Weyco Group, Inc. (WEYS) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Weyco Group Inc. Fourth Quarter and Full Year 2020 Earnings Release Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, John Wittkowske, Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you. Good morning and welcome to Weyco Group's conference call to discuss our fourth quarter and full year 2020 results. On this call with me today are Tom Florsheim Jr., Chairman and CEO; and John Florsheim, our President and COO. Before we begin to discuss the results of the quarter, I will 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 its impact on the global economy. Actions taken by governments such as stay-at-home and similar orders that among other things are effects require retail store closures, or limit foot traffic, the financial health of the company’s customers and business partners, including the effects of any bankruptcy proceedings by such parties, the performance of the company’s supply chain and the health and welfare of the company’s employees. Additionally, some comparisons refer to non-GAAP measures. Our SEC filings may contain additional information about these non-GAAP measures and why we use them. Net sales for the fourth quarter of 2020 were $62 million compared to last year's fourth quarter net sales of $86.9 million. Operating earnings were $7.9 million for the quarter compared with $11.5 million in the fourth quarter of 2019. Net earnings totaled $5.1 million compared to $8.8 million last year. Diluted earnings per share were $0.52 per share in the fourth quarter of 2020 and $0.90 per share in 2019. In the North American wholesale segment, net sales for the fourth quarter of 2020 were $46.2 million compared with $68.8 million last year. Earnings from operations for the wholesale segment were $5.6 million compared with $10.9 million last year. Sales volumes were down across all three men's legacy brands due to the slow retail environment, resulting from the ongoing pandemic, but our BOGS outdoor brand increased 5% for the quarter as consumers continue to spend more time outdoors. Our cost-cutting measures, mainly in employee and advertising costs, helped us generate solid earnings in the fourth quarter despite the reduction in sales. Our North American retail segment, which includes our e-commerce businesses and retail stores, had net sales of $8.7 million for the quarter compared to $9.1 million last year. Retail operating earnings were $2.7 million this quarter and $1.5 million last year. Retail sales decreased due to the closing of three unprofitable stores in the third quarter of 2020 as well as reduced foot traffic in our existing stores, resulting from the pandemic. The decrease was offset by a 15% increase in e-commerce sales due to consumers turning to online shopping in the COVID-19 environment. Retail operating earnings increased due to the benefit of closing unprofitable stores and higher operating earnings from our websites. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $7.1 million in the fourth quarter of 2020 compared with $9 million in 2019, down as a result of the pandemic. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $393,000 for the quarter compared to operating losses of $854,000 in the same period last year. We will now discuss our full year 2020 results. Throughout this discussion, we will refer to adjusted amounts, which are non-GAAP financial measures. Adjusted amounts exclude the following items, which were recognized primarily during the second and third quarters of 2020; $5.9 million in employee costs related to restructuring and temporary closures; $4.3 million from two large customer receivable write-offs due to bankruptcies filed during the pandemic; $3.1 million for the impairment of retail store fixed assets and operating lease right-of-use assets; $2 million in reserves for obsolete and slow-moving inventory due to COVID-19-related impacts; $1.5 million in early lease termination charges and $500,000 in other related charges, which were partially offset by $5.4 million of income from government wage and rent subsidies. Additionally, adjusted amounts exclude $2 million of tax expense related to deferred tax assets of the company's foreign subsidiaries. Reconciliations to the most directly comparable GAAP financial measures are contained within our earnings release. Our overall net sales were $195.4 million in 2020 compared with $304 million in 2019. Loss from operations totaled $7.6 million in 2020 compared to earnings from operations of $27 million in 2019. Adjusted earnings from operations were $4.3 million in 2020. The company's 2020 net loss totaled $8.5 million or $0.87 per diluted share compared to net earnings of $20.9 million or $2.10 per diluted share in 2019. Adjusted net earnings were $3.2 million or $0.32 per diluted share in 2020. In the wholesale segment, net sales were $152.2 million in 2020 compared to $242.1 million last year. Net sales of the Stacy Adams, Florsheim and Nunn Bush brands were down significantly for the year due to the effects of the pandemic. BOGS net sales were down slightly for the year though business improved as the year went on as consumers spent more time outside. Licensing revenues were $1.2 million this year and $3.0 million last year down in line with reductions in licensee sales of branded products. Wholesale gross earnings as a percent of net sales were 35.5% in 2020 versus 36.6% in 2019. The decrease in gross margins was largely due to additional costs related to the tariff on certain footwear imported from China and higher overseas freight costs. Wholesale earnings from operations were $975,000 in 2020 compared to $27.8 million in 2019. Adjusted wholesale earnings from operations were $5.8 million in 2020. In our retail segment net sales were $21.5 million in 2020 and $25.2 million in 2019. The decrease was due to fewer stores in 2020 as a result of the previously mentioned closure of unprofitable stores and a significant decline in brick-and-mortar same-store sales due to the pandemic. This decrease was partially offset by a 9% increase in e-commerce sales due to consumers turning to online shopping during the COVID-19 environment. Retail losses from operations totaled $1.1 million in 2020 compared to earnings of $2.8 million in 2019. Adjusted retail earnings from operations totaled $1.5 million in 2020. Our other operations had net sales of $21.7 million compared to $36.7 million last year. The decrease was due to lower net sales at both Florsheim Australia and Florsheim Europe resulting from the pandemic. Collectively, Florsheim Australia and Florsheim Europe had a combined loss from operations totaling $7.5 million compared to a loss from operations of $3.5 million last year. The adjusted loss from operations for the company's other operations was $3.1 million in 2020. In late 2020, we decided to close Florsheim Europe, which includes a small wholesale business and two retail stores. Total sales at Florsheim Europe were $2.6 million in 2020. Approximately $1.6 million of the non-GAAP adjustments described earlier are costs related to the closing of Florsheim Europe in 2021. At December 31, 2020, our cash and marketable securities totaled $47.5 million and we had no amounts outstanding on our line of credit. During 2020, we generated $40 million of cash from operations. We used those funds to pay $11.8 million in dividends, pay down $7 million on our line of credit, and repurchase $2.1 million of our company stock. Additionally, we had $3.4 million in capital expenditures. We estimate that our 2021 capital expenditures will be between $1 million and $2 million. On March 9, 2021, the company's Board of Directors declared a quarterly cash dividend of $0.24 per share to all shareholders of record on March 19, 2021, payable on March 31, 2021. I would now like to turn the call over to Tom Florsheim Jr. our Chairman and CEO.

