Weyco Group, Inc.

Good day and thank you for standing by. Welcome to Waco Group Incorporated third quarter 2024 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 1-1 on your telephone. You will then hear an automated message advising 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 first speaker today, Judy Anderson, Chief Financial Officer. Please go ahead.

Thank you. Good morning and welcome to Waco Group's conference call to discuss third quarter 2024 results. On the 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, 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, changes in interest rates, and other macroeconomic factors that may cause a slowdown or contraction in the US or Australian economies. Overall net sales for the third quarter were $74.3 million, down 12% compared to $84.2 million in 2023. Consolidated gross earnings as a percent of net sales increased to 44.3% from 43% in last year's third quarter, due mainly to higher gross margins in our North American wholesale segment. Quarterly earnings from operations were $10.2 million, down 18% from $12.4 million in 2023. Quarterly net earnings totaled $8.1 million or $0.84 per diluted share compared to $9.3 million or $0.98 per diluted share last year. Net sales in our North American wholesale segment were $61.1 million, down 12% from $69.5 million in 2023. Floorshine sales exceeded prior year, while our other brands were lower compared to last year. Wholesale segment growth earnings as a percent of net sales increased to 40.1% in the third quarter of 2024, compared to 38.6% last year. Wholesale segments selling and administrative expenses were $15.1 million for the quarter compared to $15.6 million last year, down as a result of lower employee costs, mainly commission-based compensation. As a percent of net sales, selling and administrative expenses were 25% and 22% in the third quarters of 2024 and 2023, respectively. The increase as a percent of net sales was because many of our costs are fixed in nature and do not vary with sales. Wholesale operating earnings totaled $9.4 million for the quarter, down 16% from $11.3 million last year as a result of lower sales. Net sales in our North American retail segment, which were generated mainly by our e-commerce websites, were $7.2 million for the quarter, down 5% from $7.6 million last year. Lower sales on our BOGS website as a result of the mild fall were partially offset by higher sales on our Florsheim and Stacey Adams websites this quarter. Retail segment growth earnings as a percent of net sales were 66.9% and 65.4% in the third quarters of 2024 and 2023 respectively. Retail operating earnings totaled $800,000 for the quarter versus $900,000 last year. Our other operations historically included our retail and wholesale businesses in Australia, South Africa, and Asia Pacific, collectively referred to as Florsheim Australia. We ceased operations in the Asia Pacific region in 2023 and have substantially completed the wind down of that business. Therefore, third quarter 2024 operating results only include Australia and South Africa. Net sales of Florsheim Australia were $6 million, down 15% from $7.1 million in the third quarter of 2023. The decrease was almost entirely due to the closing of our Asia Pacific operations. Sales in Australia were down 1% for the quarter due to the impact of four fewer stores operating compared to the same period last year. Australia's same-store sales were up 1% for the quarter. Florsheim Australia's gross earnings were 59.2% of net sales for the quarter and 61.6% of net sales last year. Its operating earnings were zero for the period down from $300,000 of operating earnings last year. Interest income totaled $900,000 in the third quarter of 2024, compared to $300,000 in last year's third quarter. This year included interest earned on higher cash balances in the US and Canada. At September 30th, 2024, our cash and marketable securities totaled $81.8 million, and we had no debt outstanding on our $40 million revolving line of credit. During the first nine months of 2024, we generated $17.3 million of cash from operations, mainly from net earnings, and used funds to pay $9.6 million in dividends. We also repurchased $600,000 of company stock and had $900,000 of capital expenditures. We estimate that 2024 annual capital expenditures will be between one and $2 million. On November 5th, 2024, our board of directors declared a cash dividend of 26 cents per share to all shareholders of record. On November 18th, 2024, payable January 2nd, 2025. Additionally, on November 5th, 2024, our board of directors declared a special one-time cash dividend of $2 per share to all shareholders of record on November 18th, 2024, payable January 2nd, 2025. I would now like to turn the call over to Tom Florsheim, Jr., our chairman and CEO.

