Weyco Group, Inc.

Thank you for standing by and welcome to Waco Group's first quarter 2022 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 call may be recorded. Should you require any further assistance, please press star 0. I would now like to turn the call over to your host, John Wachowski, CFO. Please go ahead.

Thank you, good morning everyone. Welcome to Waco Group's conference call to discuss our first quarter 2022 results. On this call with me today are Tom Florsheim, Jr., our chairman and CEO, and John Florsheim, our president and COO. In addition, as previously announced, I will be retiring on May 6th, which is Friday. So with us today is also Judy Anderson, who is our current Vice President of Finance and Treasurer and who will be the CFO effective on Friday. Before we begin to discuss the results of the quarter, 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 results may differ materially. We refer you to the section entitled Risk Factors in our most recent annual report on Form 10-K and to our other filings with the Securities and Exchange Commission for a discussion of important factors and risks that could cause our actual results to differ materially from our projections. including the uncertain impact of inflation on our costs and consumer demand for our products and the continuing direct and indirect effects of the COVID-19 pandemic in the United States and Asia. Overall net sales were a first quarter record of $81.4 million compared to $46.9 million in 2021. Consolidated gross earnings were 35.8% of net sales for the quarter, compared with 41.2% of net sales in last year's first quarter. The decrease in gross margins was due to lower wholesale margins. Earnings from operations totaled $5.4 million, compared with $1.6 million in the first quarter of 2021. Quarterly net earnings rose to 4.1 million, or 42 cents per diluted share, up 1.3 million, or 14 cents per diluted share. Last year's first quarter results continued to be impacted by the effects of the COVID-19 pandemic. As such, comparisons of first quarter 2022 financial performance to 2021 may have limited utility. Therefore, selected comparisons to 2019 are included as appropriate. Net sales for the first quarter of 2022 exceeded 2019 levels by 10%. Our operating earnings also improved, beating 2019 levels by 6%. Net sales in the North American wholesale segment were a first quarter record of $67.1 million, compared with $33.4 million in 2021, with sales up across all of our brands. Last year's first quarter sales of our legacy brands were lower than normal because of the pandemic, because the pandemic significantly impacted demand for dress and dress casual footwear. The wholesale segment experienced significant growth in the first quarter of 2022, with net sales surpassing 2019 levels by 13%. Wholesale gross earnings were 30% of net sales in the first quarter of 2022, compared with 34.5% of net sales in 2021. The decrease in gross margins was primarily due to higher inbound freight costs as we continued to pay premium rates during the quarter. Wholesale gross margins are expected to improve in mid to late 2022 as the supply chain stabilizes and negotiated price increases with customers go into effect. Wholesale selling and administrative expenses were $15.3 million for the quarter compared with $10.2 million in last year's first quarter. The increase was largely due to higher employee costs as the company's sales volumes have increased. Additionally, last year's first quarter expenses were reduced by $1.8 million in government wage subsidies. As a percent of net sales, selling and administrative expenses were 23 percent in 2022 and 31 percent in 2021. Expenses were down relative to sales because many of our costs do not vary directly with sales. Wholesale earnings from operations rose to $4.8 million for the quarter, up from $1.4 million in the first quarter of 2021 due to higher sales partially offset by lower gross margins and higher selling and administrative expenses. Net sales of our North American retail segment were a first quarter record of $7.9 million compared with $5.6 million in 2021. Same-store sales rose 39%, due to a 38% increase in e-commerce sales, with sales up on all brands' websites and higher brick-and-mortar sales. Last year's brick-and-mortar sales were down significantly as a result of the pandemic. Retail net sales in the first quarter of 2022 surpassed the 2019 levels by 41%. While most of the increase was driven by e-commerce growth, Brick and mortar sales at our four remaining locations also collectively exceeded 2019 levels. Retail gross earnings as a percent of net sales were 65.9% and 65.3% in the first quarters of 2022 and 2021, respectively. Selling and administrative expenses for the retail segment were $4.4 million for the quarter compared with $2.9 million last year. The increase was primarily due to higher e-commerce expenses, primarily freight and advertising. Retail operating earnings were $828,000 for the quarter compared to the $756,000 last year. The increase was primarily due to improved performance at active brick-and-mortar locations. Earnings from our e-commerce businesses were down slightly for the quarter as increased sales were offset by the higher expenses. Our other operations have historically included the wholesale and retail businesses of Florsheim Australia and Florsheim Europe. However, as previously disclosed, the company has closed Florsheim Europe and is in the final stages of winding down this business. As a result, the 2022 operating results of the other category reflect only that of Florsheim Australia. Other net sales for the first quarter totaled $6.4 million compared to $7.9 million in 2021. The decrease was due to the closing of Florsheim Europe and lower sales in Florsheim Australia. Florsheim Australia's net sales fell 8% for the quarter, with sales down in both its wholesale and retail businesses. The weakening of the Australian dollar relative to the U.S. dollar also contributed to the decrease, as Florsheim Australia's net sales in local currency were only down 2%. Retail sales in Australia, which account for a majority of Florsheim Australia's sales, were up 7% for the quarter in local currency, but these results were offset by lower sales in Asia due to the additional lockdowns imposed in Hong Kong during the quarter. Florsheim Australia's net sales for the first quarter of 2022 reached 89% of 2019's levels. Other operating losses totaled $243,000 for the quarter versus operating losses of $481,000 last year. The improvement between periods was primarily due to the shedding of losses at Florsheim Europe. At March 31, 2022, our cash, short-term investments, and marketable securities totaled $34 million, and there were no amounts outstanding on our revolving line of credit. During the first three months of 2022, we generated $231,000 of cash from operations and liquidated $8.1 million of investment securities. We used funds to pay $2.3 million in dividends and repurchase $1.8 million of our company stock. We also had $352,000 of capital expenditures. We estimate that our 2022 annual capital expenditures will be between $2 and $3 million. On May 3, 2022, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on May 27, 2022, payable on June 30, 2022. I would now like to turn the call over to Tom Florsheim, Jr., our Chairman and CEO.

