Earnings Call Transcript - WEYS Q2 2020

Operator, Operator

Good day, ladies and gentlemen, and thank you for being here. Welcome to the Second Quarter 2020 Earnings Release Conference Call for Weyco Group. Currently, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. I would now like to hand the conference over to your host, Mr. John Wittkowske. Thank you, and please proceed.

John Wittkowske, Host

Thank you. Good morning, everyone and welcome to Weyco Group's conference call to discuss our second quarter 2020 results. On this call with me today are Tom Florsheim Jr., our Chairman and CEO; and John Florsheim, our President and COO. Before we begin, I would like to 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 resulting global economic slowdowns. Actions by governments such as stay-at-home orders that among others require retail store closures, the financial health of the Company's customers and business partners, including the effects of any bankruptcy proceedings by such party, the performance of the Company's supply chain and the health and welfare of the Company's employees. Additionally, some comparisons may refer to non-GAAP measures. Our SEC filings may contain additional information about these non-GAAP measures and why we use them. The COVID-19 pandemic significantly impacted the Company's second quarter results. The majority of retailers, including our retail stores, were closed for a vast majority of the quarter due to government orders and business recovery has been slow. As a result, the Company experienced significant sales losses during the quarter, which led to substantially lower second quarter earnings. Net sales for the second quarter of 2020 were $16.7 million compared to second quarter 2019 net sales of $60.5 million. Operating losses totaled $13 million for the quarter as compared to operating earnings of $1.9 million in the second quarter of 2019. The Company's net loss totaled $8.9 million for the quarter compared to net earnings of $1.5 million in last year's second quarter. Diluted loss per share was $0.91 in the quarter, compared to diluted earnings per share of $0.15 in the second quarter of 2019. In the North American wholesale segment, net sales for the second quarter of 2020 were $9.3 million compared with $46.1 million last year. Net sales across all of our brands were down significantly in all major categories as a result of retail shutdowns due to the pandemic. Licensing revenues declined to $141,000 for the quarter from $636,000 last year, in line with the reduction in licensees' sales of branded products. Wholesale gross earnings were 34.7% of net sales in the second quarter of 2020 compared to 35.1% of net sales in 2019. The wholesale segment had operating losses totaling $10.2 million for the quarter, compared to operating earnings of $2.2 million last year. The losses this quarter included the write-off of approximately $3.3 million in receivables as a result of the JCPenney bankruptcy filing in May of 2020, offset by $1.4 million of income from US and Canada government wage subsidies. Net sales of the North American retail segment, which include our retail stores and US e-commerce sales were $3.6 million in the quarter, down from $5.4 million in last year's second quarter. Same-store sales, which include US e-commerce sales, were down 31% due to retail store closures, which were partially offset by higher sales on our Company's websites. The retail segment had operating losses totaling $856,000, down from earnings of $400,000 last year due to larger operating losses at brick-and-mortar stores. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $3.7 million in the second quarter, down from $9 million last year. The decrease was due to lower net sales at both Florsheim Australia and Florsheim Europe resulting from retail shutdowns. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $2.2 million for the quarter, compared to operating losses of $749,000 in last year's second quarter. The losses this quarter included the write-down of approximately $1 million of obsolete inventory at Florsheim Asia and included $1.3 million of income from rent and wage subsidies recognized during the period. At June 30, 2020, our cash and marketable securities totaled $25.9 million and we had no debt outstanding on our $60 million line of credit. During the first six months of 2020, we generated $12.6 million of cash from operations. We used funds to pay $7 million in dividends, paid down $7 million on our line of credit and repurchased $1.3 million of our Company stock. Additionally, we had $2.7 million of capital expenditures. We estimate that in 2020 total annual capital expenditures will be between $3 million and $4 million. On August 4, 2020, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on August 28, 2020, and payable on September 30, 2020. I would now like to turn the call over to Tom Florsheim, Jr., our Chairman and CEO.