Thanks, Judy, and good morning, everyone. It was a challenging quarter as sales in our North American wholesale business were down 12%. We are facing an economic environment in which consumers have limited discretionary funds and footwear market sales are being impacted accordingly. While the near-term retail outlook is uncertain, we remain confident in our belief that each brand is well positioned in its respective category for growth when conditions improve. In our outdoor division, bog sales were down 18% for the quarter. As discussed in previous conference calls, the outdoor category, particularly the weather boot market, has been under pressure for the better part of two years. During the pandemic, retailers and consumers alike loaded up on outdoor gear, resulting in record sales for many brands, including bogs, Since then, the industry has been working through excess inventory, and we believe we've finally reached an equilibrium for fall 2024. However, many retailers are taking a wait and see approach regarding orders, operating under the premise that if they need inventory, it will be available in the market. The result is that we've seen demand impacted by the mild and dry weather throughout the country, which has negatively affected our wholesale business. The adverse effects of the weather extended to our Boggs e-commerce business, which was down 31% for the quarter. While our success with the Boggs brand for the balance of 2024 depends on fall and winter weather returning to normal, for the long term, we are focused on reducing the weather sensitivity of the business. Towards that goal, we have doubled down on our sales effort in the farm and ag trade channel, with the introduction of our seamless construction collection, which is 30% lighter and twice as durable as the vulcanized construction more commonly used in our category. The farm and ag trade channel is less weather dependent and utilizes BOGS products year round. We are making progress in this category, but it will take time to expand our penetration in retailers that cater to this market. We are also introducing seamless construction in lighter, less insulated products to our kids and women's lifestyle collections, which will help us make Boggs more of a three-season brand for this customer base. It has been a challenging stretch for the Boggs brand. Having our retail partners with right-sized inventory will help move Boggs forward. What's next on the agenda is rekindling demand with products that are built to match long-term weather changes. Our combined legacy business was down 10%, with Forsheim up 1%, Stacey Adams down 17%, and Nunn Bush down 20%. As a category, dress footwear has been trending down for some time, except for a brief period emerging from the pandemic when there was a burst of weddings and more dressy occasions. This downtrend resulted in retailers shifting funding away from dress footwear and toward other categories. Given this context, Foreshine's performance over the last few years including this quarter is very solid. Foreshine continues to pick up market share in the refined footwear category and has made good strides in the hybrid and true casual segments of the market. Our Stacey Adams brand had a difficult quarter. The brand remains the market leader in accessible fashion in the contemporary dress footwear segment and is performing well, especially with accounts that maintain dress-oriented footwear as an important part of the retailer assortment. The challenge is evolving the product lineup so that Stacey Adams is in consideration for hybrid and more refined casual footwear. While it will take time, we are getting traction at retail with casual lifestyle product, particularly in the hybrid category. Our Nunn-Busch brand caters to a more value-oriented, price-sensitive consumer. We saw reduced demand in the third quarter as these consumers cut back on discretionary purchases. In addition, a significant portion of Nunn-Busch's sales decrease in the third quarter was due to a shift in timing of shipments to a large retailer from third to second quarter. Despite the volume drop, we feel good about the future trajectory of the Nunn-Busch business. We have reinvented Nunn-Busch as the most casual brand within our legacy portfolio. Nunn-Busch is also well positioned in the market with a strong value proposition and innovative comfort technology. Retail sales were down 5% for the quarter compared to last year. The decline in retail sales was driven primarily by the decrease in Boggs Econor sales. Overall, our direct-to-consumer business has been more price sensitive and promotionally oriented. As Judy referenced, the drop in sales at Fortune Australia was the result of our closing operations in the Asia Pacific region. Sales in the remaining markets, which include Australia, New Zealand, and South Africa, were flat for the period. We are finding the economic environment in Australia to be very similar to that of North America, with consumers under pressure and very conservative in their approach to discretionary purchases. Our overall inventory balances as of September 30th, 2024 was $72.2 million up from $67.9 million at June 30th. As explained in our last conference call, we are continuing to bring our inventories up to make sure that we have enough inventory to meet demand for our core items during the fourth quarter from both our wholesale customers and to support our e-commerce businesses. We are comfortable with where we are from an inventory standpoint. Our overall gross margin was 44.3% compared to 43% last year. We are also comfortable with our margins and are focused on keeping them in this range. As Judy mentioned yesterday, our board of directors cleared a one-time special cash dividend alongside our regular quarterly dividend. This return of capital to our shareholders is the result of our strong financial performance over the past few years, which led to a buildup of cash and excess of the amount necessary to fund operations, capital expenditures, and fulfill corporate obligations. Looking ahead, we believe our strong balance sheet and liquidity will continue to allow us to fund organic growth, invest in our business, and remain opportunistic with respect to future strategic opportunities or share repurchases. 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.