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Weyco Group Inc (NASDAQ:WEYS)
Q3 2020 Earnings Call
Nov 4, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Earnings Release Conference Call. [Operator Instructions]

I would now like to hand the conference over to one of your speakers today, Mr. John Wittkowske. Sir, please go ahead.

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

Thank you. Good morning. Welcome to Weyco Group's conference call to discuss our third quarter 2020 earnings. 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 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 its 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.

During this call, we will discuss some of our financial results on an adjusted basis. Amounts referred to as adjusted exclude the following items recognized during the quarter. $3.1 million for the impairment of retail store fixed assets and operating lease right-of-use assets. $1.7 million in employee costs relating to restructuring and temporary closures. $1.5 million in early lease termination charges. $1.1 million from a customer receivable write-off due to a bankruptcy filed during the pandemic. $1 million in reserves for obsolete and slow-moving inventory due to COVID-19-related impacts. And $300,000 in other charges, partially offset by $1.4 million of income from government wage subsidies. Additionally, adjusted amounts exclude, $2 million of tax expense related to deferred tax assets at the company's foreign subsidiaries. Reconciliations to the most directly comparable GAAP financial measurements are contained within our earnings release.

Net sales for the third quarter of 2020 were $53.2 million compared to third quarter 2019 net sales of $82.5 million. Operating losses totaled $3.8 million for the quarter compared to operating earnings of $8.5 million in the third quarter of 2019. Adjusted earnings from operations were $3.6 million for the third quarter. The company's net loss totaled $5.9 million for the quarter or $0.60 per diluted share compared with net earnings of $6.6 million or $0.66 per diluted share in last year's third quarter. Adjusted net earnings were $1.5 million or $0.16 per diluted share for the third quarter.

In the North American wholesale segment, net sales for the third quarter of 2020 were $44 million compared with $67.8 million last year. BOGS third quarter net sales rose 6% for the quarter due to higher sales in the farm, service and industrial trade channel and higher e-commerce -- and with e-commerce retailers. Net sales of the Florsheim, Stacy Adams and Nunn Bush brands were down 58%, 55% and 32% respectively for the quarter, due mainly to the current decrease in demand for dress and dress casual footwear as a result of the ongoing pandemic. Licensing revenues were $224,000 in the quarter compared with $630,000 last year, down in line with reductions in licensee sale of branded products.

Wholesale gross earnings were 35.7% of net sales in the third quarter of 2020 compared with 35.9% of net sales in 2019. Earnings from operations for the wholesale segment were $2.8 million in the third quarter compared with $9.5 million in the same period one year ago. Adjusted earnings from operations for the wholesale segment were $4.7 million in the third quarter.

Net sales of the North American retail segment, which include both our retail stores and US e-commerce sales were $4.4 million in the third quarter compared with $5.2 million in last year's third quarter. The decrease between periods was partly due to closing three unprofitable stores during the quarter. E-commerce sales were up 16% for the quarter, but were offset by a significant decline in brick and mortar same-store net sales due to reduced foot traffic as a result of the ongoing pandemic. The retail segment had operating losses totaling $2.8 million for the quarter, down from earnings of $365,000 last year. The adjusted loss from operations for the retail segment was $184,000 of earnings for the quarter -- for the third quarter of 2020.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $4.8 million in the third quarter, down from $9.5 million last year. This decrease was due to retail shutdowns and stay at home orders in both Australia and Europe. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $3.8 million for the quarter compared to operating losses of $1.4 million in last year's third quarter. The adjusted loss from operations for the company's other businesses was $1 million for the third quarter.

Our balance sheet and overall financial position have remained strong throughout the pandemic. As of September 30, 2020, our cash and marketable securities totaled $22.5 million and we have $5.2 million of debt outstanding on our revolving line of credit. Subsequent to quarter end, our debt was repaid and we currently have no amounts outstanding on our line of credit. In October, we also started repurchasing our company's stock again under our current stock buyback program.

During the first nine months of 2020, we generated $6.8 million of cash from operations. We used funds to pay $9.4 million in dividends, paid down $1.9 million on our line of credit and repurchased $1.3 million of our company's stock. Additionally, we had $3.2 million of capital expenditures. We estimate that 2020 annual capital expenditures will be between $3.5 million and $4 million, and our 2021 expenditures will be between $1 million and $2 million. On November 3, 2020, our board of directors declared a cash dividend of $0.24 per share to all shareholders of record on November 30, 2020, payable January 4, 2021.

