Q3 2023 WEYCO Group Inc Earnings Call
Participants
John W. Florsheim; President, COO, Assistant Secretary & Director; Weyco Group, Inc.
Judy Anderson; VP, CFO & Secretary; Weyco Group, Inc.
Thomas W. Florsheim; Chairman & CEO; Weyco Group, Inc.
John Eric Deysher; Portfolio Manager; Bertolet Capital Trust - Pinnacle Value Fund
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Weyco Group Third Quarter 2023 Earnings Release Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Judy Anderson, Chief Financial Officer.
Judy Anderson
Thank you. Good morning, and welcome to Weyco Group's conference call to discuss third quarter 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 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, 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.
Overall, net sales were $84.2 million, down 13% compared to record third quarter sales of $97 million in 2022. Consolidated gross earnings increased to 43% of net sales compared to 40.6% of net sales in last year's third quarter, due mainly to higher gross margins in our North American wholesale segment.
Quarterly earnings from operations were $12.4 million, down 12% compared to record operating earnings of $14.2 million in 2022. Quarterly net earnings totaled $9.3 million or $0.98 per diluted share compared to record net earnings of $10.8 million or $1.12 per diluted share last year.
Net sales in our North American wholesale segment were $69.5 million, down 15% compared to record sales of $81.6 million in 2022. The decrease was primarily due to a 42% decline in BOGS 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 fourth quarter, we anticipate that our sales will continue to fall short of 2022.
Not only are we going up against a strong fourth quarter 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% of net sales in the third quarter of 2023 compared to 36.3% of net sales last year. 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 $15.6 million for the quarter compared to $16.7 million 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% and 21% of net sales in the third quarters of 2023 and 2022, respectively. Wholesale operating earnings totaled $11.3 million for the quarter, down 13% from $12.9 million last year due primarily to lower sales.
Net sales in our North American retail segment were a third quarter record of $7.6 million, up 6% over our previous record of $7.1 million last year. The increase was due to higher sales across all our domestic e-commerce websites with the largest increases at BOGS and Florsheim.
Retail segment gross earnings as a percent of net sales were 65.4% and 66.3% in the third quarters of 2023 and 2022, respectively. Selling and administrative expenses for the retail segment totaled $4 million or 53% of net sales for the quarter compared to $3.9 million or 55% of net sales last year. Third quarter retail operating earnings rose to $926,000, up 12% compared to $825,000 last year, mainly due to the increase in web sales.
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 $7.1 million, down 14% compared to $8.2 million in the third 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% of net sales compared to 61.4% of net sales in last year's third quarter. Its operating earnings were $256,000 for the quarter versus $476,000 last year. 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 million, and we had no debt outstanding on our $40 million revolving line of credit. During the first 9 months of 2023, we generated $62.9 million of cash from operations due mainly through reductions in inventory levels.
We used funds to pay off $31.1 million on our line of credit to pay $9.3 million in dividends and to repurchase $3.4 million of our common stock during the 9-month period. We also had $2.6 million of capital expenditures. We estimate that 2023 annual capital expenditures will be between $3 million and $4 million. 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 Florsheim, Jr., our Chairman and CEO.
Thomas W. Florsheim
Thanks, Judy, and good morning, everyone. Sales in our North American wholesale business were down 15% for the quarter. While we are never pleased with the decrease, the comparison was against a record third quarter last year. Wholesale sales in 2022 reflected strong demand but also significant pipeline fill as many accounts were replenishing stock completed due to pandemic-related supply chain delays.
To provide some context, taking out 2022, this year's third quarter would have been our most profitable third quarter in 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.
With demand softening, retailers are being conservative with at-once and future orders at the wholesale level. 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 with expectation of strong consumer sell-throughs.
Sales did not keep pace in the back half of last year and the upward trade channel entered 2023 with an inventory glut. The situation has been exacerbated by unseasonably warm weather in early fall. As a result, BOGS shipments declined 42% compared to record sales for the brand last year, with retailers placing fewer orders due to the current saturation 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. While the majority of our BOGS inventory is in core product that remains failed 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 the inventory backlog in the outdoor footwear category will not normalize until the back half of 2024.
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 a 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 third quarter. 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 our 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 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. As such, all 3 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 were up 6% for the quarter with increase driven primarily by our e-commerce business. 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 second quarter conference call, the Australian market is facing some of the same challenges as in the U.S. 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 $79.6 million as of September 30, 2023, compared to $128 million 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. Our overall gross margin was 43% and compared to 40.6% last year. We have worked hard to offset increased costs and 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.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of John Deysher with Pinnacle.
John Eric Deysher
Good progress on the inventories. Glad to see the debt 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, 2.4 million shares year-to-date. Is there anything remaining on the share repurchase at this point?
Thomas W. Florsheim
Yes. Judy, can you give that number?
Judy Anderson
903,000 shares.
John Eric Deysher
Is remaining.
Thomas W. Florsheim
Yes. So we have plenty remaining. So I mean...
John Eric Deysher
I was just going to say, what was the average on the 2.4 million buyback?
Thomas W. Florsheim
$25.43. And is that number right, the 2.4 million, I thought it was a little higher.
John W. Florsheim
Total cost of our shares purchased through October 31 was about $3,794,000.
Thomas W. Florsheim
Yes. So it's about $3.8 million, John.
John Eric Deysher
3.8 million shares at...
Thomas W. Florsheim
No dollars, dollars, $3.8 million.
John Eric Deysher
$3.8 million, and the average cost was $25.43.
Thomas W. Florsheim
Right. So we can give you the number of shares. How many shares was that, John?
Judy Anderson
149,000.
John W. Florsheim
Yes, 149,000.
Thomas W. Florsheim
149,000, John.
John Eric Deysher
Okay. Sorry, my mistake. Sorry, Tom, I cut you off. What are you going to say as to the future uses?
Thomas W. Florsheim
Well, we're going to continue to probably build some cash. I mean a lot of that cash that we've built is from -- we spent a lot of money building up our inventories because our inventories were depleted due to the 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 to 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.
John Eric Deysher
Okay. That's helpful. Would you consider a special dividend? I don't think you've done that historically, but is that...
Thomas W. Florsheim
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.
John Eric Deysher
Okay. Good. That's helpful. What's the status of Forsake? You bought that over a year ago. 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?
Thomas W. Florsheim
Yes. No, first of all, I want to state that the Forsake 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, buying outdoor brand when the market for -- and that category is totally saturated. And so what we've done, John, the last 1.5 years is retool the brand. And so fall of '23 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 '24, fall of '24.
And John and I just came back from our sales meeting. We had a sales meeting for BOGS and for Forsake on Portland. And we actually are encouraged about the brand. I mean I'm not making any promises, but we feel that it has unique positioning. 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 a chance. And again, it's less than 1% of our business, so it's not hurting us.
And we have a very talented office on 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, 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.
John Eric Deysher
Okay. All right. Fine. So you've got the pieces in place, you just need to execute at this point?
Thomas W. Florsheim
Exactly. Exactly.
Operator
We're showing no further questions at this time. And I would now like to turn it back to Judy Anderson for closing remarks.
Judy Anderson
I'd just like to thank everybody for joining us today and wish you a great back half of your week, this week. Thank you.
Operator
Yes. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
