Earnings Call Transcript - WEYS Q1 2022

Operator, Operator

Thank you for standing by, and welcome to Weyco Group’s First Quarter 2022 Earnings Conference Call. Please be advised that today’s call may be recorded. I would now like to turn the call over to your host, John Wittkowske, CFO. Please go ahead.

John Wittkowske, CFO

Thank you. Good morning, everyone. Welcome to Weyco Group’s conference call to discuss our first quarter 2022 results. On this call with me today are Tom Florsheim Jr., our Chairman and CEO; and John Florsheim, our President and COO. In addition, as previously announced, I will be retiring on May 6, which is Friday. So, with us today is also Judy Anderson, who is our current Vice President of Finance and Treasurer, and who will be the CFO effective on Friday. 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 results may differ materially. We refer you to the section entitled risk factors in our most recent annual report on form 10K 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 costs and consumer demand for our products, and the continuing direct and indirect effects of the COVID-19 pandemic in the United States and Asia. Overall net sales were a first quarter record of $81.4 million compared to $46.9 million in 2021. Consolidated gross earnings were 35.8% of net sales for the quarter, compared with 41.2% of net sales in last year’s first quarter. The decrease in gross margins was due to lower wholesale margins. Earnings from operations totaled $5.4 million, compared with $1.6 million in the first quarter of 2021. Quarterly net earnings rose to $4.1 million, or $0.42 per diluted share, up $1.3 million or $0.14 per diluted share. Last year’s first quarter results continued to be impacted by the effects of the COVID-19 pandemic. As such, comparisons of first quarter 2022 financial performance to 2021 may have limited utility. Therefore, selected comparisons to 2019 are included as appropriate. Net sales for the first quarter of 2022 exceeded 2019 levels by 10%. Our operating earnings also improved, beating 2019 levels by 6%. Net sales in the North American wholesale segment were a first quarter record of $67.1 million compared with $33.4 million in 2021, with sales up across all of our brands. Last year’s first quarter sales of our legacy brands were lower than normal because the pandemic significantly impacted demand for dress and dress casual footwear. The wholesale segment experienced significant growth in the first quarter of 2022, with net sales surpassing 2019 levels by 13%. Wholesale gross earnings were 30% of net sales in the first quarter of 2022, compared with 34.5% of net sales in 2021. The decrease in gross margins was primarily due to higher inbound freight costs as we continued to pay premium rates during the quarter. Wholesale gross margins are expected to improve in mid to late 2022 as the supply chain stabilizes and negotiated price increases with customers go into effect. Wholesale selling and administrative expenses were $15.3 million for the quarter, compared with $10.2 million in last year’s first quarter. The increase was largely due to higher employee costs, as company sales volumes have increased. Additionally, last year’s first quarter expenses were reduced by $1.8 million in government wage subsidies. As a percent of net sales, selling and administrative expenses were 23% in 2022, and 31% in 2021. The expenses were down relative to sales because many of our costs do not vary directly with sales. Wholesale earnings from operations rose to $4.8 million for the quarter, up from $1.4 million in the first quarter of 2021 due to higher sales partially offset by lower gross margins and higher selling and administrative expenses. Net sales of our North American retail segment were a first quarter record of $7.9 million, compared with $5.6 million in 2021. Same-store sales rose 39% due to a 38% increase in e-commerce sales, with sales up on all brands’ websites and higher brick-and-mortar sales. Last year’s brick-and-mortar sales were down significantly as a result of the pandemic. Retail net sales in the first quarter of 2022 surpassed the 2019 levels by 41%. While most of the increase was driven by e-commerce growth, brick-and-mortar sales at our four remaining locations also collectively exceeded 2019 levels. Retail gross earnings as a percent of net sales were 65.9% and 65.3% in the first quarters of 2022 and 2021, respectively. Selling and administrative expenses for the retail segment were $4.4 million for the quarter, compared with $2.9 million last year. The increase was primarily due to higher e-commerce expenses, primarily freight and advertising. Retail operating earnings were $828,000 for the quarter, compared to the $756,000 last year. The increase was primarily due to improved performance at active brick-and-mortar locations. Earnings from our e-commerce businesses were down slightly for the quarter, as increased sales were offset by the higher expenses. Our other operations have historically included the wholesale and retail businesses of Florsheim Australia and Florsheim Europe. However, as previously disclosed, the company has closed Florsheim Europe and is in the final stages of winding down this business. As a result, the 2022 operating results of the other category reflect only that of Florsheim Australia. Other net sales for the first quarter totaled $6.4 million, compared to $7.9 million in 2021. The decrease is due to the closing of Florsheim Europe and lower sales in Florsheim Australia. Florsheim Australia’s net sales fell 8% for the quarter, with sales down in both its wholesale and retail businesses. The weakening of the Australian dollar relative to the US dollar also contributed to the decrease, as Florsheim Australia’s net sales in local currency were only down 2%. Retail sales in Australia, which account for a majority of Florsheim Australia’s sales, were up 7% for the quarter in local currency, but these results were offset by lower sales in Asia due to the additional lockdowns