WEYCO Group Inc (WEYS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011, Weyco Group Incorporated earnings conference call. My name [Katina], and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session. (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 CFO. Please proceed.

Thank you, and welcome everybody and good morning and thanks for joining us on our second quarter conference call. Sorry, it's a little bit late. There was a little bit of technical difficulty.

On this call with me today are Tom Florsheim, Jr., Chairman and CEO; and John Florsheim, President and COO.

Before we begin, I'd like to 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 may differ materially.

We refer you to our most recent Form 10-K as filed with the Securities and Exchange Commission, which 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 use them.

Net sales for the second quarter of 2011 were $56.6 million, up 16% from $48.7 million in 2010. Operating earnings were $2.7 million versus $1.7 million in 2010. Net earnings were $1.9 million, as compared with $1.3 million. Diluted earnings per share were $0.17 in 2011 versus $0.11 in 2010.

As we announced last quarter, we acquired The Combs Company, the owner of the BOGS and Rafters footwear brands on March 2, 2011. BOGS is a line of boots and shoes for men, women and children, which is sold across the agricultural, industrial, outdoor specialty, outdoor sport, lifestyle and fashion markets. Rafters is a line of outdoor sandals. The two brands had approximately $27 million of sales during 2010, with the majority of those sales under the BOGS brand name.

Hereafter in this call, we will refer to The Combs Company as BOGS. The financial results of BOGS are included in our consolidated financial statements from the date of acquisition. We expect the BOGS 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.

North American wholesale net sales of footwear for the second quarter of 2011 were $38.7 million, compared with $34.8 million in 2010. Wholesale sales in 2011 included BOGS sales of $2.6 million for the quarter. Licensing revenues for the quarter were $650,000, compared to $470,000 last year. BOGS' licensing revenue were $143,000.

Operating earnings for the wholesale segment decreased approximately $725,000 this quarter, compared to the same period of 2010. This was the result of slightly lower gross margins and higher selling and administrative expenses, primarily due to the inclusion of BOGS' second quarter operations this year.

BOGS had an operating loss for the quarter as sales in the second quarter are typically low due to the seasonality of the business, and most operating costs are fixed in nature. In addition, there were transition costs in the quarter associated with moving BOGS operations from Eugene, Oregon and integrating them into our Glendale, Wisconsin facility. That transition is now complete. Net sales of our North American retail segment results from sales of our branded men's footwear to consumers in our 31 domestic Florsheim retail stores and through our Internet business.

Net sales increased 11% to $5.9 million in the second quarter of 2011, compared with $5.3 million in 2010. Same-store sales were up 19%. There were four fewer retail stores during the second quarter of this year. Retail operating earnings improved by approximately $360,000 for the quarter. The increase was the result of higher sales volumes and flat SG&A costs.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $11.3 million in 2011 versus $8.1 million in 2010. The majority of other net sales are generated by Florsheim Australia.

Florsheim Australia's net sales were up 39%. In local currency, those sales were up 16%, reflecting higher sales in both its wholesale and retail businesses. The additional increase in US dollars was caused by the weaker US dollar relative to the Australian dollar this year.

Florsheim Europe sales increased due to higher wholesale shipments in the second quarter. Collectively, the operating earnings of these businesses were $1.5 million in the quarter, compared with $96,000 last year. This increase was driven by higher sales volumes and gross margins at Florsheim Australia.

Our cash and marketable securities totaled $69.3 million at June 30 this year, compared to $70.2 million at the end of last year. We have borrowed $31 million under our revolving line of credit this year, mainly to fund the BOGS acquisition.

We also generated $14.7 million of cash from operations, paid dividends of $3.6 million, used $10 million -- $10.2 million to repurchase company stock, and had $3.1 million of capital expenditures during the first half of the year. We expect that our capital expenditures will be between $4 million and $5 million for 2011, which include the cost associated with integrating BOGS into our operations.

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

Thanks, John, and good morning everyone. We have been busy this past quarter integrating BOGS operations into ours. All BOGS inventories now house in our distribution facility in Glendale, Wisconsin and the distribution center in Eugene, Oregon is closed.

Going forward, sales, marketing and design functions for the BOGS and Rafters brands will be managed out of Portland, Oregon under the direction of The Combs family with all other functions here in Glendale.

As John mentioned, BOGS contributed $2.6 million of sales to our second quarter and had a loss from operations. This was expected because the second quarter is an off-season period for BOGS with slow sales. However, operating costs are fairly level throughout the year as the majority of them are fixed in nature. In addition, operating costs this quarter included transition expenses incurred to move inventory and operations across the country.

We are happy to have the majority of this transition behind us as we move into the second half of the year, which is the main selling season for the BOGS brand. Our current backlog of orders is in line with our expectations and we look forward to a busy second half for BOGS.

