WEYCO Group Inc (WEYS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2011 Weyco Group earnings conference call. My name is Laura and I am your operator for today. At this time all participants are in a listen-only mode, and we will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Mr. John Wittkowske, Senior Vice President and CFO. Please proceed.

Thank you and good morning, everyone and welcome to Weyco Group's conference call to discuss our third-quarter 2011 earnings. Also on this call with me today are Tom Florsheim, Junior, 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 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.

Our net sales for the third quarter of 2011 were $74.6 million, up 31% from $57.1 million in 2010. Operating earnings were $6.7 million versus $4.5 million. Net earnings were $4.4 million as compared with $3.4 million. And diluted earnings per share were $0.40 in 2011 versus $0.30 in 2010.

As will be discussed throughout this call, the improvement in 2011 sales and earnings was the result of increases across our North American wholesale and retail businesses and the result of the acquisition of The Combs Company which we completed during the first quarter.

The Combs Company owns the BOGS and Rafters footwear brands. 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.

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 March 2, 2011, acquisition date.

North American wholesale net sales of footwear for the third quarter of 2011 were $55.5 million compared with $41.1 million in 2010. Wholesale sales in 2011 included Bogs sales of $10.7 million for the quarter.

Licensing revenues for the quarter were $1.1 million, compared with $362,000 in 2010. Bogs licensing revenues were $583,000 and were derived primarily from licensing partnerships in Canada and overseas markets.

Operating earnings for the wholesale segment increased approximately $1.7 million this quarter compared to the same period of 2010. This was the result of higher sales of each of our brands and the impact of the Bogs acquisition. As discussed in our previous calls, we expected the Bogs acquisition to be accretive to our earnings in the third and fourth quarters of 2011, as the majority of Bogs sales occur in the second half of the year.

Net sales of our North American retail segment result from sales of our branded men's footwear to consumers in our 30 domestic retail stores and through our Internet business. Net sales increased 13% to $5.8 million in the third quarter of 2011 compared with $5.2 million in 2010.

Same-store sales were up 22%. There were six fewer retail stores during this quarter compared to last year.

Our retail operating earnings improved by approximately $622,000 for the quarter. The increase was the result of higher sales volumes and slightly lower selling and administrative expenses.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $12.2 million compared with $10.6 million last year. The majority of the other net sales are generated by Florsheim Australia. Their net sales were up 18%.

In local currency, Florsheim Australia sales were flat. The increase in US dollars was caused by the weaker US dollar relative to the Australian dollar this year. Collectively, the operating earnings of these businesses were $1.5 million in the third quarter compared with $1.6 million last year.

Earnings before tax were $7.1 million for the third quarter of 2011 compared to $5.6 million last year. Our increase in operating earnings of $2.2 million was partially offset by a decrease in other income and expense of approximately $770,000. This was primarily the result of foreign currency transaction gains and losses.

In the third quarter of 2011 we had net foreign currency transaction losses of $424,000 compared with a gain of $547,000 last year. This increase was primarily due to foreign currency gains and losses recognized on intercompany loans with Florsheim Australia.

Our cash and marketable securities totaled $63.8 million at September 30 this year compared with $70.2 million at December 31, 2010. We had additional borrowings of $39 million under our revolving line of credit this year, mainly to fund the Bogs acquisition along with the increased inventory and capital expenditure needs as a result.

We also generated $5.4 million of cash from operations; paid dividends of $5.4 million; used $12.1 million to repurchase our Company stock; and had $4 million of capital expenditures. We expect the total capital expenditures for the year to be between $4 million and $5 million. This includes costs associated with integrating Bogs into our operations.

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

Thanks, John, and good morning, everyone. Bogs main selling season began this quarter, and consequently sales of the BOGS and Rafters brands totaled $10.7 million for the quarter. Since the March 2 acquisition date, the brands have contributed $15.6 million of sales and $727,000 of licensing revenues to our top line and have made a positive contribution to our operating earnings.

Our current backlog of orders is in line with our expectations, and we believe have begun to hit our stride with Bogs. We are very pleased with the strong early sellthroughs at retail across a broad range of accounts. In particular, BOGS kids' boots performed extremely well during the back-to-school selling period.

As we head into the fourth quarter we anticipate similar success with our men's and women's product. We also believe a significant opportunity exists to increase our market share in both the hunting and industrial boot categories.

We are also pleased that we experienced growth across all the brands in our portfolio this quarter, with Stacy Adams, Nunn Bush, and Florsheim sales up 6%, 5%, and 10%, respectively. Sales of our Umi children's brand also doubled this past quarter from a relatively small base.

We are especially encouraged by the increase in Florsheim sales, as we believe we are making solid progress updating the brand through placement of footwear with a more casual orientation. The Nunn Bush sales increase was driven in part by the launch of Nunn Bush Core, a collection of walking shoes which combines our successful Comfort Gel technology platform with a lightweight, dual-density, contoured outsole.

