U.S. Markets closed

Edited Transcript of WEYS earnings conference call or presentation 6-May-20 3:00pm GMT

Q1 2020 WEYCO Group Inc Earnings Call

Milwaukee May 17, 2020 (Thomson StreetEvents) -- Edited Transcript of WEYCO Group Inc earnings conference call or presentation Wednesday, May 6, 2020 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John F. Wittkowske

Weyco Group, Inc. - Senior VP, CFO & Secretary

* John W. Florsheim

Weyco Group, Inc. - President, COO, Assistant Secretary & Director

* Thomas W. Florsheim

Weyco Group, Inc. - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* John Eric Deysher

Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Weyco Group First Quarter 2020 Earnings Release Conference Call. (Operator Instructions) And please be advised that today's conference is being recorded.

Now it's my pleasure to turn the call to John Wittkowske.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone. Welcome to Weyco Group's conference call to discuss our first quarter 2020 earnings. On this call with me today are Tom Florsheim, our Chairman and CEO; and John Florsheim, our President and COO.

Before we begin, 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. The 10-K identifies 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 resulting global economic slowdown, actions taken by governments, such a stay at home and similar orders, that among other effects, require retail store closures, the financial health of the company's customers and business partners, the performance of the company's supply chain, and the health and welfare of the company's employees. Additionally, some comparisons may refer to non-GAAP measures. Our SEC filings may contain additional information about these non-GAAP measures and why we use them.

Our operations and business experienced significant disruptions beginning in the second half of March 2020, due to the unprecedented condition surrounding the COVID-19 pandemic. Government mandated shutdowns of nonessential businesses resulted in the majority of retailers temporarily closing their stores, which significantly affected our wholesale business. Our domestic retail locations closed on March 18, and remain closed due to government orders. Overseas, our wholesale and retail businesses in Australia, Asia, South Africa, and Europe were similarly impacted by retail store closures and lockdowns, requiring consumers to stay at home. These closings resulted in lower first quarter sales and earnings across all of our businesses, and the company expects shutdowns and global economic slowdown caused by the pandemic to continue to adversely impact our business during 2020.

Net sales for the first quarter of 2020 were $63.6 million, down 14% compared to first quarter 2019 net sales of $74.1 million. Operating earnings were $1.3 million in 2020 compared with $5.1 million in the first quarter of 2019. Net earnings were $1.2 million this quarter and $4 million last year. Diluted earnings per share were $0.12 per share in the first quarter versus $0.40 per share in the first quarter of 2019. In the North American wholesale segment, net sales for the first quarter were $52.7 million, down 11% compared to $59.5 million last year.

Stacy Adams, BOGS, and Nunn Bush net sales declined 23%, 22%, and 8% respectively, with sales down across most major categories, as a result of the COVID-19 related shutdowns of retail locations. These decreases were partially offset by a 4% increase in the net sales of the Florsheim brand, which had strong sales in January and February before the retail shutdowns went into effect. Licensing revenues were $461,000 for the quarter and $707,000 last year. Wholesale gross earnings were 31.8% of the net sales in the first quarter, compared to 34.3% of net sales last year. The decrease in gross margins was primarily due to the additional costs of the tariff on certain footwear imported from China. As we discussed in our previous call, an additional tariff of 15% was assessed from September 1, 2019 until February 14, 2020 when it was reduced to 7.5%. Because we purchased a limited amount of inventory at the higher tariff rate, we expect the tariff's negative impact on our margins to lessen as we sell through our current inventory. Wholesale operating earnings were $2.8 million for the quarter and $5.2 million last year.

Net sales of our North American retail segment, which include both our retail stores and U.S. e-commerce sales, were $4.8 million, down 15% compared with $5.6 million in last year's first quarter. Same-store sales, which include the U.S. e-commerce sales, were down 13% for the quarter, due primarily to retail store closings late in the quarter and decreased sales on the company's websites. As a result, the retail segment had operating losses totaling $89,000 for the quarter, compared with operating earnings of $483,000 last year.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $6.1 million in the first quarter, down from $9.1 million last year. The decrease was due to lower net sales at both Florsheim Australia and Florsheim Europe, largely caused by retail shutdowns and government orders for consumer stay at home. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $1.3 million in the first quarter, compared to operating losses of $543,000 in the first quarter of '19.

Other income and expense totaled $407,000 of income in the first quarter of 2020, compared to $125,000 of expense in last year's first quarter. The increase this year or this quarter was primarily due to unrealized gains, unfavorable foreign exchange contracts held by Florsheim Australia. At March 31, 2020, our cash and marketable securities totaled $31.4 million, and we had no debt outstanding on our $60 million revolving line of credit. During the first 3 months of 2020, we generated $15 million of cash from operations, we used funds to pay $4.7 million in dividends, paid down $7 million on our line of credit, and repurchased $1.3 million of our company stock. Additionally, we had $1.8 million of capital expenditures. We expect that our 2020 annual capital expenditures will be between 3 and $4 million. On May 5, 2020, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on May 29, payable on June 30.

I will now turn the call over to Tom Florsheim, Jr., our Chairman and CEO.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thanks, John, and Good morning, everyone. The retail landscape has changed dramatically over the first quarter of 2020, due to the impact of the COVID-19 pandemic and related government orders. But we are focused on the long term as we navigate the current situation. We believe our strong balance sheet and operating expertise will allow us to manage our way through this crisis. Our distribution center and the majority of our supply chain continue to operate, which allows us to continue shipping e-commerce orders while remaining ready to commence full operations, when appropriate.

