Weyco Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Weyco Group Inc. Fourth Quarter and Full Year 2020 Earnings Release Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, John Wittkowske, Chief Financial Officer. Thank you. Please go ahead, sir.

[John Wittkowske:]

Thank you. Good morning and welcome to Weyco Group's conference call to discuss our fourth quarter and full year 2020 results. On this call with me today are Tom Florsheim Jr., 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.

[Tom Florsheim:]

Thanks, John, and good morning everyone. We feel positive about the return to profitability in the fourth quarter with reflected increased demand in certain areas of our business as well as reduction in our expenses as we align costs with our lower sales volume. While the market for 2021 remains very hard to predict, we are optimistic that our wholesale business will see a pickup in the second half of the year. Our BOGS business held up well during 2020 and we were pleased with how the business accelerated in the latter part of the year, as consumers spent more time outdoors. Even with relatively modest precipitation in November and December across the country, demand for BOGS product was very strong. While we entered the fall with adequate inventory, we quickly sold through key programs as there was a shortage of outdoor boots in the general market to satisfy increasing demand. We were able to replenish a good portion of these programs in order to meet unexpected demand in early 2021. During this past year, BOGS also continued to diversify its product mix, selling more lightly insulated and lifestyle-oriented product in the women's market, while also developing its men's occupational work related footwear. Regarding our legacy brands, the business remains challenging. While we see a slight increase in demand at the retail level, our wholesale partners are reducing styles in dress and dress casual footwear that are work or occasion oriented. We believe that the normalization of our legacy business is tied closely to the rollout of vaccinations and people returning to normal activities. We expect that demand will increase as companies bring workers back to the office and people can be confident going to social events such as weddings and family celebrations. However, the timing is uncertain. While we are disappointed with the level of wholesale shipments across our legacy brands, there were some bright spots. Casual and fashion boots were extremely good and we are also making significant progress toward introducing new casual footwear. The pandemic motivated us to accelerate change and commit to rapid overhaul of our product mix. The new lines we are shipping this spring as well as showcasing for our customers for our fall launch offer a fresh more relaxed take on our brands. While we anticipate increased demand for our traditional dress-oriented styles in the second half of the year, we are excited about our prospects to extend in the lifestyle categories based on the favorable reception of new product we have introduced during the pandemic.

[Operator:]

Our first question comes from the line of John from Pinnacle.

[John Deysher:]

Good morning everyone.

[Tom Florsheim:]

Good morning.

[John Deysher:]

I have a couple of questions. One -- well first, let me say you did pretty well in 2020. I mean considering the pandemic and its impact on retail and shoe purchasing. So, I was proud to see that ex all the noise, you actually did pretty well. So congratulations.

[Tom Florsheim:]

Thanks, John. We appreciate that.

[John Deysher:]

Good work. A couple of questions I guess on the demand side, what's the tone of your customer base? We had a couple of bankruptcies. Are there credit issues that linger out there? And secondarily, you expect an optimistic second half. Is that driven by a firm order book or just hopes that the vaccines bring people back to shopping?

[John Wittkowske:]

Yes. John, as far as your first question, regarding the -- what was -- can you restate your first question? I'm sorry.

[John Deysher:]

Well, what's the credit of your existing customers?

[John Wittkowske:]

Okay, yes, yes. I mean, there's still lingering issues out there. They're not as large as they were during the height of the pandemic. We're watching it closely and feel we have a better handle on it. But you're still in a kind of interesting time in the retail environment, where you have certain channels within brick-and-mortar that remain under pressure. And I wouldn't want to mention any specific retailers. But in general, we're just -- we feel that, while we're better than we were eight or nine months ago, there's still some issues that we -- that are out there that we are watching very closely.

[Tom Florsheim:]

And I'd just add to that John that after being stung a couple of times last year, we're being very, very cautious. We're very aware of the credit risk. As far as your second question, it's kind of mixed, because with BOGS, our backlog is way up. It's -- that business is very, very good. With the legacy brands our backlog is a little bit challenged right now, because the retailers are hesitant to commit for the second half, because they are watching their inventories very, very closely. So most of our -- what we've said about improvement in the second half, is based on our feeling that if everybody in the US that wants to can be vaccinated by the end of May, that things are going to start improving over the summer and that we are going to see a significant bump in the second half, because there's a lot of weddings that were canceled that are being rescheduled for the second half. And people -- I think there's just a pent-up feeling in this country that people want to get back to doing normal things. But what we're doing, because the backlog is challenged with legacy brands is very strategically bringing in inventory that we feel is safe, and so that we have enough inventory to chase the business a bit as it comes back.

[John Wittkowske:]

We actually think that there's a chance, there's not enough inventory out there in the marketplace for the more traditional dress casual business at the back half of the year, because you have this reaction among a lot of retailers where they've reduced styles within that area of the market and they move more towards very relaxed casual, which made sense. But then, if the pendulum swings back, there's not a lot of companies that have maintained stocks from a wholesale standpoint in the more traditional area of the business. And we feel that we could be pretty well positioned with less competition. The question really is the timing. The BOGS, just -- Tom mentioned that, it's different for different brands. Our BOGS backlog is very strong, because there is a shortage of boots out there last fall. So, I think retailers -- it's the opposite effect where retailers want to make sure that they're covered for fall 2021. So, that business is actually very strong right now, when you look at the confirmed bookings.

