Weyco Group's (WEYS) CEO Thomas Florsheim on Q1 2018 Results - Earnings Call Transcript

Weyco Group, Inc. (NASDAQ:WEYS) Q1 2018 Earnings Conference Call May 7, 2018 11:00 AM ET

Executives

John Wittkowske - SVP, CFO & Secretary

Thomas Florsheim - Chairman & CEO

Analysts

Paul Carter - Adaptable Capital

Operator

Welcome to the First Quarter 2018 Earnings Release Conference Call. My name is Christine, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to John Wittkowske, CFO; you may begin.

John Wittkowske

Thank you. Good morning, everyone. Welcome to Weyco Group's first quarter 2018 conference call. On this call with me today is Tom Florsheim Jr., our Chairman and CEO; and John Florsheim, our President & 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 results or events 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 decided to use them.

Net sales for the first quarter of 2018 were $69.5 million, up 1% compared with 2017 net sales of $69.1 million. Operating earnings were $3.6 million, an increase of 3% over the $3.5 million in 2017. Net earnings attributable to Weyco Group were $3 million this quarter, a 35% increase as compared with $2.2 million last year. Diluted earnings per share were $0.29 in the first quarter versus $0.21 per share in 2017. In the North American wholesale segment, net sales for the first quarter were $53.8 million compared with $52.9 million last year. Licensing revenue were $793,000, up from $701,000 last year. Wholesale gross earnings were 33.1% of net sales compared with 30.8% of net sales in 2017.

Wholesale operating earnings increased 7% to $3.4 million in the first quarter of 2018, up from $3.2 million last year, mainly due to higher gross margin. The net sales of our North American retail segment which includes both our retail stores and U.S. internet sales were flat at $4.9 million. Same-store sales which includes the U.S. internet sales were up 6% for the quarter due mainly to higher sales on the Company's website. Retail operating earnings increased $206,000 this quarter, up from $43,000 last year; again, due to better performance and higher operating earnings on the Company's website.

Our other operation which includes the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $10.8 million in the first quarter of 2018, down 5% compared to $11.3 million in 2017. The decrease was primarily mainly due to lower net sales at Florsheim Australia. Florsheim Australia's net sales were down 6% for the quarter, with lower sales at both it's retail and wholesale businesses. Collectively, Florsheim Australia and Florsheim Europe had operating losses of $29,000 this quarter compared to operating earnings of $252,000 last year, due primarily to the lower sales at Florsheim Australia.

Company's income tax provision was down for the quarter due to the lower U.S. federal tax rate of 21% in 2018 versus 35% in 2017 resulting from the passing of the Tax Cut & Jobs Act effective January 1, 2018. At March 31, 2018, our cash and marketable securities totaled $53.6 million and we had no outstanding debt. During the first three months, we generated $8.4 million of cash from operations. We used those funds to pay $4.6 million in dividend, and we had $125,000 of capital expenditures. We estimate that 2018's capital expenditures will be between $2 million and $3 million.

On May 3, 2018, our Board of Directors declared a cash dividend of $0.23 per share to all shareholders of record on May 28, payable on June 29, 2018. This represents an increase of 5% above the previous quarterly dividend rate of $0.22 per share.

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

Thomas Florsheim

Thanks, John, and good morning, everyone. Our North American wholesale revenues for the quarter were up 2%. Given the tough retail environment, we feel good about our performance. Within our principal categories, men's dress and dress casual, footwear; we're picking up market share while at the same time increasing our gross margins by managing our inventories well.

While sales performance of our individual brands varied significantly, our North American wholesale business is off to a solid start in 2018. Our Florsheim business was up 21% for the quarter. We continue to experience exceptional sales at retail for the Florsheim brand and we're picking up shelf space even in challenging retail channel such as department stores. Sales are being driven by updated sales vets [ph] that reflect modern, salient and comfort features but also are very much connected to the classic care to Florsheim. Anecdotally, we're getting a lot of feedback that Florsheim is increasingly being purchased by younger audience that connects with the authenticity of the brands history. We believe our current sales momentum and receptivity among retailers and consumers will help us move Florsheim towards our long-term goal of increasing our casual penetration.