imposed in Hong Kong during the quarter. Florsheim Australia’s net sales for the first quarter of 2022 reached 89% of 2019’s levels. Other operating losses totaled $243,000 for the quarter, versus operating losses of $481,000 last year. The improvement between periods was primarily due to the shedding of losses of Florsheim Europe. At March 31, 2022, our cash short-term investments and marketable securities totaled $34 million and there were no amounts outstanding on our revolving line of credit. During the first three months of 2022, we generated $231,000 of cash from operations and liquidated $8.1 million of investment securities. We used funds to pay $2.3 million in dividends and repurchase $1.8 million of our company’s stock. We also had $352,000 of capital expenditures. We estimate that our 2022 annual capital expenditures will be between $2 and $3 million. On May 3, 2022, our board of directors declared a cash dividend of $0.24 per share to all shareholders of record on May 27, 2022, payable on June 30, 2022. 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. We continue to be very pleased with the strong results of our wholesale business, with a 13% gain over 2019. This performance resulted in record first quarter wholesale sales for the company, as two of our brands, Florsheim and BOGS, registered individual record first quarter sales. BOGS sales were 72% for the quarter, which is on top of a 17% annual increase last year. Part of the reason for the strong increase is we were at a much better overall inventory position on classic BOGS products versus 2021. Sales would actually have been higher if not for some supply chain delays on lighter weight spring products. BOGS has been on a very strong run and we feel good about the mix of classic and lifestyle products in our backlog and look forward to a strong second half of the year. We are very excited about our momentum and additional opportunities that retailers are seeing with BOGS to expand their reach. This bodes well for the future. Regarding the legacy brands, the comparison to last year is not relevant, since much of the country was still restricted from social activities and work perspectives. However, in comparison to 2018, two of our three legacy brands had strong increases, including the aforementioned record for Florsheim, with a 17% increase over 2019, as well as a 24% increase for Nunn Bush. Stacy Adams sales were 80% of 2019 levels. In many instances, we are still filling the pipeline with our major retail partners and we anticipate we will be chasing inventory due to supply chain disruptions with certain footwear packages into the second half of 2022. The good news is that we continue to experience strong sell-throughs and high average unit retails, even as the inventory at retail works back toward more normalized levels. The dress and refined casual markets remain particularly robust, with record social events on the calendar and the gradual return to an office work environment. While we are selling a significant amount of dress shoes, we realize that eventually the market will return to a more normalized level as retailers restock their inventory. As mentioned in previous conference calls, our design emphasis during the pandemic has been to further develop the casual side or legacy business in keeping with the particular DNA of each brand. We’re encouraged by our progress. Today, Nunn Bush very much has a casual profile, and BOGS, Stacy Adams, and Florsheim are increasing their casual mix. This period of time has allowed us to move down the learning curve and expand our casual range with the realization that the post-pandemic world will likely embrace a more relaxed lifestyle. We know we’re picking up market share of the tailored side of the business, and our objective is to also increase our penetration of men’s casual business over time. We had strong growth in the retail business, driven by a 38% increase in our e-commerce segment. While we’re up significantly in sales, one caveat is that higher e-commerce shipping and advertising costs reduced our profitability. We’re working to mitigate these cost increases while maintaining a solid growth trajectory. As internet sales are an important piece of our future business model, we’re very pleased that our four remaining brick-and-mortar stores had solid performances, with an increase versus 2019. Regarding Florsheim Australia, which includes New Zealand, the Pacific Rim, and South Africa, our sales were down 8%. The Omicron outbreak in Hong Kong and the Pacific Rim significantly reduced both wholesale and retail sales in that region. However, our business in the Australian and New Zealand markets was actually up slightly in local currency, even with the increased case count compared to nearly zero cases for the same period in 2021. We are encouraged that retail traffic increased as the quarter progressed, and we believe that our position is strengthening in this market. As mentioned previously, the pandemic has enabled us to reset our business model on the Australian continent. A combination of more manageable leases, e-commerce growth, and the continued growth of our BOGS Australian business puts us in a much better position to achieve a profitable year in that region. Our overall inventory levels were $62.1 million as of March 31, 2022, compared to $47.3 million at the end of March 2021. We are continuing to build our inventory levels as required to support the increased demand for our products. Our total gross margins for the quarter were 35.8%, down from 41.2% in 2021. Our North American wholesale gross margin for the quarter was 30%, down from 34.5% a year ago. Shipping costs continue to put pressure on our margins; however, as discussed during last quarter’s call, we have another price increase taking effect in July, which will help our margins. Fortunately, our revenues for the quarter were high enough to produce an increase in total gross margin dollars compared to 2019. 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