Excluding BOGS, our North American wholesale business was up 4% this quarter. Looking at performance by division, Stacy Adams was up 14%, as the brand experienced strong sales of mainstream fashion footwear to national accounts. Meanwhile, Florsheim and Nunn Bush sales were down 1% and 2% respectively.

We continue to focus on evolving the casual arena of our existing brands. We are fortunate to have strong brands and we believe there's significant opportunity to leverage each brand's heritage to build unique products for today's more relaxed lifestyle. This emphasis is reflected in various initiatives across our respective divisions, including the introduction of the Nunn Bush Core enhanced walking shoe collection this fall, the expansion of the Florsheim casual assortment, as well as the growth of the Stacy Adams modern and denim footwear segments. Repositioning our brands to penetrate new categories is a long-term ongoing process, but we believe we're making solid headway.

The changes we are making in the merchandise index of our existing business, in combination with the addition of BOGS and Rafters, and the 2010 acquisition of Umi, has given our wholesale business a decidedly more casual market position.

In our North American retail segment, our second quarter same-store sales increased 19%. While we are pleased with the improvement of our Florsheim retail business, we continue to close underperforming stores as their leases expire.

To date in 2011, we have closed four stores and one more is scheduled to close next week. While maintaining a retail presence is an important part of our branding strategy for Florsheim, we will continue to evaluate our stores and the retail landscape on an ongoing basis.

Overseas, our retail performance remains strong with same-store sales up 8% in our Australian stores and 18% in Asia. In May, we opened a Florsheim store as part of the new Westfield City Center project, which is in the center of downturn Sydney. This is a high-profile store that we believe will serve as a flagship for the brand in the eastern hemisphere. Our overseas wholesale performance has also picked up in the quarter with Australia's wholesale sales up now 7% for the year over last year after a disappointing first quarter.

Similar to other companies in our industry, we face significant pricing pressure out of China and India, based on increased labor and material costs. Product costs out of China are also increasing due to the strengthening of the Chinese currency relative to the US dollar. We have raised our selling prices for fall in an effort to maintain our margins, but we believe we will continue to face increasing costs on the supply side for the near to medium term.

That concludes our formal remarks today. We appreciate everyone's interest in Weyco Group and would now like to open up the call to any questions that might be out there.

(Operator Instructions) Darren Weems.

Yes. Can you talk about the potential accretion for the BOGS acquisition please?

Well, we don't typically give guidance and we're not going to give a number out there. But I think what we'll try to do, to give the magnitude is to say how much sales were in 2010, which were $27 million and we certainly would expect and will achieve growth higher than that on a year-over-year basis. Now, realize that we also didn't have the first two months of BOGS this year. We started on March 1 and the $27 million is an annual number. But we're not -- we just aren't in the -- we don't give guidance like that, but we do expect it to be accretive, but I can't give you a number.

Okay. And then for operating expenses, can you talk about the unusual items in operating expenses this quarter, maybe quantify beyond the items?

Well, you mean the unusual items, you mean the --

Transition cost and things like that.

Transition cost. We don't have that specifically broken out, nor will we in the 10-Q. So I can't throw a number out there. But it was -- at the top of my head, I do not have a -- I do not want to throw a number out there because I don't have that number and I don't want to give a misleading number on that. I guess the best I can say is we had a double operation for about four months of the year and that it's completed.

We hired less people in Milwaukee than we would have had in the Eugene facility. So we expect some synergies there. We would expect synergies in the warehousing operation, which we had to add some people here, but certainly not to the extent that for in Eugene, Oregon to handle the volume, we did make some investments in capital expenditures to handle the volume and handle the extra inventory. All of that is behind us and I think you'll see the results of that in the next two quarters.

Okay. And then on the gross margin, you were a little bit concerned last quarter about leather prices and talking about rise in prices that kind of get ahead of those trends, your gross margin was a lot better than I expected this quarter. Is this a good level to think about going forward?

The price pressures out of Asia continue. We benefited somewhat in the last quarter from strong margins in our oversea subsidiaries, specifically Australia and Asia. So I think that -- I agree with you that our margins ended up looking pretty healthy this quarter. I think that as we move into the third and fourth quarter, it's little difficult to give you an exact number and we're not trying to be vague here, but it's a little bit of a moving target with prices. I mean, we're getting price increases daily.

It seems as if the capacity in China right now is opening up, for the first half of the year it was very tight. Second half of the year, factories are looking for orders. And so, even though there continues to be a lot of price pressure that is offsetting or mitigating some of the price pressure. So we're hoping that as we move into the second half, it's going to be a little bit less.

So I would say that we hope to be able to continue to show the kind of margins that we did in this most recent quarter, but they could be slightly lower.

Okay. And then also the sales look pretty good across all your different brands collectively. Does it feel like the environment is getting better or about the same?

