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Weyco Group Inc. (NASDAQ:WEYS)

Q4 2008 Earnings Call

February 24, 2009; 11:00 am ET

Executives

Tom Florsheim, Jr. - Chairman & Chief Executive Officer

John Florsheim - President & Chief Operating Officer

John Wittkowske - Senior Vice President & Chief Financial Officer

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 Weyco Group earnings conference call. My name is Shinal and I’ll 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)

I would now like to turn the presentation over to your host for today’s call Mr. John Wittkowske.

John Wittkowske

Thank you. Good morning everyone and welcome to Weyco Group’s conference call to discuss our fourth quarter and full year 2008 results. I’m John Wittkowske, Weyco Group’s Senior Vice President and Chief Financial Officer. Also on this call today are Tom Florsheim Jr., Chairman and CEO and John Florsheim, President and COO. On behalf of John and Tom, I’d like to thank all of you for joining us here today and before I begin I’ll 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 event or results may differ materially.

We refer you to our 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 fourth quarter of 2008 were $50 million, down from $62.2 million in 2007. Net earnings were $3.5 million, compared with $7.8 million last year. Fourth quarter diluted earnings per share were $0.30 compared with $0.66 per share in 2007. For the year, net sales were $221.4 million down 5% from $232.6 million in 2007. Net earnings were $17 million, down from $22.9 million last year.

Diluted earnings per share were $1.45 down from $1.91. Wholesale, net sales for the quarter were $41.1 million, down $51.5 million in 2007. For the year, wholesale sales were $188.2 million, down 5% from $197.4 million in 2007.

Looking at each brand in our wholesale division, Stacy Adams sales decreased 17% in the quarter and 3% for the year. Nunn Bush sales were down 11% for the quarter and up 1% for the year. Florsheim sales decreased 31% for the quarter and 12% for the year.

Licensing revenues for the quarter were $1.3 million as compared with $1.4 million in 2007 and $4.3 million for the year as compared with $4.1 million last year. Licensee sales of Stacy Adams branded products were down for the quarter and for the year as the independent clothing retailers continue to face a challenging retail environment.

However, our Stacy Adams licensing revenues increased for the quarter and year, because at the beginning of 2008, we terminated our agreement with our licensing agent to whom we previously paid a portion of the royalties.

The services performed at the licensing agent are now handled in-house and the related costs are included in selling and administrative expenses and offset a portion of the licensing revenue gain. Licensing revenues from the sales of Florsheim footwear overseas and branded products were down 11% for the quarter and were flat for the year.

Net sales in our retail division were $7.6 million for the quarter, compared with $9.4 million last year. For the year, retail sales were $28.9 million, compared with $31.1 million in 2007. Same-store sales were down 19% for the quarter and 8% for the year.

During 2008, we closed two of our U.S. retail locations and in the first week of January 2009, we closed the third. Total sales generated by these three stores in 2008 were approximately $2.6 million. We currently operate 36 stores in the United States, two in Europe and in Internet business.

Operating earnings were down $6.9 million for the fourth quarter, with $5.7 million of the decrease in our wholesale division, $1.1 million in our retail division and $85,000 in licensing revenue. In the wholesale division, most of the decrease in operating earnings for the quarter was due to lower sales volume and lower gross margins. Wholesale gross margins were 29.4% for the fourth quarter of 2008 versus 35.5% in 2007.

Margins were down due to higher overall product cost and fourth quarter refinements to management’s estimates in response to current economic conditions related to sales returns and allowances along with coop advertising accruals, which resulted in more expense in the fourth quarter of 2008, compared with 2007.

Wholesale selling and administrative expenses for the quarter were down $500,000. This was primarily due to a decrease in salaries and salesmen’s commissions, offset by a $300,000 increase in bad-debt expense. Salary expense was impacted in the fourth quarter, by the reversal of bonus accruals that has been accumulated throughout the year due to the declining profitability in the fourth quarter.

Commissions paid to our wholesale sales force were lower due to the lower sales volumes in the fourth quarter of 2008. The $1.1 million decrease in our retail earnings from operations during the fourth quarter was due primarily to lower sales volumes.

For the year, operating earnings were down $9.6 million with $7 million of the decrease in our wholesale division, $2.8 million in our retail division and a $200,000 increase in our licensing business.

In the wholesale division, most of the decrease in operating earnings for the year was due to lower sales volumes and lower gross margins, principally due to higher product costs. Wholesales margins were 30.7% in 2008 versus 32.8% in 2007. Wholesale selling and administrative expenses for the year were up $200,000.

2008 bad debt expense was $700,000 higher this year, due to the bankruptcy filings of several of our accounts. This was offset by lower salary expense and lower wholesale commissions. As a percent of sales, selling and administrative expenses were 20.9% up from 19.9% in 2007.

This increase reflects the fix nature of most of our expenses. The $2.8 million decrease in our retail earnings from operations for the year was due primarily to an overall 7% decline in sales and an increase in selling and administrative expenses.

The increase in selling and administrative expense is due to costs in 2008, related to additional stores that were opened in the fourth quarter of 2007, along with continued higher operating expenses particularly rent and occupancy costs. The reduced sales volume did not results in a corresponding decrease in operating costs, as the majority of our retail expenses are fixed in nature.

Interest income for the fourth quarter was $520,000 compared with $530,000 last year and $2 million for the year, compared with $2.2 million last year. The majority of our interest income is from our investments in marketable securities, interest expense was not significant this year.

Cash and marketable securities totaled $57.6 million at December 31, 2008 with only $1.3 million of short-term borrowings. Our net cash position of $56.3 million is comparable to the $56.2 million at the end of last year.

