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Weyco Group, Inc. (NASDAQ:WEYS)

Q1 2013 Earnings Call

May 3, 2013 11:00 a.m. ET

Executives

Tom Florsheim, Jr. – Chairman and CEO

John Florsheim – President, Chief Operating Officer and Assistant Secretary

John Wittkowske – SVP, CFO and Secretary

Operator

Good day, ladies and gentlemen, and welcome to the first quarter Weyco Group earnings conference call. My name is Alisha and I will be your coordinator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And I would now like to hand the call over to your host for today, Mr. John Wittkowske, Senior Vice President and Chief Financial Officer. You may proceed, sir.

John Wittkowske

Thank you. Good morning everyone and welcome to our Weyco Group’s conference call to discuss our first quarter 2013 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 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 such statements are just predictions and that actual event 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 Form 10-K identifies important factors and risks 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.

Our net sales for the first quarter of 2013 were $73.6 million, compared to $75.3 million in 2012. Operating earnings were $4.7 million for the first quarter versus $5.8 million in 2012. Net earnings attributable to Weyco Group were $3.2 million, that’s compared to $3.9 million. Diluted earnings per share were $0.30 per share this year versus $0.35 per share in 2012.

Net earnings for the first quarter of 2012 included approximately $301,000, or $0.03 per diluted share of income resulting from an adjustment to reduce the estimated liability for future payments to be made as a result of the 2011 Bogs acquisition. No significant adjustment was made to the estimated liability in the first quarter of 2013.

North American wholesale sales of footwear for the first quarter of 2013 were $54.6 million compared to $55.9 million in 2012. Wholesale sales of our Stacy Adams, Florsheim and Bogs brands were up 2%, 3%, and 8% respectively, while sales of our Nunn Bush brand were down 11%. The increase in Bogs sales was due to additional business in Canada. We took over the distribution of Bogs in Canada from a third party licensee effective June 1, 2012. This increase was partially offset by a 9% decrease in Bogs net sales in the United States.

Licensing revenues were $594,000 in the first quarter compared to $725,000 last year. Operating earnings for the wholesale segment were $3.7 million compared to $4.5 million in the first quarter last year. Gross earnings as a percent of sales were 31% in 2013 compared with 30.5% in 2012.

Selling and administrative expenses were $13.4 million compared to $12.8 million last year. Excluding the 2012 adjustment related to the Bogs acquisition, our selling and administrative expenses would have been approximately flat between years and our operating earnings would have been down only $300,000 in 2013.

Net sales of our North American retail segment, which include both our internet sales and retail stores, were $5.7 million in both the first quarter of 2013 and 2012. Same store sales were up 10% for the quarter. There were six fewer retail stores at the end of the first quarter than they were at the same time last year. Retail operating earnings improved by $447,000 for the quarter due to higher same store sales and the closure of underperforming stores.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $12.6 million in the first quarter of 2013 versus $13.0 million in 2012. The majority of other net sales were generated by Florsheim Australia. Florsheim Australia's net sales were down 2%. Florsheim Australia's retail sales increased 9% with same store sales of 8% but the retail increase was more than offset by a 13% decrease in Florsheim Australia's wholesale business.

Operating earnings of our other businesses were $514,000 in the first quarter of this year compared with $1.4 million in the same period last year. Our cash and marketable securities were $55 million at March 31. We generated 3.7 million of cash from operations, $2.8 billion from the maturity of marketable securities and had $2.5 million of proceeds from stock option exercises. We spent $4.1 million on purchases of our company stock, repaid $7 million on our line of credit and had $564,000 of capital expenditures during the quarter.

On May 1, 2013, we purchased a 50% interest in a building in Montreal, Canada for $3.4 million. We previously leased this facility which currently serves as our Canadian office and distribution center. Including this purchase we estimate that 2013 capital expenditures will be between $5 million and $6 million.

No dividends were paid in the first quarter of 2013, as we accelerated our first and second quarter 2013 dividends into 2012. On April 30, 2013, our Board of Directors declared a cash dividend of $0.18 per share to all shareholders of record on May 31, 2013, payable on July 1. This represents an increase of 6% above the previous quarterly dividend rate.

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

Tom Florsheim, Jr.

Thanks John and good morning. Our wholesale business in North America was down slightly as we encountered a sluggish retail environment during the first quarter. We believe consumer spending at apparel and footwear were soft in response to unseasonably cold weather across much of the US as well as economic factors such as increased gas prices and their assumption of the fall payroll tax.

Nunn Bush, which does a significant amount of business with mid-tier department stores and shoe chains was impacted to the largest degree of our major brands with the decline of 11%. The decrease was mainly due to soft sales at department stores. While the overall Nunn Bush performance at retail continued to strong, some major change cut back on their storewide inventory levels reducing filling orders on core product. While this affected Nun Bush’s near term business we believe the brand has momentum going into the back half of the year with a larger number of new programs in the pipeline. New products slated for fall expands Nun Bush’s casual assortment and builds off the brand’s position in the market as a provider of comfort solutions for value conscious consumers.

Our Stacy Adams sales increased 2% in the first quarter. Stacy Adams decrease in its department store business was offset by an increase in sales to shoe chains as well as independent retailers. We were pleased with the continued evolution of Stacy Adams from our niche high fashion brand to a leader in accessible mainstream fashion and footwear market.

Florsheim ended the quarter with a 3% increase in sales. Success of new more casually oriented products helped to lift sales. Florsheim kids business which was launched for fall 2012 also continued to show well and we see the kids business as development opportunity for the brand. Our Bogs division was up 8% this past quarter. The Bogs increase was attributed to the addition of Canadian sales as we began to distribute Bogs directly in that market beginning June 1, 2012.