Stacy Adams sales were up 1% for the quarter as the brand continues to be a consistent performer at retail in the dress shoe category. Stacy Adams is experiencing strong momentum in e-commerce trade channel which is helping offset the volatility in brick-and-mortar retail. Sales were down 10% this quarter with Nunn Bush sales and national shoe chains off significantly. As discussed in previous conference calls, the Nunn Bush brand is impacted disproportionately by the challenges of mid-tier department stores. We do believe that this situation is beginning to stabilize and we should start to see Nunn Bush get back on a growth track beginning in the second quarter.

Our BOGS business was down 2%. The decrease in BOGS was the result of a reduction at sales of obsolete inventory. BOGS came out of 2016 with surplus inventory insulated footwear that needed to be cleared in off-price channels. We took a more conservative approach to seasonal product in 2017 and consequently ended with very clean inventories. This was a positive outcome for BOGS from a bottom line perspective. As we head towards the back half of the year, we are well positioned for a successful fall.

Our North American retail segment was up 6% in terms of same-store sales We saw our online sales bounce back in the first quarter of 2018, which offset a slight decrease in our brick and mortar stores that continue to be impacted by decreasing mall traffic. Our focus continues to be on building our direct-to-consumer sales through our websites while maintaining a handful of flagship stores in key cities for marketing objectives. Our overseas business was down 5% for the quarter. The decrease was driven primarily by the loss of our third largest wholesale account in Australia, which became a credit issue. Overall, our international business remains sluggish and we're focusing on managing expenses to ensure we have a profitable bottom line. While the long term potential remains positive, we're seeing similar challenges to our international business model that we have experienced in the U.S. and are determined to be proactive to make the necessary changes in order to have a solid foundation for the future.

Our inventory levels at March 31 were $51 million, compared to $55 million a year ago. As discussed in previous conference calls, we have lowered our exposure to seasonal product by reducing our inventory levels in those areas. This has contributed to higher margins due to fewer close outs. Overall gross margins were 38.3% versus 36.5% a year ago, up 180 basis points. While the U.S. Dollar has remained strong [indiscernible], it has weakened against Chinese currency and therefore, it's possible that we will face some margin pressure if the dollar stays at its current levels.

This concludes our formal remarks. Thank you for your interest in Weyco Group and I'd now like to open the call to your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We do have a question from Paul Carter of Adaptable Capital. Go ahead.

Paul Carter

Thank you. First, regarding [indiscernible].

Thomas Florsheim

Did you say the Australian customer? We missed the part of...

Paul Carter

I'm sorry. The bond...

Thomas Florsheim

Did you ask us what the volume was of Nunn Bush [ph]?

Paul Carter

Yes. Just how big of a customer, how they've been and what sort of impact this year do you expect your liquidation to have?

Thomas Florsheim

Yes, [indiscernible] between $2 million and $3 million. And in terms of the impact or liquidation, on general market, I think it's going to be impacts of scores of Midwest, but I don't think it's going to have a large impact. I think they're volumes. They were a good account for us. We're disappointed to bonds going to Chapter 11 [ph] and eventually liquidate. It wasn't entirely unexpected, I think -- you will see that both, the volume you pick up in other accounts that are [indiscernible].

Paul Carter

And just a couple of questions on the lifestyle relationship in India. Will Weyco Group's revenue be in the form of royalties or will you be receiving wholesale revenues for the product that's distributed across the 100 points of sale later this year?

Thomas Florsheim

It will be a licensing revenue.

Paul Carter

And the relationship of yours or is it sort of through the Australian sub or do you have a non-controlling interest?

Thomas Florsheim

No, it's directly from the U.S. to India.

Paul Carter

And are you able to say what your expectations for incremental revenue from that relationship is?

Thomas Florsheim

It's in the early stages, it's one of those things where we don't expect that it's going to really have a big impact in first couple of years. Hopefully it will over the longer term but it's something that we're working closely with Samara [ph] Lifestyle, and -- but they are going to start opening stores as you're pricing. But it's going to take -- it's going to be a slow build, we're going to do it with them slowly and kind of methodically which we found from past experiences that's what works best.

Operator

[Operator Instructions] I'm showing no further questions at this time.

Thomas Florsheim

Okay, we'd like to thank everybody for your participation. And look forward to talking with you next quarter. Have a great day.

Operator

Thank you. And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.