Thanks, John, and good morning, everyone. We continue to be very pleased with the strong results of our wholesale business with a 13% gain over 2019. This performance resulted in record first quarter wholesale sales for the company as two of our brands, Floresheim and Boggs, registered individual record first quarter sales. Boggs sales rose 72% for the quarter, which is on top of a 17% annual increase last year. Part of the reason for the strong increase is we were in a much better overall inventory position on classic BOGS product versus 2021. Sales would actually have been higher if not for some supply chain delays on lighter weight spring product. BOGS has been on a very strong run and we feel good about the mix of classic and lifestyle product in our backlog and look forward to a strong second half of the year. We are very excited about our momentum and the additional opportunities that retailers are giving Boggs to expand their range. This bodes well for the future. Regarding the legacy brands, the comparison to last year is not relevant since much of the country was still restricted from a social event and work perspective. However, in comparison to 2019, two of our three legacy brands had strong increases in including the aforementioned record for Florsheim, with a 17% increase over 2019, as well as a 24% increase for Nunn-Bush. Stacey Adams sales were 80% of 2019 levels. In many instances, we are still filling the pipeline with our major retail partners, and we anticipate we will be chasing inventory due to supply chain disruptions with certain footwear packages into the second half of 2022. The good news is that we continue to experience strong sell-throughs and high average unit retails, even as the inventory at retail works back toward more normalized levels. The dress and refined casual markets remain particularly robust with record social events on the calendar and the gradual return to an office work environment. While we are selling a significant amount of dress shoes, we realize that eventually the market will return to a more normalized level as men restock their closets. As mentioned in previous conference calls, our design emphasis during the pandemic has been to further develop the casual side or legacy business in keeping with the particular DNA of each brand. We are encouraged by our progress. Today, Nunn-Bush very much has a casual profile, and both Stacey Adams and Forsheim are increasing their casual mix. This period of time has allowed us to move down the learning curve and expand our casual range with the realization that the post-pandemic world will likely embrace a more relaxed lifestyle. We know we are picking up market share on the tailored side of the business, and our objective is to also increase our penetration of men's casual business over time. We had strong growth in the retail business driven by a 38% increase in our e-commerce segment. While we were up significantly in sales, one caveat is that higher e-commerce shipping and advertising costs reduced our profitability. We are working to mitigate these cost increases while maintaining a solid growth trajectory, as internet sales are an important piece of our future business model. We are very pleased that our four remaining brick and mortar stores had solid performances with an increase versus 2019. Regarding Florsheim, Australia, which includes New Zealand, the Pacific Rim, and South Africa, our sales were down 8%. The Omicron outbreak in Hong Kong and the Pacific Rim significantly reduced both wholesale and retail sales in that region. However, our business in the Australian and New Zealand markets was actually up slightly, and local currency, even with the increased case count versus nearly a zero case level for the same period in 2021. We are encouraged that retail traffic increased as the quarter progressed, and we believe that our position is strengthening in this market. As mentioned previously, the pandemic has enabled us to reset our business model on the Australian continent. A combination of more manageable leases, e-commerce growth, and the continued growth of our Boggs Australian business puts us in a much better position to achieve a profitable year in that region. Our overall inventory levels were 62.1 million as of March 31st, 2022, compared to 47.3 at the end of March 2021. We are continuing to build our inventory levels as required to support the increased demand for our products. Our total gross margins for the quarter were 35.8% down from 41.2% in 2021. Our North American wholesale gross margin for the quarter was 30% down from 34.5% a year ago. Shipping costs continue to put pressure on our margins. However, as discussed during last quarter's call, we have another price increase taking effect in July, which will help our margins. Fortunately, Our revenues for the quarter were high enough to produce an increase in total gross margin dollars compared to 2019. 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 again. As a reminder to ask a question, you will need to press star 1 on your telephone. Again, that's star 1 on your touch-tone telephone to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Once again, that's star 1 on your touch-tone telephone. And our first question comes from the line of David Wright of Henry Investment. Your line is open.

