Weyco Group, Inc.

Good day, everyone, and welcome to White Coat Group Inc. fourth quarter and full year 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Chief Financial Officer, Judy Anderson. Please proceed.

Thank you. Good morning and welcome to Waco Group's conference call to discuss fourth quarter and full year 2025 results. On this call with me today are Tom Florsheim, Jr., Chairman and Chief Executive Officer, and John Florsheim, our 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 US 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 fourth quarter of 2025 were $76.8 million, down 5%, compared to $80.5 million in the fourth quarter of 2024. Consolidated gross earnings were 44.1% of net sales compared to 47.9% of net sales in the fourth quarter of 2024. Earnings from operations were $10.2 million for the quarter, down 12% from $11.5 million in the fourth quarter of 2024. Net earnings totaled $8.7 million for the quarter, down 13% or $10 million from $10 million last year. Diluted earnings per share were $0.91 per share in the fourth quarter of 2025 compared to $1.04 per share in the prior year's fourth quarter. Net sales in our North American wholesale segment totaled $56.7 million for the quarter, down 6% from $60.4 million last year. Sales were down due to lower shipping volumes, partially mitigated by our July 1, 2025 price increases. Wholesale gross earnings as a percent of net sales were 37.2% and 42.4% in the fourth quarters of 2025 and 2024, respectively. Gross margins for the quarter were negatively impacted by incremental tariffs. Although selling price increases helped mitigate the effect of these tariffs, they did not fully offset the resulting costs, leading to margin erosion for the period. Wholesale selling and administrative expenses totaled $12.7 million, or 23% of net sales for the quarter, versus $16.7 million, or 28% of net sales last year, down largely due to lower employee costs this year. Wholesale operating earnings totaled $8.4 million for the quarter, down 6% from $8.9 million in 2024 due to lower sales volumes and gross margins. In early 2025, the US imposed reciprocal and retaliatory tariffs on imported goods. Throughout 2025, these incremental tariffs increased the cost of our products by 19 to 50%, resulting in gross margin compression. On February 20, 2026, the U.S. Supreme Court ruled that the International Emergency Economic Powers Act, also known as IEPA, does not authorize the President to impose tariffs, invalidating the statutory basis for incremental tariffs enacted since February of 2025. The matter has been remanded to the Court of International Trade for further proceedings, including issues related to implementation and potential refunds. We paid approximately $16 million of incremental tariffs in 2025. In December of 2025, we filed a lawsuit seeking a refund for amounts paid in connection with incremental tariffs imposed pursuant to IEFA. The President responded to the Supreme Court ruling by announcing the implementation of a 10% across the board tariff under a separate statutory authority. The administration has indicated that rates may be increased further subject to statutory limits. Certain other tariffs imposed under authorities independent of IEPA remain in effect. U.S. trade policies remain fluid and unpredictable, creating near-term gross margin uncertainty. We have mitigation strategies in place and will continue to adjust as needed in response to future policy developments. Net sales in our retail segment totaled $13.3 million for the quarter, down 5% from $14.1 million in 2024. Fourth quarter 2025 sales were negatively impacted by an increase in sales reserves related to our e-commerce businesses. Retail growth earnings as a percent of net sales were 64.3% versus 65% in the fourth quarter of 2025 and 2024 respectively. Retail operating earnings totaled $1.9 million for the quarter and $2.5 million in last year's fourth quarter. The decrease was primarily due to the sales reserve adjustment described earlier. Our other operations consist of our retail and wholesale businesses in Australia and South Africa, which are collectively referred to as Florsheim Australia. Net sales of Florsheim Australia were $6.8 million in the fourth quarter of 2025, up 12% from $6 million in 2024. In local currency, Florsheim Australia's net sales were up 11% for the quarter, driven by growth in both its wholesale and retail businesses. Florsheim Australia's gross earnings as a percent of net sales were 61.5% and 62.5% in the fourth quarters of 2025 and 2024 respectively. Its quarterly operating losses totaled $100,000 in 2025 versus operating earnings of $100,000 in the prior year. We will now discuss our full year 2025 results. Consolidated net sales for the full year were $276 million, down 5% compared to sales of $290 million in 2024. Consolidated gross earnings were 43.2% of net sales compared to 45.3% of net sales in 2024. Full year 2025 operating earnings were $29.2 million, down 20% from $36.6 million in 2024. Net earnings totaled $23.1 million, down 24% from $30.3 million last year. Diluted earnings per share were $2.41 per share in 2025 and $3.16 per share in 2024. North American wholesale net sales were $217 million in 2025 down 5% compared to $228 million in 2024. We are pleased to announce that despite the challenges of 2025, our Floorshine brand achieved record wholesale sales. Sales of our Nunn-Bush, Stacey Adams, and Boggs brands decreased in 2025. Wholesale gross earnings as a percent of net sales were 37.5% in 2025 and 40.2% in 2024. Growth margins for the year were negatively impacted by incremental tariffs. Wholesale selling and administrative expenses totaled $54.6 million for the year and $60.1 million last year, down largely due to lower employee costs. As a percent of net sales, wholesale selling and administrative expenses were 25 percent 6% in 2025 and 2024, respectively. Wholesale operating earnings totaled $26.6 million in 2025, down 16% from $31.5 million in 2024 due to lower sales volumes and gross margins. In our North American retail segment, net sales were $35.7 million in 2025, down 8% from a record $38.7 million in 2024. The decrease was primarily due to lower direct-to-consumer sales of Floorshine, Boggs, and Stacey Adams Footwear. Boggs website sales were also impacted by fewer promotional activities in 2025. Retail growth earnings as a percent of net sales were 65.7% and 65.9% in 2025 and 2024, respectively. Retail operating earnings totaled $3.3 million for 2025 and $5.3 million last year. The decrease was primarily due to lower sales volumes. Net sales of Florsheim Australia remained relatively flat at $23.7 million and $23.6 million in 2025 and 2024, respectively. In local currency, Florsheim Australia's net sales were up 2% for the year, driven by growth in its retail businesses. Florsheim Australia's gross earnings as a percent of net sales were 61.5% and 61% in 2025 and 2024, respectively. Florsheim, Australia generated operating losses totaling $700,000 for 2025 and $200,000 in 2024. Our effective tax rates for 2025 and 2024 were 28% and 23.9% respectively. Our 2025 income tax provision included a charge to establish an evaluation allowance on Florsheim Australia's deferred tax assets. Our 2024 tax provision was reduced by deductions related to share-based compensation. At December 31st, 2025, our cash and marketable securities totaled $101 million and we had no debt outstanding on our $40 million revolving line of credit. During 2025, we generated $37.3 million in cash from operations and used funds to pay $7.7 million in dividends. We also repurchased $5.3 million of company stock and had $1.8 million of capital expenditures. We estimate that 2026 annual capital expenditures will be between $1 and $3 million. During January of 2026, we paid our 2025 fourth quarter and special cash dividends totaling $21.4 million to shareholders. On March 3rd, 2026, our board of directors declared our first quarter cash dividend of 27 cents per share to all shareholders of record on March 13th payable March 31st, 2026. I would now like to turn the call over to Tom Florsheim, Jr., our chairman and CEO.

