Earnings Call Transcript - WEYS Q4 2022

Judy Anderson, Chief Financial Officer

Thank you. Good morning, everyone, and welcome to Weyco Group's conference call to discuss fourth quarter and full year 2022 results. On this call with me today are Tom Florsheim, Jr., Chairman and CEO; and John Florsheim, President and COO. 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 and to our other filings with the Securities and Exchange Commission for a discussion of important factors and risks that could cause our actual results to differ materially from our projections, including the uncertain impact of inflation on our cost 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 economy. Net sales for the fourth quarter of 2022 were $99 million, down 2% compared to last year's fourth quarter net sales of $101.4 million. Consolidated gross earnings increased to 46.6% of net sales for the quarter compared to 40.2% of net sales in last year's fourth quarter due to higher gross margins in our North American wholesale segment. Quarterly operating earnings rose to a record $15.1 million, up 18% compared to $12.8 million in the fourth quarter of 2021. Fourth quarter 2022 net earnings were $10.2 million or $1.06 per diluted share, compared to $10.3 million or $1.07 per diluted share last year. In the North American wholesale segment, net sales for the quarter were $75.5 million, down 6% from $79.9 million last year. Last year's fourth quarter sales were abnormally high due to supply chain delays, which caused some third quarter orders to ship in the fourth quarter. Wholesale gross earnings were 41.3% of net sales for the quarter compared to 33.7% of net sales in last year's fourth quarter. Gross margins returned to pre-pandemic levels as a result of selling price increases implemented to address higher costs. Selling and administrative expenses were $20.5 million or 27% of net sales for the quarter compared to $17.5 million or 22% of net sales, last year. The increase in 2022 was primarily due to higher advertising and pension expenses. Operating earnings rose to $10.7 million for the quarter, up 14% over $9.4 million in last year's fourth quarter, due mainly to higher gross margin. Net sales in our North American retail segment were a record $14.2 million for the quarter, up 6% compared to $13.5 million last year. The increase was primarily due to higher sales on the Florsheim website. Sales at our four domestic stores were also up collectively for the quarter. Retail gross earnings as a percent of net sales were 64.5% and 66.2% in the fourth quarters of '22 and '21, respectively. Selling and administrative expenses totaled $5.9 million or 41% of net sales for the quarter compared to $5.6 million or 42% of net sales last year. Retail operating earnings were $3.3 million in the fourth quarter of both 2022 and 2021 as higher sales were offset by lower gross margins and higher expenses this year. 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 were $9.2 million, up 16% compared to $8 million in the fourth quarter of 2021. In local currency, Florsheim Australia's net sales were up 29% for the quarter, with sales up in both its wholesale and retail businesses. Other gross earnings were 61.8% of net sales for the quarter compared to 61.1% of net sales in the fourth quarter of 2021. Other operating earnings reached $1.1 million for the quarter compared to $41,000 last year. The increase was driven by improved performance of our retail business in Australia. We will now discuss our full year 2022 results. Consolidated net sales for the full year were a record $351.7 million, up 31% compared to $267.6 million in 2021. Consolidated gross earnings as a percent of net sales were 41.1% and 40.1% in 2022 and 2021, respectively. Operating earnings were a record $40.4 million, up 57% over 2021 operating earnings of $25.7 million. 2022 net earnings were a record $29.5 million or $3.07 per diluted share, up 44% compared to $20.6 million or $2.12 per diluted share in 2021. North American wholesale net sales were a record $283 million in 2022, up 38% compared to $205 million in 2021. While part of the overall increase was due to pipeline sales, sales were also up due to robust consumer demand and higher selling prices this year. Wholesale gross earnings as a percent of net sales for the year were 35.6% in '22 and 33.8% in 2021. Gross margins returned to pre-pandemic levels as a result of selling price increases implemented to address higher costs. Selling and administrative expenses were $68.2 million and $49.9 million in 2022 and '21, respectively. 2021 expenses were reduced by $5.5 million in wage subsidies received from the U.S. and Canadian governments. As a percent of net sales, wholesale selling and administrative expenses remained flat at 24% of net sales in both 2022 and '21. Wholesale operating earnings reached a record $32.6 million in 2022, up 68% over $19.5 million in 2021, due mainly to higher sales and gross margins this year. In the North American retail segment, net sales were a record $36.7 million in 2022, up 16% compared to $31.6 million in 2021. The increase was primarily due to higher sales across all our brands' websites fueled by strong consumer demand. Sales were also up for the year at our four domestic brick-and-mortar stores. For the year, retail gross earnings were 65.7% of net sales in 2022 and 66.4% of net sales in 2021. Retail selling and administrative expenses were $18.1 million or 49% of net sales for the year compared to $14.3 million or 45% of net sales last year. The increase in 2022 was mainly due to higher e-commerce expenses, primarily outbound freight and advertising. The retail segment had operating earnings of $6.1 million in 2022 and $6.7 million in 2021. The decrease was primarily due to lower earnings from our e-commerce business as higher sales were offset by higher selling and administrative expenses. Our other operations had net sales of $31.8 million in 2022, up 4% from $30.7 million in 2021. Sales in U.S. dollars were up $3.5 million or 12% at Florsheim Australia. In local currency, Florsheim Australia's net sales were up 22% for the year, with sales up in both its retail and wholesale businesses. Last year's sales at Florsheim Australia were negatively impacted by COVID-related lockdowns that existed throughout much of 2021. Florsheim Europe was closed and had no sales in '22 versus $2.3 million of sales in 2021. Other gross earnings were 61.1% of net sales in 2022 versus 55.8% of net sales in 2021. Other operating earnings recovered to $1.7 million in 2022, up from operating losses of $404,000 in 2021. The improvement in 2022 was due to stronger performance at Florsheim Australia and the shedding of losses at Florsheim Europe. At December 31, 2022, our cash short-term investments and marketable securities totaled $25.5 million, and we had $31.1 million outstanding on our $50 million revolving line of credit. During 2022, we had net borrowings of $31.1 million on our line of credit and liquidated $8 million of investment securities. We used funds to pay $7 million in dividends and to repurchase $4.2 million of our company's stock. In addition, our operations resulted in a net $29.9 million use of cash mainly to fund inventory purchases. We also had $2.3 million of capital expenditures. We estimate that our 2023 annual capital expenditures will be between $2 million and $4 million. On March 7, 2023, our Board of Directors declared a quarterly cash dividend of $0.24 per share to all shareholders of record on March 17, 2023, payable March 31, 2023.