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. While COVID-19 continues to impact our business, we are pleased with the upward trend in the third quarter. Our revenues returned to sustainable levels. And as John discussed, our efforts to reduce expenses resulted in operating profits on an adjusted basis. Our BOGS wholesale business accelerated throughout the third quarter and finished with a 6% increase versus last year. The strength of the BOGS business reflects increased demand in the outdoor footwear market as consumers continue to spend more time outdoors during the pandemic.

We opted to maintain significant inventory levels in our core BOGS programs for fall 2020, while some of our competitors appear to have taken a more conservative approach. This decision has helped the BOGS business, and we expect this trend will continue throughout the balance of the year as there is a shortage of boots in the marketplace. The BOGS business has also been driven by increased sales of more lifestyle-oriented footwear that is not as dependent on inclement weather. We see lifestyle casual opportunity as a key component to future BOGS' growth, and are excited by the positive consumer reception.

During the third quarter, our BOGS online business was up over 100% in the US and over 85% worldwide. This increase was driven in part by the outdoor footwear trend. However, we are also -- we also believe that the online growth of BOGS indicates increased consumer recognition and excitement regarding the brand's expanded product choices. Although uncertainty remains regarding the unexpected duration of the pandemic, we are currently bullish on BOGS' ability to maintain its momentum in 2021 and beyond.

Regarding our legacy brands, as we discussed last quarter, our product has historically been focused on go to work type shoes. And while we are seeing some pick-up, we expect rest of the business casual footwear to remain under pressure until a higher percentage of people are back in their offices and normal social activities are resumed. This fall, we delivered new product that is more casual, both in the boot category as well as sport casual and casual. We are seeing strong sell-throughs on boots across all three legacy brands, and our casual product is also performing well.

We have increasingly focused on pivoting toward more casual product for several years now as it was clear before the pandemic that lifestyles were becoming more casual. While the pandemic accelerated this trend, because our product pipeline was already headed in this direction, we were able to react quickly. We are very encouraged to see the strong retail performance in casual products as it shows that our brands resonate with consumers in this area. Florsheim, Stacy Adams and Nunn Bush are brands that are well known and trusted. And while we expect to continue to reduce the percentage of our dressier footwear and increase the casual segment, we believe that we will be able to maintain our market share once life normalizes.

With most of our customers' stores reopening in July, we're starting to see our revenues increase, although retail stores continue to face challenges with respect to foot traffic. As we move through the quarter, our shipments increased each month. Some of this growth was attributed to seasonality as we ship new thought product in August and September. So those months have historically experienced higher volumes. Nevertheless, we are pleased to see significantly improved revenues, which allow us to show an operating profit in the North American wholesale segment in the quarter. While our fill in at once type business is not as robust as 2019, we are getting regular orders each week from most of our major accounts.

In terms of our US retail segment, our third quarter sales were down 15%, however, our e-commerce business was up 16% during the same time period. As indicated earlier in the call, we decided to close three unprofitable US retail stores in the third quarter, which leaves us with five brick and mortar stores in this country. With the reduction of our store base, e-commerce will represent the vast majority of our retail sales. We see momentum in this area of the business and are committed to investing in our e-commerce platform. Our strategy is to continue examining our brick and mortar stores both in the US and overseas for potential further reductions and leverage our strength in digital sales to grow our direct-to-consumer business.

Our October e-commerce sales were strong. Given our positive start to the fourth quarter and our exit from the worst performing brick and mortar stores, we anticipate renewed profitable growth in our US retail business. Our overseas business continues to be impacted by COVID-19. Due to the government mandates in Australia, much of the country has been subject to prolonged shutdowns. In Victoria where many of our Florsheim stores are located, non-essential commerce has been closed for most of the time period between April and October. The good news is that our stores in Victoria reopened last week, and thus far, sales are encouraging. Another high point in Australia is the growth of our BOGS business. Year-to-date, our BOGS wholesale business is up 32%. Our web business is also showing strong growth in Australia with an increase of 20% for the quarter and for the year.

As of September 30, 2020, our inventory is at $76.2 million versus $81.3 million at the same time last year. Our inventories remain high in dress and dress casual product, but the excess is in core carry forward product, which continues to sell but at a slower pace compared to last year. We expect our inventories to come down. And we believe that within the next three to six months, our inventory will be at the appropriate level relative to sales.

We made the decision in April to bring in for our products such as boots despite all the uncertainty, and that decision has paid off. As we forecast Spring '21, we are being conservative on seasonal product, but bringing in additional inventory in the casual area as we are encouraged by the momentum we're seeing for these products. As John said earlier in this call, we are fortunate that our balance -- we are fortunate that our strong balance sheet has given us the ability to take the actions necessary to move forward in ways that we anticipate will allow our brands to be successful in a retail landscape where consumer preferences are evolving at a fast pace. We believe the changes we have taken this year will benefit our profitability once the impact of the pandemic is over.