Thanks, Judy, and good morning, everyone. Our overall company sales were down 5% in the fourth quarter and 5% for the full year. While we are never content with the decline, given the challenges we face related to tariffs, and dampened consumer sentiment, we are proud of the work done by our production and sales teams to navigate these economic headwinds. For an extended period during the second quarter, we faced tariff rebates, excuse me, tariff rates that rendered trade with China, our largest sourcing country, commercially prohibitive. Because the second quarter is a primary manufacturing period for our key fall shipping window, This created a strong likelihood of disrupted deliveries to both our wholesale partners and our direct-to-consumer business. By strategically keeping production running on key programs and holding finished goods overseas, we positioned ourselves to deliver nearly 100% of our fall shipments on time once tariffs were reduced to commercially viable levels. Throughout 2025, new tariffs increased the cost of our products by 19% to 50%, resulting in gross margin compression despite a 10% increase that took effect in July. Over the past year, we have made significant progress in diversifying our manufacturing base to be less China-centric. Sales over combined legacy business declined 7% in the fourth quarter and 4% for the year. Given the uncertain economic environment, particularly in soft goods, our accounts continued to take a conservative approach to inventory management, which negatively impacted fourth quarter shipments. The Porsche division reported a 1% decrease for the quarter and a 2% increase for the year. The brand achieved $92 million in sales in 2025, an all-time record, making it one of the few men's brands outside of the athletic category to sustain this level of post-pandemic growth. While the non-athletic brown shoe category has been in secular decline, Florsheim has bucked the trend and gained market share. Sell-throughs of traditional dress and refined casual footwear have been strong, and the brand continues to make progress in the hybrid and dress sneaker categories. Our Nunn-Busch business declined 13% for the quarter and 10% for the year. The mid-tier trade channels, which account for the majority of Nunn-Busch's volume, remain under pressure, negatively impacting sales. As an opening price point brand with major retailers, Nunn-Busch also faces increased competition from private label programs as stores seek to improve margins. We believe we're taking the necessary steps to return Nunn-Busch to growth, including value engineering product to meet key price points while delivering attributes and benefits not typically found in private label offerings. Retail sell-through of Nunn-Busch remains solid. Stacey Adams sales declined 13% for the quarter and 9% for the year, reflecting continued challenges in the fashion dress shoe market. While the Stacey Adams brand remains a leader in this category, retailers are devoting less inventory and shelf space to dress shoes. Our focus with Stacey Adams continues to be on expanding categories beyond its core elevated dress offerings. The Boggs business remains difficult with sales down 6% for the quarter and 11% for the year. While early winter cold and snowfall resulted in strong sell-through of Boggs product, Fall sell-in declined year over year as retailers maintained a conservative chase-based inventory strategy for seasonal product. Retailers ended the season with exceptionally clean inventories and we're now seeing strong bookings for fall 2026. While we are optimistic about improvement this year, we remain mindful of the long-term impact of climate change on the weather boot category. Our priority continues to be the development of footwear designed for multi-season use. Net sales in our retail segment declined 5% for the quarter and 8% for the year. In 2025, our e-commerce consumer was increasingly value-oriented. While our overall inventory position is significantly cleaner than the prior two years, which is a positive, it resulted in lower conversion among consumers motivated by clearance discounts. As we enter the new year, we remain disciplined in our approach to inventory management and anticipate a lower level of clearance sales. We believe that there is a meaningful opportunity to drive full price sales through improved storytelling across our brand portfolio and clearer communication of product attributes and benefits. Excuse me. Florsheim Australia's net sales increased 12% for the quarter and 11% in local currency. For the year, net sales were flat, increasing 2% in local currency. Foresham Australia, which includes New Zealand, South Africa, and our Asia wholesale business, remains a work in progress. While certain areas, such as Australian e-commerce, delivered solid gains, we continue to face challenges in our Australian wholesale business where improvements are necessary to drive profitability. Excuse me. Our overall inventory as of December 31st, 2025 was 65.9 million compared to 74 million at December 31st, 2024. We think our inventories are at a healthy level as we move into the first quarter of this year. Our overall gross margins were 44.1% for the quarter and 43.2% for the year. Our margins were down 200 basis points for the year due to incremental tariffs. With the IEPA tariffs ruled unlawful and the administration implementing new tariffs, we're expecting continued cost uncertainty in 2026. We are prepared to continue to adjust our margin and pricing strategy with the goal of maintaining historical margins. 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 so much. And as a reminder, if you have a question, simply press star 11 to get in the queue and wait for your name to be announced. To remove yourself, press star 11 again. One moment, please. Again, that is star 1-1 if you have a question. One moment for our first question comes from the line of John Drescher with Pinnacle. Please proceed.