Tom Florsheim, Chairman and CEO

Thanks, John and good morning, everyone. The retail environment continues to be significantly affected by the COVID-19 pandemic. The impact was particularly harsh in the second quarter with retailers closed for the majority of the quarter and consumers staying at home even after stores began to reopen. However, we remain focused on the long-term goals and objectives of the Company as we navigate through this unprecedented situation. Consumer purchasing behaviors have changed over the past several months. Consumers are seeking new and increased opportunities to participate in outdoor and socially distanced activities, which has created an opportunity for outdoor-minded products such as BOGS. We have already seen solid increases in BOGS online business during the second quarter and as we move into BOGS' busy season in the back half of the year, we are optimistic that the brand may have new opportunities to grow and potentially increase market share. Over the past several seasons, we have talked about the evolution of our legacy brands into more casual products. We have made strides in this area, but both Florsheim and Stacy Adams still saw a high percentage of what we refer to as 'go to work' type shoes. The dress and dress casual footwear market has currently seen significantly lower demand, because many people have not yet returned to offices and also due to weddings and other dress-up type events being canceled due to COVID. Nunn Bush has performed better because of its more casual product offering. We expect that our dress and dress casual business will have the opportunity to recover when people are no longer spending so much time in their homes and are able to return to normal social activities, although the timing of a return to normal is of course unknown. Many of the new shoes and boots we are delivering this fall are more casual, and the majority of our spring '21 line is also geared toward a relaxed lifestyle. The transformation to more casual footwear and apparel was a strong trend prior to COVID but has greatly accelerated due to stay-at-home mandates. Our backlog is down for fall because our selling season was interrupted by shutdowns, and we received many cancellations for both spring '20 and fall '20 orders from retailers. We are in the process of having virtual meetings with our customers to solidify fall orders and to showcase our new lines for spring '21. While it would be preferable to meet with customers face to face, we're finding that with the technology available, we can effectively show new product and communicate with our brick-and-mortar and e-commerce customers. Our distribution center and supply chain are fully operational, which enables us to fulfill wholesale and e-commerce orders in a timely manner. We believe we have the infrastructure and technology systems in place that will allow us to adapt to the future consumer landscape. We believe we are well-positioned to respond to changes in consumer demand during these volatile times. In 2019, we built our inventory levels of core products in anticipation of the imposition of the China tariff. When the pandemic hit the US in March of this year, we adjusted our 2020 buys accordingly. At June 30 of this year, we have $81.4 million of inventory versus $82.8 million at the same time last year. Our current level of inventory is higher than optimal given decreased demand. We have reviewed our inventories at June 30 and with the exception of some obsolete inventory we wrote off in Asia this quarter, we feel our inventory is solid with a good base of core products. However, given the uncertainty in the marketplace, we will continue to review and monitor seasonal and discontinued products throughout the rest of the year, which might result in additional inventory write-downs. As the world reawakens and the marketplace evolves, we are in a good position to respond to our consumers' needs. Cost management and liquidity remain top priorities of our Company during this challenging time. Expenses across the organization are being evaluated and right-sized so that we can effectively operate during this period of lower sales volumes. During the quarter, we adjusted our advertising spending, which reduced second quarter selling expenses by $1.1 million. We qualified for $1.5 million in government wage subsidies in the US and Canada and received additional rent and wage subsidies outside of the US totaling $1.3 million. We are continuing to pursue additional subsidies and other cost savings at this time. Our balance sheet and associated liquidity remain highlights in the Company's current financial position with nearly $26 million in cash and short-term marketable securities, and the full $60 million available on our line of credit. We believe we are in a strong cash position, which affords us the ability to withstand the economic effects of the current pandemic situation. Collection of our accounts receivable has slowed, and we expect that trend to continue over the coming months. In addition, as previously discussed, we had a write-down of receivables during the quarter due to the bankruptcy of JCPenney. We are continuing to actively manage our receivables to secure payments and mitigate risk, and are also monitoring the financial health of our other customers. This concludes our formal remarks. Thank you for your interest in Weyco Group, and I would now like to open the call to your questions.

Operator, Operator

Our first question or comment comes from the line of Fredrick Zoller. Your line is open.

Unidentified Analyst, Analyst

Yes. Hi, how are you guys doing?

Tom Florsheim, Chairman and CEO

Good morning.

John Wittkowske, Host

Good morning.

Unidentified Analyst, Analyst

Yes. Just a quick question on the JCPenney issue. The possibility of them reopening stores on a future day once they re-emerge from bankruptcy, is that, I'm just curious, because I wasn't even aware that you guys had shoes there. So I thought it was mostly Macy's. But can you just give me maybe the top brick-and-mortar stores that you guys percentage-wise sell, have the most sales in, because I know Macy's is a big one. And also the JCPenney thing, the possibility of them re-emerging from bankruptcy, is that something that could boost earnings going down the line if they were to re-emerge from bankruptcy and make it come back?

John Wittkowske, Host

Yes, I mean we don't break down our sales to customers by customer, but JCPenney was a big account, and Macy's is a big account. With JCPenney re-emerging coming out of bankruptcy, they filed for Chapter 11 reorganization and we are again shipping to them, but with secure terms. So that they emerge and come back stronger, it will be good for our business. We are back shipping to them in a way where we don't have any kind of exposure. If that answers your question.

Tom Florsheim, Chairman and CEO

And I think, was the second part of your question whether you feel they're going to emerge as an ongoing entity from Chapter 11?

Unidentified Analyst, Analyst

Well, it just seems to me that at least in my general area that they still have stores open and they're still selling the shoes. Without it, I looked into it, I looked it up and they have shoes in stock. So we are still selling shoes. So, I mean the $3.3 million.

