Weyco Group Inc Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for being here, and welcome to the Weyco Group Inc. Fourth Quarter and Full Year 2020 Earnings Release Conference Call. All participant lines are currently in listen-only mode. After the presentations, we will have a question-and-answer session. I will now turn the conference over to our speaker today, John Wittkowske, Chief Financial Officer. Thank you. Please proceed, sir.

Thank you. Good morning and welcome to Weyco Group's conference call to discuss our fourth quarter and full year 2020 results. On this call with me today are Tom Florsheim Jr., Chairman and CEO; and John Florsheim, our President and COO. Before we begin to discuss the results of the quarter, I will read a brief disclaimer. During the course of 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 such statements are just predictions, and that actual events or results may differ materially. We refer you to Weyco Group’s most recent Form 10-K, as filed with the Securities and Exchange Commission as well as other filings with the SEC. The Form 10-K, as well as our most recent Form 10-Q, identify important factors and risks that could cause the company’s actual results to differ materially from our projections. With respect to the ongoing COVID-19 pandemic, numerous factors will determine the extent and length of the impact on the company, including the extent and duration of the pandemic and its impact on the global economy. Actions taken by governments such as stay-at-home and similar orders that among other things are effects require retail store closures or limit foot traffic, the financial health of the company’s customers and business partners, including the effects of any bankruptcy proceedings by such parties, the performance of the company’s supply chain and the health and welfare of the company’s employees. Additionally, some comparisons refer to non-GAAP measures. Our SEC filings may contain additional information about these non-GAAP measures and why we use them. Net sales for the fourth quarter of 2020 were $62 million compared to last year's fourth quarter net sales of $86.9 million. Operating earnings were $7.9 million for the quarter compared with $11.5 million in the fourth quarter of 2019. Net earnings totaled $5.1 million compared to $8.8 million last year. Diluted earnings per share were $0.52 per share in the fourth quarter of 2020 and $0.90 per share in 2019. In the North American wholesale segment, net sales for the fourth quarter of 2020 were $46.2 million compared with $68.8 million last year. Earnings from operations for the wholesale segment were $5.6 million compared with $10.9 million last year. Sales volumes were down across all three men's legacy brands due to the slow retail environment resulting from the ongoing pandemic, but our BOGS outdoor brand increased 5% for the quarter as consumers continue to spend more time outdoors. Our cost-cutting measures, mainly in employee and advertising costs, helped us generate solid earnings in the fourth quarter despite the reduction in sales. Our North American retail segment, which includes our e-commerce businesses and retail stores, had net sales of $8.7 million for the quarter compared to $9.1 million last year. Retail operating earnings were $2.7 million this quarter and $1.5 million last year. Retail sales decreased due to the closing of three unprofitable stores in the third quarter of 2020 as well as reduced foot traffic in our existing stores resulting from the pandemic. The decrease was offset by a 15% increase in e-commerce sales due to consumers turning to online shopping in the COVID-19 environment. Retail operating earnings increased due to the benefit of closing unprofitable stores and higher operating earnings from our websites. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $7.1 million in the fourth quarter of 2020 compared with $9 million in 2019, down as a result of the pandemic. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $393,000 for the quarter compared to operating losses of $854,000 in the same period last year. We will now discuss our full year 2020 results. Throughout this discussion, we will refer to adjusted amounts, which are non-GAAP financial measures. Adjusted amounts exclude the following items, which were recognized primarily during the second and third quarters of 2020: $5.9 million in employee costs related to restructuring and temporary closures; $4.3 million from two large customer receivable write-offs due to bankruptcies filed during the pandemic; $3.1 million for the impairment of retail store fixed assets and operating lease right-of-use assets; $2 million in reserves for obsolete and slow-moving inventory due to COVID-19-related impacts; $1.5 million in early lease termination charges and $500,000 in other related charges, which were partially offset by $5.4 million of income from government wage and rent subsidies. Additionally, adjusted amounts exclude $2 million of tax expense related to deferred tax assets of the company's foreign subsidiaries. Reconciliations to the most directly comparable GAAP financial measures are contained within our earnings release. Our overall net sales were $195.4 million in 2020 compared with $304 million in 2019. Loss from operations totaled $7.6 million in 2020 compared to earnings from operations of $27 million in 2019. Adjusted earnings from operations were $4.3 million in 2020. The company's 2020 net loss totaled $8.5 million or $0.87 per diluted share compared to net earnings of $20.9 million or $2.10 per diluted share in 2019. Adjusted net earnings were $3.2 million or $0.32 per diluted share in 2020. In the wholesale segment, net sales were $152.2 million in 2020 compared to $242.1 million last year. Net sales of the Stacy Adams, Florsheim and Nunn Bush brands were down significantly for the year due to the effects of the pandemic. BOGS net sales were down slightly for the year though business improved as the year went on as consumers spent more time outside. Licensing revenues were $1.2 million this year and $3.0 million last year down in line with reductions in licensee sales of branded products. Wholesale gross earnings as a percent of net sales were 35.5% in 2020 versus 36.6% in 2019. The decrease in gross margins was largely due to additional costs related to the tariff on certain footwear imported from China and higher overseas freight costs. Wholesale earnings from operations were $975,000 in 2020 compared to $27.8 million in 2019. Adjusted wholesale earnings from operations were $5.8 million in 2020. In our retail segment net sales were $21.5 million in 2020 and $25.2 million in 2019. The decrease was due to fewer stores in 2020 as a result of the previously mentioned closure of unprofitable stores and a significant decline in brick-and-mortar same-store sales due to the pandemic. This decrease was partially offset by a 9% increase in e-commerce sales due to consumers turning to online shopping during the COVID-19 environment. Retail losses from operations totaled $1.1 million in 2020 compared to earnings of $2.8 million in 2019. Adjusted retail earnings from operations totaled $1.5 million in 2020. Our other operations had net sales of $21.7 million compared to $36.7 million last year. The decrease was due to lower net sales at both Florsheim Australia and Florsheim Europe resulting from the pandemic. Collectively, Florsheim Australia and Florsheim Europe had a combined loss from operations totaling $7.5 million compared to a loss from operations of $3.5 million last year. The adjusted loss from operations for the company's other operations was $3.1 million in 2020. In late 2020, we decided to close Florsheim Europe, which includes a small wholesale business and two retail stores. Total sales at Florsheim Europe were $2.6 million in 2020. Approximately $1.6 million of the non-GAAP adjustments described earlier are costs related to the closing of Florsheim Europe in 2021. At December 31, 2020, our cash and marketable securities totaled $47.5 million and we had no amounts outstanding on our line of credit. During 2020, we generated $40 million of cash from operations. We used those funds to pay $11.8 million in dividends, pay down $7 million on our line of credit, and repurchase $2.1 million of our company stock. Additionally, we had $3.4 million in capital expenditures. We estimate that our 2021 capital expenditures will be between $1 million and $2 million. On March 9, 2021, the company's Board of Directors declared a quarterly cash dividend of $0.24 per share to all shareholders of record on March 19, 2021, payable on March 31, 2021. I would now like to turn the call over to Tom Florsheim Jr. our Chairman and CEO.

