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Weyco Group, Inc. (NASDAQ:WEYS)

2Q 2013 Results - Earnings Call Transcript

July 31, 2013 11:00 AM ET

Executives

John Wittkowske - Chief Financial Officer

Tom Florsheim Jr. - Chairman and CEO

John Florsheim - President and COO

Analysts

Rebecca Simmons - DCRZ Inc.

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2013 Weyco Group Earnings Conference Call. My name is Lisa and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate 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 would now like to turn the call over to your host, Mr. John Wittkowske, Chief Financial Officer. Please proceed.

John Wittkowske

Thank you. Good morning, everyone. Welcome to our second quarter conference call. 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. The 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.

Net sales for the second quarter of 2013 were $65 million compared to $60 million in 2012. Operating earnings were $3.7 million for the quarter versus $3.4 million last year. Net earnings attributable to Weyco Group were flat at $2.2 million for the quarter. Diluted earnings per share also remained flat at $0.20 per share.

Earnings for the second quarter of 2012 included approximately $700,000 or about $410,000 after tax, which equals $0.04 per diluted share of income that resulted from a reduction of the estimated liability for future payments related to the BOGS acquisition. Without this adjustment, earnings from operations and net earnings attributable to Weyco Group would have been up 36% and 22% respectively for the quarter.

North American wholesale net sales of footwear for the second quarter of 2013 were $47 million compared to $43 million in 2012. Licensing revenues were $625,000 compared to $539,000 last year. Operating earnings for the wholesale segment were $2.2 million this quarter compared to $2.1 million last year. Without the $700,000 adjustment that I referred to before, our earnings from operations for the wholesale segment would have been up 57% for the quarter.

Gross earnings as a percent of net sales for the wholesale segment were 29.9% in the second quarter compared with 29.3% in 2012. Selling and administrative expenses for the wholesale segment were $12 million or 26% of sales as compared to $10.7 million or 25% of sales in last year second quarter. Excluding the 2012 adjustment related to BOGS acquisition, our selling and administrative expenses as a percent of net sales would have been flat between years.

Net sales of our North American retail segment, which includes our retail stores and internet sales were $5.4 million compared to $5.6 million last year. Same store sales were up 6%, there were seven fewer retail stores at the end of the second quarter of 2013 than they were at the same time last year.

Retail operating earnings increased by $550,000 for the quarter, mainly due to higher same store sales and the previous closing of underperforming stores. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $12.2 million in the second quarter versus $11.1 million in the second quarter last year.

The majority of our other net sales are generated by Florsheim Australia. Florsheim Australia's net sales were up 7%. Florsheim Australia's retail sales increased 13% overall with same store sales up 9%. Our Florsheim Australia’s wholesale business was flat for the quarter. Collectively operating earnings of Florsheim Australia and Florsheim Europe were $900,000 compared to $1.3 million in 2012.

The decrease in operating earnings was primarily due to higher selling and administrative expenses in Florsheim Australia’s retail businesses and also cost associated with the expansion of our distribution center in Australia, which was needed to accommodate Bogs.

Other expense for the second quarter of 2013 included foreign currency transaction losses of approximately $520,000 that will recognize on intercompany loans between the United States and Florsheim Australia, compared to only $140,000 of those foreign currency losses last year.

At June 30, 2013; our cash and marketable securities were $45 million. We generated $15.9 million of cash from operations, received proceeds of $6.3 million from the maturity of marketable securities and collected $2.8 million from the exercise of stock options.

We spent $4.6 million on repurchases of our company stock. We paid $25 million on our line of credit and had $1.1 million of capital expenditures. Additionally on May 1, 2013; we purchased a 50% interest in a building in Montreal, Canada for $3.2 million. We previously leased that facility which now serves that our Canadian office and distribution center.

Including this real estate investment, we estimate that 2013 annual capital expenditures will be between $5 million and $6 million. On July 29, 2013; the company’s board of directors declared a quarterly cash dividend of $0.18 per share to all shareholders of record on September 1, 2013 payable on September 30, 2013.

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

Tom Florsheim Jr.

Thanks, John, and good morning. Overall, we are pleased with the performance of our brands during the second quarter. After relatively slow start to the year, we saw retail improved in the latter part of spring which positively impacted our wholesale shipments and help us and the first half of the year with the revenue increase.

In terms of our brands, Florsheim had an extremely strong performance with an 18% increase. Sales into the department store and family shoe chain trade channels were up significantly as the brand continues to diversify towards a more casual product range.

Last fall, we launched a Florsheim Kids footwear line which was followed by a new spring line in 2013. Consumer acceptance of Florsheim Kid shoes continues to be very positive resulting in incremental sales for the brand.

Nunn Bush sales increased 11% in the quarter. We are excited about the new product in Nunn Bush began to flow into the market this spring. We are standing our dynamic comfort category with a proprietary footwear technology that replicates many of the comfort features found in the product footwear.

In addition, we started to ship the new Nunn Bush Lights program which capitalizes our consumer interest in light weight footwear construction. The early read on Nunn Bush product has been strong and we feel we have good momentum with the brand as we head into fall.

Our Stacy Adams business was up 2% in the quarter. Shipments increased to all trade channels with the exception of the half price category is the brand have loss closed out inventory to liquidate this year. Overall, Stacy Adams’ sales continue to perform well at retail.

Bogs sales were down 8% this past quarter. As a result of the mild start to the winter, retailers entered 2013 with high levels of inventory which they needed to sell down. The cold wet spring helped toward this end and we believe our major accounts have inventories in line as we head into the key fall selling season.

In terms of new product we see focused on diversifying Bogs and good footwear less dependent on cold weather. This spring, we introduced non-insulated rain boots which sold out and we believe this would be a growth category in the future. Rumi sales increased 46%at a small base. We are starting to shift Rumi back to store product and we will hit a good read on the fall line over the next few months.