That concludes our formal remarks. Thanks for your interest in Weyco Group. And I would now like to open up the call to any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] I'm showing no questions at this time. And -- I'm sorry. I do show a question from the line of John Deysher with Pinnacle. Your line is open. Please go ahead.

John E. Deysher -- Pinnacle Value Fund -- Analyst

I'm glad I made it on to the call. How are you guys?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Hi, John. We're doing OK. How are you?

John E. Deysher -- Pinnacle Value Fund -- Analyst

Good, thanks. A couple of quick questions. One, Tom, are all of your wholesale customers open at this point?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Essentially, they are. I would say that as you probably are aware, many of them have -- are making their footprint smaller. So there are fewer actual stores, but all of our major accounts at least our open. There are some smaller independent accounts in certain areas that have yet to reopen. But for the most part, our retailer customers are open.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. That's good news. You mentioned Spring 2021, how does the order book look now versus a year ago? I'm guessing it's probably down, but is it down significantly from a year ago for Spring of '21?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Well, we have a combination of two different types of orders, carry forward orders on ongoing products and we're still in the process actually of entering those orders for first and second quarter of 2021. As far as new product sales [Technical Issues] our business is down, and I can't [Technical Issues] it's not because I don't want to, but I don't have the exact percentage, but retailers are being more conservative about their placements of new shoes. And so, that business is down. But the positive thing, I would say is that, as I mentioned in the conference call that almost all of the new product that we're showing for Spring is casual, and the reception to that product has been good from the retailers. It's just orders themselves are smaller than in previous years because the retailers have been acting in a very conservative way due to the environment and all the uncertainty.

John E. Deysher -- Pinnacle Value Fund -- Analyst

All right. Okay. That's understandable. And on your retail stores, you closed three, you have five left in the US. How many retail stores that we have still in Australia and Europe at this point?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Well, there is 33 in Australia, I believe. That's roughly the number. In Europe, there's two. And then we have some shop-in-shops and some stores in Hong Kong, there is probably between the shop-in-shops and the stores, there is about seven. Right, John?

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

Yeah.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah, seven. And that's...

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

They were all short-term leases.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. And they're all short-term leases.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. So, you can get out of those, if you need to. But the other, the 33 and the two, are any of those stores that you can vacate soon, if they're not profitable?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yes. I mean, we -- the leases come up. They're not all on the same schedule. So we have leases in Australia, for example, come up all the time and what we've been doing is the leases come up is renegotiating lower rents. And if we can't get a deal that we think will be profitable, we are walking away from those stores too. But in Australia, most of the leases are much shorter term than the US, the typical lease there is, I would say, is three years.

And -- while, in the US, it's usually five years or more. Australia is a bit different though John than our US business, because while you know our US business is focused on wholesale, our Australian market is very different. And while we do have a wholesale business there, the bulk of our business is retail, and historically, we've been able to make good money in retail, that wasn't true in 2019, but we feel that we're -- we actually -- you've heard us talk about our new management down there, and some of the other things that we're doing. So we still feel that we have an opportunity to do well in the retail brick and mortar business in Australia. With that said, we're also very focused on growing our web business.

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

Yeah. I mean, John, just to add to that. I mean, I think what you're going to see over the next year or two, there's a big reset in terms of retail leases, length of leases, how leases are structured, just based upon the realities of the marketplace. And so, there is going to be -- you're seeing a culling of retail stores right now that's going to -- it's ultimately going to impact the structure of the relationship between landlords and tenants within the sector. And we're kind of in the beginning of that, and our feeling is, we -- where appropriate we'll see, in retail, important for us, for instance, in Australia, as we mentioned. But you have to structure deals that are sustainable, that are profitable, that are good for both parties. And so, you're kind of in this process right now, we're in sort of feeling it out.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. Well, that's encouraging. And does the same hold true for Europe in terms of leases there and resets there? Hello?

Operator

[Technical Issues] Ladies and gentlemen, your conference will resume momentarily. [Technical Issues]

Again, ladies and gentlemen, one moment till our conference resumes. [Technical Issues]

And Mr. Wittkowske, you can continue, sir.

[Operator Instructions] And I'm showing no further questions on the phone lines at this time. I'd like to turn the conference back over to Mr. John Wittkowske for any further remarks.

[Technical Issues] Ladies and gentlemen, please standby your conference will resume momentarily. [Technical Issues]

All right, Mr. Wittkowske, you can go ahead and continue, sir.

