WEYCO Group Inc (WEYS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Weyco Group earnings conference call. My name is Chanel and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be facilitating 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 presentation over to your host for today's call, Mr. John Wittkowske, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you. Good morning everybody. And welcome to our first quarter conference call. On this call with me today are Tom Florsheim, Jr., our Chairman and CEO, and John Florsheim, our President and COO.

On behalf of Tom and John, I would like to thank all of you for joining us today for our quarterly 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 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. Additionally some comparisons may refer to nonGAAP measures. Our SEC filings may contain additional information about these nonGAAP measures and why we use them.

Net sales for the first quarter of 2009 were $58.9 million, down 4% from $61.3 million in 2008. Net earnings were $2.5 million for the first quarter as compared with $5.1 million in 2008. Diluted earnings per share were $0.22 in 2009 as compared with $0.43 in 2008.

North American wholesale sales for the first quarter of 2009, which include both our US and Canadian wholesale sales, were $45.6 million compared with $50.6 million in 2008. Looking at each brand in our wholesale division, sales of our Nunn Bush brand were up 3% while sales of our Stacy Adams and Florsheim brands were down 15 and 18%, respectively.

Sales in our retail division, which include our 36 domestic retail stores and our Internet business, were $5.2 million in the first quarter, down from $6.5 million last year. Same-store sales were down 9.2%.

Licensing revenues for the quarter were $800,000 compared with $1.1 million last year. The Company's licensing revenues consist of royalties earned on sales of Stacy Adams apparel and accessories in the United States, Florsheim's specialty footwear and accessories in the United States, and on sales of Florsheim footwear in Mexico and certain markets overseas.

For the first quarter of 2009, licensing revenues were down because Stacy Adams royalties dropped 8% as the current retail environment has been particularly tough on small independent retailers who distribute much of this product -- snd because of the impact of the acquisition of one of our larger overseas licensees.

On January 23, 2009, we acquired a 60% interest in a new subsidiary now named Florsheim Australia, which subsequently purchased the Florsheim wholesale and retail businesses in Australia, South Africa and Asia-Pacific. Accordingly, the consolidated financial statements for Florsheim Australia for the period of January 23 through March 31, 2009 are consolidated in our first quarter 2009 results.

These businesses were previously licensed by us to a third-party from whom we had collected approximately $1 million of royalty income annually. First quarter licensing revenues include royalties from these entities for only the first 23 days of January, resulting in the decrease in overall licensing revenues for the quarter.

Foreign sales, which include the wholesale and retail sales of Florsheim Europe and Florsheim Australia, were $7.3 million in 2009 versus $3.2 million in 2008. Florsheim Europe sales were $2.9 million in 2009 with the remaining $4.4 million representing consolidated sales of Florsheim Australia.

Operating earnings were $3.3 million for the first quarter of 2009, down from $7.6 million in 2008. This primarily reflects the decrease in wholesale operating earnings, which were down $3.4 million between periods, and includes the impact of the $300,000 decrease in licensing revenues. Retail division operating earnings decreased $475,000 and foreign operating earnings decreased $350,000.

In the wholesale division, the decrease in operating earnings for the quarter was due to lower sales volumes and lower gross margins. Sales volumes were down, due to the poor economic environment. Wholesale gross margins were 26.6% for the first quarter 2009 versus 30.4% in 2008.

The lower gross margins were due to higher product costs in the first quarter of this year compared with the same period of last year. all of which could not be passed on to our customers.

Wholesale selling and administrative expenses for the quarter were down $100,000. This reflects increased pension and stock option expense this year offset by lower salesman's commissions and employee costs. With the exception of salesman's commissions which move in tandem with changes in sales volumes, most wholesale, selling and administrative expenses are fixed in nature.

In the retail division, the decrease in operating earnings in the first quarter was primarily due to lower sales volumes and lower gross margins. Gross margins were 64.8% in 2009 compared with 66.7% last year.

In the foreign segment, Florsheim Australia had a net operating loss for the quarter of approximately $360,000, primarily due to acquisition-related costs.