Thanks, John, and good morning everyone. We feel positive about the return to profitability in the fourth quarter with reflected increased demand in certain areas of our business as well as reduction in our expenses as we align costs with our lower sales volume. While the market for 2021 remains very hard to predict, we are optimistic that our wholesale business will see a pickup in the second half of the year. Our BOGS business held up well during 2020 and we were pleased with how the business accelerated in the latter part of the year, as consumers spent more time outdoors. Even with relatively modest precipitation in November and December across the country, demand for BOGS product was very strong. While we entered the fall with adequate inventory, we quickly sold through key programs as there was a shortage of outdoor boots in the general market to satisfy increasing demand. We were able to replenish a good portion of these programs in order to meet unexpected demand in early 2021. During this past year, BOGS also continued to diversify its product mix, selling more lightly insulated and lifestyle-oriented product in the women's market, while also developing its men's occupational work related footwear. Regarding our legacy brands, the business remains challenging. While we see a slight increase in demand at the retail level, our wholesale partners are reducing styles in dress and dress casual footwear that are work or occasion oriented. We believe that the normalization of our legacy business is tied closely to the rollout of vaccinations and people returning to normal activities. We expect that demand will increase as companies bring workers back to the office and people can be confident going to social events such as weddings and family celebrations. However, the timing is uncertain. While we are disappointed with the level of wholesale shipments across our legacy brands, there were some bright spots. Casual and fashion boots were extremely good and we are also making significant progress toward introducing new casual footwear. The pandemic motivated us to accelerate change and commit to rapid overhaul of our product mix. The new lines we are shipping this spring as well as showcasing for our customers for our fall launch offer a fresh more relaxed take on our brands. While we anticipate increased demand for our traditional dress-oriented styles in the second half of the year, we are excited about our prospects to extend in the lifestyle categories based on the favorable reception of new product we have introduced during the pandemic. In terms of our US retail segment, our focus remains on investing and growing our e-commerce business. Our e-commerce business was up 9% for the year and 15% for the quarter. BOGS drove the growth on the Internet with sales up 53% in the US and nearly 80% Canada as compared to 2019 and up nearly 100% in Canada in the fourth quarter. As a result of the closing of unprofitable stores, we currently have only four active brick-and-mortar retail locations. Accordingly, the future results of our US retail segment will be driven by our more profitable e-commerce business. On a worldwide level, we continue to leverage the e-commerce platform we have built in the US to other locations including Canada, Australia and New Zealand. We have seen success with worldwide e-commerce sales up 29% in the fourth quarter and 18% for the year. Our overseas business is still down significantly, but we're starting to see signs of economic recovery, especially in Australia. Australia has begun to increase the percentage of workers allowed in offices and shopping malls and street stores are also seeing steady growth in consumer traffic. We have been able to exit a number of unprofitable stores, as well as renegotiate retail leases on more favorable terms and feel we are in a good path toward improved profitability in 2021 in Australia and New Zealand. In the Pacific Rim, our business remains limited as ongoing traffic restrictions have reduced store traffic -- travel restrictions have reduced store traffic. The Florsheim Europe business has been unprofitable in the last few years. And as John mentioned earlier, we have decided to close those operations, so we will be winding down the business this year. In our third quarter call, we talked about further bringing down our inventories to align with sales. Our inventories as of December 31 were $59 million versus $76.2 million as of September 30, 2020 and $86.7 million at the end of 2019. We have reduced our dress inventory levels that make sense with the decreased demand for this category and we continue to transition our mix to include more inventory of casual product. As we look ahead to 2021, we believe that, at least the first half of the year will continue to be impacted by the pandemic. But with the rollout of vaccines, we are hoping to see an improved retail environment and consequently higher sales in the second half of the year. With our new leaner operations coupled with our strong balance sheet, we believe, we are well positioned for growth and profitability as conditions improve. That concludes our formal remarks. We appreciate your interest in Weyco Group and I now would welcome any questions.