And our first question comes from the line of David Wright of Henry Investment.

David Wright, Analyst

Can you talk about the size of the price increases that you’re implementing percentage-wise?

Tom Florsheim, Chairman and CEO

We’ve had a few different price increases. We started raising our prices in the fall of 2021 and continued throughout this year. The first one was in the range of 8%. I would say that, to give you a ballpark number all-in, we’ve probably raised our prices in total around 15%.

David Wright, Analyst

And just in terms of the input side, so freight rates are up, can you put any context on that? You know, like, it used to cost us $2 to get a pair of shoes to the States, now it costs us $3.

Tom Florsheim, Chairman and CEO

Sure.

David Wright, Analyst

Any context in that way?

Tom Florsheim, Chairman and CEO

That we spent a lot of time looking at that. And basically, pre-pandemic, freight from Asia cost roughly $1.10 a pair. That was what we used as an accounting cost. Today, freight from Asia is roughly $3.75 per pair. From India, it’s been a little bit higher, was $1.50 pre-pandemic; it’s probably gone up closer to $4, and so those numbers are pretty close to what we’re paying right now, and we’re hoping eventually that goes down, but right now, that’s where it stands, and so they quadrupled.

David Wright, Analyst

And then my last question, again kind of around the inflation theme, in terms of, you know, the raw materials to have your shoes made, any particular pressure points with particular materials?

Tom Florsheim, Chairman and CEO

I don't think certain materials are going down more drastically.

David Wright, Analyst

Is inflation affecting what it costs you to make a shoe the way it’s affecting what it costs somebody to build something that has other raw materials, like steel, etc.?

Tom Florsheim, Chairman and CEO

I mean, we’re seeing raw material increases across the board. That situation has stabilized. I mean, the big increases were right in the middle of 2021, and we’ve had some subsequent increases, but it’s stabilized quite a bit. And so, we’re not getting a lot of increases today on raw materials, but when you go back to last year, we had increases on the chemicals that we use for finishes, we had increases on the materials that we use for bottoms and footbeds and midsoles, you have labor increases overseas which had an impact. So, it was really pretty much across the board and, you know, fortunately, the increases were somewhat manageable, I would say, compared to what we’ve seen in other industries. And really, when you analyze it, the freight increase is the most problematic.

David Wright, Analyst

Well, look at that, you’ve had great results, and so coming out of the pandemic, it’s nice to have something from the portfolio that is stable and doesn’t produce too many negative surprises. So, please keep up the good work and thanks for taking my questions.

Operator, Operator

Our next question comes from John Deysher of Pinnacle.

John Deysher, Analyst

Solid quarter, and I just have a couple of quick questions. Regarding the prior discussion of price increases, we’re reading a lot about consumers, and therefore some retailers pushing back against price increases. I’m just wondering if you’re seeing any of that yet amongst your customer base?

