Weyco Group, Inc.

Good day and thank you for standing by. Welcome to the Waco Group, Inc. fourth quarter and full year 2023 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Judy Anderson, Chief Financial Officer. Please go ahead.

Good morning and welcome everyone to Waco Group's conference call to discuss fourth quarter and full year 2023 results. On this call with me today are Tom Florsheim, Jr., Chairman and Chief Executive Officer, and John Florsheim, President and Chief Operating Officer. Before we begin to discuss the results for the quarter and year, I will read a brief cautionary statement. During 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 the section entitled Risk Factors in our most recent annual report on Form 10-K which provides a discussion of important factors and risks that could cause our actual results to differ materially from our projections. These risk factors are incorporated herein by reference. They include, in part, the uncertain impact of inflation on our costs and consumer demand for our products, increased interest rates, and other macroeconomic factors that may cause a slowdown or contraction in the US or Australian economies. Net sales for the fourth quarter of 2023 were $80.6 million, down 19% compared to last year's fourth quarter net sales of $99 million. Consolidated gross earnings increased to 50.3% of net sales for the quarter, compared to 46.6% of net sales in last year's fourth quarter, due mainly to higher gross margins in our North American wholesale segment. Quarterly operating earnings were $11.5 million, down 24% compared to record operating earnings of $15.1 million in the fourth quarter of 2022. Net earnings were $8.5 million, or $0.90 per diluted share, for the quarter compared to $10.2 million, or $1.06 per diluted share, for the fourth quarter of 2022. In the North American wholesale segment, net sales for the quarter were $59.6 million, down 21% from $75.5 million last year. The decrease was primarily due to a 32% decline in box sales, but also due to decreased sales across our legacy brands as a result of weaker demand. Wholesale growth earnings were 44.9% of net sales for the quarter compared to 41.3% percent of net sales in last year's fourth quarter. Gross margins improved as a result of lower inventory costs, primarily inbound freight. Wholesale selling and administrative expenses totaled $18.9 million for the quarter compared to $20.5 million last year. The decrease was largely due to lower employee costs, mainly commission-based compensation. As a percent of net sales, wholesale selling and administrative expenses totaled 32% for the quarter versus 27% last year. Wholesale operating earnings totaled $7.9 million for the quarter, or down 27% compared to $10.7 million in 2022, primarily due to lower sales. Net sales in our North American retail segment were $13.9 million for the quarter, down 3% compared to record sales of $14.3 million last year. The decrease was primarily on the Boggs e-commerce website as a result of lower demand. Retail growth earnings as a percent of net sales were 65.8% and 64.5% in the fourth quarters of 2023 and 2022, respectively. Retail selling and administrative expenses totaled $5.6 million for the quarter compared to $5.9 million last year, down as a result of lower web advertising costs. As a percent of net sales, retail selling and administrative expenses were flat at 41% in both this year and last year. Retail operating earnings reached a record $3.5 million in the fourth quarter of 2023, up 6% over $3.3 million in 2022. The earnings improvement resulted from lower costs in the fourth quarter of 2023. Our other operations consist of our retail and wholesale businesses in Australia, South Africa, and Asia Pacific, collectively referred to as Florsheim Australia. However, as previously disclosed, we ceased operations in the Asia Pacific region in 2023 and are in the final stages of winding down this business. Net sales of Florsheim Australia were $7.2 million, down 23% from $9.2 million in the fourth quarter of 2022. In local currency, Florsheim Australia's net sales were down 22%, due mainly to the loss of a sizable wholesale customer in Australia earlier this year, but also due to lower retail sales in the Asia Pacific region as a result of its wind down. Florsheim Australia's gross earnings were 65.4% of net sales for the quarter compared to 61.8% in the fourth quarter of 2022. Its operating earnings were $200,000 for the quarter compared to $1.1 million last year, down due to lower sales volumes this year. We will now discuss our full year 2023 results. Consolidated net sales for the full year were $318 million, down 10%, compared to record sales of $351.7 million in 2022. Consolidated gross earnings increased to 44.9% of net sales in 2023 from 41.1% last year, due mainly to higher gross margins in our North American wholesale segment. Full year 2023 operating earnings were a record $41 million, up 2% over our previous record of $40.4 million in 2022, despite lower sales. Net earnings were a record $30.2 million, or $3.17 per diluted share in 2023, up 2% compared to $29.5 million or $3.07 per diluted share in 2022. North American wholesale net sales were $250.4 million in 2023, down 12% compared to record sales of $283.2 million in 2022. The decrease was primarily due to a 31% decline in bog sales compared to record sales for the brand last year. Sales of the Stacey Adams, Florsheim, and Nunn-Busch brands were also down for the year due to lower demand following strong growth last year. Wholesale growth earnings as a percent of net sales were 39.7% in 2023 and 35.6% in 2022. Growth margins improved as a result of increased selling prices and lower inventory costs, primarily inbound freight. Wholesale selling and administrative expenses totaled $66 million in 2023 compared to $68.2 million in 2022. The decrease in 2023 was primarily due to lower employee costs, mainly commission-based compensation. As a percent of net sales, wholesale selling and administrative expenses were 26% in 2023 and 24% in 2022. Wholesale operating earnings reached a record $33.3 million in 2023, up 2% over our previous record of $32.6 million in 2022 due to higher gross margins and lower selling and administrative expenses. In our North American retail segment net sales were a record $38 million in 2023, up 4% over our previous record of $36.7 million in 2022. The increase was primarily due to higher sales across our legacy brands' websites, partially offset by lower sales on the BOGS website. Sales at our four domestic brick and mortar stores were down 4% for the year. Retail growth earnings were 65.9% of net sales in 2023 and 65.7% of net sales in 2022. Retail selling and administrative expenses totaled $18.3 million or 48% of net sales for the year compared to $18.1 million or 49% of net sales last year. The retail segment achieved record operating earnings of $6.8 million in 2023, up 11% over $6.1 million in 2022, due mainly to the increase in web sales. Net sales at Florsheim Australia totaled $29.6 million in 2023, down 7% from $31.8 million in 2022. In local currency, Florsheim Australia's net sales were down 3% for the year, with sales down in its wholesale businesses due to the previously mentioned mid-year loss of a wholesale customer in Australia. partially offset by higher sales across its retail businesses. Floresheim Australia's gross earnings were 62.5% of net sales in 2023 versus 61.1% of net sales in 2022. Its operating earnings totaled $1 million in 2023 and $1.7 million in 2022, down as a result of lower net sales. At December 31st, 2023, our cash and marketable securities totaled $75.9 million and we had no debt outstanding on our $40 million revolving line of credit. During 2023, we generated $98.6 million of cash from operations due mainly to net earnings and reductions in inventory levels. We used funds to pay off $31.1 million on our line of credit to pay $9.3 million in dividends and to repurchase $4.3 million of our common stock. We also had $3.3 million of capital expenditures. We estimate that our 2024 annual capital expenditures will be between $2 and $4 million. On March 5th, 2024, our board of directors declared a cash dividend of 25 cents per share to all shareholders of record on March 15, 2024, payable March 29, 2024. I would now like to turn the call over to Tom Floersheim, Jr., Chairman and CEO.

