WEYCO Group Inc (WEYS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Weyco Group earnings conference call. My name is Kendall and I'll be your Operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. John Wittkowske, Chief Financial Officer. Please proceed.

Thank you. Good morning, everyone, and welcome to Weyco Group's conference call to discuss our fourth quarter and full-year 2010 earnings. On this call with me today are Tom Florsheim Jr., our Chairman and CEO, and John Florsheim, our President and COO.

Before we begin, 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 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 non-GAAP measures. Our SEC filings may contain additional information about these non-GAAP measures and why we use them.

Net sales for the fourth quarter of 2010 were $62.3 million compared with $58.4 million in 2009. Net earnings were $5.1 million in 2010 versus $4.8 million in 2009. Diluted earnings per share were $0.45 up from $0.41 last year.

The net sales of our North American wholesale segment include wholesale sales of footwear in the United States and Canada, along with licensing revenues that result from third-party sales of our branded, apparel, accessories and specialty footwear in the United States as well as from the sale of our footwear in certain foreign markets. North American wholesale sales of footwear for the fourth quarter were $43.9 million compared with $43.2 million in 2009. Looking at each brand, Stacy Adams was up 12% while Nunn Bush and Florsheim were down 4% and 2%, respectively. Licensing revenues for the quarter were $766,000 in both 2010 and 2009.

The net sales of our North American retail segment result from sales of branded -- excuse me, of men's branded footwear to consumers in our 35 domestic retail stores and through our Internet business. Net sales were $6.8 million in the fourth quarter of 2010 compared with $6.3 million in 2009. Same-store sales were up 9%. Other net sales, which include our wholesale and retail sales in Australia, Asia/Pacific, and South Africa, which we collectively call Florsheim Australia, as well as our operations in Europe were $10.9 million in the fourth quarter, up from $8.1 million in 2009.

Operating earnings for the quarter were $7.2 million in 2010 compared with $6.7 million last year. During the fourth quarter of 2010 and 2009, earnings from operations were reduced by charges of $310,000 and $1.1 million, respectively, to recognize the impairment of certain retail segment fixed assets. For the year, net sales were $229.2 million, up 2% compared with the $225.3 million in 2009. Earnings from operations were $18.8 million, up from $16.8 million. Net earnings were $13.7 million up from $12.8 million in 2009. Diluted earnings per share were $1.19 versus $1.11 in 2009.

In the wholesale segment, net sales were $166 million in 2010 compared with $168.7 million in 2009. Wholesale product sales were $163.8 million, down from $166 million last year. Sales of the Company's Stacy Adams brand were up 9% for the year while the Nunn Bush and Florsheim brands were down 6% and 7%, respectively. The Umi brand, which was acquired in April of 2010, had $1.2 million of net sales. Licensing revenues were $2.2 million compared with $2.7 million in 2009. Operating earnings of the wholesale segment were down approximately $800,000 this year mainly due to the reduced licensing revenues.

In the retail segment, net sales were $22.5 million up from -- up 2% from $22 million. There was 1 fewer store in 2010, and same-store sales were up 3.5%. The retail division's operating earnings increased $1.1 million in 2010, primarily due to the smaller impairment charges as well as lower depreciation expense.

The Company's other businesses had net sales of $40.7 million in 2010, compared to $34.6 million in 2009. The majority of the increase was at Florsheim Australia, whose net sales increased $5.5 million, or 20%. In local currency, Florsheim Australia sales increased 4%. The weaker US dollar in 2010 relative to the Australian dollar caused the remainder of the sales increase. There was a $1.7 million increase in earnings from operations in the Company's other businesses due mainly to Florsheim Australia's increased sales and gross margins.

The Company's other income was $345,000 compared with $1.4 million in 2009. The decrease was due to lower foreign currency exchange gains on inter-Company loans in the current year.

At December 31, 2010, the Company's cash and marketable securities totaled $70.2 million, and there was $5 million of debt outstanding under our revolving credit line. At December 31, 2009, the Company's cash and marketable securities totaled $76.8 million with no debt outstanding. During the first part of 2010, cash was used to build inventories up from the historically low levels seen at the end of 2009. Later in the year, we continue to build our inventories on select core styles in anticipation of possible price increases from our overseas manufacturers. We used $7 million of cash in 2010 to pay dividends, $2.3 million to repurchase Company stock and $2.6 million for the Umi acquisition. We also borrowed $5 million under our line in 2010.

On March 2, 2011, we acquired the Combs Company. Combs owns the BOGS and Rafters footwear brands. BOGS is a line of boots and shoes for men, women and children which are sold across the agricultural, industrial, outdoor specialty, outdoor sport, lifestyle and fashion markets. Rafters is a line of outdoor sandals. The purchase price was $29.4 million in cash plus assumed debt of approximately $3.5 million and contingent payments after 2 and 5 years, which are dependent on the brands achieving certain performance measures. The 2 brands had approximately $27 million in sales during 2010, with the majority of those sales under the BOGS brand name. We expected that the acquisition will be accretive to our earnings in 2011, excluding the impact of certain purchase accounting adjustments as well as transaction and integration costs. However, we expect that most of the accretion will occur in the second half of the year as the majority of BOGS' business occurs in the third and fourth quarters. I will now turn the call over to Tom Florsheim Jr., our Chairman and CEO.

