Weyco Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 4 speakers on the call.

Operator

Good day. Thank you for standing by. Welcome to the Weyco Group Third Quarter 2023 Earnings Release Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Judy Anderson, Chief Financial Officer.

Speaker 1

Thank you. Good morning, and welcome to Weyco Group's conference call to discuss Q3 2023 results. On the 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 We wish to caution you that these statements are just predictions and that actual events or results may differ materially.

Speaker 1

We refer you to the section entitled Risk Factors In our most recent annual report on Form 10 ks, 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 economy.

Speaker 1

Overall net sales were $84,200,000 down 13% compared to record 3rd quarter sales of $97,000,000 in 2022. Consolidated gross earnings increased to 43% of net sales compared to 40.6 percent of net sales in last year's Q3 due mainly to higher gross margins in our North American wholesale segment. Quarterly earnings from operations were $12,400,000 down 12% compared to record operating earnings of $14,200,000 in 2022. Quarterly net earnings totaled $9,300,000 or $0.98 per diluted share compared to record net earnings of $10,800,000 or $1.12 per diluted share last year. Net sales in our North American wholesale segment were 69.5 $1,000,000 in 2022.

Speaker 1

The decrease was primarily due to a 42% decline in box sales compared to record sales for the brand last year. This quarter, our wholesale sales were negatively impacted by reduced consumer demand following record growth last year. Looking ahead to the 4th quarter, We anticipate that our sales will continue to fall short of 2022. Not only are we going up against a strong Q4 last year, But retail market conditions remain challenging as the pace of consumer spending in the footwear category has slowed, which we believe will continue to impact our business at least the remainder of the year. Wholesale segment gross earnings were 38.6 percent of net sales in the Q3 of 2023 compared to 36.3 percent of net sales last year.

Speaker 1

Gross margins improved as a result of lower inventory costs compared to last year, primarily related to inbound freight costs. Wholesale segment selling and administrative expenses were $15,600,000 for the quarter compared to $16,700,000 last year. The decrease was primarily due to lower employee costs, mainly commission based compensation. As a percent of net sales, selling and administrative expenses were 22% 21% of net sales in the 3rd quarters of 2023 2022, respectively. Wholesale operating earnings totaled $11,300,000 for the quarter, down 13% from $12,900,000 last year due primarily to lower sales.

Speaker 1

Net sales in our North American Retail segment were a 3rd quarter record of $7,600,000 up 6% over our previous record of $7,100,000 last year. The increase was due to higher sales across all our domestic e commerce websites with the largest increases at Boggs and Florsheim. Retail segment gross earnings as a percent of net sales were 65.4% and 66.3% in the 3rd quarters of 2023 and 2022 respectively. Selling and administrative expenses for the Retail segment totaled $4,000,000 or 53 percent of net sales for the quarter compared to $3,900,000 or 55 percent of net sales last year. 3rd quarter retail operating earnings rose to $926,000 up 12% compared to $825,000 last year, mainly due to the increase in web sales.

Speaker 1

Our other operations consist of our retail and wholesale businesses in Australia, South Africa and Asia Pacific, collectively referred to as Florsheim Australia. Net sales of Florsheim Australia totaled $7,100,000 down 14% compared to $8,200,000 in the 3rd quarter of 2022. In local currency, its net sales were down 10% primarily in its wholesale businesses. Florsheim Australia's gross earnings were 61.6 percent of net sales compared to 1.4 percent of net sales in last year's Q3. Its operating earnings were $256,000 for the quarter versus $476,000 last year.

Speaker 1

The decrease was primarily due to lower earnings in Australia's wholesale businesses as a result of lower sales. At September 30, 2023, our cash, Short term investments and marketable securities totaled $41,000,000 and we had no debt outstanding on our $40,000,000 revolving line of credit. During the 1st 9 months of 2023, we generated $62,900,000 of cash from operations due mainly to reductions in inventory levels. We used funds to pay off $31,100,000 on our line of credit to pay $9,300,000 in dividends and to repurchase $3,400,000 of our common stock during the 9 month period. We also had $2,600,000 of capital expenditures.