As of March 31, 2009, our cash and marketable securities totaled $55.8 million with only $4.7 million of debt resulting in a net cash position of $51.1 million. This compares with a net cash position of 56. -- excuse me, $56 million at December 31, 2008.

During the first three months of 2009, we generated $6 million of cash from operating activities, and borrowed $3.4 million under our short-term credit facility. $9.3 million of cash was used for the acquisition of Florsheim Australia, and we used $1.3 million to repurchase Company stock.

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

Thanks, John, and good morning. Our North American wholesale business from the first quarter reflected the difficult retail environment. Consumers continue to take a conservative price-sensitive approach to apparel and footwear expenditures and retailers are reacting accordingly with reduced inventory levels.

This trend accelerated in the fourth quarter of 2008 and continued through the first quarter of 2009. We believe that it will continue to affect sales in the near to midterm.

Our Florsheim business was down 18% for the quarter, reflecting softness in the traditional dress shoe business. Florsheim also faces challenges. given that the brand is at the higher end of the pricing matrix in the mid tier department store and shoe chain trade channels, which are important segments of the brand's distribution.

Due to economic factors, consumers are showing an increased tendency to trade down to more moderately priced footwear. We are mindful of the price-sensitive nature of the market and are focused on ensuring Florsheim represents a strong value to consumers while maintaining the quality that has been the hallmark of the brand.

Going forward, we are also redoubling our efforts to expand Florsheim's penetration into the casual and dress casual markets, to further align the brand with the lifestyle of today's consumer. We believe that we are making good progress from a design standpoint and are well-positioned for the casual component of Florsheim as the retail market stabilizes.

Our Nunn Bush brand, which maintains a more moderate price position in the marketplace, had a strong quarter with sales increasing 3%. In these economic times, consumers are responding to versatile footwear that can be worn both to work and more casual occasions. And Nunn Bush is having success addressing this opportunity in the market and accessible price points.

Specifically, Nunn Bush increases were driven by strong sell-throughs of our Dynamic Comfort slip-resistant products as well as the continued positive performance of our comfort gel collection. This spring we introduced an enhanced version of our comfort gel product called Comfort Gel 3.0 and initial product performance has been favorable.

Our Stacy Adams division had a challenging quarter with sales down 15%. Stacy Adams has a higher fashion component than our other brands, with styling that appeals to a consumer who is a frequent purchaser of footwear. In normal economic times, the fashion orientation of the brand helps differentiate Stacy Adams at retail and provides for consistent business addressing the needs of consumers that are looking for updated [talent] at moderate price points.

However, reflecting the general market trend, the fashion consumer has taken a more conservative approach regarding footwear purchases which impacts Stacy Adams sales. There are bright spots in the Stacy Adams division, as we are having success diversifying the brand with contemporary product that appeals to a broader consumer base.

Over the long term, we are also confident that Stacy Adams' strong market position as a leading lifestyle brand for accessible fashion provides a solid foundation to resume future growth once the economy rebounds.

Our retail division also suffered in the first quarter of 2009, due to the poor economic environment. At this time, we have no plans to open any new stores in the US. However we continue to export the market and if the prime locations become available, at reasonable prices, we may take advantage of such opportunities. Our retail business continues to be an important component of our strategy for the Florsheim brand as it provides us direct access to consumers, and enables us to showcase our brand and define and strengthen its image.

In our foreign segment, the acquisition of the business in Australia, Asia-Pacific and South Africa provides the opportunity to further develop those businesses and present a more unified brand image worldwide. For 2009, we expect consolidated sales of the new businesses to be between US$20 million and US$25 million.

We also expect that our share of the income of these businesses will exceed the royalty income we previously earned. And therefore, this acquisition will be accretive to our overall net earnings.

In this uncertain economic environment, we have taken steps to reduce our operating costs and have been closely monitoring both our inventory levels and the credit risk of our customers. Our strong financial position enables us to maintain a long-term focus on our business, to continue to invest in our brands, and to take advantage of opportunities that present themselves.

This quarter, we continued to buy back shares of our common stock at opportune times in the market. We funded the Australian acquisition and we still have ample resources to consider other ventures.

