Good day, and thank you for standing by. Welcome to the Weyco Group Third Quarter 2022 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Judy Anderson, Weyco Group's Chief Financial Officer. Judy please go ahead.

Thank you, Kyle. Good morning, everyone, and welcome to Weyco Group's conference call to discuss third quarter 2022 earnings. On this call with me today is Tom Florsheim, Jr., our 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 cautionary statement. 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 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 and to our other filings with the Securities and Exchange Commission for a discussion of important factors and risks that could cause our results to differ materially from our projections including the uncertain impact of inflation on our costs and consumer demand for our products, and the continuing direct and indirect effects of the COVID-19 pandemic. Overall, net sales were a third quarter record of $97 million, up 57% compared to $61.8 million in 2021. Consolidated gross earnings increased to 40.6% of net sales, compared to 40% of net sales in last year's third quarter due mainly to higher gross margins in our North American wholesale segment. Quarterly operating earnings were a record $14.2 million, more than double last year's third quarter operating earnings of $6.7 million. Quarterly net earnings were a record $10.8 million or $1.12 per diluted share, up more than 100% from $5.1 million or 52% per diluted share last year. Net sales in our North American wholesale segment reached a record $81.6 million, up 63% compared to $50.2 million in the third quarter of 2021. While part of this increase was due to strong consumer demand and higher selling prices, last year's third quarter sales were abnormally low due to supply chain delays, which caused some third quarter orders to ship in the fourth quarter. This quarter our wholesale business experienced peak demand and our inventory levels supported record shipments. Looking forward to the fourth quarter, we anticipate that our sales will fall short of 2021 due to last year's shift in third quarter sales to the fourth quarter. However, overall the second half of 2022 is expected to outpace the same period of 2021. Wholesale gross earnings were 36.3% of net sales in the third quarter of 2022 compared to 34.6% of net sales last year. Gross margins improved as a result of higher selling prices and lower inbound freight costs as freight rates on containers coming from China declined during the quarter. Wholesale selling and administrative expenses were $16.7 million or 21% of net sales for the quarter compared to $11.3 million or 23% of net sales last year. The increase was largely due to higher employee costs associated with our increased sales volumes. Additionally, last year's third quarter expenses were reduced by $1.9 million in government wage subsidies. Wholesale operating earnings rose to $12.9 million in the third quarter of 2022, up 114% from $6 million last year due to higher sales and gross margins. Net sales of the North American retail segment were a third quarter record of $7.1 million, up 13% from $6.3 million in the third quarter of 2021. The increase was primarily due to higher sales volumes across our major brands' websites. Sales were also up for the quarter at our four domestic brick-and-mortar stores. Retail gross earnings as a percent of net sales were 66.3% and 68.4% in the third quarters of 2022 and 2021, respectively. Selling and administrative expenses for the retail segment totaled $3.9 million for the quarter compared to $2.9 million last year. The increase was mainly due to higher e-commerce expenses primarily outbound freight and advertising. Retail operating earnings were $825,000 for the quarter versus $1.4 million last year. The decrease was primarily due to lower earnings from our e-commerce businesses as higher sales were offset by higher selling and administrative expenses. Our other operations have historically included the wholesale and retail businesses of Florsheim Australia and Florsheim Europe. However, as previously disclosed, the company closed Florsheim Europe. As a result, the 2022 operating results of the other category reflect only that of Florsheim Australia. Other net sales for the third quarter totaled $8.2 million, up 54% compared to $5.3 million in the third quarter of 2021 due to higher sales at Florsheim Australia. In local currency, Florsheim Australia's net sales were up 71% for the quarter due to higher sales in both its retail and wholesale businesses. Last year's third quarter sales were negatively impacted by COVID-19 related lockdowns, which resulted in a large number of Florsheim Australia stores being closed for a majority of the quarter. Other operating earnings recovered to $476,000 for the quarter from operating losses of $682,000 last year. The increase was due to improved performance of our retail and online businesses in Australia. At September 30, 2022, our cash, short-term investments and marketable securities totaled $18.7 million and we had $34.7 million outstanding on our $50 million revolving line of credit. During the first nine months of 2022, we drew $34.7 million on our line of credit and liquidated $8.1 million of investment securities. We used funds to pay $6.9 million in dividends and to repurchase $3.3 million of our company stock. In addition, our operation resulted in a net $42.1 million use of cash mainly to fund inventory purchases. We also had approximately $1.5 million of capital expenditures. We expect that 2022 annual capital expenditures will be between $2 million and $2.5 million. On November 1, 2022, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on November 28, 2022 payable January 3, 2023. I would now like to turn the call over to Tom Florsheim Jr., our Chairman and CEO.