Yeah, hi. Good morning. Can you talk about the size of the price increases that you're – you're implementing percentage-wise?

Sure. I mean, we've had a few different price increases. We started raising our prices in the fall of 21 and have continued throughout this year. So we've had a number of price increases. The first one was in the range of 8%. The second, I would say that to give you a ballpark number all in, we've probably raised our prices in total around 15%. Okay.

And just in terms on the input side, so freight rates are up. Can you put any context on that? You know, like it used to cost us $2 to get a pair of shoes to the States. Now it costs us $3. Sure. Any context that way?

Yes. Yeah. In fact, we spend a lot of time looking at that. And basically, pre-pandemic, freight from Asia cost roughly $1.10 a pair. That was what we used as an accounting cost. Today, freight from Asia is roughly $3.75 per pair. From India, it's been a little bit higher. It was $1.50. Pre-pandemic, it's probably gone up closer to $4.00. And so those numbers are pretty close to what we're paying right now. And, you know, we're hoping eventually that goes down. But right now that's where it stands. And so they've quadrupled.

Okay. And then my last question, again, kind of around the inflation theme. In terms of, you know, the raw materials to have your shoes made, any particular pressure points with particular materials?

Is far, no, I mean, I don't think, so you're asking are certain materials going out more drastically?

I'm sorry, is inflation affecting what it costs you to make a shoe the way it's affecting what it costs somebody to build something that has other raw materials in it like steel, et cetera?

Absolutely. I mean, we're seeing raw material increases across the board. That situation is stabilized. I mean, the big increases were really in the middle of 2021, and we've had some subsequent increases, but it's stabilized quite a bit. And so we're not getting a lot of increases today on raw materials. But when you go back to last year, We had increases on the chemicals that we use for finishes. We had increases on the materials that we use for bottoms and footbeds and midsoles. You had labor increases overseas, which had an impact. And so it was really pretty much across the board. And, you know, fortunately, the increases – We're somewhat manageable, I would say, compared to what we've seen in other industries. And really, when you analyze it, the freight increase is the most problematic.

Interesting. Well, look, you've had great results since coming out of the pandemic. It's nice to have something in the portfolio that – is stable and doesn't produce too many negative surprises. So please keep up the good work, and thanks for taking my questions.

Thanks for your questions and your nice comments. Thank you.

Thank you. Once 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. Our next question comes from John Dasher of Pinnacle. Your line is open.

Good morning, everyone. Hi, John. Solid quarter. And I just have a couple of quick questions. Regarding the prior discussion of price increases, we're reading a lot about consumers and therefore some retailers pushing back against price increases. I'm just wondering if you're seeing any of that yet amongst your customer base.

