WEYCO Group Inc (WEYS) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Weyco Group earnings conference call. My name is Dilu, and I will be your operator today.

At this time, all participants will be in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded for replay purposes only.

I would now like to turn the call over to Mr. John Wittkowske, Chief Financial Officer. Please proceed, sir.

Thank you. Good morning, everyone. Welcome to our 2013 annual conference call. Today with me are Tom Florsheim, Jr., our Chairman and CEO; and Jon Florsheim, our COO -- President and COO.

Before I 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 events or results may differ materially.

We refer you to Weyco Group's most recent Form 10-K that's 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.

Net sales for the fourth quarter of 2013 were $78.5 million compared with 2012 net sales of $78.4 million. Operating earnings for the quarter were $10.8 million compared to $12.5 million in 2012. Net earnings attributable to Weyco Group were $6.8 million compared to $7.7 million last year. Diluted earnings per share were $0.62 per share for the fourth quarter of 2013 versus $0.71 per share in 2012.

Earnings in the fourth quarter of 2012 included $1.8 million, or $1.1 million after-tax, the equivalent of $0.11 per diluted share of income that resulted from a reduction in the estimated liability or future payments related to the Bogs acquisition. Without this prior-year adjustment, earnings from operations and net earnings would have been up 2% and 4%, respectively, for the quarter.

In the wholesale segment, net sales were $58.2 million in 2013 compared to $56.6 million. Wholesale gross earnings as a percent of net sales were 36.2% in the fourth quarter of 2013 compared to 36.1% in 2012. Selling and administrative expenses for the wholesale segment were $13.3 million in the fourth quarter compared to $11.3 million in 2012. As a percent of net sales, selling and administrative expenses were 23% in the fourth quarter of 2013 versus 21%.

Excluding the $1.8 million prior year adjustment related to the Bogs acquisition, fourth-quarter 2012 selling and administrative expenses would have been 24% of net sales, or flat.

Operating earnings for the wholesale segment were $7.8 million in the fourth quarter of 2013 compared to $9.1 million in 2012. Without the prior-year adjustment related to the Bogs acquisition, earnings from operations for the wholesale segment would've been up 7% for the quarter, primarily due to the increase in sales.

Net sales of our North American retail segment, which include both our retail stores and US Internet sales, were $6.9 million in the fourth quarter compared to $7.6 million in 2012.

Same-store sales were up 5%. There were six fewer retail stores at the end of the fourth quarter of 2013 than there were at the same time last year. Retail operating earnings increased by approximately $173,000, mainly due to the benefit of closing underperforming stores and improved same-store performance.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $13.5 million in the fourth quarter versus $14.1 million in 2012. The majority of other net sales were generated by Florsheim Australia. Florsheim Australia's net sales were down $790,000, or 6% for the quarter.

However, in local currency, Florsheim Australia's net sales were up 5%, driven by a 15% increase in its retail businesses, but that was mitigated by a 12% decrease in its wholesale business.

The decrease in US dollars was caused by a 12% depreciation of the Australian dollar relative to the US dollar during 2013. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $1.6 million in the fourth quarter of 2013 compared with $2.1 million in the same period last year.

The decrease was primarily due to a $600,000 decline in the operating earnings of Florsheim Australia's wholesale business, which resulted from lower wholesale sales and gross margins.

For the year, our overall net sales were $300.3 million, up 2% compared with $293.5 million in 2012. Earnings from operations were $27.8 million compared to $29.8 million in 2012. Net earnings attributable to Weyco Group were $17.6 million in 2013 compared with $19 million in 2012. Diluted earnings per share were $1.62 per share versus $1.73 per share in the prior year.

Earnings for 2012 included $3.5 million, or $2.1 million after-tax, the equivalent of $0.19 per diluted share of income that resulted from reductions in the estimated future liability related to the Bogs acquisition. Without these prior-year adjustments, earnings from operations and net earnings would have been up 6% and 5%, respectively.

