Weyco Group, Inc. (WEYS) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to Weyco Group's Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference maybe recorded. [Operator Instructions] I would now like to hand the call over to John Wittkowske, Senior Vice President/Chief Financial Officer. Please go ahead.

Thank you. Good morning and welcome to Weyco Group's conference call to discuss our fourth quarter and full year 2021 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 to discuss the results for the quarter and for the year, 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 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 our other filings with the SEC. The Form 10-K identifies important factors and risks that could cause our 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, the extent and duration of the negative impacts on our supply chain, actions taken by governments, such as stay at home or similar orders, that among other effects require retail store closures or limit foot traffic, the financial health of our customers and business partners, including the effects of any bankruptcy proceedings by such parties, and the health and welfare of our employees. Our net sales for the fourth quarter of 2021 were a record $101.4 million compared to last year's fourth quarter net sales of $62 million. Consolidated gross earnings were 40.2% of net sales for the quarter, compared to 44.5% of net sales in last year's fourth quarter. The decrease in gross margins was largely due to lower wholesale margins, partially offset by higher margins in our other businesses. Operating earnings were $12.8 million for the quarter compared with $7.9 million in the fourth quarter of 2020. Quarterly net earnings rose to a record $10.3 million or $1.7 per diluted share, up from $5.1 million or $0.52 million per diluted share last year. Last year's fourth quarter results were significantly impacted by the COVID-19 pandemic. As such, comparisons of 2021 financial performance to 2020 may have limited utility. And therefore, we are including selected comparisons to 2019 as appropriate. Consolidated net sales for the quarter exceeded fourth quarter 2019 levels by 17%, and operating earnings beat 2019 levels by 11%. In the North American Wholesale segment, net sales for the quarter were $79.9 million compared with $46.2 million last year, with sales up across all of our brands. Last year's fourth quarter sales of our legacy brands were lower than normal, because the pandemic significantly impacted sales of dress and dress casual footwear. Sales of the BOGS outdoor brand, which were less affected by the pandemic in 2020, rose 29% with sales up across most distribution categories. The North American Wholesale segment experienced significant growth in the fourth quarter with net sales surpassing 2019 levels by 16%. Not only did Florsheim in BOGS achieved record fourth quarter sales, but sales of the Stacy Adams and Nunn Bush brands rebounded to near pre -pandemic levels. While part of the sales increase can be attributed to some third quarter orders, shipping in the fourth quarter due to delays in the supply chain. We also experienced strong demand across all of our brands as consumers continue to participate in normal activities and retailers works to restock their shelves. Wholesale gross earnings were 33.7% of net sales for the quarter, compared to 39.6% of net sales in last year's fourth quarter. The decrease in gross margins in 2021 was primarily due to higher inbound freight costs, as we paid premium rates during the quarter. We believe that gross margins will improve in mid to late 2022 as the supply chain stabilizes and as negotiated price increases with our customers go into effect. Wholesale operating earnings rose to $9.4 million for the quarter, up from $5.6 million in 2020 due to higher sales, partially offset by the lower gross margins. Operating earnings reached 87% of 2019 levels. Net sales of the North American retail segment were $13. 5 million for the quarter, compared to $8.7 million last year. Same-store sales rose 57% due to a 52% increase in ecommerce sales and higher brick-and-mortar sales. Last year's brick-and-mortar sales were down significantly as a result of the pandemic. We closed three unprofitable retail stores in the third quarter of 2020, and one in the first quarter of 2021, and currently have four active U.S. brick-and-mortar locations. Retail gross earnings, as a% of net sales, were 66.2% and 66.7% in the fourth quarters of 2021 and '20 respectively. Retail operating earnings totaled $3.3 million, up from $2.7 million last year, with earnings up at brick-and-mortar locations and in ecommerce. The retail segment posted its highest ever quarterly sales and operating earnings results in the fourth quarter of 2021. Significantly, outpacing the comparative 2019 levels by 48% and 116% respectively. While most of the sales increase was driven by e-commerce growth, brick-and-mortar sales at our remaining locations also surpassed 2019 levels. Our other operations, which include the wholesale and retail businesses of Florsheim, Australia and Florsheim, Europe had net sales of $8 million for the quarter, compared with $7.1 million in 2020. The 2021 increase was at Florsheim, Australia with sales up in both it's retail and wholesale businesses, partially offset by the lower sales at Florsheim, Europe, which we are in the final stages of winding down. Gross earnings in our other businesses were 61.1% of net sales for the