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Weyco Group Inc. (NASDAQ:WEYS)

Q3 2013 Results Earnings Call

October 30, 2013 11:00 AM ET

Executives

John Wittkowske - Chief Financial Officer

Tom Florsheim Jr. - Chairman and CEO

Analysts

Rebecca Simmons - DRZ Incorporated

Operator

Good day, ladies and gentlemen. And welcome to the Quarter Three 2013 Weyco Group Earnings Conference Call. My name is Debra, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And I would now like to turn the call over to Mr. John Wittkowske, Chief Financial Officer. Please proceed, sir.

John Wittkowske

Thank you. Excuse me, sorry. Good morning, everyone. Welcome to Weyco Group’s third quarter conference call. On this call with me today is Tom Florsheim Jr., our Chairman and CEO.

Before we begin, I’d like to 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.

Our net sales for the third quarter of 2013 were $83 million, compared with $79 million in 2012. Operating earnings increased 6% to $8.6 million in the third quarter of 2013 from $8.1 million in 2012.

Our net earnings attributable to Weyco Group were $5.4 million up 4% from $5.2 million last year. Diluted earnings per share were $0.50 a share for the third quarter up from 48%, excuse me, $0.48 per share last year.

Earnings for the third quarter of 2012 included approximately $460,000 or approximately $270,000 after-tax, which equals $0.03 per diluted share of income that resulted from a reduction in the estimated liability for future payments relating to the BOGS acquisition. Without this prior year adjustment, third quarter earnings from operations and net earnings attributable to Weyco Group would have been up 12% and 10%, respectively.

Our North American wholesale net sales of footwear increased 6% to $64 million, compared to $60 million last year. For the quarter licensing revenues were flat at approximately $800,000.

Operating earnings for the wholesale segment increased 8% to $7.1 million up from $6.6 million. Without the $460,000 prior year adjustment relating to the BOGS acquisition earnings from operations for the segment would have been up 60% for the quarter.

Gross earnings as a percent of net sales for the wholesale segment were 32.6% in the third quarter of 2013, compared to 32.4% in 2012.

Selling and administrative expenses for the wholesale segment were $14 million for the third quarter, compared to $13.2 million in 2012. In both quarters, selling and administrative expenses as a percent of net sales were 22%. Excluding the prior-year adjustment relating to the BOGS acquisition, 2012 selling and administrative expenses would have been 23% of net sales.

Net sales of our North American retail segment, which includes our retail stores and U.S. internet sales were $5.2 million compared to $5.5 million last year. Same store sales were up 7%. There were eight fewer retail stores at the end of the third quarter of 2013 than they were at the same time last year.

Retail operating earnings increased by approximately $190,000 this quarter, mainly due to the closing of underperforming stores and increased internet business. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $13.1 million in the third quarter of 2013 compared with $12.9 million in 2012. This increase resulted from higher net sales in Florsheim Europe wholesale business, which were partially offset by 5% decrease in sales at Florsheim Australia.

Florsheim Australia’s retail business was extremely strong with a 23% increase in same store sales driven by robust growth in Asia. Wholesale shipments however were down 11% primarily due to soft sales with two key department store partners in Australia.

Due to the weaker Australian dollar this quarter, this resulted in only 10% increase in retail sales and a 21% decrease in wholesale sales when denominated in U.S. dollars. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $1 million in the third quarter compared to $1.2 million in the third quarter last year. This decrease was primarily due to a $700,000 decline in the operating earnings of Florsheim Australia’s wholesale businesses which was offset by a $450,000 increase in the operating earnings of the retail businesses.

At September 30, 2013, our cash and marketable securities totaled $43.9 million. We generated $13.9 million of cash from operations, received proceeds of $9.8 million from the maturities of our marketable securities and collected $3.6 million from stock option exercises.

We spent $4.6 million on purchases of our company stock. We paid $25 million on our line of credit and paid dividends of $3.9 million. In addition, we purchased a 50% interest in our Canadian distribution center for $3.2 million and had $1.9 million of other capital expenditures. Including the Canadian building purchase, we estimate that 2013 annual capital expenditures will be less than $6 million.

