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Weyco Group, Inc. (NASDAQ:WEYS)

Q3 2008 Earnings Call Transcript

November 4, 2008, 11:00 am ET

Executives

John Wittkowske – SVP, CFO and Secretary

Tom Florsheim, Jr. – Chairman and CEO

John Florsheim – President and COO and Assistant Secretary

Analysts

Ted Goins – Salem

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Weyco Group earnings conference call. My name is Frances and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the call over to Mr. John Wittkowske, Senior Vice President and Chief Financial Officer. Please proceed, sir.

John Wittkowske

Thanks, Frances. Also on this call today are Tom Florsheim Jr., our Chairman and CEO; and John Florsheim, our President and Chief Operating Officer. On behalf of Tom and John Florsheim, I would like to thank all of you for joining us here today for our third-quarter conference call.

Before we begin to discuss the results for 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 some 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. This document identifies important factors that could cause the company's actual results to differ materially from our projections. 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.

Net sales for the third quarter of 2008 were $57.2 million, down 2% from $58.2 million in 2007. Net earnings were $4.3 million for the third quarter as compared with $5.3 million in the third quarter last year. Diluted earnings per share were $0.37 in 2008 as compared with $0.45 in 2007.

Wholesale sales for the third quarter were $49.3 million, down 2% from $50.5 million in 2007. Looking at each brand in our whole division, sales of our Stacy Adams brand were down 18%, Nunn bush was up 16% and Florsheim sales were down 6%. Tom will discuss our individual brand performance in a few minutes.

Sales in our retail division were flat at $6.9 million. Same-store sales in the United States were down 2%, while overall same-store sales, including Europe were flat. As of the end of the third quarter, our retail division consisted of 38 retail stores in the United States, two in Europe, and an Internet business.

Licensing revenue for the quarter was $991,000 in 2008 and $807,000 in 2007. Licensee sales of Stacy Adams branded products were down for the quarter, as the independent closing retailers continue to face a challenging retail environment. However, our Stacy Adams royalties increased this quarter, because we had previously terminated our agreement with our licensing agent, to whom we previously paid a percentage of the royalties. The services performed by the licensing agent are now handled in-house and the related costs are included in our SG&A costs. Those costs offset a portion of the royalty gained. Licensing revenues from the sales of Florsheim footwear overseas and branded products in the United States were up slightly from the prior year.

Operating earnings were down $1.6 million in the third quarter of 2008 compared with the same period of 2007. This decrease consisted of decreases of $1.4 million in a wholesale division and $400,000 in our retail division, offset by the approximate $200,000 increase in royalty income.

In the wholesale division, approximately half of the $1.4 million decrease in operating earnings was due to low margins. Wholesale margins were 31.2% for the third quarter, down 140 basis points compared to last year. The rest of the decrease was due to the lower sales volume and higher selling and administrative expenses. Wholesale selling and administrative expenses were up $360,000, which was primarily the result of $380,000 of receivables written off this quarter following the bankruptcy filings of two of our customers.

In the retail division, the decrease in operating earnings was the result of higher selling and administrative expenses, principally rent and occupancy costs. Rent and occupancy costs were up $218,000, resulting from additional stores being operated in the third quarter of 2008 and from higher costs at existing stores. The remaining increase was due to additional employee costs and depreciation.

As of September 30, 2008, our cash and marketable securities totaled $56.3 million, with only $2 million of debt, resulting in a net cash position of $54.3 million. This compares with a net cash position of $56.2 million at December 31, 2007.

In the first nine months of 2008, we generated $9.2 million of cash from operating activities and borrowed $1.5 million under our short-term credit facility. We used $2 million of cash for capital expenditures, $8.4 million to purchase company stock, and $4.1 million to pay dividends. We anticipate total capital expenditures for 2008 to be between $2 million and $3 million.

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

Tom Florsheim, Jr.

Thanks, John, and good morning everyone. Our results this quarter reflected the difficult economic and retail environment, as well as the impact of cost

pressures on both our wholesale and retail businesses. While our individual brands have experienced some swings in volume this quarter, we believe that our overall sales held up well in light of the current climate.

Our Stacy Adams volume fell off this quarter with net sales down 18%. The decline was in part due to timing of shipments. As we mentioned in our second quarter conference call, Stacy Adams benefited in the second quarter from the shipment of important new contemporary footwear programs to a number of national accounts. This pipeline fill resulted in a volume shift away from the third quarter for several key retailers. In addition to the timing shift, Stacy Adams continued to experience a general slowdown with the independent store trade channel, which remains an important part of the brand's business. While the third quarter was challenging, overall Stacy Adams sales for the first nine months remained flat compared to last year.

The Nunn Bush business was a bright spot, with a 16% increase in the quarter. The Nunn Bush growth reflected the successful introduction of our new Dynamic Comfort line of slip resistant footwear as well as the continued strong performance of our Nunn Bush Comfort Gel product. As a leader in laterally priced branded footwear, we believe Nunn Bush is well-positioned to pick up market share during this price sensitive period.

