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Weyco Group, Inc. (NASDAQ:WEYS)

Q4 2007 Earnings Call

February 26, 2008 11:00 am ET

Executives

Rob Damron – Investor Relations

Thomas W. Florsheim, Jr. – Chairman of the Board & Chief Executive Director

John W. Florsheim – President, Chief Operating Officer, Assistant Secretary & Director

John F. Wittkowske – Chief Financial Officer, Senior Vice President & Secretary

Analysts

Haruki Toyama – Toyama Capital

Operator

Good day ladies and gentlemen and welcome to the Q4 2007 Weyco Group earnings conference call. My name is Antwon and I’ll be your coordinator today. At this time all participants are on listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over Mr. Rob Damron, Investor Relations Representative. Please proceed sir.

Rob Damron

Good morning and welcome to Weyco Group’s conference call to discuss fourth quarter 2007 and full year earnings. I’m Rob Damron Weyco Group’s Investor Relations Representative. On this call today are Tom Florsheim, Chairman & CEO, John Florsheim, President & COO and John Wittkowske, Senior Vice President & CFO.

Before I turn the call over to management 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 events or results may differ materially. We refer you to Weyco Group’s most recent Form 10K and Forms 10Q as filed with the Securities & Exchange Commission. These documents identify important factors that may 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.

I will now turn the conference call over to John Wittkowske, Weyco Group’s Senior Vice President & CFO to discuss some of the financial highlights of the quarter and the year.

John F. Wittkowske

Good morning everyone. On behalf of John and Tom Florsheim I would like to thank all of you for joining us today on our fourth quarter and year end conference call. Net sales for the fourth quarter of 2007 were $62.2 million up 3% from $60.6 million in 2006. Net earnings were a record $7.8 million compared with $7.7 million last year. Fourth quarter diluted earnings per share were $0.66 compared with $0.64 per share in 2006. For the year net sales were a record $232.6 million up 5% from $221 million in 2006. Net earnings were a record $22.9 million up 5% from $21.9 million last year. Diluted earnings per share were $1.91 per share up from $1.81 in 2006.

Wholesale sales for the quarter were $51.5 million up 3% from $50 million in 2006. For the year wholesale sales were $197.4 million up 5% from $187.1 million. Looking at each brand in our wholesale division Stacy Adams’ sales increased 11% in the fourth quarter and 5% for the year. The increases are attributable to good performance in the national shoe chain and department store sectors. Nunn Bush’s sales were down 3% for the quarter and 2% for the year. The decrease in Nunn Bush sales was caused by soft sales in Canada. US sales were flat in 2007 despite the residual impact of the loss of business with May Company following its acquisition by Federated. We were able to replace this business through increased sales to other department stores.

Florsheim net sales increased 5% for the quarter and 14% for the year. Florsheim net sales for the quarter and year included $1.4 million and $5.7 million respectively of Florsheim sales in Canada. Prior to 2007 Florsheim footwear was distributed in Canada by a third party licensee. That license arrangement terminated December 31, 2006 and we are now operating our own wholesale business in Canada. For the quarter the Florsheim US business was down 3% but up 4% for the year. The increase in Florsheim sales was driven by the department store sector but was hurt by a continued decline in sales to independent footwear and clothing stores.

Royalty income for the quarter was $1.3 million in 2007 as compared with $1.2 million in 2006 and flat for the year at $4.1 million. For both the quarter and the year we experienced decreases in our royalty income from sales of Stacy Adams branded products as independent clothing retailers to sell these products have struggled in the current retail environment. In addition, Florsheim royalties for the quarter and year were impacted by the absence this year of Canadian royalties due to the previously mentioned change in distribution in Canada. These items were offset however by increases in royalty income from other Florsheim licensees.

Sales in our retail division were flat for the quarter at $9.4 million and for the year retail sales were $31.1 million an increase of 5% over last year’s $29.8 million. Same store sales decreased 2% for the quarter and increased 1% for the year. We now operate 39 stores in the United States, two in Europe and an Internet business. During 2007 we opened five new stores and closed one in the United States and closed two in Europe. Overall gross margins were 38.4% this year compared with 38.6% last year. Wholesale gross margins were down 20 basis points while retail margins were flat.

Selling, general and administrative expenses were 22.9% of sales for the fourth quarter of 2007 compared with 23.7% for the fourth quarter of 2006. For the year SG&A costs were 23.8% of sales versus 23.5% in 2006. Wholesale SG&A costs as a percent of net sales were down for the quarter but were slightly offset by an increase in retail costs. For the year wholesale SG&A costs were flat while retail costs were up. Retail SG&A costs increases were due to the new stores this year and more expensive operating costs at existing stores.