On October 28, 2013, the company's Board of Directors declared a quarterly cash dividend of $0.18 per share, payable to all shareholders of record on December 10, 2013 and payable on January 2, 2014.

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

Tom Florsheim Jr.

Thanks John and good morning everyone. Overall retail sales in footwear and apparel were lackluster during the third quarter. This was especially in the case of the mid-tier department store and family shoe chain trade segments, both of which are on foreign trade channels for our brands.

Given this context, we are pleased with the 6% increase in our wholesale business this quarter. The increase in wholesale was driven by 39% gain in our Nunn Bush division. Over the past year, we have revamped a large part of the Nunn Bush line with a focus on leveraging the brand’s comfort heritage.

The ramp to Nunn Bush sales reflected new product shipments of an expanded range of casual and dress casual footwear with enhanced comfort technology. The initial positive retail performance of our new Nunn Bush lights program, as well as the continued strength of our Nunn Bush core and ATC product lines puts the brand in a strong position for future growth.

Florsheim sales were off slightly this past quarter, but are up over 5% on a year-to-date basis. We believe that we're making good progress in terms of updating the product mix in a way that builds upon Florsheim's unique heritage.

Stacy Adams sales were up 8% for the quarter, due to a decline in department store business. However, Stacy Adams was down only 1% for the year. Overall, Stacy Adams performance remains very good at the retail. In particular, the brand has experienced strong sell-through, a new fashion casual packages, which complements Stacy Adams’ core strength as a leader in modern dress footwear.

Our BOGS business was up 4% for the quarter, although the weather has been relatively mild, early sign of BOGS has been strong and we are receiving significant phone orders on core product. Our business in Canada has been particularly good. We also had a successful launch of the BOGS Summit Series, which is a lightweight, waterproof washable boot introduced earlier this fall. From a product standpoint, it is aperture for BOGS and the consumer acceptance has been exciting, as we project a complete sellout of the women summit.

We are also encouraged by the extremely strong e-commerce business we are doing with BOGS at our own site, as well as on the leading industry sites. At our North American retail segment, our third quarter same-store sales, which include the U.S., Internet -- which include our U.S., Internet sales increased 7%.

We are now operating with a relatively small base of 18 stores in the U.S. market. Our emphasis is on approving profitability by closing unprofitable stores in secondary markets, while investing in flagship stores in U.S. cities that serve more international markets, such as New York and Miami.

We're also very focused on both the branding and e-commerce aspects of our website, which has been an important source of growth for the company. Florsheim Australia’s wholesale business experienced a decline in revenue this past quarter at both the Asian and Australian markets. Australia's wholesale business was challenged by its concentration of business with two large accounts. However, we believe that as Australian economy improves, so are the business with these key retailers.

In China, we're open for business under our joint venture with Pitanco that serves Mainland China and are excited about the opportunities that this new venture presents. So far this year, we have opened 28 shops or shop within shops with five more planned before the end of the year. The retail businesses in Australia and Asia continued to grow and thrive based on the strength of the brand in these regions, fueling the strong increase in sales this past quarter. We believe there are significant opportunities for growth in China and other international markets.

That concludes our formal remarks. We appreciate everyone’s interest in Weyco Group and I’d now like to see if there are any questions out there.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) And your first question comes from the line of Rebecca Simmons of DRZ Incorporated. Please proceed.

Rebecca Simmons - DRZ Incorporated

Hi, guys. Thanks for taking my questions.

Tom Florsheim Jr.

Good morning, Rebecca.

Rebecca Simmons - DRZ Incorporated

Good morning and congratulations on another good quarter.

Tom Florsheim Jr.

Thank you.

Rebecca Simmons - DRZ Incorporated

And I just wanted to see if you could maybe talk a little bit more about the environment that you’re seeing right now and how you’re feeling kind of as you get ready to go into the holiday season?

Tom Florsheim Jr.

Yeah. I think that’s a question that is on a lot of people's minds. I think that you can't help but to be a little bit concerned after what we've all seen in the last few weeks with the government shutdown, you hear the numbers on consumer psychology, which have [down] double digits and that’s obviously usual thing is.