quarter compared to 48.6% of net sales in the fourth quarter of 2020. Collectively, Florsheim, Australia and Florsheim, Europe had operating earnings totaling $41,000 for the quarter versus operating losses of $393,000 last year. The improvement between periods was primarily due to lower operating losses at Florsheim, Europe. Other net sales for the quarter reached 88% of 2019 levels with Florsheim, Australia beating 2019 level offset by lower sales at Florsheim, Europe. Lockdowns imposed in Australia were lifted, which allowed us to reopen all of the Florsheim, Australia's retail stores during the quarter. We will now discuss our full-year 2021 results. Our consolidated net sales in 2021 were $267.6 million, compared with $195.4 million in 2020. Consolidated gross earnings were 40.1% and 40.2% of net sales in 2021 and 2020, respectively. Operating earnings rose to $25.7 million, up from operating losses of $7.6 million last year. Net earnings were $20.6 million or $2.12 per diluted share in 2021, compared to net losses of $8.5 million or $0.87 per diluted share in 2020. Our 2020 results were significantly impacted by the pandemic due to most brick-and-mortar retailers being closed for a majority of the second quarter, and an overall increase in consumer demand -- overall decrease in consumer demand. Additionally, last year's operating results included non-recurring charges totaling $11.9 million. Consolidated net sales for the year recovered to 88% of 2019 levels, and operating earnings reached 95% of 2019 levels. North American wholesale net sales were $205.4 million in 2021, compared to $152.2 million in 2020 with sales up across all brands. Last year sales of our legacy brands were down significantly as a result of the pandemic. Sales of the BOGS outdoor brand rose 17%, with sales up across most distribution categories. Wholesale gross earnings as a% of net sales were 33.8% in 2021 and 35.5% in 2020. The decrease in gross margins was largely due to higher inbound freight costs, as previously discussed. Selling and administrative expenses were $49.9 million, or 24% of net sales, versus $53.1 million, or 35% of net sales in 2020. 2021 expenses included income of $5.5 million in weight subsidies received from the U.S and Canadian governments, and expense of $1.1 billion to write off certain assets related to the closing of Florsheim, Europe. 2020 wholesale expenses included $4.8 million in non-recurring charges. Wholesale operating earnings rose to $19.5 million in 2021 from $975,000 in 2020 due mainly to higher sales. 2021 wholesale sales and operating earnings rose to 85% and 70% of 2019 levels respectively. Business recovery was sluggish early in 2021 with the first quarter still being impacted by the pandemic. But operations improved significantly after COVID vaccinations were rolled out in the second quarter. In our North American Retail segment, net sales were $31.6 million in 2021 and $21.5 million in 2020. Same store sales rose 53% due to a 43% increase in e-commerce sales and higher brick-and-mortar same store sales. For the year, retail gross earnings rose to 66.4% of net sales, up from 64.8% of net sales in 2020 with gross margins up at both active brick-and-mortar locations and an e-commerce. The retail segment had operating earnings of $6.7 million in 2021 compared with operating losses of $1.1 million in 2020. Last year's losses included $2.6 million in non-recurring charges. The improvement in 2021 was due to the benefit of closing unprofitable stores. Higher e-commerce earnings, and improved performance at active brick-and-mortar locations. 2021 retail sales and operating earnings surpassed 2019 levels by 25% and 138%, respectively. The increases were primarily due to growth in our more profitable e-com business. Our other operations had net sales of $30.7 million in 2021, compared with $21.7 million in 2020. Increase was at Florsheim Australia with sales up in both its retail and wholesale businesses. For the year, other net sales amounted to 84% of 2019 levels with Florsheim Australia reaching 93% of 2019 levels offset by lower sales at Florsheim Europe. Gross earnings in our other businesses were 55.8% of net sales in 2021 versus 48.8% of net sales in 2020. Collectively, Florsheim Australia and Europe had operating losses totaling $0.404 million in 2021, compared with operating losses of $7.5 million in 2020 and $3.5 million in 2019. Florsheim Australia had operating earnings of $0.118 million resulting from improved gross margins and cost reductions. Last year's losses included $4.5 million in non-recurring charges. The improvement in 2021 is primarily due to stronger results at Florsheim Australia. At December 31st, 2021 our cash short-term investments and marketable securities totaled $38 million, and there were no amounts outstanding on our revolving line of credit. During 2021, we generated $6.4 million of cash from operations. We used funds to pay $9.3 million in dividends, invested $8.1 million in short-term investments, and repurchased $2.5 million of our stock. We also spent $2.6 million to acquire the Forsake brand, and had $1 million of capital expenditures. We estimate that our 2022 annual capital expenditures will be between $2 million and $3 million. On March 8, 2022 our Board of Directors declared a quarterly cash dividend of $0.24 per share to all shareholders of record on March 18th, 2022 payable on March 31st, 2022. I would now like to turn the call over to Thomas W. Florsheim Jr, our Chairman and CEO.