Operating earnings as a percent of net sales were 18.7% in the fourth quarter this year and 19.6% last year. For the year operating earnings as a percent of net sales were 14.7% versus 15.1% in 2006. This decline was caused by the combination of slightly lower wholesale margins and the increase operating costs in our retail division. Higher interest income related to increased investment in marketable securities and higher interest rates also contributed to our earnings growth. Interest income for the quarter was $530,000 compared with $473,000 last year and $2,159,000 for the year compared with $1,941,000 last year. Earnings were also helped by lower interest expense this year due to lower short term borrowings in 2007 compared with 2006. Interest expense for the fourth quarter was $65,000 compared with $166,000 last year and $353,000 for the year in 07 versus $608,000 last year.

Our balance sheet remains strong with cash and marketable securities of $56.8 million and only $550,000 of borrowings at December 31st. This net cash position of $56.2 million is up from a net cash position of $46.3 million last year. During 2007 we generated $24.2 million of cash from operating activities. We used $2.7 million of cash for capital expenditures, $9.9 million to purchase company stock, $4.7 million to pay dividends, $10.4 million to pay down short term borrowings and we invested $7.1 million in additional marketable securities. 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.

I will now turn the call over to Tom Florsheim, [Inaudible] our CEO.

Thomas W. Florsheim, Jr.

Good morning. Overall, we believe our brands fared well this year relative to the industry. While we definitely felt a squeeze on discretionary spending in some sectors we experienced gains in others. Within our brands we have a large range of styles and price points and while some consumers may have curtailed their spending on footwear this year others were drawn to our quality and value. As John noted earlier sales of the Florsheim brand in the quarter and the year both increased due to the additional distribution in Canada. In the US sales were up for the year but down for the fourth quarter. The decrease in the fourth quarter was reflective of the overall slowdown at retail during the period. While the US economic environment at the moment is challenging we believe that over the long term we continue to have good potential for growth with the Florsheim brand.

Over the past two years we have increased our penetration in the casual, dress casual and contemporary segments and we believe there remains significant opportunity to gain shelf space in these product areas going forward. With the Florsheim brand our focus is to leverage Florsheim’s heritage of craftsmanship with the latest in comfort and technology and relevant styling. As a part of that effort we recently announced a collaboration with Men’s wear design firm Duckie Brown to introduce a collection of high end men’s shoes targeting a more fashion forward consumer. Duckie Brown, a finalist for the CFDA Men’s Wear and Designer of the Year Award will enable the brand to reach select specialty and department stores that did not currently carry Florsheim. The Florsheim by Duckie Brown line will be introduced to retailers in fall 2008 and will appear in stores in fall 2009. Our intention here is to in a smaller way test the boundaries of the brand and its success in the high end market.

Our Nunn Bush brand was down slightly for the quarter and year. In the context of the industry the brand’s performance remains consistent and we believe it continues to be viewed by our accounts as a brand that delivers good profitability and sales turns. As John mentioned, in the US we were able to offset our loss of the May Company volume by increasing our business with other mid tier department stores. With Nunn Bush, our goal is to provide the best blend of innovation and value in the men’s footwear market. In fall 2008 we are introducing a new line of slip resistant footwear for the workplace targeting the service industry called Nunn Bush Dynamic Comfort. This footwear will be lightweight and flexible with enhanced shock absorption. We view this as a great opportunity for Nunn Bush to address the growing demand for quality, moderately priced shoes to be worn as everyday casual styles but that are also certified as slip resistant and are appropriate for working in the service sector.

Stacy Adams had a good fourth quarter boosting sales gains despite the slowdown in the industry. This was driven by increased business in department stores which was somewhat offset by decreased business with independent and clothing retailers. All year both our footwear revenues and royalties from Stacy Adam licensed products felt the impact of the downturn in business for the smaller independent retailers which is an important distribution channel for Stacy Adams. We feel fortunate to have made up the difference with larger retailers this year but remain cognoscente of the continued challenges of our independent customer base. We will continue to focus in 2008 on enhancing the Stacy Adam’s position as a leading fashion lifestyle brand. We have discussed in previous calls our test during 2007 of Stacy Adam’s women’s footwear in the market. For a number of reasons we have determined that this is not a business that we want to roll out at this time and we are exiting the women’s business. Due to positive feedback about the line from retailers and consumers we may consider a women’s line for Stacy Adams some point in the future but it would more likely take the form of a licensing arrangement with established women’s footwear wholesaler.

