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Weyco Group, Inc. (NASDAQ:WEYS)

Q2 2008 Earnings Call

August 7, 2008 11:00 am ET

Executives

Thomas W. Florsheim, Jr. - Chairman of the Board, Chief Executive Officer

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

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

Analysts

[Ted Goins]

[Huraki Tuwana]

Operator

Ladies and Gentlemen, welcome to the second quarter 2008 Weyco Group earnings conference call. My name is Gwen and I will be your operator 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 conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. John Wittkowske, Senior Vice President and CFO.

John F. Wittkowske

Good morning everyone and welcome to Weyco Group’s conference call to discuss our second quarter 2008 earnings. Also on this call today are Tom Florsheim, Jr., Chairman and CEO, and John Florsheim, President and COO. On behalf of Tom and John I’d like to welcome you all here and thank you for joining us today for our conference call.

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 events or results may differ materially. We refer you to Weyco Group’s most recent Form 10K as filed with the Securities and Exchange Commission. This document identifies the 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.

Our net sales for the second quarter of 2008 were $53 million up 9.6% from $48.4 million in 2007. Net earnings were flat at $4.1 million for the second quarter of both 2008 and 2007. Diluted earnings per share were $0.34 in both 2008 and 2007. Wholesale sales for the second quarter were $44.7 million up 12% from $39.9 million in 2007. Looking at each brand in our wholesale division, sales of our Stacy Adams brand were up 35%, Nunn Bush 3%, and Florsheim 6%. Tom will discuss individual brand performance in a few minutes.

Sales in our retail division decreased 4% to $7.4 million down from $7.7 million last year. Same-store sales were down 6% for the quarter. Second quarter retail sales included four new stores that were opened in the second half of 2007. During the second quarter of 2008 our retail division consisted of 39 retail stores in the United States, two in Europe and an Internet business. In July we closed one of our retail locations.

Licensing revenue for the quarter was $969,000 in 2008 and $835,000 in 2007. Licensee sales of Stacy Adams branded products were down for the quarter as the independent clothing retailers continue to face a challenging retail environment. However, Stacy Adams royalties increased this quarter because we terminated our agreement with our licensing agent to whom we previously paid a percentage of the royalties. The services performed by the licensing agent are now handled in-house and those costs are included in selling and administrative expenses and offset a portion of the royalty gain. Licensing revenues from the sales of Florsheim footwear overseas and branded products in the United States were consistent with the prior year.

Overall gross margins were 37.2% this quarter compared with 38.6% last year. Approximately half the decrease in overall margins was due to a change this quarter in the mix of wholesale and retail sales with wholesale sales making up a significantly higher percentage of total sales than last year. Because wholesale sales carry lower margins than retail sales, the increase in wholesale sales resulted in a decrease in overall gross margin. Additionally, wholesale gross margins were down 80 basis points and retail gross margins were down 50 basis points.

Selling and administrative expenses were 26.1% of sales for the second quarter of 2008 versus 26.4% in 2007. Wholesale selling and administrative costs were 20.8% of sales in 2008 as compared with 22.3% in 07, while retail selling and administrative costs were 61.9% of retail sales in 08 as compared with 50.8% in 2007. The decrease in wholesale selling and administrative costs as a percent of sales reflects the fixed nature of many of our wholesale selling and administrative expenses in relation to the increase in wholesale sales. In the retail division the increase reflects higher operating costs, in particular rent and occupancy costs coupled with lower sales volumes.

As of June 30, 2008 our cash and marketable securities totaled $61.7 million with only $2 million of debt resulting in a net cash position of $59.7 million. This compares with a net cash position of $56.2 million at December 31, 2007. In the first half of 2008 we generated $12.1 million of cash from operating activities, borrowed $1.5 million under our short-term credit facility, and we used $1.8 million of cash for capital expenditures, $6.2 million to purchase company stock, and $2.5 million to pay dividends. We anticipate our total capital expenditures for 2008 to be between $2 million and $3 million.