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

Hello, John, are you still there? Hello?

John E. Deysher -- Pinnacle Value Fund -- Analyst

I can hear you. Can you hear me?

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

Okay. Now we can hear you.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Sorry, about that John.

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

We don't know what happened.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. We have technical difficulties, but we're back.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay, good. I just wanted to follow-up, you talked about Australia. What about Europe? Is there a reset going on there in terms of the relationships between landlords and retailers? I know you only have two stores there but maybe there is an opportunity for more stores?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. We are not really looking at expanding retail in Europe. We are evaluating Europe overall. It's been a small division for us and one of the things that we're doing from an expense standpoint is looking at every single different piece of our business and that's one that has been very moderately profitable some years, some years its lost a little bit of money. And so, we are studying the viability of Europe and whether that's really something that's we're going to go forward with.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. Do you think that decision will be made by year-end?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yes.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. All right. Good to hear. All right. Good. And then, just a couple of financial questions, one you bought -- you resumed buybacks in October. Can you share with us how many shares you bought in October?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. We just -- we went back into the market about a week ago when the stock went down and we bought back, as a total amount [Technical Issues] 25000.

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

Almost 26,000 shares.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah.

John E. Deysher -- Pinnacle Value Fund -- Analyst

26,000. Okay. And how much dollar-wise do you have left on the repurchase authorization?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Do you know what that number is? We can get that number for you -- I got it.

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

It's significant. I don't know the exact number at the top of my head right now.

John E. Deysher -- Pinnacle Value Fund -- Analyst

All right.

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

One second, John.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Do you want the Q? John, did you have any other questions [Speech Overlap]?

John E. Deysher -- Pinnacle Value Fund -- Analyst

Yeah. I did. That's OK. I can look at the Q, but the most important one for me is the adjustments that were made and there were a string of them, which is fine, but tell us which of those seven or eight items impacted SG&A and we will assume the remainder impact to gross margins? I'm trying to get to where we are on a normalized basis. So, maybe you could just tell me which of those specific items impacted SG&A?

Thomas W. Florsheim -- Chairman and Chief Executive Officer

John, do you want to run through that?

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

Yeah. Actually, all of them affected SG&A with the exception of the inventory -- $1 million of inventory. And, of course, the $2 million tax expense number.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. So, the $1 million of inventory was -- at the gross -- at the COGS level, cost of goods sold?

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

That's correct.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. And the rest are all at?

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

SG&A.

John E. Deysher -- Pinnacle Value Fund -- Analyst

SG&A. Okay. So -- and if we adjust that, does that gives us a good run rate for SG&A going forward?

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

We believe it does. We have made operational changes. Obviously, when we talk about employee cost, for restructuring and closures, we've made adjustments to our cost structure. We've looked at our advertising numbers. So, we believe that our third quarter adjusted gets us close. I'm not saying it's perfect at the third quarter. We still are going to continue to evaluate our SG&A and make adjustments where needed, and where appropriate. But I think it's certainly much closer.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Okay. Because, I mean, the adjustments that you mentioned affected SG&A were like $9.2 million in total. And if we reduce SG&A by that amount, that gets us to $15 million. It seems low, but maybe you have a comment on that?

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

Well, you just mentioned a $9 million. I don't know if that's quite the number. If you look in the press release, you could see back in the -- in the back, where we've got earnings loss from operations adjusted. And we have $7.4 million of adjustments for the third quarter, $1 million of that was gross margin. So $6.4 million would be SG&A of the total $7.4 million.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. I think what you're doing, John, is you're adding back in the government tax [Phonetic].

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

The $2 million of tax. No, the tax number or maybe you said, yes.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Yeah. The wage and rent subsidies, which is a positive number. The $1.4 million.

John E. Deysher -- Pinnacle Value Fund -- Analyst

No, no, no. I excluded that. But let me follow-up with you offline, because I want to get this reconciliation right.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

Okay. That's fair.

John E. Deysher -- Pinnacle Value Fund -- Analyst

All right. I'll call you after the call, and we can go through it.

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

Sure. That's fine.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Yeah. Okay. That's all we have.

Thomas W. Florsheim -- Chairman and Chief Executive Officer

All right. Thanks, John.

John E. Deysher -- Pinnacle Value Fund -- Analyst

Yeah.

Operator

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to John Wittkowske for any further remarks.

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

No. We just -- thank you for joining us on our call today and we look forward to talking with you after our fourth quarter. And we're all hoping for good news. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

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

Thomas W. Florsheim -- Chairman and Chief Executive Officer

John E. Deysher -- Pinnacle Value Fund -- Analyst

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