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Weyco Group Inc (NASDAQ:WEYS)
Q2 2020 Earnings Call
Aug 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Second Quarter 2020 Earnings Release Conference Call for Weyco Group. [Operator Instructions]

At this time, I would like to turn the conference over to your host Mr. John Wittkowske. Thank you. Sir, please begin.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Thank you. Good morning, everyone and welcome to Weyco Group's conference call to discuss our second quarter 2020 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, I would like to 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 resulting global economic slowdowns. Actions by governments such as stay at home and similar orders that among others -- among other effects require retail store closures, the financial health of the Company's customers and business partners, including the effects of any bankruptcy proceedings by such party, 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.

The COVID-19 pandemic significantly impacted the Company's second quarter results. The majority of retailers including our retail stores were closed for a vast majority of the quarter due to government orders and all -- and business recovery has been slow. As a result, the Company experienced significant sales losses, sales volume losses during the quarter, which led to substantially lower second quarter earnings.

Net sales for the second quarter of 2020 were $16.7 million compared to second quarter 2019 net sales of $60.5 million. Operating losses totaled $13 million for the quarter as compared to operating earnings of $1.9 million in the second quarter of 2019. The Company's net loss totaled $8.9 million for the quarter compared to net earnings of $1.5 million in last year's second quarter. Diluted loss per share was $0.91 in the quarter, compared to diluted earnings per share of $0.15 in the second quarter of 2019. In the North American wholesale segment net sales for the second quarter of 2020 were $9.3 million compared with $46.1 million last year.

Net sales across all of our brands were down significantly in all major categories as a result of retail shutdowns due to the pandemic. Licensing revenues declined to $141,000 for the quarter from $636,000 last year, in line with reduction in licensees' sales of branded products. Wholesale gross earnings were 34.7% of net sales in the second quarter of 2020 compared to 35.1% of net sales in 2019. The wholesale segment and operating losses totaling $10.2 million for the quarter, compared to operating earnings of $2.2 million last year. The losses this quarter included the write-off of approximately $3.3 million in receivables as a result of the JCPenney bankruptcy filing in May of 2020 offset by $1.4 million of income from US and Canada government wage subsidies.

Net sales of the North American retail segment, which include our retail stores, excuse me, and US e-commerce sales were $3.6 million in the quarter, down from $5.4 million in last year's second quarter. Same-store sales which include US e-commerce sales were down 31% due to retail store closures, which were partially offset by higher sales on our Company's websites. The retail segment had operating losses totaling $856,000, down from earnings of $400,000 last year due to larger operating losses at brick and mortar stores.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $3.7 million in the second quarter, down from $9 million last year. The decrease was due to lower net sales at both Florsheim Australia and Florsheim Europe resulting from retail shutdowns. Collectively Florsheim Australia and Florsheim Europe had operating losses totaling $2.2 million for the quarter, compared to operating losses of $749,000 in last year's second quarter. The losses this quarter included the writedown of approximately $1 million of obsolete inventory at Florsheim Asia and included $1.3 million of income from rent and wage subsidies recognized during the period.

At June 30, 2020, our cash and marketable securities totaled $25.9 million and we had no debt outstanding on our $60 million line of credit. During the first six months of 2020, we generated $12.6 million of cash from operations. We used funds to pay $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 $2.7 million of capital expenditures. We estimate that in 2020 total annual capital expenditures will be between $3 million and $4 million. On August 4, 2020, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on August 28, 2020 and payable on September 30, 2020.

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

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Thanks, John and good morning, everyone. The retail environment continues to be significantly affected by the COVID-19 pandemic. The impact was particularly harsh in the second quarter with retailers closed the majority of the quarter and consumers staying at home even after stores began to reopen. However, we remain focused on the long-term goals and objectives of the Company as we navigate through this unprecedented situation. Consumer purchasing behaviors have changed over the past number of months. Consumers are seeking new and increased opportunities to participate in outdoor and socially distanced activities, which has created an opportunity for outdoor minded products such as BOGS.

We have already seen solid increases in BOGS online business during the second quarter and as we move into BOGS busy season in the back half of the year, we are optimistic that the brand may have new opportunities to grow and potentially increase market share. Over the past several seasons, we have talked about the evolution of our legacy brands in a more casual product. We have made strides in this area, both -- but both Florsheim and Stacy Adams are -- still saw a high percentage of what we refer to as go to work type shoes. The dress and dress casual footwear market has currently seen significantly lower demand, because many people have not yet returned to offices and also due to weddings and other dress-up type events being canceled due to COVID.