And so, I guess, we are -- where we have some concerns, fortunately the path to shown that people kind of move on and that hopefully what the situation at least temporarily settled in Washington, the market doing better again, people are starting to feel better and will have a good Christmas, but it is -- it’s a big question out there, we really don’t know.

Rebecca Simmons - DRZ Incorporated

Okay. Are there certain product lines that maybe you feel better about or any weak areas that you are seeing?

Tom Florsheim Jr.

Its -- we actually feel very good about how our products are performing at retail. We get sell-throughs on a weekly basis from almost all of our major accounts. And we are seeing very strong performance really across the Board with our brands and the nice, I hate to call a surprise, but considering the fact that the fall has been pretty warm in certain places in the country.

Our BOGS business is really, really strong right now and so that’s catch a huge positive after two winters where it's been challenging because of such mild, mild weather right until -- right up to Christmas and then it getting coldly in the spring which is kind of tough for weather booth brand.

But so we’re pleased about that. We talked about Nunn Bush, our retail performance is great. We had tremendous growth in that brand. And in Stacy and in Florsheim things are looking very positive too so, hopefully, the country moves beyond what we've see in the last few weeks and we have a decent Christmas, I think that we are well-positioned to do so if the consumer cooperates.

Rebecca Simmons - DRZ Incorporated

Okay. Yeah. That’s sounds great. What about the international side of the business? Could you talk a little bit more about the dynamics there? I know retail you guys have continued to grow and done very well and maybe wholesale little bit weaker?

Tom Florsheim Jr.

Right. We just kind of taking it country by country I guess or region by region. In Australia, both John and I talked about the fact that we do business what these two big department store groups in Australia. And Australia’s economy has been a little bit challenge. They had their elections this fall. And we did up to the election there was quite a bit of uncertainty.

Hopefully now that that’s over, people feel recently know the direction politically in the country and that things will improve a bit. And so we are hoping that the situation with those hopes the retailers would turn around.

Our retail business in both places has been very good and so we see that as a positive indication for the strength of the brand in those areas and we continue to open and remodel stores in both Asia and Australia. In Asia, the wholesale business is little more complicated because it crosses a number of different countries and the retailers in the businesses are more spread out. But it has been a little more challenging there.

I think everybody has read about some of the difficulties that they are facing in China right now where their economy really for the first time in several years has fell down. And I think that a lot of the larger retailers there are feeling that. So it’s just not an easy environment. But I think that we’re holding our own and we’re pleased that our retail continues to do very well there.

In Europe, I would say that we are seeing a little bit of a comeback but I would say that it’s reserve. One of the things, it’s helping our numbers this quarter as we had lot of our big stores closed a year ago for remodeling. We are in a temporary location but now that we’re back in one of the main streets in Milan, our business is growing again.

And so I think Europe still has ways to go. We had a decent quarter there but I don't think that -- before I should say that, we still see that it’s going to take a couple of more years at least for Europe to already come back. And I think that covers the main international areas.

Rebecca Simmons - DRZ Incorporated

Okay. I think you said in your remarks earlier that you opened 28 stores or going into 28 stores in Asia, is that right?

Tom Florsheim Jr.

Yes, what those are, it’s really like a franchise type store where we have different retailers opening Florsheim, either shops within shops in a department store or freestanding stores. And then they buy from us from a wholesale standpoint. So that's really more of a wholesale play longer-term than a retail play. But it’s exciting that we have a partner over there who really seems to know the market. And the fact that we’ve had such interest in opening these Florsheim shops or shops within shops is very encouraging.

Rebecca Simmons - DRZ Incorporated

Do you have, may be a projection of where you hope to be this time next year or over the next year or two?

Tom Florsheim Jr.

If you ask me, six months, I can give you that. I think that we’ve had -- we feel very good about this joint venture. We want to be a little bit cautious with projections just because it’s completely new for us. And so we’re getting it off to what we feel is a strong start but I would feel better about giving you some kind of -- giving you a projection really in six months after we see how this goes.