Our wholesale margins during 2007 were consistent with 2006. Looking forward to 2008 we will be carefully monitoring our margins as we continue to feel cost pressures from our overseas factories due to the weakening dollar and increased labor and material costs. So far we have been addressing this issue by being mindful of expenses and raising prices selectively. In our retail division while our sales volumes have held up we have struggled to maintain the same level of profitability as operating costs continue to rise. While we continue to look for additional retail opportunities, given the current retail environment we are proceeding with caution and will only open new locations that are expected to enhance both the Florsheim brand and our profitability. Currently, we do not have any new store openings planned for 2008.

In conclusion, while we are very pleased that 2007 was a record year in sales and net income we are also mindful of the challenging need for the current retail environment. Our focus remains on the long term. We are committed to making the necessary investment in our brands and business to ensure profitable growth in 2008 and beyond.

That concludes our formal remarks and we’d be glad to entertain any questions that may be out there. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Please hold briefly for your first question. Your first question comes Haruki Toyama with Toyama Capital. Please proceed with your question.

Haruki Toyama – Toyama Capital

First, your tax rate continues to come down John, is that you’re buying more muni bonds? Or, what is that from?

John F. Wittkowske

Actually, it’s really a combination of a little more muni income and also lower state taxes. We do plan and we’ve been able to reduce our state tax provision over the last couple of years. So, those are the two main reasons and you’ll see that in the annual report in the effective rate reconciliation.

Haruki Toyama – Toyama Capital

Okay. Then, capital expenditures I think you had been forecasting $3 to $4 million as late as October, what happen there?

John F. Wittkowske

I think a little of that comes in to timing of when these bills get paid with some of the store remodeling and I think that is a little bit to do with it. I think we ended up around $2.7 and next year I’m anticipating I’d drill out for around $2 to $2.5 would be my guess next year. I think we still have some store remodeling that we’re doing. We don’t have any new store openings planned this year right now but those could come up so that’s a possibility. [Inaudible] that number stays around $2 million next year.

Haruki Toyama – Toyama Capital

Okay. You had hoped that you might be able to open two, three or four stores this year, did you cut back because of the environment or just because you couldn’t find the right locations?

John F. Wittkowske

Well, I’m not sure we ever had [inaudible] how many stores we were going to open each year. We certainly right now are taking a little bit harder look at retail locations in general and retail of course, even the big retailers are having a little bit harder time now and it’s even harder for the smaller retailers so we’re being very cautious. We want to make sure if we’re going to open a store that we have a very high degree of confidence that it’s going to change the brand and profitability. So, we’re not cutting off the spigot if you will but we’re going to make sure that we’re not going to stick to some predetermined number that we’re going to open X number of stores per year.

Haruki Toyama – Toyama Capital

Finally, on the retail margins up until recently you were doing 16, 17% plus operating margins and I think a lot of the reductions came in the form of rents and new openings, I don’t know if that’s true or not but can you comment on that and talk about whether you can get back those levels?

John F. Wittkowske

I would say that I don’t believe that we can get back to that level of profitability in retail. I think that rents and operating costs at these malls and other centers are increasing and when we renew leases that’s what we really take a look at is to make sure we can maintain or at least maintain what we would consider an adequate level of profitability. I don’t believe that it can be as high as 16.7, the number you threw out there in retail, I think it will be a little bit lower than that.

Haruki Toyama – Toyama Capital

When you say operating costs are we talking about labor? Or, are we talking about mostly the rent you’re paying?

John F. Wittkowske

It’s more rent costs, it’s not really labor costs. A lot of the people in retail are paid on a base plus commission basis so that costs really is not that – it’s not that variable or it’s variable but it doesn’t change that much. It’s really the fixed costs that are the issue.

Haruki Toyama – Toyama Capital

Because you’re still seeing – you know the sales are okay but you’re still seeing flat to positive same store sales so does that mean the rents are going up as they renew or?

John F. Wittkowske

Yes.

Haruki Toyama – Toyama Capital

How many years do you typically sign on when you open a stores?

John F. Wittkowske

Typically it’s about eight. Eight to 10, it varies on the leases.

Haruki Toyama – Toyama Capital

Okay. So you’re seeing a lot of leases renewing right now?

John F. Wittkowske

That’s exactly right. Again, when we acquired Florsheim they had a lot of older leases that had very favorable terms. Some were very long term leases and over the time things renew and we’ve closed some, we’ve opened some, we’ve gotten better deals on others but in general that’s exactly what’s occurring.

Operator

(Operator Instructions) Please hold briefly for your next question. There are no further questions at this time.

John F. Wittkowske

Okay. Well, thank you very much and we’ll talk to you after our first quarter conference call. Thank you.

Operator

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

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Source: Weyco Group, Inc. Q4 2007 Earnings Call Transcript

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