Stacy Adams, meanwhile, continued to experience strong retail sales of the brand's more mainstream contemporary footwear across its major accounts.

In terms of Umi, this was the first fall season the brand was able to leverage Weyco's design, development, and sales infrastructure. Umi product is performing well at retail and we feel the brand is well positioned to increase its share of the children's premium footwear market.

In our North American retail segment, our third-quarter same-store sales increased 22%, driven in part by the strong growth of our e-commerce business. While we are pleased with the improvement of our Florsheim retail business, we will continue to close underperforming stores as their leases expire.

To date in 2011 we have closed five stores. While maintaining a retail presence is an important part of our branding strategy for Florsheim, we will continue to evaluate our stores in the retail landscape on an ongoing basis.

Overseas our retail performance remained strong, with same-store sales up 13% in Australia and 10% in Asia. There was softness however in overseas wholesale shipments this quarter, mainly in Australia, where sales to our two major wholesale accounts continue to be challenging.

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 experience increasing costs on the supply side for the near to medium term.

That concludes our formal remarks. We appreciate your interest in Weyco Group, and I would now like to open the call to any questions.

(Operator Instructions) Rebecca Simmons, DePrince, Race & Zollo.

Good morning. Thanks for taking my call today. My question is on gross margins. I was seeing if you could talk maybe a little more color on raw materials and your expectations going forward, and also if you're still seeing some pricing pressure out of Asia.

Okay. Yes, I would say that we definitely are still seeing pricing pressure out of Asia, and there has been somewhat of a shift as far as what the source of that pressure is. Over the last year, there has been a lot of pressure due to raw material increases, and that to some extent has settled down.

Obviously a big raw material for us is leather, and the leather market has stabilized. So that is a positive, that raw materials have somewhat settled down.

What we are continuing to face -- where we're continuing to face increases involves labor costs and also the currency. The Chinese currency is down about 3.5% so far this year, but there is a real concern on the part of the factories that they don't really have any way to hedge. So the US is putting a lot of pressure on China to increase the value of that currency, and so the factories are nervous about the dollar continuing to weaken against their currency, so that is a big factor.

The other thing is, China continues to basically dictate increases in labor costs. It's the amount that people are paying per hour and all the other benefits that are involved in labor costs, and we see that continuing. So out of China we definitely continue to feel quite a bit of pressure, and it comes from essentially those two things that I just mentioned.

Okay, great. And then looking at your Bogs acquisition, I know it started to be accretive in the quarter. Is this in line with your expectations? What -- do you feel it is going to strengthen going forward?

Yes, we are pleased with the quarter in the sales. The numbers are certainly above what Bogs did the prior year, and we certainly expected them to be up. It's very difficult to really predict where it's going to end up.

It is pretty new. We are now putting our design-development capital behind it, so there is a lot more inventory available for customers to fill in, so it's very difficult to predict.

But we are certainly happy with the quarter and its value to the bottom line. We don't usually give guidance going forward, so I won't do that, but I would say that it is doing about what we expected.

Okay, that's great. Then you had a lot of sales growth on a lot of your different lines. Do you think that that type of growth is sustainable? Or how -- you kind of -- what are you viewing that going forward?

This is an area where we kind of get into like giving forecasts, and we hesitate to do that. I think what I will say is that we have spent a lot of time on our core brands over the last few years trying to position them more in a casual space, trying to update our look so that we stay relevant to what is happening with fashion, which means a lot of them have a little bit more of a contemporary look. And I think that some of that has paid off.

So whether that is going to be sustainable or somewhat of a victim to what is happening at retail -- and there's a lot of questions about how retail is going to be in the fourth quarter and how Christmas selling is going to be, and we're not immune to that. So I guess the quick answer to our question is we think that Stacy Adams, Nunn Bush, and Florsheim are in pretty good places today. So we hope that that growth is sustainable, but no promises.

Okay, great. Lastly, just looking at your inventory levels, how do you feel about where those are at?

I think that are inventory levels are in a good place. We forecast in a pretty strategic way where a good percentage of our surplus inventory is in our core styles that we will be continuing.

So the one nice thing about the men's business -- and Bogs, even though it has women's, men's, and kids has a big core business. But both -- really when you look across our brands, and maybe the one exception is our smallest brand, which is Umi, we have a high percentage of our styles that we would consider core carryforward styles.

So we are able to carry that inventory. If it doesn't sell in one season, it is still good inventory the following season. So we are able to -- and so that minimizes our markdown exposure.

We are very careful on seasonal goods and goods that will be -- that are seen as in-and-out type product. So our inventory is very clean. I think it is as clean as it has ever been, and I think we are very comfortable with where are inventory levels are.

Okay. Well, that was all I had. I appreciate you taking my questions.

Thanks for the questions.

Thank you.

Thank you for your questions. Sir, you have no further questions at this time. (Operator Instructions) Sir, we have no questions coming through at this time.

Okay, then we will thank everybody again for joining us and we will talk to you next quarter. Thank you.

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