WEYCO Group Inc (WEYS) 2007 Q3 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Q3 2007 WEYCO Group Earnings Conference Call. My name is Mike. I'll be your operator today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Rob [Dameron], Investor Relations Representative. Please, proceed, sir.

Thanks, Mike. Good morning and welcome to WEYCO Group's conference call to discuss third quarter 2007 earnings. I'm Rob Dameron, WEYCO Group's Investor Relations Representative.

On this call today are Tom Florsheim, Chairman and CEO, John Florsheim, President and COO and John Wittkowske, Senior Vice President and 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 future events and the future financial performance of the Company. Additionally, some comparisons may refer to non-GAAP measures. 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 important factors that could cause the Company's actual results to differ materially from our projections.

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

Thanks, Rob. Good morning, everyone. On behalf of Tom and John Florsheim, I would like to thank you all for joining us today for our quarterly conference call.

Our net sales for the third quarter of 2007 were $58.2 million, up 4% from $56.1 million in 2006. Net earnings were 5.3 million, up 3% from 5.2 million last year. Diluted earnings per share were $0.45 compared with $0.43 in 2006. Wholesale sales for the third quarter were $50.5 million, up 4% from 48.5 million in 2006.

Looking at each brand in our wholesale division, Florsheim net sales increased 14% while Stacy Adams sales increased 9% and Nunn Bush down 8%. Wholesale sales included $2 million of Florsheim sales in Canada, which accounted for the increase in both Florsheim and overall sales -- wholesale sales this quarter.

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. As a result, royalty income was down $100,000 for the quarter. For the year, Florsheim sales in Canada totaled $4.4 million and we expect 2007 Florsheim Canadian sales to be between $5.5 million and $6 million with royalty income reduced by 250,000.

Excluding the new Florsheim Canadian sales, wholesale sales would have been flat for the quarter. Tom will talk about each individual brand performance in a few minutes.

Sales in our retail division increased 2% to $6.9 million, up from $6.7 million last year. Same-store sales were flat for the quarter. Our retail division now consists of 37 retail stores in the United States, four in Europe and an internet business.

Overall licensing revenue was down 12% to $807,000 from $916,000 last year due primarily to the previously mentioned change in Canadian distribution. Other Florsheim royalties were up this quarter but that impact was offset by a decrease in Stacy Adams royalties, reflecting the continued struggles faced by the independent clothing retailers.

Overall gross margins were 37.5% in the third quarter, compared with 36.7% last year. Wholesale gross margins were up 100 basis points, while gross margins at retail were up 130 basis points.

Selling and administrative expenses, as a percent of net sales, were 23.9% for the third quarter of 2007, compared with 22.7% in 2006. SG&A costs, as a percent of sales, increased in both the wholesale and retail divisions in the third quarter. The increase in wholesale selling and administrative expenses was due to costs in Canada resulting from the transition this year of our Florsheim Canadian business and in the United States increases in both advertising and employee-related costs.

Retail costs increased due to more expensive leave renewals and new stores this year. Operating earnings, as a percent of net sales, were 13.6% in 2007 and 14% in 2006.

As of September 30, 2007, our cash and marketable securities totaled $54.7 million with only $5.6 million of debt, resulting in a net cash position of 49.1 million. This compares with a net cash position of 46.3 million at December 31, 2006.

For the first three quarters of 2007, we generated $14.3 million of cash from operating activities. And we used 2.2 million of cash for capital expenditures, 8.9 million to purchase [back] company's stock, 3.4 million to pay dividends and we reduced our short-term borrowings by 5.4 million. We expect our total capital expenditures to be between 3 million and 4 million by the end of '07.

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

Thanks, John and good morning. In this part of the call, I would like to elaborate further regarding the performance and direction of our wholesale brands and retail operations.

As John mentioned, our overall wholesale sales were up 4% this quarter. The retail environment for the footwear and apparel industries has been challenging and we experienced softness this quarter across many of our trade channels, particularly, in the independent shoe and apparel retailers. Our Florsheim U.S. sales were flat for this quarter.

For the year, Florsheim U.S. sales are up 7%. The business remains solid, relative to the overall men's footwear market. We continue to see opportunity to pick up market share in the business casual, as well as the weekend casual markets. Toward this end, we recently began selling a range of new products with our proprietary bio-comfort sock liner system.

The bio-comfort system incorporates a number of technological features that we believe will strengthen Florsheim's position beyond the traditional dress shoe market. Retail reception was strong and we look forward to delivering new footwear in spring 2008.