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

Thomas W. Florsheim, Jr.

Good morning. We are pleased with our second quarter wholesale results with sales increases at each of our three brands. As we discussed last quarter we believe that our volumes have held up in this challenging retail environment because our brands have a strong core of moderately priced footwear with a proven track record of sell-throughs at retail.

Our Stacy Adams brand had a great quarter with sales up 35%. This growth was driven by an increase in sales of contemporary footwear to national accounts. We have recently expanded our Ray, a denim friendly footwear and these styles shipped to many of our major accounts in the second quarter. Another reason for our growth in the quarter was that Stacy Adams sells a lot of seasonal product and because of tight budgets many retailers are bringing in seasonal styles later. This caused some volume to shift from the first quarter to the second. While we have great momentum in Stacy Adams going into the third quarter, the gains we experienced in the second quarter were in part caused by the unique items I just discussed and we do not expect this level of increase in the third or fourth quarters of 2008.

Nunn Bush sales this period were up 3%. We introduced the new Nunn Bush Dynamic Comfort line of slip-resistant footwear this quarter. Dynamic Comfort has been well received at retail and helped deliver the solid quarter for Nunn Bush. The Nunn Bush Comfort Gel products also continue to be popular with consumers. Last week at the Western Shoe Association’s trade show we introduced a new generation of our Comfort Gel technology which was well received and reflects our continuing focus on comfort.

Our Florsheim brand bounced back in the second quarter with sales up 6% driven primarily by increased shipments of our Comfortech line. We have expanded our range of Comfortech styles as part of our overall goal of increasing our market share in the dressed casual and casual footwear categories. A significant percentage of our Comfortech line now incorporates our new bio-comfort insoles and F white outsoles. Both innovations have been well received at retail and have helped us achieve higher Comfortech sales.

Our wholesale gross margins were down 80 basis points this quarter. As we have discussed in previous quarters this was a result of pricing pressures from our overseas factories due to higher material and labor costs, the weak US dollar, and higher freight and transportation costs. We have been able to partially offset some of these price pressures by selectively increasing our wholesale prices, but we remain sensitive to the challenges of our retailers and consumers. In our retail division same-store sales were down 6% which is reflective of the overall difficult retail environment. As John mentioned our retail profitability has decreased due to lower sales and increased selling and administrative costs.

Although we are continuing our search for new store locations in the US we are very selective and mindful of the current factors affecting the retail environment today and we currently have no new store openings planned for the remainder of 2008. Over the past few years we have remodeled the majority of our retail stores and now they reflect a new more contemporary design. We are putting the finishing touches on a few stores but we do not expect any further significant capital expenditures on the retail side in the near future.

In summary, we believe our brands have performed well this quarter within the context of the industry. We continue to focus on the growth of our business by enhancing our products, building customer relationships, and mitigating cost pressures for our retailers and consumers. Our balance sheet remains strong and we continue to generate cash. As our net cash position grows we will evaluate the best ways to utilize this cash including continued repurchases of shares, increased dividends, and potential acquisitions.

That concludes our formal remarks. Thank you for your interest in Weyco Group. And we’d now like to open the floor to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Ted Goins].

[Ted Goins]

I was curious about the Stacy Adams business at your retail stores. The stores I’ve been to featuring Stacy, how did the Stacy brand hold up at your retail stores? And if you could expand a little bit on the sales increase in Stacy, that’d be great.

Thomas W. Florsheim, Jr.

The Stacy Adams business is a fairly small component of the business at most of our retail stores. The product in the Florsheim shops, you’re referring to in our own retails stores?

[Ted Goins]

Yes. I’ve been to a few of the Florsheim stores and there’s not a lot of Stacy there but I have seen it there, and I just didn’t know if that would be a good indicator of how it’s selling through or if this was really a product filled nationally rather than sort of a sell-through. I’m trying to get my arms around that a little bit.

Thomas W. Florsheim, Jr.