In the wholesale segment, net sales were $225.7 million compared with $217 million in 2012. Wholesale gross earnings as a percent of net sales were 32.6% in 2013 compared to 32.2% in 2012. Selling and administrative expenses for the wholesale segment were $52.8 million in 2013 compared to $48.1 million in 2012.

As a percent of net sales, selling and administrative expenses were 24% and 22% in 2013 and 2012, respectively. Excluding the $3.5 million prior-year adjustment, 2012 selling and administrative expenses would've been 24% of net sales.

Operating earnings for the wholesale segment were $20.7 million in 2013 compared to $22.2 million in 2012. Without the prior-year adjustment related to the Bogs acquisition, earnings from operations for the wholesale segment would have been up 11% for the year, primarily due to the increase in sales and gross margins.

In our retail segment, net sales were $23.3 million for the year, down 4% from $24.3 million. Same-store sales were up 7%. The retail divisions operating earnings increased to $3 million in 2013, up from $1.7 million in 2012. This increase was mainly due to the benefit of closing underperforming stores and earnings increases at both our retail stores and our Internet business.

Our other businesses had net sales of $51.4 million in 2013 compared with $51.2 million in 2012. Florsheim Europe's wholesale business was up, but was offset by lower net sales at Florsheim Australia. Florsheim Australia's net sales were down $730,000, or 2% for the year.

In local currency, Florsheim Australia's net sales were up 6% for the year, driven by a 16% increase in its retail businesses, but were offset by a 9% decrease in its wholesale business. Wholesale shipments were down due to soft sales with a few key retailers in Australia as well as the challenging economic conditions and a weakening local currency in South Africa.

Earnings from operations from our other businesses were approximately $4 million in 2013 compared with $5.9 million in 2012. This decrease was primarily due to a $2 million decline in the operating earnings Florsheim Australia's wholesale businesses, which resulted from lower wholesale sales as well as increased infrastructure costs to accommodate the Bogs expansion in Australia.

At December 31, 2013, our cash and marketable securities totaled $46 million and we had $12 million outstanding under our revolving line of credit. We generated $29.8 million of cash from operations; received proceeds of $14 million from maturities of our marketable securities; collected $3.9 million from stock option exercises. We spent $4.6 million on purchases of our Company stock, repaid $33 million on our line of credit, and paid dividends of $4.1 million.

In addition, we purchased a 50% interest in our Canadian distribution center for $3.2 million and had $2.7 million of other capital expenditures. We expect capital expenditures to be approximately $2 million to $3 million in 2014.

On February 24, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.18 per share to all shareholders of record on March 17, 2014, payable on March 31, 2014.

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

Thanks, John, and good morning. Given the general soft retail environment for the holiday season, we feel positive about the overall performance of our brands. In the fourth quarter, our North American wholesale business was up 3%, which was in line with our 4% increase for the full year in 2013.

Our BOGS division had the Company's largest gain for the quarter, with a 22% increase in sales, driven primarily by the harsh winter weather across significant parts of the US and Canada. For the year, BOGS sales were up 9%.

We are encouraged by the sell-throughs at retail as well as through our e-commerce site. Based on the last two mild winters, we went into the season with a conservative inventory position, as did many of our accounts. As a result, we did not realize the full upside based on the weather-related demand.

However, we believe that the low level of inventory in the market, combined with the strong BOGS performance, bodes well to the fall 2014 selling season.

BOGS remains committed to diversifying the brand by introducing categories that are less weather-dependent. For fall 2014, we are expanding our kids collection to include a range of casuals that will allow BOGS to move beyond purely outdoor usage occasions.

In our women's collection, we are introducing additional non-insulated fashion styles constructed with waterproof leather. BOGS men's for fall includes more lifestyle product, including waterproof leather, casuals, and hikers.

While we are excited about capitalizing on the strength of the brand to evolve the business, we are also mindful that the design of the new product must connect to the unique character and heritage of BOGS.

In terms of our Nunn Bush business, the quarter was down 2%; however, we had a very strong year, with an 8% gain in net sales. In 2013, Nunn Bush had a number of significant new product launches, primarily through the expansion of its dynamic comfort concept and their introduction of Nunn Bush lightweight footwear.