Nunn Bush has performed better because of -- because of its more casual product offering. We expect that our dress and dress casual business will have the opportunity to recover when people are no longer spending so much time in their homes and are able to return to normal social activities, although the timing of a return to normal is of course unknown. Many of the new shoes and boots, we're delivering this fall are more casual, and the majority of our spring '21 line is also geared toward o relaxed lifestyle. The transformation to more casual footwear and apparel was a strong trend prior to COVID, but has greatly accelerated by stay at home mandates.

Our backlog is down for fall, because our selling season was interrupted by shutdowns and we received many cancellations for both spring '20 and fall '20 orders from retailers. We are in the process of having virtual meetings with our customers to solidify fall order and also to show our new lines for spring '21. While it would be preferable to meet with customers face to face, we're finding that with the technology that is available. We can effectively show new product and communicate with our brick and mortar and e-commerce customers. Our distribution center and supply chain are fully operational, which enables us to fulfill wholesale and e-commerce orders on a timely basis. We believe we have the infrastructure and technology systems in place that will allow us to adapt to the future consumer landscape. We believe we are well positioned to respond to changes in consumer demand during these volatile times.

In 2019, we built our inventory levels a core product in anticipation of the imposition of the China tariff. When the pandemic hit the US in March of this year, we adjusted our 2020 buys accordingly. At June 30 of this year we have $81.4 million of inventory versus $82.8 million at the same time last year. Our current inventory, our current level of inventory is higher than optimal given decreased demand. We have reviewed our inventories at June 30 and with the exception of some obsolete inventory, we wrote off in Asia this quarter, we feel our inventory is solid with a good base of core product. However, given the uncertainty in the marketplace, we will continue to review and monitor seasonal and discontinued products throughout the rest of the year, which might result in additional inventory write downs.

As the world reawakens and the marketplace evolves, we are in a good position to respond to our consumers' needs. Cost management and liquidity remain top priorities of our Company during this challenging time. Expenses across the organization are being evaluated and right-sized so that we can effectively operate during this period of lower sales volumes. During the quarter, we adjusted our advertising spending, which reduced second quarter selling expenses by $1.1 million. We're qualified for $1.5 million in government wage subsidies in the US and Canada and received additional rent and waste subsidies outside of the US totaling $1.3 million.

We are continuing to pursue additional subsidies and other cost savings at this time. Our balance sheet and associated liquidity remain highlights in the Company's current financial position with nearly $26 million in cash and short-term marketable securities, and the full $60 million available on our line of credit, we believe we are in a strong cash position, which affords us the ability to withstand the economic effects of the current pandemic situation. Collection of our accounts receivable has slowed, and we expect that trend to continue over the coming months.

In addition, as previously discussed, we had a write down receivables during the quarter due to the bankruptcy of JCPenney. We are continuing to actively manage our receivables to secure payments and mitigate risk and are also monitoring the financial health of our other customers.

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.

Questions and Answers:

Operator

[Operator Instructions] Our first question or comment comes from the line of Fredrick Zoller [Phonetic]. Your line is open.

Fredrick Zoller -- Analyst

Yeah. Hi, how you're guys doing?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Good morning.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Good morning.

Fredrick Zoller -- Analyst

Yes. Just a quick question on the JCPenney issue. The possibility of them reopening store is on a future day once they reemerge from bankruptcy, is that, I'm just curious, because I wasn't even aware that you guys even had shoes there. So I thought it was mostly Macy's, but can you just give me maybe the top brick and mortar stores that you guys percentage wise that you sell, have the most sales in, because I know Macy's is a big one. And also the JCPenney thing, the possibility of them reemerging from bankruptcy, is that something that could boost earnings going down the line if they were to reemerge from bankruptcy and make it come [Phonetic].

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Yeah, I mean we don't break down our sales to customers by customer, but JCPenney was a big account, Macy's is a big account. With JCPenney reemerge coming out, they filed for Chapter 11 reorganization and we are again shipping them, but with secure -- it's secured. So that they emerge and come back stronger, it will be good for our business. We are back shipping them in a way where we don't have any kind of exposure. If that answers your question.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

And I think, was the second part of your question, whether you feel, they're going to emerge as an ongoing entity from Chapter 11?

Fredrick Zoller -- Analyst

Well, it just seems to me that at least in my general area that they still have stores open and they're still selling the shoes, without it, I looked into it, I looked it up and they have shoes in stock. So we are still selling shoes. So, I mean the $3.3 million.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

No, what happens with the Chapter 11 is, allows them to continue as a functioning business. And what they've done is they've slated I think. And I'm not going to get the number exactly right, but I think it's about 250 stores that they are closing. And so they are running, quite an amount of business sales in those stores. But in their remaining stores which I think is, in the neighborhood of 700, 800 stores, they're continuing to do business. And then right now, there is actually, I think in the next couple of weeks, there's a number of bidders for JCPenney, so they will go forward. And you know we -- it's hard to predict with COVID-19 exactly, how everything shakes out, but we certainly are encouraged by the fact that there is some bid, that there are multiple bidders for the JCPenney business and at least in the near term, they are going to continue as an important customer of ours.