The spring Bogs sales were also helped by the introduction of non-insulated rainboots which sold through well at retail. In the U.S. however Bogs sales were down 9% for the quarter. We believe that Bogs sales in the US decreased because retailers continued to sell winter products carried over from the prior mild winter rather than by new stock. We continue to be in process with the strength of the Bogs brand and its loyal retailer and consumer following. We believe that diversifying the product line to extend the selling season and new syndication is to key to the future growth of the brand.

As John mentioned, sales in our North American retail were up 10% in terms of same store sales driven in part by strong increases in our ecommerce business. During the first quarter we closed two of our retail locations and we currently plan to close one more store before the end of the year leaving us with 20 retail locations in the US at the end of 2013. While we view retail as an important part of our branding strategy for Florsheim, we will continue to evaluate the profitability of individual stores and the retail ramp on an ongoing basis.

Overseas our retail performance remained solid with same store sales of 5% in Australia and 20% in Asia. In Australia, we opened two new stores in the first quarter, one outside Melbourne and the other in Adelaide. Our wholesale business in Australia has been more challenging as some of our key retail partners have reduced their inventory models in reaction to the tough domestic market. This past quarter we started to expand our distribution center – our distributor of Bogs in Australia and we anticipate steady growth for the brand based on the positive early consumer response.

That concludes our formal remarks. We appreciate your interest in Weyco Group. Now I would like to open up the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rebecca Simmons with Doctor Inc.

Unidentified Analyst

I just wanted to see if you could give a little more color, I know you mentioned that Bogs in the US was down a bit. I know a lot of retailers have been getting get hit by some weather shifts and just want to know if you gave a little more color there.

John Wittkowske

A little more color in terms of Bogs are just generally North American retail.

Unidentified Analyst

I am looking at Bogs in particular.

John Wittkowske

I think that with Bogs we had a bit of carryover effect. With this fog was again a very mild fog, we had two in a row now. And as the retailers moved into the first quarter, inventories in the U.S. were still fairly – they still had inventory well and that affected our first quarter business. We are trying to develop as I mentioned less seasonal component to Bogs, hence not insulated rainboots and those kids are very well but because of this carryover effect with the warm fall, we just did not see the new orders resulted in their shipments first quarter. But we do feel that we are making good progress with the brand. We are doing some what we think are interesting things with the product to make it less seasonal and we are looking forward to a good fall and also we have some – we have some things in the pipeline that we think are going to be a positive for the brand as we move into 2014.

Unidentified Analyst

And then with Canada, is that then within your expectation so far?

John Wittkowske

Canada has been very good. It was basically at or above what we expected. The following for that brand is very, very strong up there, and sometimes when you take over license business you can run into some unexpected things that may be difficult the first year and basically the transition from it being a license business toward the operating the business was seamless and we were able to grow the business the first year and the response from the retailers and from the consumers has been great. And we are seeing the business continue into this year in a way that we think is very positive. So that’s all good.

Unidentified Analyst

And then how are the order patterns as you move into the second quarter?

John Wittkowske

We don’t give guidance in terms of looking at our bookings, that’s something that we haven’t done over the years. But overall our business is pretty solid, a lot of our business throughout our company are core filing programs that we get from our major retail partners. And as Tom mentioned in the conference call we saw a bit of a slowdown on that in the first quarter as stores wanted to keep their overall storewide inventory in mind. So our shoes could be selling relatively well but if they are interested in keeping the store level inventories within a certain range, it sometimes can affect us and I think that’s what happened in the first quarter. In April we saw open up a little bit.

So we kind of – it’s hard to predict that back half of the year and that’s why we don’t give specific guidance because a lot of it does depend on the general retail environment as well as how car shoes are selling.

Tom Florsheim, Jr.

Just to add a little bit more color to what John said, I think that we mentioned in the call but our shoes are selling well really across our brands at retail. And we look very carefully at our new shoe business and what our responses to the new lines that we are launching in the brand. And that’s been very positive in the new business. Our new shoe business as we move into fall is good. So while it was a little bit of a little warm quarter I think that – again we see in the conference call, we anticipate a very decent back half, I mean the trends are good especially in North America.

Unidentified Analyst

And then lastly looking at your margins, how – could you talk a little bit about how leather prices are looking or any other maybe costs that are impacting you?

Tom Florsheim, Jr.

You probably noticed our margins were decent for the first quarter. So we are happy about that, overall our margins were up and they were up in wholesale North America as well. I talked about a little bit leather prices in the last call and we are continuing to see pressure in that area. And hopefully that will level out. So we are running into some of that. We’ve been pushing our prices through our retail customers up a bit and plan to continue to do so. I think that we are in an environment particularly any shoe company that’s sourcing out of China where it’s inevitable that we are going to continue to see leather prices continue to move up a bit. And right now the other prices are factor, I think that it’s manageable. We are not seeing anything that’s really off the wall and difficult to manage. And so it’s kind of a progression of what we’ve seen over the last few years and our plan is to continue to – trying to push our prices up a bit and we do that slowly over time so that we don’t have any big price jumps.

And we are also looking at alternative sourcing. I think that we are sourcing in India as well, China right now on a pretty big way. And the labor rates are more attractive in India. They have the same impact because leather is a worldwide market. And we are also – we are making some of our Rumi kid shoes in Vietnam and I just was over in Asia (inaudible) more shoes in Vietnam. So I think that, it makes sense right now to look at alternatives to China because of the increasing prices over there which we view – it’s something that’s just become a part of doing business in China. So we are looking at different options.

Operator

(Operator Instructions) There are no further questions in the queue at this time. I would now like to turn the call over to John Wittkowske for closing remarks.

John Wittkowske

Just want to again thank everybody for joining us and we look forward to talking after the second quarter. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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