quarter reached 88% of 2019 levels, with Florsheim Australia beating 2019 levels, offset by lower sales at Florsheim Europe. Lockdowns imposed in Australia were lifted, which allowed us to reopen all of the Florsheim Australia's retail stores during the quarter. We will now discuss our full year 2021 results. Our consolidated net sales in 2021 were $267.6 million, compared with $195.4 million in 2020. Consolidated gross earnings. were 40.1% and 40.2% of net sales in 2021 and 20, respectively. Operating earnings rose to $25.7 million, up from operating losses of $7.6 million last year. Net earnings were $20.6 million, or $2.12 per diluted share in 2021, compared to net losses of $8.5 million, or $0.87 per diluted share in 2020. Our 2020 results were significantly impacted by the pandemic due to most brick and mortar retailers being closed for a majority of the second quarter and an overall decrease in consumer demand. Additionally, last year's operating results included non-recurring charges totaling $11.9 million. Consolidated net sales for the year recovered to 88% of 2019 levels and operating earnings reached 95% of 2019 levels. North American wholesale net sales were $205.4 million in 2021 compared to $152.2 million in 2020, with sales up across all brands. Last year's sales of our legacy brands were down significantly as a result of the pandemic. Sales of the Boggs outdoor brand rose 17%, with sales up across most distribution categories. Wholesale gross earnings as a percent of net sales were 33.8% in 2021 and 35.5% in 2020. The decrease in gross margins was largely due to higher inbound freight costs as previously discussed. Selling and administrative expenses were $49.9 million or 24% of net sales versus $53.1 million or 35% of net sales in 2020. 2021 expenses included income of $5.5 million in wage subsidies received from the U.S. and Canadian governments and expense of $1.1 million to write off certain assets related to the closing of Florsheim Europe. 2020 wholesale expenses included $4.8 million in non-recurring charges. Wholesale operating earnings rose to $19.5 million in 2021 from $975,000 in 2020 to due mainly to higher sales. 2021 wholesale sales and operating earnings rose to 85% and 70% of 2019 levels, respectively. Business recovery was sluggish early in 2021, with the first quarter still being impacted by the pandemic, but operations improved significantly after COVID vaccinations were rolled out in the second quarter. In our North American retail segment, net sales were $31.6 million in 2021 and $21.5 million in 2020. Same-store sales rose 53% due to a 43% increase in e-commerce sales and higher brick and mortar same-store sales. For the year, retail gross earnings rose to 66.4% of net sales, up from 64.8% of net sales in 2020. with gross margins up at both active brick-and-mortar locations and in e-commerce. The retail segment had operating earnings of $6.7 million in 2021, compared with operating losses of $1.1 million in 2020. Last year's losses included $2.6 million in non-recurring charges. The improvement in 2021 was due to the benefit of closing unprofitable stores, higher e-commerce earnings, and improved performance at active brick-and-mortar locations. 2021 retail sales and operating earnings surpassed 2019 levels by 25% and 138% respectively. The increases were primarily due to growth in our more profitable e-com business. Our other operations had net sales of $30.7 million in 2021, compared with $21.7 million in 2020. Increase was at Florsheim Australia, with sales up in both its retail and wholesale businesses. For the year, other net sales amounted to 84% of 2019 levels, with Florsheim Australia reaching 93% of 2019 levels, offset by lower sales at Florsheim Europe. Growth earnings in our other businesses were 55.8% of net sales in 2021 versus 48.8% of net sales in 2020. Collectively, Florsheim Australia and Europe had operating losses totaling $404,000 in 2021, compared with operating losses of $7.5 million in 2020 and $3.5 million in 2019. Florsheim Australia had operating earnings of $118,000, resulting from improved gross margins and cost reductions. Last year's losses included $4.5 million in non-recurring charges. The improvement in 2021 was primarily due to stronger results at Florsheim, Australia. At December 31, 2021, our cash, short-term investments, and marketable securities totaled $38 million, and there were no amounts outstanding on our revolving line of credit. During 2021, we generated $6.4 million of cash from operations. We used funds to pay $9.3 million in dividends, invested $8.1 million in short-term investments, and repurchased $2.5 million of our stock. We also spent $2.6 million to acquire the Forsake brand and had $1 million of capital expenditures. We estimate that our 2022 annual capital expenditures will be between $2 and $3 million. On March 8th, 2022, our board of directors declared a quarterly cash dividend of 24 cents per share to all shareholders of record on March 18th, 2022, payable on March 31, 2022. I would now like to turn the call over to Tom Floresheim, Jr., our chairman and CEO.