In 2008, we generated $15.7 million of cash from operations and used $2.2 million of cash for capital expenditures, a net of $9.3 million to purchase company stock and $5.7 million to pay dividends. For 2009, we expect capital expenditures to be approximately $1 million.

I’ll now turn the call over to Tom Florsheim Jr. our Chairman and CEO.

Tom Florsheim Jr.

Thanks John and good morning. Through the end of the third quarter this year, our overall sales volume held up well considering the economic climate with overall sales up slightly. Our wholesale sales dropped 1% and retail sales were down 2%. In the fourth quarter, however both our wholesale and retail businesses suffered significant volume losses.

There were several aspects of the poor economic climate in the later part of 2008 that caused this decline. The general pull back in consumer spending affected our retail sales and also caused our wholesale customers to reduce their inventory levels.

Additionally credit issues in the retail industry became more pronounced, causing us to reduce or in some cases seize our shipments to a number of retailers. We believe that the challenges that we faced in the fourth quarter of 2008 will continue into 2009. As we move forward, our strong financial position allows us to continue to make the necessary long-term investments in our brands, so that they will be well positioned when economic conditions improve.

With that in mind, I would like to discuss some of our plans and strategies for each of our brands. We believe that Nunn Bush will continue to be solid performer, with its blend of innovation and relevant styling offered in a moderate price Nunn Bush has historically been a brand that retailers can relay on for solid sell throughs in tough times.

Despite the downturn, that many of the large retailers are seen in their overall business, our sell throughs remain strong and many of the large retailers, we are gaining shelf space. In spring 2009, we will begin shipping our new Nunn Bush Comfort Gel 3.0 footwear which features an enhanced version of our successful Comfort Gel product line.

Comfort Gel 3.0 was well received at the trade level and we look forward to getting the shoes to retail. We also continue to be enthused by the strong performance of our Dynamic Comforts slip resistant footwear line, which is a top seller with some of our most important accounts. In tough economic times the consumer searches for value and we believe that Nunn Bush is well positioned to gain market share.

Stacy Adams continues to be a leading fashion brand in the men’s market and has also sold at a moderate price point. While its moderate pricing often keeps it in play in a more difficult economy, it relies more than our other brands on sales to small independent shoe and apparel retailers and this trade class has been hit hard as the economy has declined.

Fortunately, over the past several years we’ve grown with Stacy Adams distribution in department stores and chain stores and the brand continues to do well in these trade channels. We feel that Stacy Adams occupies a unique position in the men’s market. The brand has a strong history and fashion and offers the mainstream retailer incremental volume by reaching a fashion consumer.

Through our licensing efforts, we have positioned Stacy Adams as a lifestyle brand and we believe that we are in a good position to grow our distribution into large retailers when the economy recovers.

Florsheim faces the most significant challenges in 2009, due to the fact the brand is at the higher end of the pricing metrics and many of the mid-tier stores where we compete. While in the near-term Florsheim maybe impacted as consumer’s trade down, we remain committed to our long-term objective of developing a younger, more casual consumer base.

Towards that end, we feel very good about the new fall ‘09 Florsheim line, which includes a higher percentage of casual footwear than any previous Florsheim line as well as styling that we believe is relevant for today’s moderate consumer.

In addition, for fall 2009 Florsheim is introducing a new collection in collaboration with Duckie Brown an award wining men’s wear design team that has a strong following in the fashion community and sells some of the most selected stores worldwide. The Florsheim by Duckie Brown line features interesting twist at Florsheim legacy product utilizing different materials in unique design details.

The collection has been well received and we have secured orders from fashion, leading to fashion retailers such as [Barnie’s, Scoop and Oda]. While we don’t anticipate the Florsheim by Duckie Brown line to be significant volume in the near-term, we believe that it will create excitement with consumers will support our overall strategy of elevating the Florsheim brand within the market.

Our retail division in the U.S. struggled in the fourth quarter, for both the sales and earning perspective. We feel that our Florsheim shops play an important role in our branding strategy, but given the environment we are being very cautious about opening new stores. It is possible that there will be opportunities to secure locations that we have not been able to in the past because of the weaker demand for new locations by many of the larger retailers.

In January 2009, we bought a Majority Interest in the company that acquired the Australian, Asia Pacific and South African Florsheim businesses. These businesses were formerly licensed to a third party. Our total cash outlay was approximately $10 million and our investment in the company included a combination of debt and equity.

The total sales for the combined businesses acquired were approximately $25 million for their fiscal year ended June 30, 2008. The acquisition includes both wholesale and retail businesses with 24, Florsheim stores in Australia, one in New Zealand and one in Macau.

This acquisition provides us the opportunity to have better control over our brand, grow our business in these regions and increase the overall profitability of our company over the long-term.

Our balance sheet remained strong and we continue to evaluate ways to best utilize cash, including continued repurchases of shares, increase dividends and potential acquisitions. Our Board of Directors recently authorized the repurchase of an additional 1 million shares of our common stock under our stock repurchase program bringing the total available to purchase to approximately 1.5 million shares.

Well we believe 2009 will be a challenging year. Our goal continues to be, to deliver solid value to our customers and provide growth to our shareholders and I believe our company is well positioned to do both over the long-term.

That concludes our formal remarks. Thank you for your interest in Weyco Group. We’ll now open the floor to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this moment there are no questions in the queue. I would now like to turn the call back over to Mr. John Wittkowske.

John Wittkowske

If there are no questions, we’d like thank everybody again for joining us and have a good day.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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