Thomas Florsheim, Chairman and CEO

Thanks, Judy, and good morning, everyone. We are very pleased with our fourth quarter results, which capped off a record year in both sales and earnings. Our entire Weyco team worked extremely hard throughout 2022 to navigate supply chain issues and challenging market conditions, and we are proud of this accomplishment. As mentioned, part of our strong volume this year had to do with pipeline fill, as many retailers needed to get shoes back on their shelves in the first half of the year. However, we also enjoyed strong consumer demand for our brands, especially in our more traditional business, which experienced a resurgence in 2022. And our legacy business comprised of Florsheim, Stacy Adams and Nunn Bush, all three brands had comeback years. Florsheim was going against a record fourth quarter last year, driven by timing of shipments and was down 14% for the fourth quarter. However, the brand was up 43% for the year and 2022 was a record year for Florsheim. Stacy Adams sales were up 5% for the quarter and 49% for the year. The Nunn Bush brand was up 18% for the quarter and 40% for the year. Our legacy brands benefited from the strength of the men's dress and refined casual business as consumers were once again updating their wardrobes for social occasions as well as the return to the office work environment. While the refined footwear market returned to more normalized sell-through during the fourth quarter, the category is healthy, and we expect to see steady performance throughout 2023. As discussed in past conference calls, Florsheim, Nunn Bush and Stacy Adams are focused on diversifying their product mix, with Nunn Bush having the most success at retail with its value-oriented, comfort casual footwear. Florsheim also continued to make progress with a strong casual boot performance in the fourth quarter. While BOGS was down 14% for the quarter, they were up 23% for the year, leading the brand to a record year of sales. In 2022, we delivered on a strong backlog of orders as BOGS continues to broaden its mix of footwear into less seasonal lifestyle product. In the fourth quarter, the outdoor category was oversaturated with product due to the unwinding of supply chain issues. We saw a more promotional environment, along with the softness in consumer demand, reflecting mild winter weather in certain parts of the U.S. and Canada. Despite these changes in the market, we remain enthused about the overall performance of the BOGS brand. As we progressed through 2023, we are mindful of the more challenging environment in the outdoor category, but we are optimistic that we can navigate these changes and continue to move the brand forward and evolve the product offering. In our retail segment, sales were up 6% for the quarter and 16% for the year. Given the promotional environment and some of the weather challenges impacting BOGS, we are pleased with the increase for the fourth quarter and double-digit growth for the year. We believe this reflects the strength of our e-commerce platform and the appeal of our brands. From a bottom line perspective, the promotional environment affected our gross margins, and we had higher expenses leading to a flat profit for the fourth quarter. However, during the quarter, we did make progress on controlling our spending in a more competitive, less efficient advertising space, and we also found creative ways to slightly reduce our freight costs, as long as we are cognizant of striking the right balance between growth in our direct-to-consumer business and maintaining profitability. Florsheim Australia's net sales in local currency were up 29% in the fourth quarter and 22% for the year. Australia was the bright spot for our business this year as we saw growth across retail, e-commerce and wholesale for Florsheim, as well as increases for BOGS via wholesale and e-commerce. This resulted in greater profitability for the division. A portion of the increase was related to comparisons with pandemic-related shutdowns in 2021, but a good part of our success had to do with our management team's strong execution in 2022, including a warehouse move and the opening of several new stores. Our overall inventory was $128 million as of December 31, 2022, up from $112 million at the end of September 2022. We have been building our inventories, and due to supply chain issues, we brought in much of our inventory for spring '23 early. We are at peak inventory right now and expect to see our levels come down as we move through the first half of the year. The supply chain at this point is largely back to normal and that will make it easier for us to plan our inventory levels and bring product in closer to the season that is being targeted. That concludes our formal remarks. Thank you for your interest in Weyco Group. And I would now like to open the call to your questions.