Thank you, John, and good morning, everyone. As John mentioned, we had an outstanding end to the year with record wholesale shipments in the fourth quarter and strong performances across all brands. Our results reflected two underlying trends. First, The slow unwinding of the supply chain bottleneck as we started to receive significant quantities of footwear in the fourth quarter. The incoming shipments allowed us to fill a portion of the demand pipeline as we are still in the process of getting retailers back to their natural inventory models. And second, we are seeing outstanding consumer response to our product offerings in both legacy and outdoor brands. Our Boggs brand has been solid across the pandemic time frame, so it was especially meaningful that we had a record fourth quarter for Boggs. Our classic weather boot styles experienced elevated demand in multiple distribution channels, ranging from department stores in cities to farm and agricultural stores in rural communities. In addition, we greatly expanded sales of our casual and lifestyle footwear from a wholesale and direct-to-consumer perspective. Relative to 2019, our Boggs e-commerce business in North America was up over 100% for both the fourth quarter and for all of 2021. The Boggs brand is in a good place as we build off the strong momentum over the past two years and push successfully into new categories. In June of 2021, we acquired the Forsake brand, which joined Boggs as part of our outdoor group in Portland. Over the past few months, we've been working with Forsake's founders, Jake Anderson and Sam Barstow, to onboard the brand and to determine opportunities to expand Forsake's reach both in the wholesale and direct-to-consumer channels. Similar to our other brands, Forsake faced certain supply chain constraints and delays, but we believe we're making good progress in terms of putting the right structure in place for future growth. Our legacy brands, which encompass Forsheim, Stacey Adams, and Nunn-Bush, had a robust fourth quarter. In previous calls, we've discussed the demand roller coaster associated with the dress and dress casual business. We went from nearly non-existent demand in early March to unprecedented interest a few months later, and that trend continued largely through the end of 2021. The fall off in the refined footwear category early in the pandemic followed a long period where the category had already been under pressure due to the increased importance of athletic and athleisure casual footwear in today's lifestyle. As a result, At the onset of COVID, many of our competitors pulled back or exited from the dress shoe business, which put us in a strong position to pick up significant market share when the business bounced back. While we remain committed to diversifying our legacy product mix, we also recognize that we have a tremendous opportunity to be the leader in a still sizable category in the footwear world. As we look forward in 2022, we see good things on the horizon with more workers returning to the office and and increased social events, including a record forecast for weddings, all of which bodes well for our business. While we are excited with how our legacy brands have benefited from the comeback of dress footwear, an underlying story in the recent success we have had introducing products in the casual and athletic vein. For example, the number two collection, on Foreshine e-commerce for 2021 was a sneaker program, and four of the top 15 shoes were true casuals. This type of consumer acceptance is something that we could not have imagined two years ago. We have a similar success story with Nunn-Bush as its number two wholesale package last year was a sneaker collection. As we look back over the last two years, we feel good about the work we have done during the pandemic to pick up market share in our traditional business while at the same time pushing it into new categories and positioning ourselves for additional opportunities. In terms of our retail business, we posted our highest ever quarterly sales, which was driven by a 52% increase in e-commerce. Online transactions account for the vast majority of our retail sales, and our fourth quarter growth is all the more impressive when you consider we were going against double-digit increases in the fourth quarter of 2020. We are trending well above industry e-commerce growth numbers, which speaks to both the strength of our brands as well as our execution in this space. We continue to invest resources in marketing and analytical tools to build our e-commerce platform as we see this area as a key piece of our growth model moving forward. We are also planning to invest in our distribution center to enable us to process and ship more efficiently the large increase in e-commerce orders, which we have experienced over the past several years. In terms of our international performance, we had an increase in the fourth quarter sales and profitability from Florsheim, Australia, which includes the markets of New Zealand, South Africa, and the Pacific Rim. Australia reopened retail in October after months of lockdowns, which put us in the position to end the year on a stronger note. Overall, 2021 was a turnaround year for overseas markets. We exited an unprofitable European Foreshine business and signed a long-term licensing deal brand in that region. We also reset our Australian business with more favorable retail leases, increased wholesale sales for Boggs and Foreshine, and experienced solid growth in our e-commerce business. We are optimistic that the changes made will allow for our international business to once again be a steady, profitable contributor to Waco Group. Our overall inventory levels were 71 million at December 31st, 2021, compared to 59 million at the end of 2020. As explained in our last call, our inventory includes both inventory in transit to our distribution center and also on hand inventory. Before the supply chain issues, typically about 10 to 20% of our inventory was in transit, so we did not break our inventory down in our reporting. As of December 31st, 2021, 59% of the $70 million or 1.9 million peers was in transit, with 41% or 1.3 million peers on hand in our distribution center. We continue to receive a much higher number of containers on a daily basis than normal, and this has allowed us to maintain strong shipments to our customers and start building back inventory levels on core product that is needed for at-once business. Our wholesale gross margins for the quarter were 33.7% versus 39.6% in the fourth quarter of 2020. As John stated, most of the decrease in gross margin was due to higher shipping costs. Starting in January 2022, we raised our selling prices, which will offset some of this margin loss. As we move into fall 2022, we will have a second price increase go into effect, which will cover both freight and factory price increases, and that is when we expect to see wholesale margins improve. We are continuing to see strong demand for our brands across the board and expect that both pipeline fill and strong consumer demand will drive our business as we move into 2022. We expect our first quarter 2022 volume to be significantly better than 2021, not only because demand is up, but also because the first quarter of 2021 was still somewhat impacted by the pandemic. As of March 1st, 2022, the company's North American wholesale backlog was the highest in the company's history. We have bought aggressively, especially on core products, to make sure that we can fulfill demand as well as builders our in-stock inventory back to normal levels. 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.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star 1 on your touchtone telephone to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And again, to ask a question, press star 1 on your touchtone telephone. Our first question comes from the line. John Dysher of Pinnacle. Your line is open.