Thank you Judy, and good morning everyone. We are very excited about the strength of our wholesale business, which led to a fourth consecutive quarter of record sales. As Judy noted, our wholesale business grew nearly 63% compared to last year's third quarter. This significant increase is partly due to our strong inventory position relative to the third quarter of 2021, when our shipments were limited by supply chain issues. Additionally, we saw robust demand from both retailers and consumers for our footwear. Compared to a strong pre-pandemic third quarter in 2019, our wholesale shipments rose nearly 20%, and we achieved record profitability for the quarter. We take pride in this achievement, especially during a time of economic uncertainty. Our legacy brands, including Florsheim, Stacy Adams, and Nunn Bush, saw substantial gains of 82%, 68%, and 50% respectively. Florsheim and Nunn Bush experienced significant increases over 2019, with Florsheim achieving its largest third quarter on record. The market is shifting away from the in-home casual lifestyle that was prevalent during the pandemic towards a more dressy aesthetic. This transition has increased demand for work-oriented and occasion-oriented footwear, leading to strong sales across all our traditional legacy brands. We have gained from reduced competition in dress and dress casual footwear, as some brands have withdrawn from this area during the pandemic. Over the past few years, we've also broadened our casual offerings and explored various footwear categories, enhancing our understanding of what resonates with our brands. The focus on casual during the pandemic has provided valuable insights for future product development, yet we believe the market for refined footwear will remain a growth opportunity for us in the near to mid-term while we continue to strengthen our casual assortment across all brands. In our outdoor product group, BOGS is up 52% from last year, marking a record quarter for BOGS shipments. As mentioned in previous calls, our outdoor business surged during the pandemic, and we spent much of 2020 and 2021 addressing supply chain challenges to meet escalating consumer demand. In 2022, we are in a much better inventory position, allowing us to fulfill our robust backlog of orders. Additionally, we have expanded our BOGS sales beyond classic styles, gaining market share, particularly in the women's category with more casual and lifestyle products. As we approach the fourth quarter, it's clear that the outdoor market is experiencing an oversaturation of product, and consumer demand has somewhat softened compared to last year. We believe we are well-positioned to navigate these changes since most of our BOGS inventory consists of styles we think will remain relevant in the future. As we discussed in our second quarter call, the integration of Forsake has been slower than expected due to supply chain challenges. We are in the process of launching several new styles for fall 2023 and believe the brand will be well-prepared for a relaunch in the latter half of next year. Our retail sales rose 13% for the quarter, primarily driven by strong e-commerce performance. We are encouraged by this solid growth, as industry statistics suggest that e-commerce sales in footwear have largely plateaued year-over-year. However, our e-commerce profitability has significantly declined due to higher SG&A costs, particularly related to shipping and advertising. Increases in shipping expenses are tied to surging fuel costs, and the digital advertising landscape has become more competitive and less efficient in some respects, with new privacy regulations limiting advertisers' ability to effectively target consumers compared to previous years. Moving forward, we're focused on aligning our costs while continuing our sales growth trajectory. Sales in Florsheim Australia increased by 71% compared to 2021 in local currency, with higher sales in both our wholesale and retail segments. Last year's Florsheim Australian markets faced significant COVID-related shutdowns. During the third quarter, our Australian management team adeptly managed the transition to a new warehouse. With the Australian markets reopening, both our Florsheim and BOGS businesses are showing strong momentum. We anticipate that BOGS will achieve a third consecutive year of record sales, which has become an essential part of our business model in this market. We are pleased with the improvement in Australia and the recovery to profitability for the region. Our total inventory was $112 million as of September 30, 2022, up from $52.9 million at the end of September last year. As highlighted in prior calls, we've been increasing our inventories to satisfy product demand. Our higher inventories have supported our record third quarter results. The supply chain continues to improve, and delivery times have become more predictable and shorter. For this fall and spring 2023, we have arranged for earlier inventory receipts than usual to ensure timely delivery to our customers. As we prepare for fall 2023, our manufacturing lead times have returned to closer to historical levels, allowing us to bring products to market more timely. Our overall gross margin was 40.6%, compared to 40% last year. This improvement is due to price increases and lower inbound freight costs. While freight costs remain above pre-pandemic levels, we are seeing a decrease, which has contributed to improved margins. This concludes our formal remarks. Thank you for your interest in Weyco Group, and I would now like to open the call for your questions.

Your first question comes from David Wright from Henry Investment Trust L.P. David, you can go ahead.

Good morning, David.

Hey. I have two questions. First, did you have any share repurchase in the latest quarter?

We did. We repurchased 28,000 shares for the quarter at a total cost of $736,000.