Thanks, John, and good morning everyone. We are encouraged by our return to profitability in the fourth quarter, which shows increased demand in some areas of our business and a reduction in expenses as we align costs with our lower sales volume. Although the market for 2021 is difficult to predict, we are hopeful that our wholesale business will see improvement in the second half of the year. Our BOGS brand performed well throughout 2020, and we were pleased with its acceleration in the latter part of the year, as consumers engaged more in outdoor activities. Despite having relatively low precipitation in November and December nationwide, demand for BOGS products remained strong. We started the fall with sufficient inventory, but we quickly sold out of key offerings due to a market shortage of outdoor boots that could meet rising demand. We managed to replenish many of these offerings to meet the unexpected demand at the beginning of 2021. Over the past year, BOGS also continued to broaden its product range, offering more lightly insulated and lifestyle-oriented options in the women's segment and developing men's work-related footwear. Our legacy brands are still facing challenges. While we observe a slight uptick in retail demand, our wholesale partners are reducing styles in dress and dress casual footwear geared toward work or formal occasions. We believe that the stabilization of our legacy business is closely linked to the vaccination rollout and the return of people to regular activities. We expect demand to rise as companies bring employees back to the office and people feel more comfortable attending social events like weddings and family gatherings. However, the timing of this recovery is uncertain. Although we are disappointed by the level of wholesale shipments for our legacy brands, there were some positive developments. Casual and fashion boots showed strong performance, and we are making substantial progress in introducing new casual footwear. The pandemic pushed us to speed up change and commit to rapidly revamping our product mix. The new lines we are launching this spring, along with the fall offerings we are presenting to customers, feature a fresh and relaxed interpretation of our brands. While we anticipate increased demand for our traditional dress-oriented styles in the latter half of the year, we are excited about the potential to expand into lifestyle categories based on the positive response to new products we have introduced during the pandemic. Regarding our US retail segment, our efforts are focused on investing and growing our e-commerce business. Our e-commerce revenue rose by 9% for the year and 15% for the quarter. BOGS led the online growth with sales increasing by 53% in the US and nearly 80% in Canada compared to 2019, and almost 100% in Canada in the fourth quarter. Due to the closure of unprofitable stores, we currently operate only four brick-and-mortar retail locations. Consequently, the future performance of our US retail segment will be driven by our more profitable e-commerce business. Globally, we continue to leverage the e-commerce platform established in the US in other markets, including Canada, Australia, and New Zealand. We have seen success in worldwide e-commerce, with sales increasing by 29% in the fourth quarter and 18% for the year. Although our international business is still significantly down, we are beginning to notice signs of economic recovery, particularly in Australia. Australia has started to increase the number of workers allowed in offices, and shopping malls and street stores are experiencing steady growth in consumer traffic. We have successfully closed several unprofitable stores and renegotiated retail leases on more favorable terms, putting us on a strong path towards improved profitability in Australia and New Zealand in 2021. In the Pacific Rim, our business remains limited due to ongoing traffic restrictions affecting store visits. The Florsheim Europe business has not been profitable in recent years. As John mentioned earlier, we have decided to close those operations and will be winding down the business this year. In our third quarter call, we discussed further reducing our inventories to align with sales. As of December 31, our inventory was $59 million, down from $76.2 million as of September 30, 2020, and $86.7 million at the end of 2019. We have cut our dress inventory levels to correspond with decreased demand for that category while transitioning our inventory mix to include more casual products. Looking ahead to 2021, we believe that at least the first half of the year will still be influenced by the pandemic. However, with the rollout of vaccines, we are optimistic for a better retail environment and consequently higher sales in the second half of the year. With our streamlined operations and solid balance sheet, we believe we are well-positioned for growth and profitability as conditions improve. That concludes our formal remarks. We appreciate your interest in Weyco Group, and I now welcome any questions.

