WEYCO Group Inc (WEYS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Weyco Group earnings conference call. My name is Charis and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today, Mr. John Wittkowske, Chief Financial Officer. Please proceed, sir.

Thank you. Good morning, everyone, and welcome to Weyco Group's conference call to discuss second-quarter 2012 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 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 certain 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 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. The 10-K 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 second quarter of 2012 were $60 million, up 7% from $57 million in 2011. Operating earnings were $3.4 million versus $2.7 million in 2011. Net earnings attributable to Weyco Group were $2.2 million as compared with $1.9 million.

Diluted earnings per share were $0.20 in 2012 compared with $0.17 in 2011. North American wholesale net sales of footwear for the second quarter of 2012 were $43 million compared with $39 million last year. The increase in sales resulted from increased shipments across all our major brands.

Operating earnings for the wholesale segment were $2.1 million this quarter compared with $1 million in the second quarter last year. Our gross earnings as a percent of sales were 29.3% compared with 31.3% in 2011. Gross earnings as a percent of sales decreased due to pricing pressure from our suppliers in China and India, based on increased labor and material costs. 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.

Selling and administrative expenses for the wholesale segment were $10.7 million or 25% of sales for the quarter, as compared with $11.3 million or 29% of sales in last year's second quarter. Second-quarter 2012 selling and administrative expenses were decreased by a $700,000 adjustment to reduce our estimate of two future payments due to the former owners of BOGS and Rafters, based on the performance of the brands. The first payment, due in March 2013, is based on 2011 and 2012 performance. The second payment, payable in March 2016, is based on 2013 through 2015 performance.

The past year's mild winter adversely affected BOGS' performance for 2011 and the first half of 2012, relative to our original projections, causing us to lower our estimate of the first payment. No significant adjustment was made to the estimate of the second payment.

In our North American retail segment, which includes our retail stores and Internet sales, net sales were $5.6 million for the second quarter of 2012 compared with to $5.9 million in 2011. Same-store sales were up 5% for the quarter. There were five fewer retail stores at the end of the second quarter this year.

Retail operating earnings decreased by $165,000, mainly due to a termination fee paid during the second quarter to close an underperforming store. That store will close in January 2013.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $11.1 million in the second quarter versus $11.3 million in 2011. The majority of other net sales are generated by Florsheim Australia. Florsheim Australia's net sales were up 3%, or $285,000; but that gain was offset by a sales decrease at Florsheim Europe of $445,000. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $1.3 million compared to $1.5 million last year.

Our cash and marketable securities were $57.9 million, and we had $34 million outstanding under our revolving line of credit at June 30. We generated $6.6 million of cash from operations; realized $2.9 million from the maturity of marketable securities during the first half of the year. We also repaid a net $3 million under our revolving line of credit; paid dividends of $3.5 million; bought back $3.8 million of our common stock; and had $2.1 million of capital expenditures during the six-month period ended June 30.

This past December, we purchased a new building adjacent to our current distribution center. During the second quarter, we began construction to connect this new building to our current facility. This will provide us with additional space for BOGS product, and will allow us to accommodate future growth while still maintaining the efficiency of our operations. Including this project, we estimate that 2012 capital expenditures will be between $7 million and $8 million.

I would now like to turn the call over to Tom Florsheim, Jr., our Chairman and CEO.

Thanks, John, and good morning. We are pleased with our overall wholesale shipment growth during the second quarter, as our major brands posted solid gains. Breaking down our portfolio, sales of our Stacy Adams and Nunn Bush brands increased 13% and 9%, respectively. Similar to the first quarter, Stacy Adams' performance reflected the brand's success in selling more basic, modern footwear to mainstream retailers, as shipments were up significantly in the department store and family shoe chain trade channels.

Nunn Bush, meanwhile, also experienced strong sales through department stores. In addition, Nunn Bush continued to benefit from the diversification of its product mix towards more casual footwear. Florsheim sales were up 5%, with the brand sales gain driven in part by strong performance with independents. As discussed in previous conference calls, our strategy with Florsheim has been to leverage the brand's heritage of craftsmanship to penetrate categories beyond the dress shoe market.

This spring, we made solid progress toward that end, with the introduction of a number of casual shoes that did very well at retail. We are focused on building off this success. And we believe that we have good momentum going into the fall with strong, new product bookings.