Good morning, everyone.

Good morning.

Solid, solid year and a difficult market. Just a couple of quick questions. You mentioned you paid approximately $16 million in incremental tariffs. How much of that did you recover in terms of price increases?

I would say that, you know, Judy, I don't know if you... Our wholesale margins... Hi, John.

Our wholesale margin is down about 400 basis points from last year, more or less. You know, so we had a 10% price increase you know, but it didn't cover, you know, a significant portion of what the, you know, how the tariffs impacted our business.

Are you, yeah, that was John speaking. John, are you looking for a dollar amount?

Well, a percentage would help. In other words, did you recover 50% with price increases, 30%, 70%, just a rough percentage.

Yeah, it's hard to, you know, it's a confusing answer because, you know, the tariffs from different countries varied a lot. You know, the last several months from India, we had a 50% tariff. So the 10% increase, you know, just got us a small percentage of the tariff back, you know. And most of the other countries were at around 20%. But that also varied during the several months of the second half, where China was originally higher and went down to 20%. I believe it was at 30% for a period, and then it was over 100% for a period. And so the 10%, we took a very methodical approach to increasing prices because we're in a tough market as far as consumer sentiment. What we were trying to achieve with that was mitigate part of the tariff impact, but also maintain market share as best as we could. And so, you know, it's not, I guess it's not an easy answer, and I'm sorry if we're not giving you exactly what you want there.

Okay, that's understandable. The lawsuit for the refund, about how much are you looking to retrieve? with that lawsuit?

Well, we're hoping to retrieve the whole thing. As the administration's attorneys took this up through the court system, I can't remember if it was the Federal Appeals Court or the Court of International Trade, but they basically said to the court, please do not state this Because if the Supreme Court rules this unlawful, we will pay back these incremental tariffs, the IEPA tariffs, with trust. And so they're on record in the court system as saying they would pay this back. Once the Supreme Court ruled, the tune changed a little bit from the administration saying they might litigate it. I think that's going to be difficult for them because they were so clear in what they said to the court as this moved up to the Supreme Court. Now it goes back down to the Court of International Trade for a remedy. We're optimistic, but we've also seen that things can get tied up in litigation no matter what. We're going to wait and see, but we're optimistic about getting back the whole $16 million.

Oh, okay, so that was the refund that you're seeking, $16 million or so. Exactly.

You don't state a number when you file the lawsuit. It's just a refund on all the IEPA tariffs.