Our performance of Stacy Adams in our own retail stores has been good but it’s less than 10% of the business in those stores. So I don’t know that that gives us a great barometer. I’m sorry I can’t give you a better answer than that.

[Ted Goins]

That’s not a good sample size. I through you off with the question. I also noticed that you bought some shares back in the second quarter as well as the first quarter but maybe not as aggressive in the second quarter. John, could you offer some thought on share repurchases?

John F. Wittkowske

We’re always out there and we’re looking to take advantage when we feel the price is attractive. So based on the price of the stock, sometimes we may buy more or less and I think a little bit of that effects that. It’s also very difficult for us to buy a large amount of shares consistently because of the rules that we’re limited to a certain limit number of shares based on the volume of our trading. So in any buy-back program you’re limited to a percentage there and since our stock doesn’t trade at high volumes, sometimes we’re limited by that as well and that affects the amount of shares we can buy back.

[Ted Goins]

How much did currency affect your results?

Thomas W. Florsheim, Jr.

The currency is putting pressure on our margins. Obviously the dollar is really off against the Chinese currency. It’s come back interestingly against the Indian currency and we source a lot in India, but the net is it’s impacting our gross margins.

Operator

Our next question comes from [Huraki Tuwana].

[Huraki Tuwana]

You mentioned that you were able to offset some of the price inflation through price increases. Can you talk about the magnitude at all of the price hikes you were able to put through?

John F. Wittkowske

I just want to clarify the question. You’re asking what kind of percentage increases we’re getting from our accounts?

[Huraki Tuwana]

Yes, and actually if you could talk also about the inflation and your costs, that’d be great too.

Thomas W. Florsheim, Jr.

I’m just going to give you some kind of a fairly general answer because it’s different from different factors from different countries. We’re seeing increases from our factory base between 5% and 10% on the factory cost of the product. That would be the normal range. We have some that are higher; some that are lower; but that would be pretty typical; 5% to 10% increases over the last say six months to a year. What we’re doing with our accounts is doing this in a very kind of step-by-step fashion because this is the first time in many years that the industry has seen this kind of price pressure. And obviously with retail being tough out there, the last thing the retailers really want to do is increase their prices. So what we did beginning in January was start pushing up prices and what we’re doing is moving people up about 2% a season, sometimes a little bit more depending on the specific product and the specific brand. I’m talking really in generalities because we have obviously three different brands at different price points. And then we’re going through another wave of price increases with our customers right now, another 2% or 3%, and our goal is to absorb part of the price increase and to pass part of it on. We’re doing this in a way that we hope doesn’t hurt our volume and we think that over time we’ll be able to make up the margin. But we don’t believe that it would be a smart thing to do to try to make it up all this year in 2008 because we’re as you know long-term players and we want to use this period to possibly grow our market share and we think that we can do that by taking a very kind of methodical step-by-step strategy as far as passing on these price increases. We’re very cognizant of them; we’re negotiating hard with the factories; but there’s a lot of pressure out there and that’s basically the way we’re handling it.

[Huraki Tuwana]

2% is small so I don’t know if I would notice, but I haven’t noticed the retail prices up year-over-year for most of your products. Does that mean that the retailers are just taking lower margins on those? Are you giving more margin support or how does that work?

Thomas W. Florsheim, Jr.

I think that first of all you see a little bit of a delay from the standpoint of the retailers getting price increases and then them raising their prices at retail. But I think that another piece of that is retailers are very hesitant to push retail prices up right now so some of them have chosen to absorb some of the price increases. But our view on this is that this is not a temporary thing. Price increases are going to continue for a number of reasons. You are going to see prices at retail increase not just on shoes but on apparel and many other products because the game has changed in China and China is manufacturing a lot of the products I just mentioned, so sooner or later you’re going to see higher prices at retail both on our products and just in general.

Operator

There are no more questions at this time.

Thomas W. Florsheim, Jr.

Thank you very much. Thanks everyone. You can sign it off.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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Source: Weyco Group, Inc. Q2 2008 Earnings Call Transcript

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