Our first question comes from John from Pinnacle.

Good morning everyone.

Good morning.

I have a couple of questions. First, I want to acknowledge that you performed quite well in 2020, especially considering the pandemic's impact on retail and shoe purchasing. I'm proud to see that despite all the challenges, you managed to do well. Congratulations.

Thanks, John. We appreciate that.

Good work. A couple of questions I guess on the demand side, what's the tone of your customer base? We had a couple of bankruptcies. Are there credit issues that linger out there? And secondarily, you expect an optimistic second half. Is that driven by a firm order book or just hopes that the vaccines bring people back to shopping?

Yes, John, could you please repeat your first question? I apologize.

Well, what's the credit of your existing customers?

There are still some lingering issues, but they are not as significant as they were during the peak of the pandemic. We are monitoring the situation closely and believe we have a better grasp on it now. However, the retail environment remains complex, with certain brick-and-mortar channels still facing challenges. While we are in a better position than we were eight or nine months ago, there are still issues that we are carefully observing.

I would like to add that after facing some challenges last year, we are being extremely cautious and are very aware of the credit risk. Regarding your second question, the situation is mixed. Our backlog with BOGS has significantly increased and the business is performing well. However, our backlog with the legacy brands is facing some challenges at the moment, as retailers are hesitant to make commitments for the second half due to their close monitoring of inventory levels. Most of our optimism for improvement in the second half is based on the expectation that if vaccinations in the US are completed by the end of May, we will see improvements over the summer. There will be a notable increase in activity, particularly with many rescheduled weddings in the second half. There seems to be a strong desire among people to return to normalcy. In response to the challenges we are facing with the legacy brands, we are strategically managing our inventory to ensure we have enough to address the uptick in business when it begins to recover.