Tom Florsheim, Chairman and CEO

No, we really aren’t experiencing pushback. When we look at what the retailers are charging for our product, their margins are better than ever. We get weekly reports from all our major customers, and we can track our sell-throughs for each shoe at those retailers, along with their sell-through percentages and out-the-door prices. Currently, the retailers we work with, at least in the channels we operate, are in a strong position regarding their margins, even with some of the higher prices we're setting. The overall trend in our industry is that there is significant inflation, retailers are accepting higher prices, raising their retail prices, and it is yielding positive results. However, there is always a question lingering about when consumers might say they won't pay a certain price for shoes. We're being as cautious as possible, working to counter price increases, and doing everything we can to mitigate them. So far, we have not encountered any difficulty in passing on price increases, which I believe addresses the main concern.

John Deysher, Analyst

And the price increase you mentioned that occurs in July, how much will that be?

Tom Florsheim, Chairman and CEO

You know what, the exact percent, it’s difficult for me to give you, but I would say it’s roughly in the 5% range, and then we actually are raising prices again as we sell in spring. And so, you know, we’ve been doing this in a gradual way, I guess, and part of that is because our lead times for selling in are so long that it takes us a while to catch up, but I would say the one for fall is in the neighborhood of 5%.

John Deysher, Analyst

BOGS is doing very well, as you mentioned, and I would guess those shoes are in transit for the fall. I’m just curious, any anticipated bottlenecks for BOGS you’re going to have full representation on the shelves by the time the fall comes?

Tom Florsheim, Chairman and CEO

We hope so. We buy BOGS very early, and in fact, we’re acquiring all of the brands early, anticipating potential bottlenecks. The supply chain situation has improved a bit, though new issues continue to arise. Currently, in China, as you may have read, there is significant COVID disruption in some major cities, which is affecting some ports. All our factories in China are still producing shoes, but it has become more challenging to transport them to ports in certain areas. We are closely monitoring this situation. The important point is that our company has improved considerably in navigating these challenges. We have expedited our timelines for purchasing footwear, and many retailers are cooperating by placing their orders earlier. For those who aren't, we are taking a bit more speculative approach than usual. The only reliable way to ensure timely availability of shoes for the fall season is to buy early, anticipating that transit times may be doubled, as has been the case, and that other issues may arise. Therefore, we are aiming to bring in products as quickly as possible. We have a robust pipeline between our factories in Asia and Milwaukee, and we are receiving many containers daily to build our inventories.

John Deysher, Analyst

So you’re confident that there won’t be any issues getting the shoes in time for fall at this point in time?

Tom Florsheim, Chairman and CEO

Yes, I believe we've done everything we can, John, but there are still some uncertainties. China's zero-tolerance policy hasn't worked well with Omicron, so if the situation worsens and they start shutting down cities where we manufacture shoes, it could have an impact. We hope that doesn't happen. Right now, we have a good supply of shoes and boots, so I'm fairly confident, but I can't guarantee it completely.

John Deysher, Analyst

Okay, so we understand. Related question, is the Forsake brand going to be present in the stores for fall season, or is that more of a 2023 product?

Tom Florsheim, Chairman and CEO

John, this is John Florsheim, there is present in the stores, but, you know, we’ve been onboarding Forsake throughout the year. I think the big changes that we’re going to be making with Forsake in terms of new product are going to take place largely in 2023. So, yes, we do have some new products for fall 2022, but we’ll be venturing into new categories in spring 2023 and fall 2023.

John Deysher, Analyst

One final financial question. You bought back $1.8 million worth of stock in the quarter. How many shares was that and what’s left on the authorization?

Tom Florsheim, Chairman and CEO

The number of shares that was about 78,000 shares, and we have 1.1 million shares left on the buyback. We had 135,000 and we just authorized an additional million.

Operator, Operator

As there appear to be no further questions in the queue, I’d like to turn the call back over to John Wittkowske for closing remarks.

John Wittkowske, CFO

Thanks, everyone, for joining us on our quarterly conference call, and I hope everyone has a great day. Take care.

Operator, Operator

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