No, we really aren't. we are not feeling pushback for the reason that when you look at what the retailers are selling our product for, their margins are better than ever. And, John, we get reports every week from all of our major customers, and we're able to look at our sell-throughs on each individual shoe that we have in those retailers as well as what the sell-through percentage is and what the out-the-door prices are. Right now, the retailers that we sell, at least in the channels that we sell, are healthier than ever from the standpoint of what the margin is that they're getting, even with some of the higher prices that we're charging. I think that the general realization in our industry is that there is a lot of inflation. They're accepting the higher prices. They're raising their retails, and it's working out. Now, You know, the question in the back of everybody's mind is, you know, when is the consumer going to say, you know, I'm not going to pay XYZ for a pair of shoes. And so, you know, we're trying to be as cautious as we can. We're fighting back on all the price increases. We're doing whatever we can to mitigate those. But so far, we have not had a problem passing on price increases, which I think is the main question.

Right. Okay, good. And the price increase you mentioned that occurs in July, how much will that be?

The one, you know what, the exact percent, it's difficult for me to give you, but I would say it's roughly in the 5% range. And then we actually are raising prices again as we sell in spring. And so, you know, we've been doing this in a – gradual way, I guess. And part of that is because our lead times for selling in are so long that it takes us a while to catch up. But I would say the one for fall is in the neighborhood of 5%.

Okay. Thanks. That's helpful. Boggs is doing very well, as you mentioned. And I would guess those shoes are in transit for the fall. I'm just curious, any anticipated bottlenecks yet? For Boggs, are you certain you're going to have full representation on the shelves by the time the fall comes?

We hope so. We buy Boggs very early. And so, in fact, we're buying all of the brands early, anticipating that there will be bottlenecks. The situation, I would say, with the supply chain, is a little bit better, but then you always have new things that pop up. I mean, right now in China, as I'm sure you've been reading, they've got pretty bad COVID in some of the larger cities, and so that's impacting some of the ports. Right now, all of our factories are still making shoes in China, but it's more challenging to get the shoes to the ports in some areas. So we're monitoring that very carefully, but I think that The key thing is we've gotten much better as a company at navigating all this, and we've pulled all of our timelines for buying footwear forward, and a lot of the retailers are working with us and giving their orders earlier, and if they're not, we're speculating a little bit more than normal. But the only way you can really ensure that you're going to have shoes on time for the seasons, in this case fall, is just buying really early, anticipating that the transit times are going to be doubled because that's what they've been, and that you could have other things pop up. And so we're just trying to just bring in product as soon as possible. And we have the pipeline very full between the factories in Asia and Milwaukee, and we're still getting in a lot of containers every day and building our inventories here.

So you're confident that, there won't be any issues getting the shoes in time for fall at this point in time.

Yeah, I, you know, I feel that we've done everything possible, John, but there are some uncertainties still because, you know, obviously if China, if China's, they have the zero tolerance policy, you know, which with Omicron just hasn't worked very well. So if things change, get a lot worse over there. They start shutting down cities where we make shoes that could have an impact. You know, we're really hoping that doesn't happen. You know, we've got a great flow of shoes right now and boots right now. So, I mean, I would say I'm pretty confident, but I can't give you 100% on that.

Yeah, okay, so we understand. Related question, is Forsake, the Forsake brand going to be present in the stores for fall season, or is that more of a 2023 product?

John, this is John Forshak. It's present in the stores, but we've been onboarding Forsake throughout the year. I think the big changes that we're going to be making with Forsake in terms of new product are going to take place largely in 2023. So, you know, we do have some new product for fall 22, but, you know, we'll be venturing into new categories, you know, in spring 23 and fall 23. Okay, great.

That's helpful. One final financial question. You bought back $1.8 million worth of stock. in the quarter, how many shares was that, and what's left on the authorization?

The number of shares that was was about 78,000 shares, and we have 1.1 million shares left on the buyback. We had 135,000, and we just authorized an additional million shares, so there'll be 1.1 million available.

1.1 million shares. Right.

Okay, good.

That's helpful. Great. Thanks very much, and good luck going forward.

Thanks, John.

Thank you. Once 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 appear to be no further questions in queue, I'd like to turn the call back over to John Wachowski. for closing remarks.

Sir? Thanks, everyone, for joining us on our quarterly conference call, and I hope everyone has a great day. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.