Earnings Call Transcript - WEYS Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Weyco Group First Quarter 2024 Earnings Release Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Judy Anderson, Chief Financial Officer. Please go ahead.

Judy Anderson, Chief Financial Officer

Thank you. Good morning, and welcome to Weyco Group's conference call to discuss first quarter 2024 results. On this 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 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 U.S. or Australian economies. Overall net sales were $71.6 million, down 17% compared to record first quarter sales of $86.3 million in 2023. Consolidated gross earnings increased 44.7% of net sales compared to 43.1% of net sales in last year's first quarter due to higher gross margins in our North American Wholesale segment. Earnings from operations were $8.3 million, down 21% from record first quarter operating earnings of $10.4 million in 2023. Net earnings were $6.7 million or $0.69 per diluted share compared to record first quarter net earnings of $7.4 million or $0.78 per diluted share last year. Net sales in our North American wholesale segment were $56.2 million, down 20% compared to record sales of $69.9 million in the first quarter of 2023. The decrease was largely due to a 48% decline in BOGS sales, but also due to decreased sales across our legacy brands due to reduced demand following record sales growth early last year. Wholesale gross earnings were 39.6% of net sales compared to 38.2% of net sales in the first quarter of 2023. Gross margins improved as a result of lower inventory costs primarily inbound freight. Wholesale selling and administrative expenses totaled $14.9 million for the quarter, compared to $17.9 million last year. The decrease was primarily due to lower employee costs, including commission-based compensation. As a percent of net sales, wholesale selling and administrative expenses were 27% in 2024 and 26% in 2023. Wholesale operating earnings totaled $7.4 million for the quarter, down 16% from $8.8 million in 2023, primarily due to lower sales. Net sales of our North American retail segment were a first quarter record of $9.8 million, up 10% over our previous record of $8.9 million in the first quarter of 2023. Retail growth as a percent of net sales were 65.3% and 66.3% in the first quarters of 2024 and 2023, respectively. Retail operating earnings were flat at $1.3 million in both 2024 and 2023. Higher retail sales were offset by increased selling and administrative expenses this year, primarily web freight. 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 Asia in 2023 and are in the final stages of winding down that business. As a result, the 2024 operating results of our other category primarily reflect that of Australia and South Africa. Net sales of Florsheim Australia were $5.5 million, down 26% from $7.5 million in the first quarter of 2023. In local currency, its net sales were down 24% due mainly to lower sales in Asia as a result of the closure of our Asia operations in mid-year 2023 and the loss of a sizable wholesale account in Australia. Retail sales in Australia were also down for the quarter due to the challenging retail environment. Florsheim Australia's gross earnings were 60.2% of net sales compared to 60.5% of net sales last year. Florsheim Australia generated operating losses of $400,000 for the period, down compared to operating earnings of $300,000 in last year's first quarter. The decrease was primarily due to lower sales. Interest income totaled $900,000 in the first quarter of 2024 compared to $100,000 in last year's first quarter. Interest expense was 0 for the quarter compared to $400,000 last year. This year included interest earned on cash in the U.S. and Canada, while the prior year included interest expense incurred on outstanding debt balances during the period. At March 31, 2024, our cash and marketable securities totaled $84.7 million and we had no debt outstanding on our $40 million line of credit. During the first 3 months of 2024, we generated $14.3 million of cash from operations and used funds to pay $4.7 million in dividends. We also had $200,000 of capital expenditures. We estimate that 2024 annual capital expenditures will be between $2 million and $4 million. On May 7, 2024, our Board of Directors declared a cash dividend of $0.26 per share to all shareholders of record, on May 17, 2024, payable June 28, 2024. This represents an increase of 4% above the previous quarterly dividend rate of $0.25.