The Stacy Adams business bounced back in the third quarter with sales up 9%. Our retail performance in the department store sector and the footwear chain trade channel remains strong, offsetting soft sales in the independent apparel and footwear stores. We remain very focused on enhancing the Stacy Adams position as a leading fashion lifestyle brand in footwear, as well as in our licensed apparel and accessory business.

In spring, we will deliver our higher-priced signature line, which will be available across all licensed product categories. While we anticipate signature to be a relatively small percentage of the business, we believe that the premium nature of the product will be positive for long-term brand positioning.

The Nunn Bush brand was down 8% for the quarter. Almost half of the decrease was due to soft sales of the brand in Canada. The other half was due to the challenging conditions in the U.S. moderate footwear sector. As I mentioned in previous conference calls, we are focused on building upon the success of our comfort gel product and enhancing our penetration in the casual market.

Our overall wholesale margins were up this quarter, compared with the same period last year. This increase in margins is largely due to the effect of the new Florsheim wholesale business in Canada. Our U.S. wholesale margins were flat, as we continue to feel pricing pressures from our overseas factories, due to the weakening dollar and increased waiver and material costs. Going forward, we are cognizant that we and others in the footwear sector will have to carefully manage costs in our pricing structures in order to maintain margins.

Same-store sales in our retail division were flat for the quarter, which is in line with the overall men's footwear market. We continue to move forward with our selective search for new locations. This September, we opened two new stores, one in Staten Island and the other outside of Detroit. We are also in the process of remodeling many of our stores to reflect our new design.

Our balance sheet and cash position remain strong and we continue to evaluate the best ways to utilize cash and increase shareholder value. That concludes our formal remarks. Thank you for your interest in WEYCO Group. We would now like to open the floor to any questions.

Thank you, sir. (Operator Instructions) We do have a question from the line of Haruki Toyama with the Toyama Capital Management. Please proceed.

Hi. Do you disclose the operating income or margins by the -- within the segments, wholesale and retail before the Q comes out?

Not before the Q comes out, Haruki. This is John. We do not but the Q will be filed shortly and so that information will be available.

Great. Okay and then on the retail side, how many more stores are you planning to open this year, if at all?

The two that we just opened are going to be it for this year. And so that's -- for 2007, that's all.

Okay, so when you say capital expenditure is 3 million to 4 million, it might end up being on the lower side, if you don't open any more stores?

That's right.

Actually, Haruki, I stand corrected. We're opening a store down in Florida, the beginning of November.

Okay.

Yeah, Haruki, on the capital expenditure side, you know, we've incurred $2.2 million and as we said, we've been remodeling a bunch of the resale stores, in addition to the two new ones. But not all those bills have actually been paid yet as well. So there's approximately about 1 million to 1.25 million of retail bills for these remodels and things that are going to be coming through by the end of the year, which is how we get from the 2.2 up to approximately between 3 million and 4 million.

Okay.

So it's just a little bit of a timing issue there as to why there's that big gap.

Then, do you have any plans for next year for the retail segment yet, in terms of store openings?

Haruki, we are looking at some new locations but nothing is signed yet for 2008.

Okay but the goal is to open a few more kind of continue to the pace you had the last couple years?

I would say that's the goal. It just depends on whether we find the right locations. I mean, we're really trying to take a selective approach and if it looks like it's going to be a deal that is profitable, then you know, we'll open those new stores. It's a little bit challenging to find good retail locations at reasonable rents. And so it's just one of those things where if we find some good things, we will open new doors.

Okay and then on Stacy Adams, softness in your core independent channel but doing well in the department stores and in your trade channels. How much of that, you know, you've aggressively pursued that channel relatively recently. How much of that is sort of adding inventory to the channel versus actual retail sell through?

You know, that's a good question. I mean, where we're seeing a lift in Stacy Adams is actually our department store business is more fully developed and we're seeing strong sell throughs there. I think the inventories are relatively consistent. We are picking up shelf space in shoe chains and so we're seeing, you know, our inventories are up by virtue of that and we're seeing good sell throughs.

We mentioned earlier in the conference call the independent store base, which is about 25% of Stacy Adams' volume. It's challenging right now and has been for some time.

Okay and then can you talk a little bit about what kind of shoe chains you're getting more shelf space in at all?

Well, you know, we don't really mention specific retailers but you know there's three or four major footwear chains out there and that's where we're seeing some growth.

Okay, great. Well, that's it for me. Thank you.

Thanks, Haruki.

Currently, no other questions.

Okay, we would like to thank everyone for participating today and we will talk to you on our next conference call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Thank you very much and have a great afternoon.