Fredrick Zoller -- Analyst

All right, thank you.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question or comment comes from the line of John Deysher from Pinnacle. Your line is open.

John Deysher -- Pinnacle Value Fund -- Analyst

Good morning, everyone.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Hi, John.

John Deysher -- Pinnacle Value Fund -- Analyst

A couple of questions. One, on the share repurchase, I think you bought back $1.3 million worth in the first quarter, did you buy any in the second quarter?

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

No. I don't think so.

John Deysher -- Pinnacle Value Fund -- Analyst

And if not, why not? And what's the appetite at this point for buying back stock at the levels, it's trading at?

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Right now, I mean, we think it's a good buy at the level it's trading at, but we're trying to be smart about using our cash. We see the possibility that this is going to go on for a while and we just don't think that at this point it's wise to do stock buybacks.

John Deysher -- Pinnacle Value Fund -- Analyst

Okay, so you're holding cash for other purposes. Okay.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Just to sustain -- just, John, just to sustain the business, I mean, if you think about, I think that we're not alone. If you look at what most companies are doing right now, because of the uncertainty surrounding the situation, you want to make sure that you have ample cash reserves.

John Deysher -- Pinnacle Value Fund -- Analyst

Okay. So even though you've got a $60 million, I think undrawn revolver, your customers want to see the cash on the balance sheet. Is that fair?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yes. And also because, the revenues have fallen to such an extent that we are in a position right now where we lost money in the last quarter, which I think is the first quarter, I can remember. And I have been here a long time that we've lost money. We just are conservative, and the fact that we want to make sure that if this goes on for a while, we're going to try to right size, so that we could get to breakeven as quickly as possible. But we just feel more comfortable having money in the bank right now.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

John, the other thing is, if you look at, almost of our companies out there here suspended both stock buybacks and also a number of suspended dividend. We have maintained our dividend. And so we had to make choices in terms of where, what's important to our shareholders? And also just looking down the line, we certainly hope the pandemic will be over sooner rather than later. I mean when this all started, we thought three months, six months now, like, we're just basically being very conservative in terms of power approaching us to make sure that we maintain liquidity.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. With that said, we are investing, continuing to invest in areas of our business that we feel are going to be where we grow in the future, like D2C market. So we're -- it's not like, I just want to make it clear that we're not just trying to pile up cash that we're looking very strategically where we want to invest.

John Deysher -- Pinnacle Value Fund -- Analyst

Okay, that's fair. In terms of rightsizing the business, how much in terms of dollars would you say you'll be able to take out of the expense structure in the next 12 months?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

And that's a difficult question to answer at this point. I think we'll be in a better position to answer that next quarter. John, we're looking at everything. And we've started this process, a number of months ago, we've made a number of changes already. There is more to come. We're just -- we'll reexamine -- reexamining every aspect of our business. And for a while, I think companies have the luxury of funding some things that maybe weren't that profitable, because we're making a fair amount of money in other areas of our business. We are -- we're literally studying every single expense line in our Company right now and, to figure -- to figure out the question you just posed. And I would prefer to give you some more specific answers after the next quarter.

John Deysher -- Pinnacle Value Fund -- Analyst

Okay, that's fine. And I guess finally, you mentioned that you're selling, back to selling JCPenney on a secured basis. Is that cash on delivery or what exactly does secured mean?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

You know, we can't -- we actually, yeah, yeah.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

[Speech Overlap] But we can't do specific -- but we've taken steps to mitigate our exposure.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah, there is no, the way that we're doing it. There is no risk.

John Deysher -- Pinnacle Value Fund -- Analyst

There is no risk. Okay. Well, I mean let's ignore, JCPenney, conceptually, what are the ways besides cash on delivery that you could guarantee payment, conceptually, what are the alternatives?

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Yeah, you know, John, I mean, we're happy to like talk to you offline about this, but I don't want to get into like specifics of how we're handling our credit with different accounts.

John Deysher -- Pinnacle Value Fund -- Analyst

All right.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Feel free to call me.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. We're both were both in today.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Yeah.

John Deysher -- Pinnacle Value Fund -- Analyst

Okay. I'll give you the ring.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Okay.

John Deysher -- Pinnacle Value Fund -- Analyst

Thanks.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] I'm showing no additional audio questions in the queue at this time, I'd like to turn the call back over to management for any closing remarks.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

We just want to thank everybody for listening to the call today. Stay safe and we'll talk to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Fredrick Zoller -- Analyst

John Deysher -- Pinnacle Value Fund -- Analyst

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