Weyco Group - Q1 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Weyco Group First Quarter 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chief Financial Officer, Judy Anderson. Please go ahead.

Judy Anderson (CFO)

Thank you. Good morning, everyone, and welcome to Weyco Group's Conference Call to discuss first quarter 2023 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, 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 results to differ materially from our projections, including 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. Net sales for the first quarter were a first-quarter record of $86.3 million, up 6% compared to our previous record of $81.4 million in 2022.

Consolidated gross earnings increased to 43.1% of net sales, compared to 35.8% of net sales in the last year's first quarter, due mainly to higher gross margins in our North American wholesale segment. Operating earnings were a first quarter record of $10.4 million, up more than 90% over last year's first quarter operating earnings of $5.4 million. Net earnings were a first quarter record of $7.4 million or $0.78 per diluted share, up 84% compared to $4.1 million or $0.42 per diluted share in 2022.

Net sales in the North American wholesale segment reached a first quarter record of $69.9 million, up 4% compared to $67.1 million in 2022. Wholesale sales increased due to higher unit selling prices while pairs shipped decreased 5%. Florsheim posted 15% growth for the quarter, driven by higher sales of dress and dress casual footwear, and achieved record quarterly sales on top of record sales for the brand last year. Net sales of our other major brands, Nunn Bush, Stacy Adams, and BOGS, remained relatively steady with last year's robust first quarter results. Wholesale gross earnings were 38.2% of net sales, compared to 30% of net sales in the first quarter of 2022.

Gross margins improved, due mainly to selling price increases implemented in 2022 to address higher costs. Last year's first quarter's gross margins were negatively impacted by higher inbound freight costs as a result of the global supply chain issues ongoing at that time, which have since eased. Wholesale selling and administrative expenses were $17.9 million, or 26% of net sales for the quarter, compared to $15.3 million or 23% of net sales in last year's first quarter. This year's expenses included higher employee costs. Wholesale operating earnings reached a first quarter record of $8.8 million, up 82% compared to $4.8 million in 2022, driven by higher sales and gross margins this year.

Net sales of our North American retail segment were a first quarter record of $8.9 million compared to our previous record of $7.9 million in 2022. The increase was primarily due to higher sales on the Florsheim and Stacy Adams websites. Brick-and-mortar sales also increased for the quarter. Retail gross earnings as a percent of net sales were 66.3% and 65.9% in the first quarters of 2023 and 2022, respectively. Selling and administrative expenses for the retail segment were $4.6 million compared to $4.4 million last year. As a percent of net sales, retail selling and administrative expenses were 52% in 2023 and 55% in 2022.

This decrease was primarily due to lower e-commerce expenses relative to net sales, primarily outbound freight and advertising costs. We realized cost savings during the first quarter as a result of measures taken over the past year to control costs. Retail operating earnings were a first quarter record of $1.3 million, up 55% compared to $828,000 last year. This increase was primarily due to higher sales and improved profitability in our e-commerce businesses. Brick-and-mortar operating earnings were also up for the quarter. Our other operations consist of our wholesale and retail businesses in Australia, South Africa, and Asia-Pacific, collectively referred to as Florsheim Australia. Other net sales for the first quarter of 2023 totaled $7.5 million, up 17% compared to $6.4 million in 2022.

In local currency, Florsheim Australia's net sales were up 24%, with sales up in both its wholesale and retail businesses. Last year's sales volumes in Asia were negatively impacted by lockdowns imposed in Hong Kong during the quarter. Other gross earnings were 60.5% of net sales, compared to 59.6% of net sales in last year's first quarter. Other operating earnings recovered to $275,000 in 2023, up from operating losses of $243,000 last year. At March 31st, 2023, our cash, short-term investments, and marketable securities totaled $30.7 million, and we had $20.6 million outstanding on our $50 million revolving line of credit.

During the first three months of 2023, we generated $23 million of cash from operations. We used funds to pay down $10.5 million on our line of credit to pay $4.6 million of dividends and to repurchase $1.5 million of our common stock. We also had $660,000 of capital expenditures. We estimate that 2023 annual capital expenditures will be between $2 million and $4 million. On May 2nd, 2023, our board of directors declared a cash dividend of $0.25 per share to all shareholders of record on May 26th, 2023, payable June 30th, 2023. This represents an increase of 4% above the previous quarterly dividend rate of $0.24.