Yesterday, we announced that we increased our quarterly dividend rate from $0.14 per share to $0.15 per share. This reflects our confidence in our brands, our financial strength and the long-term success of our Company.

That concludes our formal remarks. Thank you for your interest in Weyco Group. We would now like to open the call to your questions.

(operator instructions). Haruki Toyama of [Toyama Capital Management].

I had a few questions on the Australian acquisition. They had $25 million in sales in the previous year, so I assume you are expecting a little bit of a drop?

It is too early to tell. I mean, business in Australia and Asia as well as South Africa is -- they are experiencing a bit of the same thing that we are experiencing in the US where the sales trends are a bit tough. So we are budgeting conservatively. There could be a drop down there. It is just too early to know.

Okay and is there sort of a reverse seasonality here because if you did $4.5 million in sales and you are expecting $20 million, $25 million, it doesn't -- I'm wondering if there is a seasonality issue?

The $4.5 million of sales were from -- we actually -- we've not had most of the month of January.

Right. We are missing about a month.

It was a short quarter for us, based upon the timing of the acquisition.

And then the $360,000 loss, you mentioned it was primarily due to acquisition costs. Do you know how much the acquisition costs were?

About $370,000.

Got it. And is there a seasonality to the profits as well or is that really a function of not having January again?

The seasonality would be similar to our US business. It is basically most of that business, Haruki, is Florsheim and so you are going to have the same sorts of ups and downs as you do in the US market.

The summer in Australia because it's in the Southern Hemisphere is a different time of year. But there isn't -- it's not -- the business is essentially the same. So while there is a little bit of seasonality it's -- I guess the answer to your question, no, it's not very seasonal.

OK. And do you know how much is added to your SG&A?

You mean in the actual numbers right now?

Yes because you know, you've been trending your SG&A sort of flat to down and this quarter it jumped $2.5 million, $2 million and I'm wondering how much of that came from the acquisition?

Yes, I can actually tell you that. It -- our SG&A, as we said in the call, from the US was down $100,000 in total. So the majority in our retail division, it was down about $0.5 million in pure dollars.

So on the foreign end, it's up about $2 million. So the SG&A for Australia is around $2 million to $2.1 million in that range.

Got it. And then who owns the other 40% of the equity?

It was the ex or former CEO of a company called [Figgins], which was our licensee in Australia. He was the CFO of that company and ran that Australian business or was in charge of much of it there. So he is the other partner. So he is very familiar with the business. He has been involved since day one. Since we -- in 2002 when we licensed the Florsheim business to Figgins, he's been involved since day one there.

Okay so did he actually have to buy the 40% of equity from Figgins or did -- was this already owned?

The way it worked was, we formed a new subsidiary and he owned part of some of the companies that were purchased so he got cash from some of the acquisition. And he put in cash into our business as part of his equity.

Okay and then it looks like that agreement has it that as he pays down debt, he will increase his stake to 49%?

That's correct.

And then, a couple of questions on the sourcing side. You mentioned that your gross margins and wholesale were down almost 4 points and it sounded like it was almost all higher product costs. Is that correct?

It's a combination of higher product costs and some activity in the first quarter, selling some closeouts and also being more aggressive on price.

Can you give me the approximate split of how much of that 400 basis points was for each one?

I don't think we have that broken out.

(multiple speakers) one thing that I can share with you is that in 2008, at least for the the first part of 2008, we were experiencing a lot of price pressure from factories overseas. You know everything was the raw materials were going and we were getting price increases from our factories on a very regular basis and it was difficult to pass those price increases on.

That situation has really reversed itself. Where you have, again, more capacity in China and also in India for manufacturing than -- it's an overcapacity situation given weakness in demand.

So prices have definitely stabilized. In many cases, you are able to negotiate better prices. So I think that going into the second half you're going to see that that pressure on our margins uses a bit.

And also we have been working to raise our prices with our accounts. We took a very methodical approach to that. We do not -- we did some brands just said, "Okay, our prices are up X percent. We are raising our prices X percent."