Right, okay, that makes a lot of sense. You mentioned China. I'm just curious, last year, what percentage of the cost of goods sold were imported from China, roughly?

I would say it was about 65 to 70%. From China. What we've done, John, last year was a busy year for sourcing. And what we've done is we've established a much better footprint in Cambodia and Vietnam than we had prior to 2025. So we're in a really good position to continue to grow to grow our sourcing outside of China. We were throwing a little bit of a wrench into the works because we have a big base of manufacturing in India. When China was hit with tariffs early on at very high levels, we moved product to India. Then India got hit with 50%. You know, the uncertainty around these tariffs make it difficult, but we're learning to live with that uncertainty, and we've set up a much more flexible supply chain for the future.

Okay, great. That's good to hear. And I guess, finally, on the e-commerce business, the increase in sales reserves, can you give us some color on that, why that was necessary?

That was just a standard adjustment that was made in the fourth quarter. It just happened that our sales declined by not that much, a small amount, and just that adjustment to the sales reserve was a little bit more than that. So it seemed significant in relation to the change in the sales for the quarter.

Okay. Are any of your e-commerce customers facing any kind of pressure at this point?

John, you mean are you talking about our actual direct-to-consumer customers?

Yeah, I mean, sorry. Yeah, well, It says, uh, well, both actually, um, you know, I know it's a pretty competitive business and I was just curious if there's any pressures on either the wholesale business or the e-commerce side.

What we're seeing out there is that the customer, you know, our end customer is, you know, shopping for deals and, and, um, it, and, and two things are going on. One is our inventory is extraordinarily clean right now. And, um, You know, in the first half of 2025, we had more clearance. But, you know, it really dwindled throughout the year. And so we just don't have as much clearance to offer our customers. And as such, they're moving to go look for deals on Forsheim or Boggs or Stacey Adams on other sites. The other thing, you know, in that dynamic is that as the owner of the brand, we're trying not to be out there discounting as much in terms of our ongoing line. But we do have wholesale partners out there that carry our ongoing top patterns, top styles that will discount from time to time. And we're seeing a migration of our consumers from our site to other sites in terms of purchasing. I think our overall wholesale e-commerce business is holding up relatively well. Our own websites are down just because of the two reasons I just communicated.

Okay, good. Very helpful. Just one more quickie, if I might. We're all hearing about higher oil prices, and I was just curious if that impacts your vendors in terms of, I don't know, foam costs or anything like that? Have you thought about how that dynamic might play out? As far as what costs, did you say? Foam costs or any other, you know, parts of the shoe that are oil impacted.

Yeah, no, I don't. I think that, you know, there's two impacts that I can think of. The first one is that if this goes on for a while, it's going to reduce discretionary spending on the part of the consumer because more of that spending is going to go to filling up their car for heating bills and everything. The second impact, as far as our products go, is really more with shipping. I mean, you might see the shipping lines raise their prices if it goes on because that's a big part of their cost. As far as the actual impact on components going into footwear. Unless this goes on for a long time, I think that would be very minimal. And so we don't see a major impact other than maybe more consumer, the consumer being more stretched. Other than that, from the standpoint of the cost of the shoes, we don't really see a big impact.

Okay, good. That's it. Thanks for taking my question. Thanks, John.

Thank you. Our next question comes from Christine Sutton with Shopify. Please proceed.

Yes, John, thanks for the context, and I appreciate the discipline around not discounting directly, as you just explained, which protects wholesale partnerships as well as the brand. But I wanted to ask about the dynamic of customers already bypassing the wholesale and coming to directly for the e-commerce, seeing that that was just asked, and to understand... I'm sorry.

Go ahead, Kristen. Go ahead.

My question is if the customer is already coming to your brand sites, would being able to increase the conversion basket size directly while circumventing the discount shopping, would that be a helpful aspect to layer on while still keeping the wholesale partnerships, which is obviously a critical part of the earning success for the last quarter? Yeah. Is that something that would help?

Yeah, we're always looking for ways to increase conversion, you know, and want to do that in a way that's healthy for the business. I think, you know, the situation, right, you know, where we are right now, we just have less clearance, and the consumer is under pressure right now, and I think that's affecting, you know, soft goods in general. So when consumers are, you know, have less money in their pocket, they're looking for deals, and, you know, if we have less clearance, it lowers our conversion rate, and that's just something that we work through. But we feel actually pretty good about how our e-commerce business is performing, but you're going to have these types of changes based on the obsolescence in your inventory.

I appreciate that. Thank you for the answer.

Thank you. And this concludes our Q&A session. I will turn it back to Judy Anderson for closing comments.

Thank you for your support of Waco Group and everyone have a great day. Thank you.

And this concludes our conference. Thank you for participating. You may now disconnect.