[John Deysher:]

Okay. Good. That's encouraging. And on the supply side, is the supply chain back to normal? I know you've sourced a lot through China. There were some disruptions there with the pandemic. But how would you characterize the supply chain at this point? Are you getting what you need from offshore suppliers in a timely manner?

[Tom Florsheim:]

Yes. The supply chain is basically 100% back to normal, with the exception of the shortage of containers. I'm sure you've read about, how there's so much being imported right now, not necessarily apparel and shoes. It's probably not driven by apparel and shoes. But there's so much being imported from China and other places in Asia that there is a big shortage of containers. And so, it can be more difficult to get space. And sometimes we've had to wait a week or two weeks. And then, right now, we're paying a premium for those containers. And then, once they get to the West Coast, there's issues with getting them through the ports. And part of that is due to COVID, where they have workers that are out with COVID, but it's slower getting them through the ports out on the West Coast. And so, that's the only hiccup. In general, the factories have capacity right now. They're hungry. And we're getting the shoes manufacturer that we need. It's just a matter of some of the ways getting them here.

[John Deysher:]

Is that -- are those hiccups costing you sales, in terms of not being able to make deliveries?

[Tom Florsheim:]

The retailers we have had to get some extensions for February deliveries into March. We don't see a major impact on the first quarter at all. And the retailers actually are being very understanding and give you the extensions because they're facing this across all of their products right now. And while there are delays the -- a two-week delay while it's, frustrating, is not the end of the world.

[John Deysher:]

Okay. All right. Well, that's good news. And did the percentage of business coming out of China, did that change dramatically last year, because I know you were talking about sourcing from India, Vietnam, Cambodia and other places. Did the percentage of business coming out of China changed at all last year?

[Tom Florsheim:]

Not significantly. And we're -- we still have the strategy to diversify. And we're trying to do more business in all those other places that you mentioned. But interestingly, with restrictions due to the pandemic a lot of people that moved out of China have actually returned in part to China, because all the components are still made there. And it's very difficult with all the border issues and moving components around to move components from China to Vietnam to India places like that. So you actually have brands returning to China, which is kind of interesting. And so, we still have a lot of manufacturing in China. And we have good partners there. And I would say that the pandemic actually caused kind of a hiccup in our strategy. And so we didn't move as much as we'd hoped to last year, but we're planning to restart that as things normalize and continuing that effort to diversify.

[John Deysher:]

And China was what percentage of your imports? I can't remember roughly.

[Tom Florsheim:]

I'd have -- this is a ballpark number, John. I can follow-up with you. And give you a more exact number. But I'd say, it's 70%, close to 70%.

[John Deysher:]

Got it. And the tariffs are still in place for Chinese imports, correct?

[Tom Florsheim:]

Yes. They reduced them from 15%, on leather product to 7.5%. So they're lower but there's still -- the 7.5% -- extra 7.5% is still in place. We were fearful, because initially they were talking about, duties on rubber product which would apply to BOGS. And those never happened. So that was a good thing. But we still are faced with this extra 7.5% on leather product.

[John Deysher:]

Okay. All right. Good. That's -- well, it's going in the right direction. Just a couple of quick questions on the numbers, there were no -- as far as I could see, no shares repurchased in the fourth quarter, unless I missed it. How much is left on your buyback program? And with that a lot of cash you have sitting there, is there any cash for buying shares at this point?

[John Wittkowske:]

John, that's not a correct statement. We did buyback approximately 47,000 shares in the fourth quarter. We did not buy shares. We bought back shares in the first quarter then we stopped in April. For the second and third quarter, we purchased no shares. And in the fourth quarter, we began to buy shares back again. And so, we bought 47,000 shares back in the fourth quarter, an average price of around $16 a share. And we continue to buyback some shares in the first quarter. We have approximately 336,000 shares left on our buyback program as of the end of the year. That does not include anything bought back in the first quarter, but we have continued that to some extent in the first quarter.

[John Deysher:]

Okay, all right. That's encouraging. And I guess, finally, on the list of non-recurring items, the non-GAAP adjustments that you laid out. The only one on that list that would apply to cost of goods sold would be the $2 million pre-tax expense for reserves of obsolete and slow-moving inventory. Is that correct? Everything else would go through SG&A?

[John Wittkowske:]

That's correct.

[John Deysher:]

Okay, all right. We're just trying to put the right apples in the right pocket. Okay, good. That’s all I have. Thank you very much and congratulations.

[John Wittkowske:]

Thanks for your questions.

[Operator:]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to John Wittkowske for closing remarks.

[John Wittkowske:]

Thanks everyone for attending our conference call and we look forward to speaking at the end of the first quarter. Have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.