Good morning, everyone. As Judy mentioned, we experienced a slowdown in sales as our overall wholesale shipments were down 21% versus a strong fourth quarter last year. The retail environment remains difficult for footwear and apparel as consumers are spending more of their discretionary income on experiences and services. Retailers in turn are being cautious in regards to their inventory levels. While we recognize we are in a challenging period for our industry, we are pleased with our overall financial performance in 2023. We achieved record wholesale operating earnings by maintaining our price integrity while taking a disciplined approach to our expenses. BOG sales were down 32% in the fourth quarter and 31% for the year. Mild weather throughout the fall and early winter in combination with an inventory glut in the outdoor market made for a tough 2023. We believe the outdoor boot market will remain challenging throughout 2024 as retailers right-size their inventories. With Boggs, we are focused on moving the business forward through product innovation with an emphasis on Boggs seamless rubber boot construction. Boggs seamless construction is 30% lighter than comparable vulcanized rubber boots and over twice as durable as measured by the number of flexes our seamless boots can withstand without any sign of cracking. This year, we are expanding the number of seamless boots in our line across numerous price points. Consumers and retailers are excited about this technology which positions us well for future sales growth. In addition to the expansion of our seamless collection, we are also introducing new non-insulated and lightly insulated footwear so the Boggs brand is less dependent on inclement weather. Our overall legacy business declined 16% for the quarter and 5% for the year. At the brand level, Floreshine, Nunbush, and Stacey Adams were down 13%, 18% and 19% respectively for the latest quarter, and 4%, 2%, and 10% respectively for the year. The decline in sales of all three brands reflects a general slowdown in the market for dress and dress casual footwear. In addition, many of our retail partners have shifted to more of a chase strategy in order to maintain greater inventory flexibility. We see the decrease in our legacy shipments as part of a return to normal to a normal business cycle after a period of heightened demand and supply chain delays. We anticipate this trend will continue through the first half of 2024. Our sell-throughs at retail remain solid, and we continue to diversify our product mix across all three brands to expand our casual and hybrid offerings. In our retail segment, sales were down 3% for the quarter, but up 4% for the year. The fourth quarter decrease was driven primarily by a decline in Boggs online sales due to unseasonably warm and dry weather. Overall, we believe the company had a strong direct-to-consumer performance with a solid increase for 2023, as well as record retail operating earnings. We view our direct-to-consumer business as a growth opportunity and continue to invest in our online platform. Florsheim Australia's net sales and local currency were down 22% in the fourth quarter and 3% for the year. The loss of a major wholesale count as well as soft consumer demand presented challenges in the Australian market. We anticipate headwinds through the first half of 2024 and are focused on reducing expenses while we assess opportunities to rekindle our growth. As previously discussed, we closed our Hong Kong office in December and are in the process of transitioning the Asia Pacific wholesale business to Australia division. Our inventory level was 74.9 million at December 31st, 2023, down from 128 million at December 31st, 2022. As discussed in the third quarter call, we have brought our inventories down to a level that balances availability for in-season orders with better inventory turn. For the year, overall gross margins were 44.9% in 2023 and 41.1% in 2022. Going forward, we expect our margins to remain at a healthy level. As Judy discussed, our cash flow in 2023 was strong, resulting in a balance of $75.9 million in cash and marketable securities. We continue to look at potential acquisitions and other options to put our cash to use. We also continue to invest in the distribution platform we have built in Milwaukee. In the fourth quarter of 2023, we installed equipment that automates the packing and labeling process of single pairs. With the growth of our e-commerce and drop ship business, gaining efficiency in this area allows us to give faster service with significant labor savings. This new equipment allows us to process singles at a rate of 38 to 40 peers per minute, which is a processing speed approximately four times faster than previously. 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.