Thank you, John and good morning, everyone. As John mentioned, we had an outstanding end to the year, with record wholesale shipments in the fourth quarter and strong performances across all brands. Our results reflected two underlying trends. 1. The slow unwinding of the supply chain bottleneck as we started to receive significant quantities of footwear in the fourth quarter. The incoming shipments allowed us to fill a portion of the demand pipeline as we are still in the process of getting retailers back to their natural inventory models. 2. We are seeing outstanding consumer response to our product offerings in both legacy and outdoor brands. Our BOGS brand has been solid across the pandemic timeframe, so is especially meaningful that we had a record fourth quarter for BOGS. Our classic weather boot styles experienced elevated demand and multiple distribution channels ranging from department stores in cities to farm and agricultural stores in rural communities. In addition, we greatly expanded sales of our casual lifestyle footwear from our wholesale direct-to-consumer perspective. Relative to 2019, our BOGS e-commerce business in North America was up over a 100% for both the fourth quarter and for all of 2021, the BOGS brand is in a good place as we build off the strong momentum over the past two years and pushed successfully into new categories. At June of 2021, we acquired the Forsake brand, which joined BOGS as part of our outdoor group in Portland. Over the past few months, we've been working with for Forsake 's founders, Jake Anderson and Sam Barstow, to onboard the brand and to determine opportunities to expand Forsake's reach, both in the wholesale and direct-to-consumer channels. Similar to our other brands, forsake faced certain supply chain constraints and delays, but we believe we're making good progress in terms of putting the right structure in place for future growth. Our legacy brands, which encompass Florsheim, Stacy Adams, and Nunn Bush, had a robust fourth quarter. In previous calls, we've discussed the demand roller coaster associated with the dress and dress casual business. We went from nearly non-existent demand in early March to unprecedented interest a few months later. And that trend continued largely through the end of 2021. The fall off and the refined footwear category early in the pandemic filed a long period were the category had already been under pressure due to the increased importance of athletic and athleisure casual footwear in today's lifestyle. As a result, at the onset of COVID, many other competitors pulled back or exited from the dress shoe business which put us in a strong position to pick up significant market share when the business bounced back. While we remain committed to diversifying our legacy product mix, we also recognize that we have a tremendous opportunity to be the leader is still sizable category in the footwear world. As we look forward in 2022, we see good things on the horizon with more workers returning to the office and increased social events including a record forecast for weddings, all of which bodes well for our business. While we are excited about -- excited with how legacy brands have benefited from the comeback of dress footwear and underlying story and the recent success we have had introducing products in the casual and athletic [Indiscernible]. For example, the number 2 collection of Florsheim e-commerce for 2021 was a sneaker program. And four of the top 15 shoes were true casuals. This type of consumer acceptance is something that we could not have imagined two years ago. We have a similar success story with Nunn Bush as its number 2 wholesale package last year was a sneaker collection. As we look back over the last two years, we feel good about the work we have done during the pandemic to pick up market share in our traditional business, while at the same time pushing into new categories and