The new Nunn Bush product has been well received at the retailer and consumer level, which resulted in a sales lift in the back half of the year. The brand's core ATC and comfort gel product also continue to experience good retail sales. We are pleased that Nunn Bush was able to increase its sales in an environment that has been challenging for midtier brands.

Florsheim sales were down 2% for the quarter and increased 4% for the year. Florsheim's annual growth was driven in part by the success of the brand's entry into the kids category. Florsheim kid shoes tapped into a void for branded, nonathletic footwear in the boys' market. We believe that we can steadily grow this business and the boys' product will help extend the brand to young families.

The Florsheim division also continued to expand its assortment in casual and contemporary dress categories. From a retail perspective, we have had good success with our updated product mix and believe there is more growth ahead for the brand.

Stacy Adams sales were down 2% for the quarter and the year. The decline in Stacy Adams sales can be attributed primarily to a decrease in sales to the off-price trade channel as the brand had a reduction in closeout inventory. Sales of Stacy Adams product at the consumer level are strong, especially in the modern dress shoe segment.

We continue to build upon our success in this category and are also focused on expanding our collection of modern casual footwear to diversify the brand's assortment at retail.

At our North American retail segment, we are now operating a relatively small base of 17 stores in the US market. Our emphasis is on improving profitability by closing unprofitable stores in the secondary markets while investing in flagship stores in US cities that serve more international markets, such as New York and Miami. We're very focused on both the branding and e-commerce aspects of our website, which has been an important source of growth for the Company.

We are also selectively investing in our retail presence overseas, primarily in Australia, where we are slated to open additional stores in Melbourne and Perth in 2014.

Florsheim experienced strong same store growth in both Australia and Hong Kong, which includes Macau, with increases of 7% and 22%, respectively, this past year. Florsheim Australia's wholesale business experienced a decline in revenue this past quarter and for the year in both the Asian and Australian markets.

Australia's wholesale business is challenged by its concentration of business with two large accounts. However, we believe that as the Australian economy improves so will the business with these key retailers.

In China, we are still in early stages of our joint venture with Pitanco that serves mainly in China and we are excited about the opportunities that this new venture presents.

That concludes our formal remarks. We appreciate your interest in Weyco Group and I'd now like to open the call up to see if there are some questions.

(Operator Instructions) Rebecca Simmons, DRZ Inc.

I wanted to know if you could give us an update on your quarter-to-date trends and what you're seeing so far?

Our quarter-to-date trends first quarter?

Yes.

In general, I think the year -- this is Jon -- has gotten off to, from a retail perspective, a bit of a tough start. A lot of that is weather-related. We just came back from the main industry trade show last week, and January was tough for most retailers, and I don't think February was much better.

We're not seeing that necessarily in our business. I mean our shipments are - we're not seeing a lot of cancellations or any of that nature. I'd say the general mood at retail right now is challenging.

Are you getting any feedback from your customers?

In terms -- or, I mean, as far as our product goes or as far as the general market? The general market, I think, it is tough out there, and some of that can be attributed to weather. Probably not all of it.

As far as our product, things are pretty steady. We have less of a seasonal component, and where we do have a seasonal component -- for instance, in BOGS -- that market has been very strong and has continued into the first quarter. So we're enthused about that.

In the general market, it has been less so. And spring selling, obviously, has gotten off to a slow start, just based on the fact that Presidents' Day is typically where everybody kicks off their spring selling, and weather certainly has not cooperated across the country, in most parts of the country.

Do you --

Rebecca, this is Tom. Typically, we don't comment on backlog, but one thing that I will mention is we are out right now selling fall, of course -- fall 2014. And one of the things that's very exciting to us is that, due to the performance of BOGS this past fall, and as John just mentioned, it's continued in the spring, our BOGS orders are way up as we -- we're still in the early part of our fall selling season, but the backlog is up not only on the core product, which we've been out there selling the last -- since we acquired the brand a few years ago.