Good morning, everyone. We're pleased to report improved results for the fourth quarter and the year. While 2010 had its challenges, we saw the retail environment stabilizing end on a positive note with strong holiday selling season-- with a strong holiday selling season. Over the past year, we feel we've made good progress on a number of initiatives that will better position our brands and Company for the long term.

In our wholesale business, our results varied by brand. Stacy Adams had a very good fourth quarter and year with sales up 12% and 9%, respectively. This performance reflects the success of Stacy Adams evolution to a more mainstream fashion position in the footwear market. Stacy Adams sales were up across nearly all major channels as the brand experienced growth in both its contemporary and denim-oriented footwear. Stacy Adams also expanded its penetration in rubber sole fashion-- in the rubber sole fashion casual market, a category which we believe is essential for the future growth of the brand.

The Stacy Adams licensed apparel and accessories business remains challenging for reasons discussed in previous conference calls. Stacy Adams licensed products are heavily dependent on sales of higher fashion merchandise through independent clothing stores. Business in this segment is down trending and we're currently working with our licensees to more closely follow the success of our footwear business model, which enjoys broad consumer appeal and sells across multiple trade channels.

Shipments of our Florsheim brand were down 2% in the fourth quarter and 7% for the year. This negative trend mirrors the overall decline in the men's dress shoe market. For this reason, we remain very focused on enhancing the dress casual and casual segments of the Florsheim line in order to get the brand back on a growth track. While we're disappointed with Florsheim's performance, we do feel that we've made good progress in terms of new initiatives that highlight the considerable strength of the brand name.

This spring we're delivering the fourth season of our Florsheim by Duckie Brown collection. The collaboration continues to garner positive fashion press for the brand and has enabled Florsheim to get placement at a select level of distribution. This past fall, we launched Florsheim Limited, which similar to Duckie Brown, plays off the fashion heritage of Florsheim at accessible price points. Florsheim Limited is selling well at retail and is providing good momentum for the brand.

In terms of Nunn Bush, shipments were down 4% for the quarter and 6% for the year. The [loss in volume] for Nunn Bush was primarily the result of the decline in shipments to a major national account that is converting a higher percentage of its footwear budget to private label programs. In July 2010, we delivered the first Nunn Bush All-Terrain Comfort shoes which represent an expansion of the brand into the rugged casual category. Initial sell-throughs at the consumer level have been strong, and we see Nunn Bush ATC as an important driver of future growth.

For 2011, we're also introducing an enhanced line of walking shoes called Nunn Bush Core. Nunn Bush Core combines our successful comfort gel platform with a lightweight dual density contoured outsole to create a superior walking shoe experience. We're just starting to sell Core to our retail accounts for delivery in the fall and so far our bookings have been strong.

In April of last year, we acquired the children's footwear brand Umi. During 2010, we shipped approximately $1.2 million of Umi product and we're excited about the potential of the brand as well as the opportunity Umi presents in a new category.

Over the past 6 months, under the leadership of Mark Kohlenberg, the Founder of the brand, our design staff has retooled and updated the Umi line. We believe that Umi is a strong foundation now under the Weyco umbrella the investments and product development, inventory as well the support of superior back office operations will help the brand grow.

Regarding our Florsheim Australia subsidiary, which includes the Pacific Rim and South African markets, our retail same-store sales were up approximately 8% versus 2009. We experienced solid growth in our Pacific Rim and South African wholesale shipments, but we continue to experience challenges in the Australian wholesale market. Overall, Florsheim Australia is meeting our expectations, and we anticipate additional upside in this business as we work to streamline our systems worldwide.

At our North American retail segment, our same-store sales were up 9% for the quarter and 3.5% for the year. While we are pleased with the performance of some of our retail stores, and with our online business, we still have a number of retail locations that are underperforming. In December 2009, we analyzed our stores and determined that 6 locations were not performing well enough to support our investment in them. Therefore, we took a $1.1 million impairment charge to write off the fixed assets related to these locations. Two of the six locations whose fixed assets were written off in 2009 closed in 2010.

This past December, we performed analysis again and wrote off another $310,000 of retail fixed assets relating to three additional stores. It's likely that these three remaining stores will also close as their leases expire over the next year-- over the next years, excuse me.

As John mentioned earlier in the call, we are excited about our acquisition of the Combs Company, the owner of BOGS and Rafters footwear brands. The addition of BOGS and Rafters fits well into Weyco's strategy to diversify the Company's product mix to enhance our share of the casual footwear market. Furthermore, we believe our size and infrastructure will help these brands continue to grow and thrive in the marketplace.