John Wittkowske, Host

No, what happens with Chapter 11 is that it allows them to continue operating as a business. They have planned to close around 250 stores and are conducting significant business sales in those locations. However, in their remaining stores, which number around 700 or 800, they are still operating. Additionally, there are several potential bidders for JCPenney in the coming weeks, so they will move forward. It's difficult to predict the exact outcomes due to COVID-19, but we are encouraged by the interest shown by multiple bidders for the JCPenney business, and they are likely to remain an important customer for us in the near future.

Unidentified Analyst, Analyst

All right, thank you.

Tom Florsheim, Chairman and CEO

Thank you.

Operator, Operator

Thank you. Our next question or comment comes from the line of John Deysher from Pinnacle. Your line is open.

John Deysher, Analyst

Good morning, everyone. A couple of questions. One, on the share repurchase; I think you bought back $1.3 million worth in the first quarter. Did you buy any in the second quarter?

John Wittkowske, Host

No. I don't think so.

John Deysher, Analyst

And if not, why not? And what's the appetite at this point for buying back stock at the levels it's trading at?

John Wittkowske, Host

Right now, I mean, we think it's a good buy at the level it's trading at, but we're trying to be smart about using our cash. We see the possibility that this is going to go on for a while, and we just don't think that at this point it's wise to do stock buybacks.

John Deysher, Analyst

Okay, so you're holding cash for other purposes. Okay.

John Wittkowske, Host

We need to maintain our business operations. Considering the current uncertainty, it's important to ensure that we have sufficient cash reserves like many other companies are doing.

John Deysher, Analyst

Okay. So even though you've got a $60 million, I think undrawn revolver, your customers want to see the cash on the balance sheet. Is that fair?

Tom Florsheim, Chairman and CEO

Yes. And also because the revenues have fallen to such an extent that we are in a position right now where we lost money in the last quarter, which I think is the first quarter I can remember and I have been here a long time that we've lost money. We just are conservative, and the fact that we want to make sure that if this goes on for a while, we try to right size so we can get to breakeven as quickly as possible. But we just feel more comfortable having money in the bank right now.

John Wittkowske, Host

John, the other thing is, if you look at almost all of our companies out there, they have suspended both stock buybacks and also a number of suspended dividends. We have maintained our dividend. And so we had to make choices in terms of what’s important to our shareholders. And also just looking down the line, we certainly hope the pandemic will be over sooner rather than later. I mean, when this all started, we thought three months, six months, now like, we're just basically being very conservative in terms of how we approach this to make sure that we maintain liquidity.

Tom Florsheim, Chairman and CEO

Yes. We are continuing to invest in areas of our business that we believe will drive growth in the future, such as the D2C market. I want to clarify that we are not simply accumulating cash; we are making strategic decisions about where to invest.

John Deysher, Analyst

Okay, that's fair. In terms of rightsizing the business, how much in terms of dollars would you say you'll be able to take out of the expense structure in the next 12 months?

Tom Florsheim, Chairman and CEO

And that's a difficult question to answer at this point. I think we'll be in a better position to answer that next quarter. John, we're looking at everything. And we've started this process a number of months ago; we've made a number of changes already. There is more to come. We're just reexamining every aspect of our business right now to figure out the question you just posed. I would prefer to give you some more specific answers after the next quarter.

John Deysher, Analyst

Okay, that's fine. And I guess finally, you mentioned that you're selling back to JCPenney on a secured basis. Is that cash on delivery or what exactly does secured mean?

Tom Florsheim, Chairman and CEO

You know, we can't actually confirm that at this time.

John Wittkowske, Host

But we can't do specifics, but we've taken steps to mitigate our exposure.

Tom Florsheim, Chairman and CEO

Yes, there is no, the way that we're doing it, there is no risk.

John Deysher, Analyst

There is no risk. Okay. Well, I mean, let's ignore JCPenney. Conceptually, what are the ways besides cash on delivery that you could guarantee payment? Conceptually, what are the alternatives?

John Wittkowske, Host

Yes, you know, John, I mean, we're happy to talk to you offline about this, but I don't want to get into specifics of how we're handling our credit with different accounts.

John Deysher, Analyst

All right.

John Wittkowske, Host

Feel free to call me.

Tom Florsheim, Chairman and CEO

Yes, we're both here today.

John Deysher, Analyst

Okay. I'll give you a ring.

John Wittkowske, Host

Okay.

John Deysher, Analyst

Thanks.

Tom Florsheim, Chairman and CEO

Thank you.

Operator, Operator

Thank you. I'm showing no additional audio questions in the queue at this time, so I'll turn the call back over to management for any closing remarks.

Tom Florsheim, Chairman and CEO

We just want to thank everybody for listening to the call today. Stay safe, and we'll talk to you next quarter. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.