Rebecca Simmons - DRZ Incorporated

Okay, that sounds great. And may be you can just touch on raw material cost and if you’ve seen any pressure there?

Tom Florsheim Jr.

Sure. In general, I’d say raw material costs have stabilized. We’re still getting some increases in other but that also has quieted down a bit. In China, right now I’d say its one of the bigger drivers of price increases is the fact that the dollar has weakened about 2.5% this year and people are concerned about the dollar versus the Chinese currency going into next year. And so that’s really the biggest thing that we’re worried about.

Fortunately, the other large source -- the other large country where we source product from is India. And the dollar has strengthened over 10% against the Indian rupee. And so that’s working in our favor right now and that has a little bit of an offset against the situation in China.

And so I think we’re in an environment where raw material costs are fairly stable but that hasn’t totally -- that doesn't mean that the prices in China are not continuing to move up a bit. I mean because of the currency issue that you mentioned and also what China is doing with labor costs is basically they have planned costs in minimum wages and other benefits that just go up on a regular basis a couple of times a year.

And so there’s still pressure on the cost side of the business is just better than it’s been, I’d say. When you compare it to a year ago, we are in a situation where the other prices were going through the rough.

Rebecca Simmons - DRZ Incorporated

Okay. Do you feel that you’ll be able to, kind of, maintain gross margins where you want that to be or, I mean is it kind of pressure manageable for you?

John Florsheim

Yeah, I think it’s manageable. I think that the cost increases that we are seeing are pretty predictable. And as I’ve mentioned in past calls, our approach is to very slowly and rather methodically move our customers up price wise. Part of it is by changing the mix of products. I mean, one of the things that we have been successful with the Nunn Bush is we talked about technology in the Nunn Bush product.

We are moving our average pricing up in Nunn Bush. And the way that we are doing that is by adding value to the product and so as we come out with new products in all the lines, we are very cognizant of this long-term trend towards increased -- with increased cost. And we are trying to put value in the product, so that we can raise our average retails. And I think that we have been overall successful at that and so when I refer to Nunn Bush, I‘m not talking about any kind of major price increase but we are trying to move all the brands up a little bit.

Rebecca Simmons - DRZ Incorporated

Okay. Great. So, I mean do you think you have the opportunity to see maybe stronger margins next year as you go into…?

John Florsheim

That question was hard. I would be more comfortable in saying that we feel quite comfortable that we can just contain margins. You will see our margins are up just a tick this year and it is a challenging environment, especially when you look at mid-priced brands. And so, I would not want to go out on a leniency, we are going to increase our margins because it still is a very price sensitive market and there are cost pressures. So, I would rather be with that we are going to hopefully maintain our margins as they are.

Rebecca Simmons - DRZ Incorporated

Okay. Great. And then last question that I always ask is how do you feel about your inventory levels?

John Florsheim

We feel good about our inventory levels. I think that we were conservative on our BOGS inventory and after two mild weathers we were careful. I mean, we continue to buy a lot of core product but we are particularly cautious on in and out type products. And what’s happened to some degree is we had customers that really held back by placing core products and half of that sales are better than expected. They are coming in and not only buying some of the seasonal kind of in and out type of products, but also buying larger quantities than we expected on core products.

So right now in BOGS, we are chasing inventory a bit. We don’t necessarily think that it’s unhealthy thing given the last two winters. I think that it will help us as we move in to fall ’14, because I think it encourages retailers to place orders earlier and make sure that they are covered. As far as inventory in our other brands I think that we are in pretty good shape and so the main area where we are chasing inventory a bit is in BOGS.

Rebecca Simmons - DRZ Incorporated

Okay. Great. Well, that’s all I had. I appreciate the color.

John Florsheim

All right. Thank you.

Operator

Sir, you have no more questions at this time. (Operator Instructions) You have no more questions, sir. I would now like to turn the call over to Mr. John Wittkowske for closing remarks.

John Wittkowske

Just thank you all for joining us on our call and we will talk to you at the end of the year. Have a good day.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.

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