WEYCO Group Inc (WEYS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2007 Weyco Group earnings conference call. My name is Antoine and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Rob Damron, investor relations representative. Please proceed, sir.

Thank you. 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 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 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 10-K and Forms 10-Q as filed with the Securities and Exchange Commission.

These documents identify 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.

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 and year.

Thanks, Rob. Good morning, everyone. On behalf of John and Tom Florsheim, I'd 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 million -- $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 for the year was caused by soft sales in Canada. U.S. sales were flat in 2007 despite the residual impact of the loss of business with May Co. 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 31st, 2006, and we are now operating our own wholesale business in Canada.

For the quarter, the Florsheim U.S. business was down 3% but up 4% for the year. The increase in Florsheim sales was driven by department the 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 year, we experienced decreases in our royalty income from sales of Stacy Adams branded products as independent clothing retailers who 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 cost 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 increased operating cost in our retail division.

Higher interest income related to increased investments 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 expenditure; $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 Jr., our CEO.

Thanks, John, and good morning. Overall we believe our brands fared well this year relative to the industry. While we definitely felt the 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 for the quarter and year both increased due to the additional distribution in Canada. In the U.S., 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 that period. While the U.S. 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 weightless and comfort technology and relevant styling. As a part of that effort, we recently announced a collaboration with menswear design firm Duckie Brown to introduce a collection of high-end men's shoes targeting a more fashion forward consumer. Duckie Brown finalist for the CFDA menswear designer of the year award will enable the brand to reach select specialty department and stores that do 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 attention here is to in a small 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 remained 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 U.S. we were able to offset our loss of May Company volume by increasing our business with other midtier 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 work place 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 posting 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 clothing retailers. All year both our footwear revenues and royalties from Stacy Adams 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 cognizant of the continued challenges of our independent customer base.

We will continue to focus in 2008 on enhancing the Stacy Adams position as a leading fashion lifestyle brand. We have discussed in previous calls our tests during 2007 of Stacy Adams women's footwear in the market. For a number of reasons we've 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 at 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've been addressing this issue by being mindful of expenses and raising prices selectively.

At 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 nature of 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 question that may be out there. Thank you.

(OPERATOR INSTRUCTIONS) Haruki Toyama, Toyama Capital.

Hi, I had a few questions. First, your tax rate continues to come down, John. Is that you are buying more MUNI bonds or what is that from?

Actually it's really a combination of a little bit more MUNI income and also lower estate 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 really two main reasons and you will see that in the annual report in the effective rate reconciliation.

Okay. And then capital expenditures, I think you had been forecasting $3 million to $4 million as late as October. What happened there?

A little bit of that comes into -- a little of that comes into timing as when some of these bills get paid with some of the store remodelings. And I think that's a little bit to do with it. I think we ended up around 2.7 and next year I'm anticipating I would throw it out there around to 2 to 2.5 would be my guess next year. I think we still have some store remodelings that we are doing. We don't have any new store openings planned this year right now but those could come up so that that is a possibility. If we had to guess at that number I would say it's around $2 million next year.

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

Well, I'm not sure we ever had a (technical difficulty) of how many stores we're going to open each year. We certainly right now are taking a little bit harder look at retail locations in general, retail of course even the big retailers are having a little bit harder time now and it is even harder for the smaller retailers. So we are being very cautious and we want to make sure that if we're going to open a store that we have a very high degree of confidence that it's going to enhance the brand and profitability. So we are not cutting off the spigot, if you will, but we are 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.

Okay. And then finally on the retail margin, up until recently you were doing 16%, 17% plus operating margins and I think a lot of the reduction came in the form of rents and new openings. I don't know if that is true or not. Could you comment on that and talk about whether you can get back to that level?

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 is what we really take a look at is to make sure that 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.

So when you say operating costs, are we talking about labor or are we talking about mostly the rent that you are paying?

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 cost really is not that -- it doesn't -- it's not that variable -- or it is variable, it's doesn't change that much. It's really the fixed costs that are the issue.

Okay. Because you are still seeing the sales are okay but you are still seeing flat to positive same-store sales. So does that mean the rents are going up as they renew or --?

Yes.

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

Typically it's about eight. Eight to ten, it varies on the leases.

Okay, so you are seeing a lot of old leases renewing right now?

That is exactly right. Again, when we acquired Florsheim, they had a lot of older leases that had very favorable rental terms; some were very long-term leases. And over the time, things renew and we closed some. We've open some, we've gotten better deals on others. But yes, in general, that is exactly what is occurring.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Okay, well thank you very much and we will talk to you after our first-quarter conference call. Thank you.

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