We worked with our major accounts so that over a period of really a year, we were able to get some price increases that probably didn't cover the entire amount of the price increase from the factories, but a pretty good percent of it. So I think that -- you know, we went through a period where we really were challenged from a margin standpoint. You see that still in the first quarter. But I expect that as we move into the second half that's going to subside.

Okay, and then do you still -- you used to buy about 40, 42% from India. Is that still an approximate mix percentage?

Is a little low. It's about 35 today. 35 India, 65 China. Still a little bit from South America.

And how do changes in the Indian rupee affect you? I don't know how you buy. If you buy in dollars or how that works.

We buy in dollars and, yes, it sounds like you've noticed that the dollar is at an all-time high against the rupee and that helps. We have been able to negotiate price decreases with some of the factories over there. Definitely eliminates their need to raise prices.

And so it makes -- it's much better for us when the dollar is strong like that against the rupee.

Great. That's it for me. Thanks.

(Operator Instructions). Follow-up question from Haruki Toyama.

Is there an update on -- this is on Florsheim. Is there an update on Dixie Brown? Or are you still on track to launch in the summer and the fall?

Yes, Ducky Brown there are going to be, I guess (technical difficulties) the first shoes in July. First accounts. And we've gotten placement and some very good retailers -- Saks Fifth Avenue, Barney's, Nordstrom. Some really good independents like Scoop that are will note in the industry.

So we are very excited to be rolling that out. It's a relatively small business from a value standpoint. But we think it has been very good for the brand from a creative energy and creating some interest within the industry.

And I noticed you have a safety and workshoe line in Florsheim. I don't know when you launched that.

That was something that we inherited as a license when we bought Florsheim back in 2002. And so, that's been going on for some time and it's actually doing very well. The workshoe business is through a company called (inaudible) Group. Has grown over the years and it's -- they make a really nice product and seems to be doing pretty well at retail.

And they sell primarily in workshoe outlets and also there's more wild trucks that go to different companies, construction sites, factories, they sell directly from these trucks along with some other brands that they carry.

Right. Okay. Thank you.

Thank you. (Operating instructions). Tucker Golden of Solas Capital.

Good morning. Question regarding your share purchase program. Can you just talk a little bit about how you think of that point capital to share purchases versus your dividend? Seems stock has held up fairly well all things considered and just wondering if you could talk about how you look at your stock as a value over -- good deployment of capital at this point?

Well, I think over time we have -- I guess if you guys put stocks in a category, I think you could probably call us a value type stock. And we really believe it's important for us to have a solid dividend.

We think that we are a strong, solid financial company that is going to be here, is going to be a survivor. We have certainly adequate resources from a stability standpoint on the ballot sheet.

We have said we've got this cash on the balance sheet. And we've have this opportunity before and we continue to say that we are looking for acquisitions to grow our Company. We know that our -- the market is a mature market.

So internal growth is sometimes more difficult than the highflying growth which is why I was saying we are probably a value type stock. But from a going-forward standpoint, we do continue to look for acquisitions. We think that this market will present us with opportunities. We are looking. We have the resources to do that which we think will help our growth in the future.

We continue to pay a strong dividend and we -- our plan is to continue to do that. In the meantime we talk about the share repurchase side. We also realize that there are times when the stock is very attractive in our minds, and we have the cash and so we feel that is a good use of that cash versus having it just sit in some type of investment vehicle. We think that is a better deployment of those resources.

Now we can fight back. You are limited on buyback shares based on your volume on a daily basis and so we are limited in that respect, but I think main reasons from our standpoint is we think we would be a solid company with a solid dividend with a future that we have cash to enable us to take advantage of opportunities to grow both our internal brands and external acquisitions.

Because it's basically the same thing we talked about prior to be Florsheim acquisition and we had a lot of cash at that point as well. And we said opportunities will present themselves. We are looking -- the Florsheim opportunity did and it was very successful.

We are hoping that maybe hit lightning in a bottle ball twice, but we will see about that. But we are looking.

Got it. Thanks a lot. That's helpful.

(Operator Instructions). At this moment I'm showing no questions. I would now like to turn it back over to your Senior Vice President.

We would like to thank everybody for joining us and that concludes our conference call for this quarter. Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a great day.