I would say that the environment is about the same. Retail -- you see the overall retail numbers, I mean, the retail numbers were not particularly good for June. And I think that people are nervous in general about the second half. We feel as if our brands are outperforming the market right now. We look at our sell-throughs at retail on a weekly basis at most of the major accounts that we have and we are performing quite well. And so I think that while the market has not really strengthened, I think that we are well-positioned right now with all of our brands. And so hopefully we can outperform the market in the second half.

Okay. And then lastly, you have a lot of cash and securities on the balance sheet, I think about $69 million. I mean what's your priorities for cash as you go forward?

Well, we also have about $40 million in debt.

Right.

And so I look at it as more of a net position. Our securities are running a little bit more than our current bank borrowing rate. And so we're not anxious to really just sell those off. We are evaluating our portfolio all the time from a risk standpoint, but we always look at really a net $20 million in cash which is significantly down from what it was a year and a half ago prior to the acquisitions.

And so we've always had the cash there, because we wanted to be able to make long-term decisions and make acquisitions.

We don't have any specific plans. We will continue to pay dividends. We will continue to use some excess cash to buyback our company stock if the opportunity presents itself. So I think that right now if you said, other than operations what are we using that excess cash for? I would say, [they can] be dividends and also to buyback stock when opportunity presents itself.

Okay. And then lastly, how do you feel about inventory levels?

Well, I think our inventory levels are good. I mean, we are always looking at those. I know we were up and down over the last couple of years, but we feel pretty good. We don't think we have any or certainly a great amount of bad inventory. And we're always buying and trying to project forward, given the three to four months lead times of inventory, we've always got to make projections on how much inventory to have in stock. And we're now doing that of course with BOGS as well, which is the first full season for us with that.

So, in general, we feel good about the inventory levels. We don't believe we have any really bad inventory in our warehouse. And hopefully don't go up, because as they go up, hopefully -- that's projecting future sales.

Okay. Well, thanks for taking my questions and it was a good quarter.

Thank you.

(Operator Instructions) Haruki Toyama.

Hi, how are you?

Hi, Haruki.

I have a few questions here. First, what happened with the same-store sales in retail that was very strong?

Haruki, it's a tough question to answer. I mean, we think -- we hope that it's because we're managing the stores better. We've done some things from the standpoint of store presentation, which I think are having a positive impact. I also think that the performance in the stores, which are, as you know, 100% Florsheim shops and outlets.

I think that the performance reflects the fact that we're getting a more relevant merchandise mix in Florsheim. It's more casual and in a spring season, particularly that has a positive impact. If you visited any of the stores, you'll see the windows have a lot more color. We've got fun spring casual type footwear from that which we haven't really had much of in the past. And so I would say that we're doing some things a little bit differently visually in the stores and then also just to impact of having more relevant merchandise.

Now can you translate the benefits you're seeing with sort of upgrade in mix to your wholesale channel?

We hope to see that as we move into next year. We just came out with our spring line for 2012 and we've been out showing it to accounts for two, three weeks and the response has been very, very positive. I think that we're a little bit ahead of the curve in our retail stores because we're -- we merchandise those stores the way we feel is best with a transition, with a brand where you're going from being a very dress shoe brand to a more casual brand.

It takes little bit of time to win the confidence of your accounts with that product change. And so I think that we've had some good tests at retail with our accounts on more casual footwear, and so we expect as we move into the second half of this year and really more to the spring of 2012, the mix that we see with our wholesale accounts at retail is going to change and become more casual like the mix that we currently have in the stores. And so I think that -- your question is a good one because I think that's our intention, and I think that you will see that happen more in 2012.

Okay. And then Australia, the sales rebound. So you saw your two major department stores buyback or buy more shoes for their inventory. Is that basically what happened?

Hi, Haruki. It's part of it. One of the two major department stores have seen some nice increases. And I think our performance overall has picked up at retail in Australia with those two stores. And then we're just seeing -- we have one additional major account which has helped with that increase in Australia. And so that business seems to be turning around and heading in the right direction from where it was a couple of quarters ago.

In the retail business, there is also -- has also been strong and that's helped.

Yes.

And then as -- I think John Wittkowske mentioned earlier, our gross margin is up in Australia for both retail and wholesale, and part of that is the strength of our Australian dollar.

Okay. And then on BOGS, how much of that inventory you have right now is for BOGS?

Just --

About [$250,000] I hope so.

Yes, it -- well, about $5 million, I would say.

Okay. And what is the seasonality of that, because most of your sales are in the second half of the year --

Right. That inventory would start building right now. We do -- in our inventory numbers there is in transit inventory. And so there is -- for example, in the June 30's inventory, there was a product that's going to be coming in, in July and August. That is on the water, has left the factory. That's our inventory. So it's not -- we don't count inventory only when it gets into warehouse. So there's some of that in -- for example, there's a couple of million dollars of the five that I mentioned in transit at June 30. But you would certainly -- probably see that inventory peak. I'm going to say, into July, maybe into August and then it will start being sold, and it is sold starting August through the next three, four months.