And so that works out to 28,000 shares at $736,000?

That's correct. Yes.

Thank you. My second question is about the company's strong profitability and its conservative balance sheet. I've noticed that the dividend hasn't increased in about 3.5 years. With the recent rise in earnings, what is the Board's perspective on this? I'm also curious if this relates to your stock buyback and overall capital allocation strategy. I would appreciate your insights.

The decision to keep our dividend at the same level is based on the uncertainty we anticipate in the coming year. This uncertainty is not exclusive to Weyco Group; it's widely acknowledged that there are several concerns on the horizon and significant global macroeconomic uncertainty. As you noted, our balance sheet remains conservative, and our approach to increasing dividends will reflect that caution. The intention is to eventually resume dividend increases, but we will hold off until conditions become more stable.

Right. Well, that's a fair position. I would just point out that $0.01 a share a quarter increase is only about $100,000 of real money. And I appreciate your comments on my question. Thanks very much, and good luck going forward.

Thank you.

Your next question comes from the line of John Deysher from Pinnacle Value Fund. John, your line is now open.

Good morning, Tom. Good morning, Judy.

Hi, John.

Good morning.

Good morning. A couple of questions. How much is left on the share repurchase plan?

1.1 million shares, a little less than 1.1 million.

The inventory ended the quarter at $112 million, and that clearly contributed to driving sales. How much do you expect inventory to decrease by the end of the year?

We expect it to increase slightly, probably by a few million. It's a bit difficult to predict exactly, but we are likely at our peak. However, it's possible that it will rise a bit as we approach the end of the year, and then it will likely decrease as we progress through the first quarter and into the second quarter.

Why is it going up?

What we did was we brought in our spring inventory early, because when we were purchasing the spring inventory the supply chain was still a pretty big mess. And what we have experienced in the last few quarters is difficulty in getting the inventory in here on time to ship all of our customer orders on time. We actually faced a bit of that challenge still this fall. And so, we've been moving our timelines up for purchasing because of the supply chain and the longer lead times from factories. And so, that's the reason that we brought our fall inventory and spring inventory for 2023 in early. Now what we're seeing is the supply chain normalizing and lead times getting back to almost pre-pandemic levels. We still have issues where containers will get held up sometimes and it's always the ones you need, unfortunately. But we are buying again much closer to season. So as we contemplate what we're bringing in for fall 2023, we'll be able to bring that in much closer to our need. And so that's going to help us bring down inventories.

So, you think inventory will start to come down when...

Second quarter next year.

In the second quarter of 2023, let's discuss e-commerce for a moment. The challenges you're facing are likely more significant than they were a few months or two years ago. What specific actions are you taking to achieve profitability in that area? The competition is tough, especially given the costs of advertising and freight. In fact, one of our portfolio companies opted to shut down their e-commerce operations because it wasn't generating profits and they didn't foresee any improvement. I'm interested in understanding the concrete steps you're implementing to make that business profitable.

Yes. John, our e-commerce business is very profitable, although it is less so in the third quarter compared to last year. This is due to some SG&A costs that exceeded our expectations, particularly higher freight costs associated with fuel, as well as increased advertising expenses driven by more competition and challenges in targeting due to new privacy settings. Despite this, our e-commerce sector remains a strong and profitable part of our business. Our current focus is on aligning our costs better. We recognize the advertising pressures we face as we enter the highly competitive fourth quarter for e-commerce and are dedicated to staying within our budget. Additionally, we are actively renegotiating deals with our shipping carriers to lower freight costs. Overall, we are pleased with our e-commerce growth this year but acknowledge the pressures from SG&A costs. Moreover, we are implementing new tools for targeting customers, which help us better allocate our advertising and conversion efforts more efficiently. We are currently in the beta phase and are optimistic that these tools will improve our ability to reach and attract consumers.

Okay. So, lots of positive steps there. When do you anticipate seeing the impact of those changes?

Well, I think right now in the fourth quarter, we're going to get some huge numbers in e-commerce. So I would anticipate our e-commerce growth being under pressure in the fourth quarter. As far as SG&A, that's going to happen immediately where we're going to get our costs more in line. We didn't have a great fourth quarter last year from a profitability standpoint. We were very profitable, but we didn't have the growth that we should have had given the growth in sales. What I anticipate this fourth quarter, is there's going to be more pressure in terms from a topline standpoint, but we should be able to get things more in line in terms of our expenses.

In the fourth quarter.

In the fourth quarter.

Okay, all right. Good. That’s good color. Thanks very much and good luck.

There are no further questions at the moment. I would now like to turn the conference back to Judy Anderson for closing remarks.

I just want to say thank you to everybody for participating in our call today and I hope you have a really great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.