[Operator Instructions] Our first question comes from the line of John from Pinnacle.

Good morning everyone.

Good morning.

I have a couple of questions. One -- well first, let me say you did pretty well in 2020. I mean considering the pandemic and its impact on retail and shoe purchasing. So, I was proud to see that ex all the noise, you actually did pretty well. So congratulations.

Thanks, John. We appreciate that.

Good work. A couple of questions I guess on the demand side, what's the tone of your customer base? We had a couple of bankruptcies. Are there credit issues that linger out there? And secondarily, you expect an optimistic second half. Is that driven by a firm order book or just hopes that the vaccines bring people back to shopping?

Yes. John, as far as your first question, regarding the -- what was -- can you restate your first question? I'm sorry.

Well, what's the credit of your existing customers?

Okay, yes, yes. I mean, there's still lingering issues out there. They're not as large as they were during the height of the pandemic. We're watching it closely and feel we have a better handle on it. But you're still in a kind of interesting time in the retail environment, where you have certain channels within brick-and-mortar that remain under pressure. And I wouldn't want to mention any specific retailers. But in general, we're just -- we feel that, while we're better than we were eight or nine months ago, there's still some issues that we -- that are out there that we are watching very closely.

And I'd just add to that John that after being stung a couple of times last year, we're being very, very cautious. We're very aware of the credit risk. As far as your second question, it's kind of mixed, because with BOGS, our backlog is way up. It's -- that business is very, very good. With the legacy brands our backlog is a little bit challenged right now, because the retailers are hesitant to commit for the second half, because they are watching their inventories very, very closely. So most of our -- what we've said about improvement in the second half, is based on our feeling that if everybody in the US that wants to can be vaccinated by the end of May, that things are going to start improving over the summer and that we are going to see a significant bump in the second half, because there's a lot of weddings that were canceled that are being rescheduled for the second half. And people -- I think there's just a pent-up feeling in this country that people want to get back to doing normal things. But what we're doing, because the backlog is challenged with legacy brands is very strategically bringing in inventory that we feel is safe, and so that we have enough inventory to chase the business a bit as it comes back.

We actually think that there's a chance, there's not enough inventory out there in the marketplace for the more traditional dress casual business at the back half of the year, because you have this reaction among a lot of retailers where they've reduced styles within that area of the market and they move more towards [indiscernible] very relaxed casual, which made sense. But then, if the pendulum swings back, there's not a lot of companies that have maintained stocks from a wholesale standpoint in the more traditional area of the business. And we feel that we could be pretty well positioned with less competition. The question really is the timing. The BOGS, just -- Tom mentioned that, it's different for different brands. Our BOGS backlog is very strong, because there is a shortage of boots out there last fall. So, I think retailers -- it's the opposite effect where retailers want to make sure that they're covered for fall 2021. So, that business is actually very strong right now, when you look at the confirmed bookings.