Our Florsheim business was up 6% in the quarter, reflecting the general slowdown in the market. The Florsheim brand tends to be at the higher end of the pricing matrix, in mid-tier department stores and national shoe chains, which are both important segments in Florsheim's account base. As such, the brand is more susceptible to the impact of an economic downturn than a brand like Nunn Bush. In spite of the near-term challenges, we believe that there continues to be good long-term potential to grow the Florsheim brand by focusing on expanding our reach under the Dress Casual and Weekend Casual markets.

As John mentioned, our gross margins were down 140 basis points this quarter. As we have discussed in previous quarters, this was the result of pricing pressures from our overseas factories due to higher material and labor costs, the weak US dollar, and higher freight and transportation costs. We have been able to partially offset some of these pricing pressures by selectively increasing wholesale prices, but we remain sensitive to the challenges of our retailers and consumers. Recently, these cost pressures have subsided a little with the strengthening of the US dollar and also due to factories seeing weakening demand. But overall, costs are still higher than they were a year ago.

Our retail division in the US continues to struggle from both the sales and earnings perspective. Sales are down in the US, reflecting the difficult economic climate and costs continue to increase, resulting in lower earnings. Given this environment, while we are continuing our search for new store locations in the US, we currently have no new store openings planned. Over the past few years, we've remodeled the majority of our retail stores, and they now reflect a new, more contemporary design. We do not expect any further significant capital expenditures on the retail side in the near future.

Our balance sheet remains strong and we continue to generate cash. As our net cash position grows, we will continue to evaluate ways to best utilize this cash, including continued repurchases of shares, increased dividends, and potential acquisitions.

As we work through this difficult economic period, we are encouraged by the continued strength of our brands and the overall performance at retail. We will continue to work with both our suppliers and customers to grow our gross margins, and we will keep a close eye on our expenses. Our goal is to deliver solid value to our customers and provide growth to our shareholders, and I believe our company is well-positioned to do both.

That concludes our formal remarks. Thank you for your interest in Weyco Group. We would now like to open the floor to any questions. Frances?

Question-and-Answer Session

Operator

(Operator instructions) And you have a question from the line of Ted Goins with Salem. Please proceed.

Ted Goins – Salem

Good morning.

Tom Florsheim, Jr.

Hi, Ted.

Ted Goins – Salem

Hope you guys are doing well. I just wanted to ask a little bit about 2009 in terms of their capital spending, and you had contemplated doing some work with Stacy Adams for ladies a few years ago, as I recall; and I was just wondering if you all are open to working the ladies shoe business at all or is that sort of off the table?

John Florsheim

Ted, this is John Florsheim, the answer to your question about Stacy Adams Women's, we did do a test for Stacy Adams Women's and while they were certain encouraging aspects of the test, we thought really it was out of the realm of our core competence, the running a women’s division. And so, while we feel that there is long-term potential to find a licensee in women's for the Stacy Adams brand, we are currently not pursuing the Stacy Adams Women's business within Weyco in terms of running the business and turning them into (inaudible), and everything that goes along with our wholesale model.

Ted Goins – Salem

And as far as CapEx for 2009, since you are not opening any stores to speak of, I am guessing that you won't have very much called upon for next year.

John Wittkowske

Red, this is John Wittkowske. Yes, that would be true. The majority of our capital expenditures in the past have gone towards retail and you are right, currently with our retail, there is no new openings planned. I would expect capital expenditures to be low next year. There is always some needs, – if I threw out a number and say $1 million, that is probably in the realm, but – unless something changes on the retail front, that would be a true statement.

Ted Goins – Salem

And – in the past, we have worried about currency dislocations, maybe not such a concern right now. I'm wondering if you are seeing actual raw material break and so forth, given the economic environment (inaudible) you are actually seeing lower cost of goods to you.

Tom Florsheim, Jr.

Ted, this is Tom. We are starting to see some lower prices. You know, as we talked about in the conference call, prices are higher than they were a year ago, but what is happening is with weakening demand, there is more ability to negotiate with our suppliers. And there was a period of time earlier this year, where there was a lot of demand. And you had a situation because of the price of oil going up and other raw material increases that we had suppliers like bottom makers being very demanding as far as price increases. We are seeing that turn around. And the fact is, we are able to go back to the component makers and in many cases, get them to reduce prices. So we see the cost pressure not completely subsiding, but being easier to manage. And of course, transportation costs and anything affected by oil are going to come down based on just the price of oil coming way down. So I think that the environment from a price pressure standpoint looks much better today than it did six months ago.

Ted Goins – Salem

And last question. (inaudible) you all showed a great deal of discipline in not pursuing a local acquisition to end, a year and a half or two ago. I'm wondering if you have heard any – if there has been anything in the paper up there about Allen Edmonds and how their demand might be and what might be going on competitively.

Tom Florsheim, Jr.

No, it has been very quiet. We have not heard anything.

Ted Goins – Salem

Okay. Well, thank you very much and I think you are doing great. Thank you.

Tom Florsheim, Jr.

Thanks, Ted.

Operator

(Operator instructions) And there are no other questions in the call today. We would like to thank you for your participation in today's conference. This now concludes the presentation and you may now disconnect.

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