That being said, since we do not know when our retail partners will reopen their stores, we cannot presently estimate the impact of COVID-19 on our business. But we do expect it to have an adverse effect on our operating results this year. In light of these challenges, our main priority for 2020 will be the management of our liquidity, costs, and inventories. With more than $16 million in cash and short-term marketable securities, and the full $60 million available on our line of credit, we are currently in a strong cash position. However, collection of our accounts receivable has slowed, and we expect that trend to continue over the coming months.

We have already begun a dialogue with many customers, and we'll continue to actively manage our receivables to secure payments and mitigate risk. We have reduced our operating expenses where appropriate, and we are pursuing rent relief for our retail stores worldwide. Outside of the U.S., we have qualified for government subsidies in several markets. We will continue to scrutinize our costs in light of decreased demand. We have reduced our 2020 plan inventory receipts in response to reduced short-term demand for our products. There have been some disruptions in our supply chain as a result of the pandemic. Presently, this has not had a significant impact on our operations. Currently, our factories in China are operating, but production in India has ceased, due to a countrywide shut down, and we are not sure when that production will resume. We will continue to manage our inventory levels closely throughout the year.

Our distribution system allows us to quickly adapt to changes in customer demand, and we believe our system is well suited for adjusting to the future consumer landscape. At this time, we continue to employ our people, as we believe employee stability is important to our long-term success. The majority of our corporate staff has been working remotely. We have strong brands that resonate well with consumers, and we believe we are in a strong financial position to get through these challenges. We will pay our next quarterly dividend, although we will not increase it at this time.

This concludes our formal remarks. Thank you for your interest in Weyco Group, and I'd now like to open the call to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We have a question from the line of John Deysher with Pinnacle.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [2]

--------------------------------------------------------------------------------

Good morning. Hope everyone is healthy and safe.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Hi, John. Hope you're healthy as well.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [4]

--------------------------------------------------------------------------------

Yes, we're doing well here. I just have a couple of brief questions, first on the share buyback, $1.3 million. How many shares was that, and what dollar authorization is left?

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [5]

--------------------------------------------------------------------------------

John, that was a total of 59,000 shares that were purchased. We have 382,000 shares remaining in the buyback program as of today.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [6]

--------------------------------------------------------------------------------

Okay, great. And regarding the status of your customers, obviously, that's something that it sounds like you're on top of. But have there been any -- were there any bad debts in the first quarter? And do you anticipate any bad debts going forward?

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [7]

--------------------------------------------------------------------------------

There is nothing -- no, nothing significant in the first quarter as far as anticipating bad debts. There are a couple customers out there that are significant customers, but less than 10% of our -- no customer is more than 10% of our current receivables, and we're monitoring the situations that are out there right now. So there's a possibility that we could lose some customers this quarter.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [8]

--------------------------------------------------------------------------------

I'm sorry, lose some customers because of credit issues?

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [9]

--------------------------------------------------------------------------------

Yes, there is a possibility that -- we have several customers, or really 1 to 2 major customers that potentially could be seeking relief through bankruptcy. But we don't know. There's rumors out there.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [10]

--------------------------------------------------------------------------------

Yes. At this point, John, it's just rumors. So nothing has been declared. But when you look at the leverage that some of these retailers have going into this, it makes all of us a little bit nervous. But we're just -- we're trying to -- we're going to try to work through that as we go through the year, and just be as cautious as we can, and we'll see what happens. But I think --

--------------------------------------------------------------------------------

John W. Florsheim, Weyco Group, Inc. - President, COO, Assistant Secretary & Director [11]

--------------------------------------------------------------------------------

Inevitably, there is going to be some -- you're going to have some retailers out there that we deal with that go bankrupt. The question is when and which retailers. But there's going to be fallout from this. We just -- but there's nothing -- nothing's happened yet, and we're just monitoring the situation.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [12]

--------------------------------------------------------------------------------

Okay. So for the 1 or 2 that are questionable, what percentage of your receivables will be tied to those at the end of first quarter roughly?

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [13]

--------------------------------------------------------------------------------

Less than 10%.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [14]

--------------------------------------------------------------------------------

Okay. All right. On the flip side, I mean, retailers are struggling. What about your competitors? I mean, one of the reasons we own the stock is because you've been patient and diligent about waiting for the right opportunity to take out weaker competitors. Are you hearing any rumors or anything regarding the status of your competition?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [15]

--------------------------------------------------------------------------------

Nothing really specific, but we have heard about some of our competition that has laid off most of their employees. And there are some -- I don't know what you call it -- research that's out there that shows brands that have more of a danger of not making it through to the other side of this, and there's a couple of the list on that. So that's the thing. I mean, we're not sure -- nobody's sure how long this is going to last. But it's very possible that there may be some opportunities that come out of this. And so we're going to definitely keep our eyes out for those.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [16]

--------------------------------------------------------------------------------

Yes. I mean, we like companies that go through a period like this and come out stronger on the other side. So I would encourage you to stay focused and opportunistically take advantage of them.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [17]

--------------------------------------------------------------------------------

Absolutely.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [18]

--------------------------------------------------------------------------------

Good. That's it from me. Thank you.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [19]

--------------------------------------------------------------------------------

Okay, John. Take care.