But we are selling the new product that I had talked about in my part of the call, where we were introducing waterproof leather product that is not as dependent on having a really harsh winter. And so we feel very good about what's happening from the standpoint of fall 2014 selling at BOGS. It's a little early to say about the other brands.

Do you have any new products that you are launching over the next year or so that you are seeing good response from or that you're excited about? Maybe outside of BOGS and your other core brands?

We are introducing, actually, Nunn Bush Kids for fall 2014 and that's new for us. And we've gotten a really nice response to it. One of the things that Umi did for us is introduce us to the kids market. And when we -- we did a little bit of kids business with Stacy Adams, but Umi really sort of got us thinking about strategically how do we want to parse the kids market? And then when we acquired BOGS, a big part of the BOGS business is kids. So we feel like we're moving down that learning curve.

Had a positive experience at Florsheim when we introduced Florsheim in the fourth quarter of 2012. We see an opportunity in boys' footwear, especially in the outdoor category. And so we are introducing Nunn Bush ATC kids shoes for fourth quarter at a nice price point that we see as a void in the market.

Oh, yes, I'm sorry. John Wittkowske was just giving me some additional information. Florsheim Kids was up 100% in 2013. So we see that as a nice growth vehicle.

Okay, great. And when I'm looking at the gross margins, you guys did a great job of keeping them flat over the last year. Looking forward into this year, are there any opportunities you're seeing there or any cost pressure you're expecting?

I think, in China, it's going to be more of the same. Leather prices really haven't eased. There's still currency pressure; although Chinese currency -- I don't know if you saw that. Chinese currency fell a little bit this week for the first time in a long time. It got a little bit weaker against the US dollar. So, hopefully, that's a trend, but I think that it may be temporary.

The cost pressures in China remain and I think that they're going to be something that we have to just deal with it. And we are raising prices where we can.

The one thing that we are doing, which I believe will help long-term, is we have a big presence relative to other people in the industry and India. We've been there for very long time and the dollar actually has really strengthened against the rupee, which is an Indian currency, over the last year.

And so, we are trying to grow our business in India and are finding that labor costs and the impact of the currency just make it easier to show decent margins on the product.

And so there's a lot of companies in our industry looking at other markets right now. These people are talking about Vietnam and a lot of people are in Vietnam. And we are making some product in Vietnam, but we see India as a nice balance to our sourcing in China. So, hopefully, that will help just reduce the challenges that we're facing from a pricing standpoint in China.

Should we think of gross margins as kind of flattish going forward?

Yes, that's right. I think that -- we're hoping to just maintain our gross margin, exactly.

Okay, and how do you feel about inventory levels right now?

I think that our inventory levels are in good shape. When you look at -- our inventories a slightly down at year-end, but we bought early this year due to the earlier Chinese New Year. So we feel very -- we actually are in good shape going into first quarter, but we ship a tremendous amount of shoes in February and March. And so I think that our inventory levels are right where they should be.

And our inventories are very clean as well. One of the reasons why we had a little bit of a pickup in gross margin, I think, in 2013 is -- and we alluded to it in talking about Stacy Adams -- we just had less obsolete inventory across our brands.

Certainly with BOGS, where we carry some inventory in 2012 into 2013, just because of the mild winter. It's the opposite now, where we really -- our inventories have a very low level of obsolete product.

Okay, and lastly, could you talk about cash priorities, maybe any acquisition opportunities you're seeing, or anything else you're planning on doing this year?

I'll speak a little bit to acquisition opportunities, and then Jon can maybe talk about use of cash. We are still out there looking. I mean, we've been looking -- we're always out there looking for opportunities because we see that as a key to our growth.

And we have a pretty disciplined approach to acquisitions, and right now there isn't anything that we're looking at that is imminent and we're going to just keep looking, though. But, hopefully, over the next couple of years, we'll find another good one. And that's all there is to report on that front.

And I think on the cash management side and what we are doing with the cash, you could see from this year our focus was on getting the depth from the Bogs acquisition and other things down to a level where we feel comfortable.