Speaker 1

We estimate that 2023 annual capital expenditures will be between $3,000,000 $4,000,000 On November 7, 2023, Our Board of Directors declared a cash dividend of $0.25 per share to all shareholders of record on November 27, 2023, payable January 2, 2024. I would now like to turn the call over to Tom Forshine, Jr, our Chairman and CEO.

Speaker 2

Thanks, Judy, and good morning, everyone. Sales in our North American wholesale business were down 15% for While we are never pleased with the decrease, the comparison was against a record Q3 last year. Wholesale sales in 2022 reflected strong demand, but also significant pipeline fill As many accounts were replenishing stock depleted due to pandemic related supply chain delays. To provide some context, taking out 2022, this year's Q3 would have been our most profitable 3rd quarter and wholesale operating earnings. This year, the retail environment is more challenging due to macroeconomic pressures And consumers are being cautious in terms of expenditures on footwear and apparel.

Speaker 2

With demand softening, retailers are being conservative with at once and future The change in retail dynamics is most apparent in the outdoor market. Given the spike in demand in 2021 and the first half of last year, retailers placed heavy orders And the offshore trade channel entered 2023 with an inventory glut. The situation has been exacerbated by unseasonably warm weather in early fall. As a result, BOG shipments declined 42% compared to record sales for the brand last year, with retailers placing fewer orders due to the current situation of product in the market. The BOGS brand has enjoyed very strong performance over the last few years And we see the current decline as a category issue.

Speaker 2

While the majority of our box inventory is in core product that remains valid from year to year, We are also taking steps to reduce inventory of slower moving styles. We believe the situation is manageable, but anticipate that Inventory backlog in the outdoor footwear category will not normalize until the back half of twenty twenty four. While the market is challenging, we are not standing still and are optimistic about the brand's long term growth prospects given BOGS strong consumer loyalty. We continue to develop exciting new BOGS product with special focus on less insulated footwear with a longer selling season. In terms of our legacy business, Florsheim net sales were down 7% compared to record sales for the brand in last year's Q3.

Speaker 2

Sales of Stacy Adams were down 1% and sales of the Nunn Bush brand were up 11% With the increase driven in part by incremental sales in the casual and hybrid categories and new programs to a few large retailers. The performance of our legacy business was respectable given each brand was up against strong sales in 2022. In addition, retail feedback indicates that our brands are among the most productive within their respective Categories in a difficult environment. While Florsheim, Stacy Adams and Nunn Bush are positioned differently From a fashion and price perspective, there are common threads across our legacy business. We believe that Florsheim, Nunn Bush and Stacy Adams All reflect outstanding value and trend right design within their respective categories.

Speaker 2

As such, All three brands maintained solid retail sell throughs despite a general slowdown in the more refined footwear category. We are also encouraged by our progress in selling hybrid footwear that is more casual in nature, but can be worn across a variety of settings from office to social occasions. Consumers are gravitating towards this category of footwear and we see this as an important growth area for our legacy business. From a product development perspective, We are expanding our range of hybrid footwear while selectively adding to our true casual and refined assortment. Retail sales We're up 6% for the quarter with increase driven primarily by our e commerce business.

Speaker 2

Footwear industry statistics Indicate the e commerce sales channel is down year to date. So it is encouraging that we continue to grow our e commerce platform in a very competitive environment. Sales at Florsheim Australia were down 14% and in local currency were down 10%. As mentioned in our Q2 conference call, the Australian market is facing some of the same challenges as in the U. S.

Speaker 2

Regarding softness in the footwear and apparel category. We also lost a sizable wholesale account that impacted our wholesale shipments for the quarter. Going forward, we believe that we will make up some of this deficit in the Australian market through other accounts as well as the transfer of the Asia Pacific wholesale business to the Florsheim Australia office. Our inventory level was $79,600,000 As of September 3, 2023 compared to $128,000,000 at December 31, 2022. We feel that our inventory is now at a good level overall, but continue to focus on any areas where we have slow moving product.

Speaker 2

Our overall gross margin was 43% compared to 40.6% last year. We have worked hard to offset increased costs Our margins are now at a healthy level. 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

Thank and wait for your name to be announced. Please stand by while we check our Q and A roster. Our first question comes from the line of John Deysher with Pinnacle. Your line is now open.