positioning ourselves for additional opportunities. In terms of the retail business, we posted our highest ever quarterly sales, which was driven by a 52% increase in e-commerce. Online transactions account for the vast majority of our retail sales, and our fourth quarter growth is all the more impressive when you consider we're going against double-digit increases in the fourth quarter of 2020. We are trending well above industry e-commerce growth numbers, which speaks to both the strength of our brands, as well as our execution in this space. We continue to invest resources and marketing and analytical tools to build our e-commerce platform as we see this area as a key piece of our growth model moving forward. We're also planning to invest in our distribution center to enable us to process and ship more efficiently the large increase in e-commerce orders, which we have experienced over the past several years. In terms of our international performance, we had an increase in the fourth quarter sales and profitability for Florsheim Australia, which includes the markets of New Zealand, South Africa, and the Pacific Rim. Australia reopened retail in October after months of lockdowns, which put us in a position to end the year on a stronger note. Overall, 2021 was a turnaround year for overseas markets. We exited an unprofitable European Florsheim business, and signed a long-term licensing deal brand in that region. We also reset our Australian business with more payable retail leases, increased wholesale sales for BOGS at Florsheim, and experienced solid growth in our e-commerce business. We are optimistic that the changes made will allow for international business to once again be a steady, profitable contributor to Weyco Group. Our overall inventory levels were $71 million at December 31, 2021, compared to $59 million at the end of 2020. As explained in our last call, our inventory includes both inventory in transit to our distribution center and also on-hand inventory. Before the supply chain issues, typically about 10% to 20% of our inventory was in transit. So, we did not break our inventory down in our reporting. As of December 31, 2021, 59% of the $70 million or 1.9 million peers was in transit with 41%, or 1.3 million peers, on-hand at our distribution center. We continue to receive a much higher number of containers on our daily basis than normal, and this has allowed us to main trough -- maintain strong shipments to our customers and start building back inventory levels on core product, that is needed for at-once business. Our wholesale gross margins for the quarter were 33.7% versus 39.6% in the fourth quarter of 2020. As John stated, most of the decrease in gross margin was due to higher shipping costs. Starting in January 2022, we raised our selling prices, which will offset some of this margin loss. As we move into fall 2022, we will have a second increase going to effect, which will [Indiscernible] freight and factory price increases. And that is when we expect to see wholesale margins improve. We're continuing to see strong demand for our brands across the board and expect that both pipeline fill and strong consumer demand will drive our business as we move into 2022. We expect our first quarter 2022 volume to be significantly better than 2021, not only because demand is up, but also because the first quarter of 2021 was still somewhat impacted by the pandemic. As of March 2022, the Company's North American wholesale backlog was the highest in the Company's history. We have bought aggressively, especially on core products to make sure that we can fulfill demand, as well. builders, our in-stock inventory back to normal levels. 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 Instructions] Please stand by while we compile the Q&A roster. [Operator Instructions] Our first question comes from the line of John E. Deysher of Pinnacle. Your line is open.