John Deysher, Analyst

Good morning. Thank you for taking my call. I have two quick questions. First, where do we stand with the Forsake brand at this time? I know you're keeping a close watch on it. We're approaching the two-year anniversary of the purchase, and I want to ensure we're on track for the launch. The last update mentioned a target for fall of 2023. Is that still feasible?

John Florsheim, President and COO

Yes, this is John. Regarding Forsake, we are just starting to introduce new products. We completed the purchase in June 2021, so it has been 1.5 years, but supply chain delays have hindered our progress. We are planning a more comprehensive overhaul for Weyco, except for the fall of 2023. It is still early to assess the new product performance. However, the outdoor market has become more challenging, as previously mentioned during the call, and the direct-to-consumer segment has become less effective, particularly for brands with less consumer recognition. We are eager to launch the new products in the latter half of the year, but it is too soon to make definitive conclusions.

John Deysher, Analyst

Thank you for your help. I have a couple of questions regarding the cash flow statement. It seems there are some non-recurring items there. I'm curious about where they are shown on the income statement. There's a pension settlement charge of $900,000 and a trademark impairment of $1.2 million for the year. How are these reflected on the income statement? Did they go through SG&A, or how did they appear on the income statement since it's not specified?

Judy Anderson, Chief Financial Officer

Both of those go through SG&A. The settlement loss is part of pension expense. Actually, let me change that a little bit. That pension loss, $600,000 of it goes through other income. It's just because of the accounting rules that make us split it. And the other $300,000 is in SG&A. So that's the settlement loss. And the impairment charge is in SG&A.

John Deysher, Analyst

$1.2 million?

Judy Anderson, Chief Financial Officer

Yes.

John Deysher, Analyst

Okay, good. And the gains from fair value measurement of contingent consideration, I guess that's for Forsake. Where does that flow through?

Judy Anderson, Chief Financial Officer

That's also in SG&A.

John Deysher, Analyst

That's also embedded in SG&A. Okay. Great. All right. Terrific. Thanks for the update, and good luck going forward.

David Wright, Analyst

Good morning, everyone. I have a question. You highlighted the high level of inventory. I go back five, six years when you might have ended the year with $60 million of inventory. So kind of any nervousness about the absolute level of inventory?

Thomas Florsheim, Chairman and CEO

We believe the situation is very manageable. Over the last two years, if we were to deliver our shoes on time for the season, we needed to bring everything in early. Historically, the transit time from China was about 30 days, but during the supply chain issues, it stretched to three months or even longer at times. This forced us to bring in seasonal goods and inventory earlier to ensure we had what we needed. This is part of why we've experienced significant revenue growth while some competitors have struggled. We previously mentioned that being required to buy earlier and in larger quantities has led us to focus on our core merchandise, which consists mainly of best sellers. This inventory does not spoil and can be used for several seasons. As the supply chain situation improved, we recognized the changes and reduced our buying nine months ago. We are confident that our inventories will align in the first half of this year. While they won't drop back to $60 million because our business has grown, they will be significantly lower than the $128 million.

David Wright, Analyst

Okay. Great. Thanks for that answer. Non-financial question, if you don't mind. I'm curious just more as a consumer. So in your e-commerce segment, and let's just stick with Florsheim, what's the incidence of returns? A pair of shoes, you go to the store, you try on four or five different ones and this one feels best and looks okay, so fine. I can't really do that so well with e-commerce. Curious about the return rates.

John Florsheim, President and COO

This is John. It's about 12% to 13%, for instance, on the Florsheim brand. That's relatively low when you look at it within the context of the industry. I think we benefit from a lot of our consumers' repeat purchases. They know what shoe they want, they know their size, how they fit our brands. And so we tend to have lower return rates than the industry, especially the multi-brand sites.

David Wright, Analyst

Well, thanks for giving me some insight there. Congratulations on the record results. And thanks for taking my questions.

Judy Anderson, Chief Financial Officer

I just want to say thank you, everyone, for joining our call today, and have a great day.

Operator, Operator

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