I would now like to turn the call over to Tom Florsheim Jr., Chairman and CEO.

Tom Florsheim Jr. (Chairman and CEO)

Thanks, Judy. Good morning, everyone. We are extremely pleased with the results from the first quarter, both from a sales and earnings perspective. In a difficult retail environment, we were able to achieve increases across multiple segments of our business while keeping our expenses in check, resulting in a record bottom line. While the outlook for 2023 remains uncertain, we're off to a strong start, and we feel very good about our business model as well as our ability to manage through the current macroeconomic challenges. Our overall North American wholesale business was up 4% led by our legacy business. Florsheim had another record quarter with a 15% increase as the brand continues to pick up market share in the refined footwear category.

Within the industry, Florsheim is seen as the go-to brand for on-trend dress footwear. We continue to focus on expanding the brand into the hybrid and everyday casual market. Our Nunn Bush business was up slightly for the quarter with a 1% sales increase. We are happy with the progress that Nunn Bush has made within the comfort casual segment with over half of its sales coming from the casual category. Stacy Adams was down 3% for the quarter. Stacy Adams continues to be the leading brand for accessible fashion footwear. We are well-positioned from an inventory and style perspective for the key upcoming prom and wedding seasons. Our legacy brands all experienced resurgent sales in 2022 as we benefited from historically high sell-throughs based on robust demand for refined footwear.

Lower than normal inventory levels at retail also resulted in additional shipments through pipeline fill. As of spring 2023, retail inventory levels have been reset and sell-through rates for our brands have normalized at slightly above pre-pandemic levels. While accounts are now taking a cautious approach to the market as they assess near-term consumer spending, we remain optimistic about our long-term prospects given the strength of our brand and our ability to favorably compete within the non-athletic footwear category. BOGS' first quarter sales were down 2%. After a record 2022, we have seen BOGS' wholesale sales slow in 2023 as retailers remain cautious about adding to their outdoor footwear inventory given the mild winter in many parts of the country. We anticipate the sales trend to continue into fall as accounts right-size their inventory.

We see this as a temporary setback for the BOGS brand. Bogs experienced strong demand throughout the pandemic and has enjoyed extraordinary direct-to-consumer growth. While we are heavier than normal in terms of our BOGS inventory levels, we believe it is a manageable situation as we were careful to invest in evergreen styles. Overall, the BOGS brand is healthy and maintains a leadership position within the weather boot category, as well as an expanding casual lifestyle business. We project to return to more normalized inventory levels in the fourth quarter of this year and a rebound in sales growth in 2024. In our retail segment, sales were up 14% for the quarter. Most of the increase was driven by Internet sales. Brick-and-mortar sales also increased for the quarter.

As pleased as we are with our retail sales increase, we were even happier with the jump in retail operating earnings. Our e-commerce team has been focused on reducing expenses as a percent of sales. The results this quarter indicated the progress that has been made in controlling expenses. Industry statistics show decreases in online sales year-over-year for footwear. We are currently bucking that trend. However, the challenging footwear and retail market makes us mindful of the need to manage our expenses and to maintain a healthy profit margin. Florsheim Australia's net sales were up 17% for the quarter. In local currency, they were up 24%. While we were up against an easy comparable due to last year's first Omicron partial shutdown in Australia and other overseas markets, our performance reflects a solid post-pandemic business model for the region.

As in the U.S., our business overseas is trending well, faces uncertainty related to economic pressures as the world navigates higher interest rates and cautious consumer demand. We have an excellent management team in Florsheim Australia, are confident that we can continue to maintain a strong, profitable business as we move forward. Our overall inventory as of March 31st, 2023 was $107 million, down from $128 million at December 31st, 2022. As expected, our inventory levels have come down now that the supply chain has normalized, we can plan our receipts closer to when we need to ship our shoes to customers. 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 (participant)

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment, please. One moment while we compile our Q&A roster. Our first question comes from the line of David Wright of Henry Investment Trust L.P.. Your line is now open.