Thomas Florsheim, Chairman and Chief Executive Officer

Thank you, Judy, and good morning, everyone. It was a challenging quarter as our North American wholesale business experienced a 20% decline compared to the record sales in the first quarter of 2023. Our performance reflected industry headwinds as retailers adopted a conservative approach to inventory management due to the soft sales trend in footwear and apparel categories, focusing on maintaining lower inventory levels. Although our shipments were significantly down, we remain encouraged by strong retail sell-throughs, particularly in our legacy men's brands. Our overall legacy business decreased by 13%, with Stacy Adams, Nunn Bush, and Florsheim brands down 16%, 13%, and 11%, respectively. After managing high inventories for much of 2023, retailers are cutting back on their upfront purchases and placing more orders as needed. We did see a positive increase in our at-once business, but it was insufficient to cover the deficit. We expect this conservative trend among retailers to persist through the second quarter, but we are hopeful that demand will pick up in the latter half of the year. From a competitive standpoint, we believe we are surpassing our peers in traditional dress and refined casual footwear. We are focused on adapting our brand to align with a more relaxed lifestyle and are expanding our offerings in true casual and hybrid footwear. This spring, across all three brands, we launched new products that have been well received by consumers. Although there is uncertainty in the current retail environment due to various factors, we are confident in the long-term prospects of our legacy brands. In our Outdoor division, BOGS sales significantly declined by 48% as the weather boot market continues to face challenges. As we mentioned during our fourth quarter conference call, we anticipate a difficult outdoor market in 2024. Furthermore, the sales decline for BOGS in this first quarter was exacerbated by a tough comparison with last year's shipments, particularly due to a large work boot program shipped to a key account in early 2023, which was not repeated in 2024. The absence of this program accounted for the majority of the decline in BOGS sales for the quarter. Following several seasons of strong growth, the BOGS business lost momentum in the latter half of 2023 due to oversaturated boot inventories at retail and unusually mild fall and winter weather. We believe the market is gradually normalizing as retailers work through their inventories. The hallmark of the BOGS brand is product innovation, and in this current environment, we are more committed than ever to introducing new products that differentiate BOGS from its competitors. We are rolling out a wide range of boots that utilize BOGS seamless construction, which is 30% lighter and over twice as durable compared to the standard vulcanized rubber boot. We believe that expanding our seamless collection will be a game changer as the outdoor boot market resets with cleaner inventories this fall. Our retail segment was a strong point in our first quarter with record sales and a 10% increase over last year, primarily driven by higher web sales for both Florsheim and BOGS. The growth in our direct-to-consumer business reflects the strength of our brand portfolio and the investments we've made in our e-commerce platform. Our overseas business, known as Florsheim Australia, reported a 26% sales decrease for the quarter, partly due to the closure of our Florsheim Asia retail locations at the end of last year and the loss of a significant wholesale account in Australia. Additionally, overall retail and wholesale sales throughout the region have been sluggish, reflecting general macroeconomic pressures. For the latter half of the year, we aim to manage expenses while seeking opportunities to return our overseas business to a growth path. Changing topics, our overall inventory as of March 31, 2024, was $62 million, reduced from $74.8 million on December 31, 2023. Our inventory is currently at a seasonal low point and is expected to increase to about $75 million by the end of the second quarter. Our goal is to maintain sufficient inventory to support at-once business for our core styles. Our overall gross margins were 44.7% for the quarter, up from 43.1% last year. As Judy mentioned, our wholesale margins benefited from reduced inbound freight costs. While freight costs normalized in the first half of 2022, it wasn't until late 2023 that we were able to sell through the inventory accumulated with higher freight costs and begin realizing the full advantages of these lower costs. This concludes our formal remarks. Thank you for your interest in Weyco Group. I would now like to open the call to your questions.

Operator, Operator

Our first question comes from David Wright of Henry Partners.

David Wright, Analyst

Thank you for organizing the conference call, Tom. Not every company does this, and it's commendable that you do. I also appreciate the dividend increase. I have a couple of questions: regarding stock buybacks, you purchased about $4 million each year over the last few years. However, I noticed that the stock buyback in the first quarter was very minimal, and I was curious if there was a specific reason for that.

Thomas Florsheim, Chairman and Chief Executive Officer

The reason is that we have been actively buying stock for most of the year. We set a price limit, which I can't disclose, but it is quite high. Despite this, there have been enough buyers of our stock that we haven't been able to acquire more.

David Wright, Analyst

I guess that's a happy problem to have.

Thomas Florsheim, Chairman and Chief Executive Officer

I agree. It is a happy problem.

David Wright, Analyst

You commented, you've done a great job working the inventory down from very high levels coming out of COVID. And you talked about having to build it back up, $15 million or so by the end of the quarter. What kind of free cash flow are you projecting for the full year?

Thomas Florsheim, Chairman and Chief Executive Officer

Judy, do you have an idea about that? We don't have an exact figure, but I don't expect it to significantly impact our cash. The reason our inventory is currently a bit lower is that we still produce a lot of our products in China. During the Chinese New Year closure, we experience a dry period, but now the fall shoes are starting to arrive. We will increase our inventories, and we currently have lower payables compared to last year, along with higher receivables. So, I don't anticipate this being a major issue for our cash flow.

Judy Anderson, Chief Financial Officer

It's kind of a normal seasonal variation.

David Wright, Analyst

I was curious about the inventory drawdown, especially since your cash flow from operations last year was $98 million, which is a substantial amount. The business model is really impressive, and it's run in a somewhat traditional way, but it's clearly successful, which is great to see. I hope you continue with your current approach.

Thomas Florsheim, Chairman and Chief Executive Officer

Thank you for saying that.

David Wright, Analyst

Yes, you can see it. The company has a long history, but you are paying a fair dividend, repurchasing stock, and maintaining a conservative balance sheet. The business is very profitable. You navigated through COVID successfully, and coming out of it, while revenues were significantly down in the first quarter, the margins remained stable, demonstrating a high level of efficiency. I have nothing but positive remarks.

Thomas Florsheim, Chairman and Chief Executive Officer

All right. Well, thank you very much. It's nice to start out the investor call with having some nice comments like that. So thank you.

David Wright, Analyst

And then just to close, Tom, a real quick question. The consumer dynamics, sometimes I ask about them. I wonder when you talk about the higher sales from the website, like shoes are sort of like your feet. And I just wondered, like what's sort of the return rates from what I'm going to call mail order shoes because obviously, the people can't try them on in the store.

Thomas Florsheim, Chairman and Chief Executive Officer

Yes. My brother John, who runs that area of the business is here, and he's going to answer that question.

John Florsheim, President and Chief Operating Officer

Yes. It varies a little bit by brand. But overall, we averaged 12% to 13%. We get a lot of repeat customers buying footwear from our different brands. And that 12% to 13% is very low from an industry standard perspective.

David Wright, Analyst

Yes. That surprises me. That is really great. So more good news.

Operator, Operator

At this time, I am showing no additional questions in the queue. I would now like to turn the call back over to Judy Anderson, Chief Financial Officer, for some closing remarks.

Judy Anderson, Chief Financial Officer

We just wanted to say thank you for listening to our call today, and we hope you all have a great day.

Operator, Operator

Thank you. This does conclude today's call. You may now disconnect.