We are also excited to announce that we launched Florsheim Kids shoes for back-to-school; and in July, we shipped out our first boy's shoes to the market. Florsheim Kids shoes will be sold in better department stores and independents throughout the US, as well as in some of our international accounts.

Initial selling went well, as retailers were very receptive to the concept. We believe there is a void in the boys branded market for quality, non-athletic footwear. And we believe Florsheim can successfully address this opportunity.

Sales at our BOGS and Rafters division were $3.5 million, up from $2.6 million in 2011. Last year, during our second quarter, we were in the midst of transitioning the business from Eugene, Oregon to our Glendale, Wisconsin facility, and were not in a favorable position for at-once fill-in orders.

This year we are in a strong inventory position, which allowed us to increase at-once shipments, especially the non-seasonal farm and agriculture sector. In addition, a portion of the BOGS increase can be attributed to shipments in Canada, as we took over the Canadian distribution of the brand as of June 1. We expect Canada to add $5 million to $6 million of sales for our operation in the second half of 2012.

As John mentioned earlier, the mild winter in the US caused BOGS performance in 2011 and the first half of 2012 to be lower than our original projections. Despite the slower-than-expected start, we remain very enthusiastic about the strength of the BOGS brand and its prospects for solid, long-term growth. In the US, we have increased our focus on the agricultural and industrial sectors of the business, broadening our product offerings in less weather-dependent markets.

We are also expanding the BOGS brand through additional licensing agreements and overseas markets. In our North American retail segment, our second-quarter same-store sales, which include our Internet business, increased 5%. 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 2012, we have closed four retail locations in the US. While maintaining a retail presence is important -- 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 remained strong, with same-store sales up 10% in Australia, and also 10% in Asia. We believe that a significant opportunity exists to grow the Florsheim wholesale and retail business overseas, particularly in China.

As such, we are partnering with Pitanco shoes to expand both our wholesale and retail presence in the Chinese market. Pitanco is a China-based manufacturer, distributor and retailer of men's and women's leather shoes, handbags, travel goods and accessories. It currently operates over 1000 Pitanco branded shoe stores and shop-in-shops located in many cities throughout China. Florsheim has enjoyed a long presence in the Pacific rim, including over 40 years in the Hong Kong market.

Over the last decade, we've been selling Florsheim in a limited manner in mainland China. We believe that our new affiliation with Pitanco represents an opportunity to build upon this foundation and create a stronger, long-term business model for Florsheim in China.

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

(Operator Instructions). Rebecca Simmons.

Hi, thank you for taking my questions.

Sure. Good morning, Rebecca.

Good morning. I just have a question, looking at the operating expenses; they were down in the quarter. Could you maybe talk about what drove that? And maybe if we should think of that as a good run rate going forward?

Well, as we mentioned, for the quarter, there was that $700,000 adjustment as a result of our reducing the expected payment as part of the acquisition. If you take that out, that credit, the expenses were actually flat. I think we've done a pretty good job of really maintaining our costs and keeping them in line. We do have a lot of fixed costs as part of our business in general. And so that's why, for us, the sales and margin is important. Because we have a good leverage, then, when it would come to operating income. So we think we have a -- as our volume increases, our costs will not increase to that level, so we would expect a good leverage amount going down. But I think that -- the costs were flat. I think that's a reasonable approximation, after you take out that one-time adjustment.

Okay, great. Could you talk about if you're seeing any cost pressures, whether it's from labor costs or raw materials?

Sure, sure. We still are experiencing increases in labor costs, and we see that continuing into the future. We just don't see that really slowing down. The percent of labor in a shoe is roughly 15%, so it's not an enormous percentage of the cost of a shoe. So even if labor does go up, it doesn't have a dramatic effect yet. It's something that we are going to -- we believe that we are going to continue to deal with for the foreseeable future.

Material prices have tempered a little bit. We talked about that in the last call. But the increases haven't stopped. So we still have pressure on the different materials. And, for a while, it seemed as if leather prices had stabilized. And I mentioned that, in some cases, we actually had a couple tanneries reduce prices. That seems to not be the case anymore.

