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.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our first question will come from the line of David Wright of Henry Investment Trust. Your line is now open.

Tom, John, Judy, good morning. Good morning. I have two questions. Can you at all quantify the change in inventory as a result of the pre-purchasing that you did? We see where it is. Where would it have been? And maybe add a little more on what your inventory purchase plans are for the immediate future.

So I think that what I was saying in the conference call is that the inventory that we brought in, the extra inventory that we brought in, we've basically gone through a lot of that inventory. And so our inventories are getting back to normal levels in terms of peers. I would expect that in terms of dollars, we're going to be in the 70 to 75 billion dollar range, which when you look historically at our inventory levels, it ranges, I mean, when you go back to when we had the supply chain issue, it ballooned to 120 million, but it's gone typically between 65 and 75 million. The thing that is a little bit uncertain is you add a 30% tariff to the goods that we're bringing into China, and that increases the value of the inventory because it's in the cost of the inventory. And so that is the big unknown. So I'm not sure if I'm really answering your question with all that, so I'm happy to elaborate if there's something I missed.

Yeah, I think what you said basically is that – And you're on LIFO, right, Judy?

That is correct.

Yeah. So what you're basically saying is the pre-purchasing that you did, the benefit of that kind of is in your first six months results. And, you know, we're kind of in brave new world here. Your inventory is kind of where you want it to be at around $70 million and not quite sure what's going to happen because no one's quite sure what's going to happen. I kind of, That's what I take away from it. Does that sound right?

That's correct. That's a good interpretation.

And then my second question is, you know, you started this diversification away from China when tariffs started on China. And if I'm not mistaken, you went to India. And if I'm not mistaken, that's kind of a tough place to be in right now.

That is correct. We didn't just go to India, though. We diversified to Vietnam, Cambodia, and India. And so we're going to have to wait and see what happens with India. Right before we got on this call, President Trump announced an extra 25% penalty for buying Russian oil. So that increases the tariff in India to 50%, which is not easy to manage. But what we have been able to do is really decrease our reliance on China. So when we look at our open order today, where we were 75% China, we're down to about 60% China. India represents about 14%. Vietnam is about 10%. Cambodia is about 10%. And then we have a little bit of other countries like the Dominican Republic. And, you know, we're really taking kind of a methodical approach to this because, you know, as I talked about in the conference call, we want to make sure that we protect the quality and also the delivery of our product. And so, you know, we've expanded to some new factories. We've increased our production in some existing factories in places like Cambodia. And now we want to keep an eye on how things progress, and then we'll shift production accordingly. But we've definitely made good progress in establishing a bigger footprint outside of China that we can then grow. And so we're going to do this over the next year or two. It's going to take some time. And as far as India goes, a lot of that product is dual sourced. And so we're making the same product in China as we're making in India. And so if the Indian tariffs get unmanageable, we're going to have to shift more product back to China in those particular shoes. So I think that, David, we know as well as anybody, I guess, how to navigate this situation. We've been importing for a long time. We have good relationships overseas. And we're just kind of doing this As the tariff situation evolves, we're going to continue to make changes, but our feeling is that we're in a good position to navigate through this. We know what we're doing from the standpoint of importing, and we've got such a strong balance sheet that we can weather the storm.

Well, that's a really helpful explanation, and, you know, Whenever this is over, it'll just be another chapter in the long book of the history of the company and its ability to operate through all kinds of circumstances. Great to talk to you all, and thanks for taking my questions. Thanks, David.

Thank you.

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

Good morning. Thanks for taking my question. Hi, John. Hi. You mentioned the wholesale customers are reticent about ordering too much inventory. I was just curious about the quality of the wholesale customers, the credit worthiness of them. Are you seeing anything at this point in terms of distress or anything like that for any of your wholesale customers?

I think John's going to take that question. We're going to have to be a little careful about not naming specific retailers. But John, why don't you go ahead?

In general, I mean, our antenna is up, given the shaky retail environment. But we keep very close track of this. At the moment, none of our major customers are in immediate danger from a creditworthiness standpoint. But it's something that we're watching because there's a lot of unknowns in this market.

And what's the approach should warning flags start to fly? Do you cut them off immediately or gradually phase them out? What's your approach?

It depends upon the situation. I mean, we try to work as best we can with our retailers, but we also are cognizant of realities that are out there. You know, in conjunction with Tom said about navigating our manufacturing base, the same thing in terms of looking at the credit landscape. You know, we've been doing this a long time and you just, you know, you don't want to cut off your business. You want to keep it going, but you also have to be realistic about any changes that are on the marketplace.

Okay, fine. That's helpful. Second question. from a bigger picture standpoint, what's the strategic importance of Floresheim Australia at this point? My understanding is it's a handful of retail stores. It's mostly retail oriented. It's not wholesale oriented. Why is that important to the business going forward? I mean, the last few years have been profitable, but there's been some years where it's not profitable. And I'm just wondering, Is that a long-term business you want to be in going forward?

I think that it is, John. We've been in Australia for 50-plus years, and we really dominate that market. We have about 30 Florsheim stores in Australia and one in Auckland, New Zealand. And over the history of We've made a profit. You're correct that the last several years have been choppy. But we have, right before the pandemic, we hired a new president who's doing an excellent job. We have a strong team down there. They face some of the same issues we've had with consumer sentiment and inflation and everything else down there. But we think that we have a a really good base, and I think that we're doing things in terms of the wholesale business, which is a leg of the business that we need, and we've backtracked a bit. But we think if we can get the wholesale business going and continue to grow the retail business in a moderate way, because you have to be careful that you don't get too many stores in a market like that, we're going to have decent profitability. I mean, that's our expectation. And if you go down to Australia, if you ever have a chance to visit the country, you're going to see that Florsheim shops really are the main shoe shops in our segment of the market. And so I think that we just want to protect that business because we have such a great market share.

That's interesting. Okay, so most of the revenues from Australia are – retail-oriented, this 30 or so stores that you own and operate in Australia.

And we have e-commerce businesses as well that we're growing. So there's, you know, it's like as Tom said, the market has its challenges, but we do have a really strong brand name and there's certain areas of the business that we feel that we can continue to grow.

Okay, that's helpful. And what's the presence in South Africa? I don't see much of that.

It's mostly a wholesale business. We have one retail store. It's a profitable business for us. Again, it's a situation where we've been in the market a long time. It's a very strong brand name and we want to continue to hold on to our market share there.

Okay. What's the percentage that comes from South Africa of revenues?

The percentage of that total business would probably be about 10%, right?

The percentage of Australian business is probably actually more like 20%.

20% and 80% from Australia, okay.

And also, John, just one other clarification. We've talked about this in previous calls, but when we closed our Asia Pacific business, we have maintained one piece of that business, which is the wholesale piece. And so we have some good accounts. We have a very good account in the Philippines. We have some good accounts in Hong Kong. And we are continuing to maintain and try to grow that business. Instead of doing that from our office that used to be in Hong Kong, we're doing that from our office in Melbourne. That's another piece of that business that we see opportunity in. We have a very good Floreshine business in the Philippines, for example.

Okay, okay. Okay, good. That's good, Keller. I appreciate the comment. Sure.

Thank you. Again, as a reminder, to ask a question, you'll need to press star 1-1 on your telephone. One moment, please. I am showing no further questions at this time. I would now like to turn it back to Judy Anderson for closing remarks.

Just wanted to say thank you everyone and I hope you have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.