Okay. Good. That's encouraging. And on the supply side, is the supply chain back to normal? I know you've sourced a lot through China. There were some disruptions there with the pandemic. But how would you characterize the supply chain at this point? Are you getting what you need from offshore suppliers in a timely manner?

Yes. The supply chain is basically 100% back to normal, with the exception of the shortage of containers. I'm sure you've read about, how there's so much being imported right now, not necessarily apparel and shoes. It's probably not driven by apparel and shoes. But there's so much being imported from China and other places in Asia that there is a big shortage of containers. And so, it can be more difficult to get space. And sometimes we've had to wait a week or two weeks. And then, right now, we're paying a premium for those containers. And then, once they get to the West Coast, there's issues with getting them through the ports. And part of that is due to COVID, where they have workers that are out with COVID, but it's slower getting them through the ports out on the West Coast. And so, that's the only hiccup. In general, the factories have capacity right now. They're hungry. And we're getting the shoes manufacturer that we need. It's just a matter of some of the ways getting them here.

Is that -- are those hiccups costing you sales, in terms of not being able to make deliveries?

The retailers we have had to get some extensions for February deliveries into March. We don't see a major impact on the first quarter at all. And the retailers actually are being very understanding and give you the extensions because they're facing this across all of their products right now. And while there are delays the -- a two-week delay while it's, frustrating, is not the end of the world.

Okay. All right. Well, that's good news. And did the percentage of business coming out of China, did that change dramatically last year, because I know you were talking about sourcing from India, Vietnam, Cambodia and other places. Did the percentage of business coming out of China changed at all last year?

Not significantly. And we're -- we still have the strategy to diversify. And we're trying to do more business in all those other places that you mentioned. But interestingly, with restrictions due to the pandemic a lot of people that moved out of China have actually returned in part to China, because all the components are still made there. And it's very difficult with all the border issues and moving components around to move components from China to Vietnam to India places like that. So you actually have brands returning to China, which is kind of interesting. And so, we still have a lot of manufacturing in China. And we have good partners there. And I would say that the pandemic actually caused kind of a hiccup in our strategy. And so we didn't move as much as we'd hoped to last year, but we're planning to restart that as things normalize and continuing that effort to diversify.

And China was what percentage of your imports? I can't remember roughly.

I'd have -- this is a ballpark number, John. I can follow-up with you. And give you a more exact number. But I'd say, it's 70%, close to 70%.

Got it. And the tariffs are still in place for Chinese imports, correct?

Yes. They reduced them from 15%, on leather product to 7.5%. So they're lower but there's still -- the 7.5% -- extra 7.5% is still in place. We were fearful, because initially they were talking about, duties on rubber product which would apply to BOGS. And those never happened. So that was a good thing. But we still are faced with this extra 7.5% on leather product.

Okay. All right. Good. That's -- well, it's going in the right direction. Just a couple of quick questions on the numbers, there were no -- as far as I could see, no shares repurchased in the fourth quarter, unless I missed it. How much is left on your buyback program? And with that a lot of cash you have sitting there, is there any cash for buying shares at this point?

John, that's not a correct statement. We did buyback approximately 47,000 shares in the fourth quarter. We did not buy shares. We bought back shares in the first quarter then we stopped in April. For the second and third quarter, we purchased no shares. And in the fourth quarter, we began to buy shares back again. And so, we bought 47,000 shares back in the fourth quarter, an average price of around $16 a share. And we continue to buyback some shares in the first quarter. We have approximately 336,000 shares left on our buyback program as of the end of the year. That does not include anything bought back in the first quarter, but we have continued that to some extent in the first quarter.

Okay, all right. That's encouraging. And I guess, finally, on the list of non-recurring items, the non-GAAP adjustments that you laid out. The only one on that list that would apply to cost of goods sold would be the $2 million pre-tax expense for reserves of obsolete and slow-moving inventory. Is that correct? Everything else would go through SG&A?

That's correct.

Okay, all right. We're just trying to put the right apples in the right pocket. Okay, good. That’s all I have. Thank you very much and congratulations.

Thanks for your questions.

Thank you. [Operator Instructions] At this time, I am showing no further questions. I would like to turn the call back over to John Wittkowske for closing remarks.

Thanks everyone for attending our conference call and we look forward to speaking at the end of the first quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.