David Wright (Analyst)

Yeah. Hi. Good morning. Thanks for taking my questions. And thanks for raising the dividend. I know I brought that up recently, and although it's a modest increase, I'm glad to take anything that that the company's going to declare. Thank you. Wanted to ask a couple of questions about cash and cash management. Can you tell us how the company's cash is invested and what it's earning?

Judy Anderson (CFO)

Well, Our excess cash is invested in marketable securities, which is a low-risk investment. As time has gone on recently, like, currently we do have a debt balance due to our inventory purchases last year. We have been in a pattern of, you know, just letting our municipal securities as they mature. We have not been reinvesting. They don't really look like, you know, currently that market is not very strong, so we're not reinvesting, but we think we're better off, you know, paying off our debt.

David Wright (Analyst)

I was just looking at your interest income versus your cash balances. You know, Treasury bill's close to 5% for the last few months and probably gonna stay there for a while. Don't know if that's part of your portfolio, but I did notice the interest income. You know, with interest rates having moved up, of course, short-term borrowing costs have as well. I just wondered how you think about your capital management with, you know, on the one hand, having cash or any interest at a lower rate than the interest you're paying on the debt you're borrowing. Curious for your commentary on that.

Judy Anderson (CFO)

Yes. Well, our focus has been on paying off the debt. The debt is a revolving line of credit. As the cash becomes available, it gets paid off in the U.S.. Because of foreign exchange rates in Canada, we do have a cash balance, a pretty healthy cash balance up in Canada right now. We are currently working to invest that in just the short-term savings account. They are kind of giving us some favorable interest rates up there. That's kind of a current work in process.

David Wright (Analyst)

Just from a general sense, you're more comfortable having just round numbers, $20 million in cash and $20 million in debt than having, you know, $10 million in cash and $10 million in debt?

Judy Anderson (CFO)

No. Like I said, it's just a matter of, at this moment in time, where the cash is. In the U.S., we are paying off the debt, you know, to the extent that we can. We do have a little bit of a cash balance up in Canada just because of the FX rates. We're looking to earn some more interest on that money up there. This is just a point in time thing. It's like, you know, something that we're currently working on.

Tom Florsheim Jr. (Chairman and CEO)

Yeah. Just to add to what Judy said, you know, our intention is to pay down and pay off the line of credit. You know, we've been in a position where we've been building inventories. Now that we're starting to bring inventories down because of the supply chain being normal, we are going to start generating a lot more cash. You know, the cash ebbs and flows a little bit with seasonality because as we pay for fall goods coming in, it can, you know, we can use cash. In general, you're gonna see our cash grow this year due to the inventories coming down, and we expect that we will pay off the line of credit.

David Wright (Analyst)

Great. Last question, just on kind of capital allocation. How does the board generally think about, okay, you know, historically the company has a lot of cash, and that's fine, that's good actually. How do you know, like, what's the methodology to say, okay, we're paying this much in dividends, and we're putting this much in stock buyback. Is it like, what's the formula, if you will?

Tom Florsheim Jr. (Chairman and CEO)

Well, we look at the dividend payout ratio just like everybody, and we wanna keep that at a reasonable level because we do want to have free cash flow to build cash because our goal long run is still to make some more acquisitions. That is one thing. As far as our stock buybacks go, we are in the market buying back stock when we feel that the price it is advantageous. You know? As at the levels that our stock has been over the last year, we felt that it was a good buy. You know? We kinda monitor that and do it basically on what level the stock is trading at, whether we think it makes sense.

Long term, we like to generate and build cash because our goal long term is to look for acquisitions.

David Wright (Analyst)

Okay. Well, thanks so much for all of the commentary. I took a little longer than usual. I appreciate the answers.

Tom Florsheim Jr. (Chairman and CEO)

We appreciate your questions and your interest.

Operator (participant)

Thank you. Please stand by while we compile the question-and-answer roster. Again, a reminder, to ask a question, you will need to press star one one on your telephone. One moment, please. At this time, I would like to turn it back to Judy Anderson, Chief Financial Officer, for any further comments.

Judy Anderson (CFO)

No further comments. Thank you everybody for attending our call today, and we hope you have a great day.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.