Good morning, everyone. And a nice way to wrap up the year. Congratulations.

Thank you.

Hi, John.

Just curious about a couple of things. One, the price increases that you just mentioned, you said January of this year and when was the second one going into effect.

It will be July. So for the second half of the year.

Okay. And do you anticipate those price increases to recoup part of the increase in freights and raw material costs, or how should we think about the recovery of the inflation that we're -- everyone is seeing these days.

Yeah, that's a great question. It's a little bit of a moving target because when we started this year, we felt that freight cost will probably come down in the second half of the year. And that would be a big help. But I think with everything going on in the world today, we're not so sure about that anymore. And so there's a lot of different pieces that are involved. And so, my answer to you isn't going to be a 100%. I would say that our best guess is that in the fall, I think we're still going to be down a little bit margin-wise. I would say 2% to 3%. But if freight costs get anywhere closer to normal, that will not be the case. We've -- what we tried to do with the second price increase was cover most of the freight increase, and so we're hoping to see really improved margins in the second half. I hope -- I don't know if that gives you definite answers you wanted, but that's our best guess.

Okay. So that covers the freight, but what about raw material costs?

Raw material prices we've covered. And so we're -- we really have covered those increases with -- the increases we had for the first half of '22 are covered and same with the second half. The real challenge to our margins is in these freight costs. And so, we [Indiscernible] all the way our buying works, we are basically locked in our pricing with other factories for the remainder of the year. We've covered most of our needs for this whole year at the current pricing, so we don't expect any surprises there. The other thing to consider is because our backlog is way up. We are seeing big increases in volume as we have started this year. And so even though, we have this pressure on gross margin percentages, our total gross margin percents are up and we feel that they're going to be up considerably for the year.

Okay. Good. So it sounds like your freight is still an issue, but there's no bottlenecks in terms of you getting supply.

Well, that's not 100% true either. We still are seeing some bottlenecks. There is no doubt about that, but we have so much -- Two things. We're placing orders earlier trying to give ourselves more time so that for fall, for example, we're bringing in product as early as we can. So even if the supply chain bottlenecks caused delays, we're hoping that we're going to be able to ship foods in August and September, which we were not able to do at fall of '21, just because everything came in two or three months late. The other thing is we have the pipeline so full between our factories and our distribution center, that even though there are continuing to be delays, just because we have so much in transit, we're receiving a record number of containers every day. So we're getting in product, but that's almost in spite of the supply chain bottlenecks, but not because they completely gone away. And it's different, different ports. And for raw, it seems like it's getting better. Because of various things that are happening around the world, it gets bottlenecked again. But in general, we are getting in product. And because of planning, we feel that we're going to be, either doing much better job shipping our customers at the appropriate time seasonally.

Great. That's helpful. No change in tariffs at this point, they're still what we've talked about in the past coming in from the Far East?

Yes. No change.

No change on tariffs. Okay. Talk to us about the Forsake brand. When will that plan come into effect and kind of what's your target market for that product line?

I'm going to turn that question over to John Florsheim.

Yeah, hey, John. It's -- if the target market is younger, it's 50-50 male, female, we're really looking more in the 25-40 year old range, maybe even a little younger in that. It's outdoor, it's an adventure enthusiasts. It's a very different product category within our mix. I mean, we -- it fits more with our outdoor group in Portland. In terms of winter, when that's going to come online, we're still really in the on-boarding process. It's been -- Forsake deliveries this fall were caught up in some of the supply chain bottlenecks that Tom referenced. And so, we were a little late in deliveries for the fall and then in getting in terms of getting new new product online as well. So we really look at this more, is something that's going to evolve and grow in 2023. In Rio -- also see, this is more important wholesale opportunity. But we also see it is important within our mix of direct-to-consumer, as far as our e-commerce portfolio and addresses a yarn consumer, they built a nice niche e-commerce business on their own. And we feel that we can use some of the tools that we have here that worked for other brands to grow Forsake online. Zen, does that answer your question?

Yeah, that's very helpful. So it sounds like no meaningful sales contributions until 2023. Is that fair?

I would say 2023 would be where we expect to really see the work that we're doing since we purchased the brand, to come to fruition.

Okay. Good. Well, good luck with that. And then two final financial questions. Will there be any -- With the closing of Europe, will there be any additional expenses that slash over into 2022?

No. No. We took all the right [Indiscernible] that we needed to between 2020 and 2021.

Okay. Good. That's helpful. And then on the share buyback, you spent $2.5 million last year. How many shares did you repurchase, and what's left on the authorization?

Last year, we purchased 125,000 shares. We had 210,000 left as of the end of the year. But during the first quarter, so far we bought about 50,000 shares. And so there is about a 160,000 left on that original buyback or that buyback amount. That amount can be changed at our discretion, but what's authorized right now is 160,000 as of right now.

Correct. Okay, 160,000 shares.

Yeah. We have bought back 50,000 more in the first quarter so far.

Okay, so that leaves 160,000. If you decide to increase it, does that merit disclosure in terms of the board deciding to increase it?

Yes. We would disclose it -- we would -- it would be board approved and we would disclose it.

Okay. Great. That's all I have. Thanks very much. And good continued luck.

Thanks, John.

Thanks for the questions.

Thank you. [Operator Instructions]. As there are no further questions in queue, I'd like to turn the call back over to Mr. Wittkowske for any closing remarks, sir.

Thank you. Thanks, everyone for joining us today for our conference call, and we look forward to talking to you on May 4th for our next quarterly update. Have a great day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.