Weyco Group, Inc.

Good day and thank you for standing by. Welcome to the Waco Group second quarter 2025 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 second quarter 2025 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 U.S. trade and tariff policies, which remain highly dynamic and unpredictable, the 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. Overall net sales for the second quarter of 2025 were $58.2 million, down 9% compared to $63.9 million, in the second quarter of 2024. Consolidated gross earnings were 43.3% of net sales compared to 43.9% of net sales in last year's second quarter. Earnings from operations were $3.9 million for the quarter, down 42% from $6.7 million in the second quarter of 2024. Net earnings totaled $2.3 million for the quarter, down 60% from $5.6 million last year. Our net earnings were negatively impacted by lower operating earnings and a $1.1 million adjustment to our quarterly income tax provision. Diluted earnings per share were 24 cents per share in the second quarter of 2025 and 59 cents per share in last year's second quarter. Next sales in our North American wholesale segment totaled $45.6 million for the quarter, down 9% from $50.3 million last year. Sales were down across all our brands and in most major categories. A slowdown in consumer spending amid economic uncertainty has prompted retailers to take a more cautious approach with buying and managing their inventories. Wholesale gross earnings as a percent of net sales were 37.6% and 38.2% in the second quarters of 2025 and 2024, respectively. Gross margins were negatively impacted by the effects of incremental tariffs. Wholesale selling and administrative expenses totaled $13.1 million for the quarter and $13.4 million last year. As a percent of net sales, wholesale selling and administrative expenses were 29% and 27% in the second quarters of 2025 and 2024 respectively. The increase in expenses as a percentage of net sales was because many of our operating costs are fixed and do not vary with sales. Wholesale operating earnings totaled $4.1 million for the quarter down 30% from $5.8 million in 2024, due mainly to lower sales and gross margins. Earlier this year, the US government enacted reciprocal and retaliatory tariffs, collectively referred to as incremental tariffs, on goods imported into the United States. The incremental tariff on goods sourced from China, which is where we source most of our products, reached a high of 145% in April, but was temporarily reduced to 30% on May 12, 2025 for a 90-day period ending August 12, 2025. It has not yet been announced if the China tariff will change at that time. The incremental tariff on goods we sourced from other countries excluding China were 10% throughout the second quarter of 2025. Effective August 7th, 2025, the tariffs of three of those countries will increase to between 19 and 25%. We have taken various measures to minimize the impact of the incremental tariffs on our gross margins. These measures included proactively bringing in a large amount of inventory ahead of the tariff effective date, enabling us to temporarily halt our China imports while the incremental tariff rate was 145%. We negotiated factory cost reductions with several of our Chinese suppliers. We moved sourcing of certain footwear styles out of China and are continuing our efforts to diversify sourcing. Finally, as we mentioned in our previous call, we raised U.S. selling prices effective July 1, 2025. U.S. trade and tariff policies currently remain fluid and unpredictable, and the specific tariff rates applicable to goods imported by our company continue to evolve. Therefore, despite our mitigation efforts, uncertainty still exists regarding the potential near-term impacts of incremental tariffs on our gross margin. We remain committed to adapting to changes in tariff policies and will adopt further mitigation strategies as needed. Net sales in our North American retail segment were $6.8 million for the quarter, down 11% from $7.6 million in 2024. The decrease was primarily due to lower sales on our Florsheim and Stacey Adams websites, a result of lower consumer demand for footwear. Retail growth earnings as a percent of net sales were 66.6% and 67.5%, in the second quarters of 2025 and 2024, respectively. Retail operating earnings totaled $100,000 for the quarter versus $700,000 in last year's second quarter. The decrease was due to lower sales and gross margins. 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 completed the wind down of that business in 2024. Accordingly, second quarter 2025 results of the other category only reflect the operations of Australia and South Africa. Net sales of Florsheim Australia were $5.8 million, down 4% from $6.1 million in the second quarter of 2024. The weaker Australian dollar relative to the US dollar contributed to the decrease as Florsheim Australia's net sales in local currency were down 2% for the quarter, driven by lower wholesale shipments. Florsheim Australia's gross earnings as a percent of net sales were 60.9% and 62% in the second quarters of 2025 and 2024, respectively. Florsheim Australia generated operating losses of $200,000 for the quarter versus operating earnings of $200,000 last year. Our consolidated effective tax rate was 51.1% for the quarter versus 25.1% in last year's second quarter. The increase was due to the establishment of a $1.1 million valuation allowance on deferred tax assets at Florsheim Australia as it was determined more likely than not that these assets will not be realized. At June 30, 2025, our cash and marketable securities totaled $83.8 million, and we had no debt outstanding on our $40 million revolving line of credit. During the first six months of 2025, we generated $14.4 million dollars of cash from operations and used funds to pay $5 million in dividends. We also repurchased $3.1 million of company stock and had $700,000 of capital expenditures. We estimate that 2025 annual capital expenditures will be between $1 and $2 million. On August 5th, 2025, our board of directors declared a cash dividend of 27 cents per share to all shareholders of record on August 18, 2025, payable September 30, 2025. I would now like to turn the call over to Tom Florsheim, Jr., Chairman and CEO.