So it's getting to -- it will be higher here -- if you look at July 31, I think it would be higher than what it is right now. But by September 30, there are good amount of sales that happen in August and September. So I don't think you'll see a big bump there either.

Okay. But if you -- if I assume you do something similar to $27 million then if the vast majority occurs in the second half, you might be doing something say $20 million in sales in the back half or more, but you can support that with $5 million, $6 million, $7 million of inventory?

The inventory is just starting to fall out.

(multiple speakers) starting to fall, yes, your number is -- I would tell you that your number is not far off. And yes, we have the inventory to support that sales level.

It's a constant flow of inventory.

We will have the inventory to support that level.

Okay. And then what are the licensing revenues in that business front? What kind of merchandise is that?

It's -- they've got foreign distributors in Canada and all over the world where there is a licensing fee paid, product is shipped directly to them and they pay a first cost commission on that. And that's principally what it's from.

Okay. So it's to say, it's all footwear.

It's all footwear, yes.

All right. And then I think it was you, Tom, you made a comment that you are getting price increases daily. Does that mean you're putting -- you're getting price increases from your vendors or you're pushing forward the price increases through your channel?

It's -- we're hearing from factories daily asking for price increases, which we fight as much as we can. We raised prices. Our new price list for fall just went out. It was going out this month and that reflects some higher prices. But we're doing that in a measured way because if everything that you read about beat up consumer in the US right now.

I mean, we're hesitant to raise prices too much. And so we're trying to be very kind of methodical in that and we're fighting the end price increases where we can from the supply side, but the real pressure is out there between the labor -- the things that John Wittkowske basically mentioned with labor and other components in leather costs. So it's just -- it's a little bit relentless right now though from the supply side.

Okay, great. Thank you. That's it from me.

Thanks, Haruki.

Ted Goins.

Thank you. Good morning. I just wanted to ask -- and you may have covered this on prior calls. I apologize everybody else listening. You've been very disciplined about making acquisitions in the past. And you spent a lot of money to buy BOGS. And so I was hoping you could touch on what it is that BOGS does that you found to be so special?

Sure. We've been -- Ted, we've been looking for acquisition in the outdoor market for a while. And we've filed BOGS [for a cozy] for a while. So this wasn't something that just flashed up on our radar screen. We've defined the company and we think that when you look at the outdoor market, there are certain categories like Trail Running where you have just a lot of players and the market is very kind of -- it's broken up into a lot of small pieces and we felt that in area of the market like that would be very difficult, not sure the number one or number two player.

And with BOGS, they are in a segment of the market, which is these weather boots, where it's a smaller market than Trail Running, but BOGS has a very good position in that market. They're thought of as kind of -- I'll give you a shoe analogy which maybe isn't the best thing do. But (inaudible) the weather boots. They're thought of as a very high-end product and they developed, The Combs family developed what we feel is a very unique concept. And typically these weather boots are thought of as almost like boots you just wear when it's raining or rain boots and you put them on to shovel the walk and you don't wear them, because they're not that comfortable.

The concept behind BOGS is that they're built with this booty, it's a booty construction, which is kind of if you think of a scuba diving suit, you put your foot into this near free four-way stretch shaft of the boot, and your foot slides in there, it's instantly comfortable and the boots are built on [glass] that are more like a walking shoe than your typical rain boot. So your heel is held in. And so your foot is warm, it stays dry and it's comfortable like a walking shoe, so you can literally wear it all day.

And the market has recognized that the product is unique and that has driven the growth of BOGS over the last few years. I mean they've been on this pretty incredible upward trajectory. So, we feel that they're in a very defined position in the outdoor market, a very defined segment of the outdoor market. They have a very good position within that segment. And that's really what we're looking for. We didn't want to be number three or number four in a market. We wanted something that was -- had a very good position in the outdoor business. And so we think that it's going to be a very good acquisition for us. I don't know if I -- did I answer your question?

Absolutely. If I could, if the sales were $27 million last year for BOGS, what were their sales the year before?

They almost doubled their sales from the year before. You have to put that in context of a very -- they did that in a very tough economy. There are very few companies that were growing their sales like that.

And did you approach them or did they approach you?

We approached them the first time, which was a few years ago. And this time, when we actually were able to make the acquisition, they were growing so fast that they needed to do something, because they didn't really have the capital or the infrastructure to grow. And so we went through a process that was driven by an investment bank.

Thank you. I'll follow up. Thank you very much.

Okay. Thanks, Ted.

There are no further questions at this time.

All right. We'd like to thank everybody for listening to our conference call today. Have a good week.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.