We believe there may be a shortage of inventory in the traditional dress casual segment for the second half of the year. Many retailers have cut down on styles in this market, shifting toward more casual options, which is understandable. However, if trends revert, few companies have maintained their wholesale stocks in the traditional sector. We think this positions us well with less competition, but the key factor will be timing. Regarding BOGS, as Tom mentioned, the backlog varies by brand. Our BOGS backlog is particularly strong due to last fall's boot shortage. As a result, retailers are eager to ensure they are prepared for fall 2021. Consequently, that segment is currently performing well, as indicated by our confirmed bookings.

Okay. Good. That's encouraging. And on the supply side, is the supply chain back to normal? I know you've sourced a lot through China. There were some disruptions there with the pandemic. But how would you characterize the supply chain at this point? Are you getting what you need from offshore suppliers in a timely manner?

Yes. The supply chain is basically 100% back to normal, with the exception of the shortage of containers. I'm sure you've read about, how there's so much being imported right now, not necessarily apparel and shoes. It's probably not driven by apparel and shoes. But there's so much being imported from China and other places in Asia that there is a big shortage of containers. And so, it can be more difficult to get space. And sometimes we've had to wait a week or two weeks. And then, right now, we're paying a premium for those containers. And then, once they get to the West Coast, there's issues with getting them through the ports. And part of that is due to COVID, where they have workers that are out with COVID, but it's slower getting them through the ports out on the West Coast. And so, that's the only hiccup. In general, the factories have capacity right now. They're hungry. And we're getting the shoes manufactured that we need. It's just a matter of some of the ways getting them here.

Are those hiccups affecting your sales due to difficulties in making deliveries?

The retailers we have had to get some extensions for February deliveries into March. We don't see a major impact on the first quarter at all. The retailers are being very understanding and granting these extensions because they are experiencing similar issues across all their products right now. While there are delays, a two-week delay, although frustrating, is not the end of the world.

Okay. All right. Well, that's good news. And did the percentage of business coming out of China, did that change dramatically last year, because I know you were talking about sourcing from India, Vietnam, Cambodia and other places. Did the percentage of business coming out of China change at all last year?

Not significantly. We still have a strategy to diversify and are working to increase our business in all those other locations you mentioned. Interestingly, despite pandemic-related restrictions, many people who moved out of China have returned, partly because most components are still produced there. The challenges with border issues and transporting components make it difficult to shift production from China to places like Vietnam and India. As a result, some brands are coming back to China, which is quite notable. We continue to have a strong manufacturing presence in China and maintain good partnerships there. I would say that the pandemic caused some disruptions in our strategy, leading us to not move as much as we had hoped last year, but we are planning to restart those efforts as conditions normalize and continue pursuing diversification.

And China was what percentage of your imports? I can't remember roughly.

I'd say it's around 70%. I can follow up with you later and provide a more precise figure.

Got it. And the tariffs are still in place for Chinese imports, correct?

Yes. They reduced them from 15% on leather products to 7.5%. So they're lower, but the extra 7.5% is still in place. We were concerned because initially there were discussions about duties on rubber products that would have affected BOGS, but those duties never materialized, which was a positive outcome. However, we still face this additional 7.5% on leather products.

Okay. Good. That's going in the right direction. I have a couple of quick questions about the numbers. I didn’t see any shares repurchased in the fourth quarter, unless I missed it. How much is remaining on your buyback program? And given the amount of cash you have, is there any plan for buying shares at this point?

John, that's not a correct statement. We did buy back approximately 47,000 shares in the fourth quarter. We did not buy shares. We bought back shares in the first quarter then we stopped in April. For the second and third quarter, we purchased no shares. And in the fourth quarter, we began to buy shares back again. And so, we bought 47,000 shares back in the fourth quarter, an average price of around $16 a share. And we continue to buy back some shares in the first quarter. We have approximately 336,000 shares left on our buyback program as of the end of the year. That does not include anything bought back in the first quarter, but we have continued that to some extent in the first quarter.

Okay, all right. That's encouraging. And I guess, finally, on the list of non-recurring items, the non-GAAP adjustments that you laid out. The only one on that list that would apply to cost of goods sold would be the $2 million pre-tax expense for reserves of obsolete and slow-moving inventory. Is that correct? Everything else would go through SG&A?

That's correct.

Okay, all right. We're just trying to put the right apples in the right pocket. Okay, good. That’s all I have. Thank you very much and congratulations.

Thanks for your questions.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to John Wittkowske for closing remarks.

Thanks everyone for attending our conference call, and we look forward to speaking at the end of the first quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.