Since its launch in 2002, BOGS has established a unique identity in the footwear market with a line of boots and shoes designed for men, women and children sold in a wide variety of retail channels. The goal of the brand is to provide high-quality footwear comfortable enough to wear everyday but durable enough for the toughest working conditions. The brand's signature 4-way stretch neoprene technology has a loyal following with a diverse consumer base, ranging from the industrial worker to the outdoor enthusiast to the mother looking for a warm waterproof boot for her child.

The BOGS motto of wherever there is weather, speaks to the ruggedness and authenticity of the brand. BOGS' success in these various markets has put the brand on a strong growth track in recent years which is compelling -- which is a compelling accomplishment given the prevailing retail environment.

While we are impressed with the quality of the BOGS product and the brands' growth potential, we are equally excited to be working with the Combs family. Bill Combs, the Founder and CEO of the Combs Company, will be the President of BOGS and Rafters. Sue Combs will be the Manager of Design and Development for the brands. Their sons, Dustin and Riley, will stay on as Vice Presidents of Sales.

Bill and Sue Combs, along with their sons Dustin and Riley, are part of a multi-generation footwear family with over 60 years of experience in this business. We can relate strongly to that background, and we believe that their energetic straightforward approach is a great fit for Weyco. The Combs family will continue to run the BOGS and Rafters business out of Oregon, focusing on design and product development as well as sales and marketing. Certain operational functions of the business such as purchasing, distribution and customer service may be integrated into our office and distribution center here in Glendale, Wisconsin.

This is our first major push into the true outdoor market. We believe that given the strong market trend toward more casual and outdoor lifestyles, it is strategically important for Weyco to build our presence in this area. BOGS has a strong position and a well-defined niche in the outdoor market. And we are excited about working with the Combs family to help the brand reach its potential and feel that BOGS can become a meaningful driver of our overall growth.

This concludes our formal remarks. I'd like to thank everyone for their interest in Weyco Group and we'd now like to open up the call for any questions.

(Operator Instructions) Your first question comes from the line of Darren Weems with DePrince.

Hello, thanks, guys. I was just wondering if you could provide some color on your raw materials costs, and just how to think about the gross margin in 2010? Thanks.

Sure. There are, as you're aware, a lot of price pressures out there, I mean anything from the leather markets to most of the other components involved in footwear manufacturing. And so there's definitely quite a bit of price pressure, and we experienced that in a big way as we got into the second half of 2010.

We have raised our prices, and that is something that usually takes a while to really see an impact from the price increases. But as we move into the second half of this year, 2011, we think that the price increases will offset to a large degree, the prices that we've received as far as the cost of our footwear.

We saw this a couple years ago, and sometimes there's a transition period where you have people that are still locked in at old prices, even though the price of the footwear has gone up. So there may be a period of time during the first half where we see a little bit of margin erosion, but we think that as we move through the year, that we will be able to maintain our margins.

Good. And can you talk a little bit about accretion opportunities with the Combs Company acquisition, how to think about that?

Sure, John Wittkowske will take the question.

Okay, thanks.

Yes. We believe that the BOGS acquisition will be accretive to our 2011 earnings. As we mentioned in the call, we wouldn't expect that to happen until the second half of the year given a little bit of the seasonality and when their business happens. If given an estimate, we would expect that in 2011 it would be around $0.20 a share, but it's very difficult to predict the first year of something like this. There are integration costs, there are transaction costs, synergies aren't really fully implemented typically in something like this until a little bit down the line. So the first year is very difficult to predict, but we think it could be around $0.20 without considering some of those factors.

Great. And then lastly, can you talk about the end markets for Nunn Bush and Florsheim? Do think that these brands can turn positive from a sales standpoint in 2011?

Yes. I mean it's -- we're early on in the year, and we don't like to give specific guidance on brands.

Right.

Our feeling is that especially with Florsheim, it's been caught up in overall pressure on the dress shoe market the last number of years. And so we've seen our sales decline with the market, in fact, probably not as steep as the market decline. And what we're really working to do is introduce more of a casual element to Florsheim. And I guess my feeling is we're starting to turn a corner there. We've still got a lot of work to do, but we're hopeful that we've kind of bottomed out in terms of that cycle, and we're starting to head the other way. We're seeing good growth overseas with Florsheim, which is interesting. I think the brands' position overseas for the dress market continues to be pretty strong, is encouraging.

With Nunn Bush, it really -- the decline that we saw this past year was really the result of more-- with one particular major account, more of the budget going to private label footwear. And that's a cyclical thing in our industry. There tends to be periods of time where there's more of an emphasis on private label footwear, and then it swings back towards brands. Generally, in the men's footwear market, it's very difficult to run a profitable private label business on non-seasonal goods over time. So, I'm hopeful that we'll see the trend reverse with Nunn Bush as that cycle takes its course.

Okay, thanks. That's all I have.

Thank you.

(Operator Instructions) And you have no questions on the line. I would now like to turn the call back over to John Wittkowske for closing remarks.

We just want to thank everybody, again, for joining us on the call, and we look forward to our next call. Thank you for joining us. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.