Thanks, Judy, and good morning, everyone. As Judy outlined, the tariff environment created headwinds that impacted both the top and bottom lines of our business. excuse me coming into 2025 consumers were already feeling squeezed by affordability issues now the uncertainty around potential tariff related price increases only added to their concerns about being able to cover everyday expenses the end result is that people are pulling back from discretionary purchases and footwear is one of the areas where that shows up at the same time our wholesale customers are staying cautious with their inventory buys to avoid being caught with excess product in a shaky retail environment. It all adds up to a more hesitant and unpredictable market, which puts pressure on a business like ours, and we're seeing that across all brands. The additional tariffs and the ongoing uncertainty around future tariff negotiations have impacted our short-term pricing model. Prior to 2025, 75% Our factory base was located in China. We are actively working to further diversify our supply chain while staying true to our company's reputation for delivering exceptional footwear that dollar for dollar represents one of the best values in the market. We are proud of the quality and value we provide across all of our brands, and our focus is squarely on maintaining that winning combination, which has been essential to our long-term success. Our combined legacy business was down 8% compared to last year's second quarter, with Nunn Bush off 11%, Stacey Adams down 10%, and Forsheim down 5%. While our brands are holding their own at retail, the overall men's dress, dress casual, and basic casual markets are under pressure. The traditional men's business is typically one of the first categories impacted in a slowing footwear market as consumers delay replacement purchases and an important part of our business. This category softness combined with retailers' cautious approach to inventory management made for a tough quarter. Given current consumer sentiment and the continued uncertainty around tariffs, we expect the challenging environment to persist through the second half of the year. In regards to our BOGS business, the second quarter is typically our lowest volume period. Sales for the brand were down 14%, compared to the second quarter of 2024 as consumer demand remained sluggish in the outdoor category. We are gearing up for a number of new fall product introductions, including an expansion of our seamless construction, which is lighter and more durable than traditional vulcanized rubber boot construction. In addition to diversifying bogs manufacturing away from reliance on China, we are also expanding the product line to be less dependent on cold weather demand. We now offer an enhanced assortment of lightly insulated styles, as well as newly engineered products in the work category, which is a year-round business. Retailer inventories for outdoor footwear are now very clean, and we are cautiously optimistic the brand will gain traction in the second half of the year. Net sales in our retail segment were down 11% for the quarter, reflecting the tepid consumer environment. E-commerce site traffic for the majority of our brands increased year to date, but we're seeing a decrease in conversion rates. We believe consumers are more value conscious than ever and increasingly focused on finding deals. As brand owners, we believe it's important to maintain pricing integrity and refrain from being overly promotional on our respective sites. In today's price sensitive environment, consumers tend to compare us in shop, and we may lose a purchase to a more promotional retailer. We are investing in tools to drive consumer engagement and reduce shopping cart abandonment in this competitive landscape. In terms of our international business, Porsche Australia, which includes Asia and South Africa, we saw net sales decline 4% for the quarter and 2% in local currency. Retail same-store sales were flat, and we fell short in our wholesale business. Our focus for our overseas division is on getting our wholesale business back on track as well as finding efficiencies to reduce our SG&A. Our overall inventory as of June 30th, 2025 was 71.3 million compared to 74 million at December 31st, 2024. As discussed in previous calls, we brought our inventory levels up going into 2025 in anticipation of higher tariffs. With higher tariff levels currently in place, we are bringing our inventories down to normal levels in terms of pairs. However, with the tariffs, the dollar value of our inventory may increase. Our overall gross margins were 43.3% for the quarter compared to 43.9% last year. the U.S. trade agreements are finalized. It's impossible to forecast the margin impact of the tariffs. As we get more information, we will continue our work to mitigate the impact of the tariffs by moving our supply chain and adjusting our prices. That concludes our formal remarks. Thank you for your interest in Waco Group, and I'd now like to open the call to your questions.