Good morning, everyone, and a nice way to wrap up the year. Congratulations. Thank you. Hi, John. I'm just curious about a couple things. One, the price increases that you just mentioned, you said January of this year, and when was the second one going into effect?

It will be July, so for the second half of the year. Okay. Okay.

And do you anticipate those price increases to recoup part of the increase in freights and raw material costs, or how should we think about the recovery of the inflation that everyone is seeing these days?

Yeah, that's a great question. It's a little bit of a moving target because when we started this year, we felt that freight costs would probably come down in the second half of the year. and that would be a big help. But I think with everything going on in the world today, we're not so sure about that anymore. And so, you know, there's a lot of different pieces that are involved, and so my answer to you isn't going to be 100%. I would say that our best guess is that in the fall, I think we're still going to be down a little bit margin-wise. I would say... you know, 2% to 3%. But, you know, if freight costs get anywhere closer to normal, that will not be the case. You know, what we tried to do with the second price increase was cover most of the freight increase. And so we're hoping to see really improved margins in the second half. I don't know if that gives you as definite an answer as you wanted, but that's kind of our best guess.

Okay, so that covers the freight, but what about raw material costs?

Raw material prices we've covered. And so we really have covered those increases. The increases we had for the first half of 22 are covered, and same with the second half. The real challenge to our margins is in these freight costs. And so... Also, the way our buying works, we have basically locked in our pricing with all of our factories for the remainder of the year. We've covered most of our needs for this whole year at the current pricing, so we don't expect any surprises there. The other thing to consider is because our backlog is way up, we are seeing big increases in volume. as we have started this year. And so even though we have this pressure on gross margin percentages, our total gross margin dollars are up, and we feel that they're going to be up considerably for the year.