We're getting some price pressure from tanneries again. And I think that is a little bit hard to explain why that is, because I don't think that the demand for shoes is strong right now because of what's going on in Europe. So I think that the factories in China are not that busy. However, the car market is very good. And you use leather in car seats. So there's other things driving the leather prices.

And so, just to kind of sum up, we are feeling cost pressures continue, due to these increases in labor; the prices of components; and some other increases, as well.

Do you feel comfortable that you're able to pass on those prices with your price increases? Or what are your thoughts on that?

I think that we are taking a pretty measured approach to raising prices. At retail, right now, it's difficult for our accounts to raise their prices dramatically. And so what we're doing is really taking a very step-by-step approach. And so, I think that our price increases do lag a little bit with the cost increases that we are receiving.

So while we're able to mitigate the margin loss, and we have raised our prices going into the second half, I am afraid that we will continue to see a bit of margin erosion.

Okay. Great. You had some good sales in the quarter, up 7%. Do you feel any of that was maybe pulled out of the third quarter, fourth quarter, due to new products, or maybe a quicker back to school?

This is John. No, not really; I don't think any of the sales were really pulled off of the third quarter. I think it's a pretty clean year-on-year comparison.

Okay, great. And then, lastly, maybe if you could just give a little more color on the BOGS distribution. I know you just said you switched over in June. Maybe how that's going so far, if you think maybe there is any kind of risk to that switchover; or any detail on that would be great.

We talking about related to Canada?

Sorry, yes, the BOGS distribution in Canada.

I think, so far, so good. The distribution is not, in terms of -- we're handling that now out of our -- we have a DC up in Canada, in Montreal, that we've expanded to handle the additional BOGS sales. And that process has gone very smoothly. We don't really foresee any issues. We're not changing our distribution strategy, in terms of who we are selling up in Canada. That business is very much driven by the independents. And we're going to continue with that strategy.

And this -- in terms of the sales organizations, we retained a majority of the sales organization that was selling BOGS previously. So it should be pretty seamless.

Okay. Well, that's all I had. Congratulations on another good quarter, and I'll talk to you next quarter.

Thanks, Rebecca.

Thank you.

(Operator Instructions). Todd Erickson.

Hey, guys. Can you hear me all right?

Yes.

Good morning. Two quick questions, one on trying to understand the retail operating income a little bit better. Slightly negative; you said there was a termination fee. I'm trying to understand what kind of normal operating margin -- can you update beyond what the charge was? And let me know whether, after reversing that, we are looking at kind of a normal margin in that space? Or if you expect that to maybe improve over the next year or two?

The margin -- the cost was about, off the top of my head, it was $225,000 or so. So we actually would have been up a little bit were it not for that. And we actually think the operating margins will do better as we close the underperforming stores, and leave ourselves with some solid retail locations that are doing okay.

Hard to pinpoint an exact number of what we think normal operating margin would be in retail; but we would expect that, as we close the underperforming stores and took a couple of write-offs over the past year or so for fixed assets on those closed stores, that we should be seeing at least a reasonable profit margin in retail.

Okay. So can I think of about an 8% to 10% margin as being reasonable?

Well, we don't really give the guidance on that. I don't really want to give a number.

That's fine. No big deal. Sure, sure, sure. Okay, cool. That was helpful in the termination fee there. So the second thing, just thinking about acquisitions. You made a couple over the last couple of years. What are you seeing out there, to the extent that you're looking? And any updates on plans for brand acquisition over the next year or two?

Well, what we are seeing out there, you're continuing to see consolidation on the branded side of the business. First, if you look back over the last 10 to 15 years, first the retail consolidation came. And now you have some pretty big mergers occurring in our space. And so there is more activity than we've seen in some time, in our industry.

Our feeling is that when we make an acquisition like a BOGS, we really want to focus on that for a couple of years; make sure that we are doing everything that we can to maximize the business that we've acquired. With that said, obviously, you can't control the timing of acquisitions. So we continue to try to stay abreast of what's out there and what's happening. And if something very attractive comes up, then we still are in the -- we still are looking for additional acquisitions. Just from a timing standpoint, we prefer that to be two years away.

Okay. Got it. Thank you, that's all I had. Appreciate it, guys.

All right, thank you.

And at this time, there are no further questions in queue.

Okay. Then, we'd like to thank everyone for their time. And we'll talk to you next quarter. Thank you.

And, ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.