Speaker 3

Good morning, everyone.

Speaker 2

Good morning, John. Good morning. Good morning.

Speaker 3

Good progress on the inventories. Glad to see the That paid off. I'm just curious what the plans are for the cash going forward? I know you raised your Dividend recently and I think you bought back what 2,400,000 shares year to date. Is

Speaker 2

903,000 shares.

Speaker 3

Yes, remaining. Did you hear?

Speaker 2

Yes. So we have plenty remaining.

Speaker 3

Good. I was just going to say what was the average on the $2,400,000 buyback?

Speaker 2

Yes. $25.43 and is that number right, the $2,400,000 I thought it was a little higher? Total cost of our shares purchased through October 31, it's about $3,794,000 Yes. So it's about $3,800,000 John.

Speaker 3

3,800,000 shares at $25,000,000 dollars. Dollars 3,800,000 dollars 3,800,000 and the average cost is 25.43.

Speaker 2

Right. So we can give you the number of shares. How many shares was that John?

Speaker 3

49,000. Yes, 140.

Speaker 2

149,000 John.

Speaker 3

Okay. Sorry, my mistake. Sorry, Tom, I cut you off. What were you going to say as to the future uses?

Speaker 2

Well, we're going to continue to probably build some cash. I mean, a lot of that cash that we built is From we spent a lot of money building up our inventories because our inventories were depleted due to the other supply chain issues And also coming out of COVID, our inventory basically evaporated and then we had to rebuild those inventories and because the demand was so high, We built them up to a fairly high level. And so now that we've brought them down to what we consider a good level, We're not going to see as much cash pour in as you've seen over the last 9 months. And so we're going to watch it and we're going We continue to do stock buybacks and we had a record of increasing our dividend for years and our plan I think is that we're going to continue to try to increase our dividend on an annual basis.

Speaker 3

Okay. That's helpful. Would you consider a special dividend? I don't think you've done that historically, but is that

Speaker 2

I don't think we've done that either. But if our cash continues to go up, it's definitely something that we might consider.

Speaker 3

Okay. Good. That's helpful. What's the status of Forsake? You bought that over a year ago.

Speaker 3

I'm just wondering where we are with that. And is that brand really adding value to the portfolio? And if not, What are the plans?

Speaker 2

Yes. No, first of all, I want to state that The Persig brand represents roughly 1% of our total annual sales. So when we bought it, it was very small, It remains small. And part of the reason, a big part of the reason it remains small is because our timing definitely could have been better. You know, buying an outdoor brand when the market for in that category is just totally saturated.

Speaker 2

And so What we've done, John, the last year and a half is retool the brand. And so Fall of 'twenty three is really the first season that we started to get new product out there and we have new product that's planned for spring of 2024 and fall of 2024. And John and I just came back from our sales meeting. We had a sales meeting for BOGS And for Forsaig on Portland and we actually are encouraged about the brand. I mean, not making any promises, but we feel That it has unique positioning.

Speaker 2

We have a really good guy running the brand. The product looks good. We have put together a national sales force of agents, which the brand never had before. And so we want to give it Chance. And again, it's less than 1% of our business, so it's not hurting us.

Speaker 2

And we have a very talented office out of Portland That's running BOGS and we've so there's quite a lot of efficiency there because we have the same design people doing both brands. And So we're going to we want to give it a little bit of time, let the market clear up from this inventory glut and see what happens. We're hoping that the inventory glut clears next year and so that the back half is better and we'll see what happens, but it just It has not had a fair chance and so we want to give it that.

Speaker 3

Okay. All right, fine. So you've got the pieces in place, you just need to execute at this point? Exactly, exactly. Okay.

Speaker 3

At this

Speaker 2

point? Exactly. Exactly.

Speaker 3

Okay. Good. Fair enough. Congrats on a pretty good quarter.

Speaker 2

Thanks, John. We appreciate your questions.

Operator

Thank you, John. We're showing no further questions at this time. And I would now like to turn it back to Judy Anderson for closing remarks.

Speaker 1

Just like to thank everybody for joining us

Operator

Yes, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

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