In our North American retail segment, our second quarter same-store sales increased 6% driven by strong increases in our e-commerce business. In the first half of this year, we closed four of our retail locations in the US and we have 19 stores remaining as of June 30. While maintaining retail presence is an important part of our branding strategy proportion, we will continue to evaluate our stores and the retail landscape on an ongoing basis.

Overseas, our total business was up 9% with our Australia division and our Asian division sales up 14% and 4% respectively. In both markets strong sales at our retail stores drove the increase. We also significantly expanded our BOGS wholesale sales in Australia which contributed to top line performance in that market.

Net earnings from foreign sales decreased this quarter due to currency fluctuations as well as higher selling and administrative expenses resulted from new retail locations in Australia and Asia. In addition, there were higher selling and administrative expenses in Australia to accommodate the BOGS expansion.

While net earnings were down we believe a significant opportunity exists to grow the company's international business. That concludes our formal remarks. We appreciate your interest in Weyco Group and now would like to open the call to any questions.

Question-and-Answer Session

Operator

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

Rebecca Simmons - DCRZ Inc.

I want to know if you could talk a little bit about the ordering patterns that you've seen as you entered the third quarter?

John Florsheim

The ordering habits of our customers?

Rebecca Simmons - DCRZ Inc.

Yes.

John Florsheim

Rebecca, this is John. I mean, I think you talked about a little bit throughout the year and in the first quarter of this year, when retail was sluggish, we saw a lot of our major, a number of our major retailers we were concerned about their inventory levels. Their inventory levels not necessarily on our product but their overall inventory levels in footwear or in the store in general and so we saw some cutbacks in terms of PDI (inaudible). You know weekly [tones] that we get to replace the product that we sold the previous week. And so that hurt us the first quarter.

The second quarter, that opened up and we really didn’t experience that and as we head into the fall, we feel that the retailers are a lot better situated right now, it’s very hard to predict, but we feel pretty good about our position for the fall.

Rebecca Simmons - DCRZ Inc.

I know you’ve talked about trying to break into kind of a [hunting] and industrial lines, could you give an update on how those lines are going in, in that extension there?

Tom Florsheim, Jr.

Yeah, we are expanding our product range in both hunting and industrial and we feel especially in industrial market, we have some nice technology that is both swift resistant and chemical resistant. The combination of the two is we feel real advantage within this market, but thing that we’ve learned is this kind of slow build. The distribution network in the industrial market is very different than what we are used to in terms of the trade channels we deal with. But we are getting products out there, lot of that involves getting it tested by various companies in different industries and we have got back. We anticipate this is more of a long-term play than something that’s going to explode overnight.

It’s kind of the same thing as hunting, we are getting good feedback, we are getting good PR for the technology in our box boots, but it’s one of those things that build from season to season. So we look at this as a good long-term growth opportunity, but it’s not going to make a near-term difference in the business in terms of our overall sales. It’s incremental, but it’s a relatively small part of our business.

Rebecca Simmons - DCRZ Inc.

And maybe you could talk a little bit more about on the raw material trends that you are seeing and kind of what you are seeing on the cost side of things?

Tom Florsheim, Jr.

Sure. The weather prices have continued to be a challenge. They have actually as far as the U.S. high market prices are backed off a little bit recently and so that is actually a good news as we move into the second half. Prices up high at Europe are still really at all time high, so it does create challenges. Overall from the standpoint of labor increases, the labor continues to move up in China but that’s at an expected rate, that is not a surprise and so we are able to adjust to that easier.

I think that the balance of commodities in general have stabilized or come down and so there is some aspects to weather price issue but not enough to really, not enough to mitigate and also the prices are flat or going down, prices are still moving up. And so we are trying to address that with price increases and also that and we talked about this on previous calls is pretty slow and methodical because it is very difficult to pay outside higher prices at retail.

So our price increases are in the neighborhood of 2% to our retail customers, 2% or 3% and we feel that the market could take that, but not much more. So if you saw our margins for the quarter, they were decent and hoping to maintain that as we move into the second half of the year. So it's a little bit of payout right now, but we've been able to adjust to it so far.

Rebecca Simmons - DCRZ Inc.

I think you talked about kind of expectations for the year or to have kind of flat margins with what you saw last year and then you've been able to do that so far. Is there anything that maybe pressuring you or you may miss that or opportunities to exceed that number?

Tom Florsheim, Jr.

I would say that we're still hoping to commit with flat margins for the year. It's a little bit unpredictable, but we feel that it's doable. There is obviously a lot that go throw it up into those numbers. And so it's in past would it gives you like a 100%, yes we are going to make them our same margins we did last year. But we're feeling that we should be able to accomplish, we should be able to come in pretty close to margins that we have last year.

Rebecca Simmons - DCRZ Inc.

And then did you have maybe any comments on kind of how you feel about your inventory level right now?

Tom Florsheim, Jr.

Sure. We feel good about our inventory level, our inventories are down slightly from where they were a year ago and part of that is due to our increase sales in last quarter where we are very, very clean right now. We've really focused on making sure going into the second half that we are deep on the core shoes and that we are you know being careful on the more peripheral styles which is the way we usually buy our inventory but we've really after last fall where the weather didn't happen, we are being even more focused to make sure that we've got inventory in the big core shoes and careful where it could become perishable. So overall, we feel very good about our inventory situation.

Operator

(Operator Instructions). There are no additional questions. I would now like to turn the conference back over to Mr. John Wittkowske.

John Wittkowske

Thank you for joining us today and we will talk to you at the third quarter. Have a good day.

Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. Have a great day.

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