Okay, good. So it sounds like freight is still an issue, but there's no bottlenecks in terms of you getting supply.

Well, that's not 100% true either. You know, We still are seeing some bottlenecks. There's no doubt about that. But we have so much. Two things. We're placing orders earlier, trying to give ourselves more time so that for fall, for example, we're bringing in product as early as we can. So even if the supply chain bottlenecks cause delays, we're hoping that we're going to be able to ship boots in August and September, which we were not able to do in fall. of 21 just because everything came in two or three months late. The other thing is we have the pipeline so full between our factories and our distribution center that even though there are continuing to be delays, just because we have so much in transit, we're receiving a record number of containers every day. So we're getting in product, but that's almost in spite of the supply chain bottlenecks, but not because they've completely gone away. And, you know, it's different at different ports, and, you know, for a while it seems like it's getting better, and then, you know, because of various things that are happening around the world, it gets bottlenecked again. But in general, we are getting in product, and because of planning, we feel that we're going to be able to do a much better job shipping our customers at the appropriate time seasonally.

Okay, great. That's helpful. No change in tariffs at this point? There's still what we've talked about in the past coming in from the Far East?

Yeah, no change.

No change in tariffs. Okay. Talk to us about the Forsake brand. When will that plan – come into effect? What's your target market for that product line?

I'm going to turn that question over to John Forsheim.

Hey, John. The target market is younger. It's 50-50 male, female. We're really looking more in the 25 to 40-year-old range, maybe even a little younger than that. It's outdoor. It's an adventure enthusiast. It's a very different product category within our mix. It fits more with our outdoor group in Portland. In terms of when that's going to come online, we're still really in the onboarding process. It's been for, say, deliveries this fall. We're caught up in and some of the supply chain bottlenecks that Tom referenced. And so we were a little late in deliveries for the fall. And then in terms of getting new product online as well. So we really look at this more as something that's gonna evolve and grow in 2023. And we also see this as It's an important wholesale opportunity, but we also see it as important within our mix of direct-to-consumer as far as our e-commerce portfolio. It addresses a younger consumer. They built a nice niche e-commerce business on their own, and we feel that we can use some of the tools that we have here that have worked for other brands to grow Force 8 online. Does that answer your question?

Yeah, that's very helpful. So it sounds like no meaningful sales contributions until 2023. Is that fair?

I would say 2023 would be where we expect to really see the work that we're doing since we purchased the brand to come to fruition.

Okay, good. Well, good luck with that. And two final kind of financial questions. Will there be any, with the closing of Europe, will there be any additional expenses that slash over into 2022? No, no.

We took all the write-offs that we needed to between 2020 and 2021. Okay, good. That's helpful.

And then on the share buyback, you spent $2.5 million last year. How many shares did you repurchase, and what's left on the authorization?

Last year, we purchased 125,000 shares. We had 210,000 left as of the end of the year. But during the first quarter so far, we bought about 50,000 shares. and so there's about $160,000 left on that original buyback or that buyback amount. That amount can be changed at our discretion, but what's authorized right now is $160,000 as of right now.

Right, okay, $160,000 shares.

And we have bought back $50,000 more in the first quarter so far.

Okay, so that leaves $160,000. If you decide to increase it, does that merit disclosure in terms of the board deciding to increase it?

Yes, we would disclose it. It would be board approved, and we would disclose it. Okay, great.

That's all I have. Thanks very much, and good continued luck.

Thanks, John. Thanks for the questions.

Thank you. Again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. As there are no further questions in queue, I'd like to turn the call back over to Mr. Wachowski for any closing remarks. Sir?

Thank you. Thanks, everyone, for joining us today for our conference call, and we look forward to talking to you on May 4th for our next quarterly update. Have a great day.

This concludes today's conference call. Thank you for participating.