And you can see it went from $45 million down to about $12 million. We used operational cash and some of our maturities from marketable securities. Now we're going to be in different point where we're going to start generating cash over and above that, of course.

We're starting to buy some more investments; rates have moved up a little bit. But we're pretty careful with that. We're not going out too long right now. We're just following and laddering out some municipals. But the goal --

Buy back shares, too.

We'll buy back shares when it's there, when the opportunity arises. And we are just cognizant of the -- as Tom mentioned, we are always looking for the acquisition. So we're not going to lock up our cash in very long-term securities, but we do ladder them out to make sure. And our borrowing rate on our debt is low. So I think we're doing well on cash management now. That is our approach.

Okay. You guys have done such a great job navigating this difficult market environment and you continually see earnings growth over the last few years. Overall, it seems like you are cautious but still pretty optimistic going forward.

I mean, when -- I'm thinking about your Company and it seems like you think you can continue to kind of block and tackle through this environment. Is that kind of in line with kind of how you're looking at things?

Absolutely, I think that's right. I think that to do well in this environment, you do have to do a whole lot of blocking and tackling, that's a good way to put it. You really have to do the basics well. And I think that we are good at that. And we are pretty conservative, but we can be aggressive in a disciplined way when we're looking for these acquisitions.

We really -- with a fairly mature market in the US, and with -- I think we have some good growth in BOGS still and I think that Florsheim -- I think that we have decent growth, but it's single-digit growth, probably, in the legacy brands. We just see making a smart acquisition as a key part of our strategy to continue our growth.

Okay, great. That's all I have. Thank you for your time.

Joel Leonard, DCO Capital Management.

Hi guys, I'm trying to drill down a little bit more on the BOGS story, because I think it's a good one. And I understand that we benefited from a frigid winter, but I was really interested in hearing more about what BOGS can do for the brand in terms of making product that doesn't rely on cold winters.

When I think about UGGS, for instance, people wear those in the middle of July. And I was wondering, because I see the BOGS story as really very interesting, and I just wonder if you are thinking like that?

Yes, that's a big part of our strategy moving forward. We did benefit from a cold winter; that makes everybody look little better, but we don't want to be dependent upon that going forward. So in a number of areas, we are diversifying the product line. We are doing more non-insulated product. We are still tying it to the BOGS DNA; it's waterproof leather that we're using in most of the products.

And we are doing that in both women's and men's, and in kids. It's all more lifestyle-type product. And we've gotten a very nice reception to it for fall 2014; we are going to be introducing that product starting really in July.

The other thing that we've been trying to do, which is not really weather-based, we're expanding what we're doing in the industrial market and it's taken us a while to move down that learning curve, but we have some really interesting product that is both slip resistant and chemical resistant, and there's not a lot of that in the industrial market that's -- especially this rubber-based product.

We are slowly getting a beachhead in that market. The industrial market takes time to build. It's got more of a complex distribution network, but we're starting to get some nice feedback from end consumers and from distributors in that market.

We're also expanding what we're doing in the hunting market. We have a nice -- it's small business, but we have a nice following in the hunting market. And we see that as tying very much in with the BOGS brand positioning. And again, we're very careful -- we're being very careful to introduce product that is unique in the marketplace and we're getting more placement and we see that as a growth story for us over the long-term.

Okay, if I wanted to buy a pair of BOGS, I can click on the BOGS website or I can try and go to Zappos, or whatever. Can you tell me more about the BOGS website? Are you guys selling through that website? Is that getting decent response or is it more that you're just pushing it through your retail distribution?

You know, we've had significant growth in BOGS e-commerce this year. We, particularly in Canada -- when we launched Canada in -- no, I think it was the fourth quarter of 2012. And we had significant growth in 2013 and we've continued to have really nice growth in the US, as well.

And I think that really actually speaks to two things that are going on in the marketplace. One is BOGS-specific; I think the brand has got momentum. I think we're building a strong following, so there's interest in the brand, so that attracts consumers to our website.

And then, in general in our industry, the brick-and-mortar component of retail is challenged and you're just seeing a lot more activity on the Internet and we are benefiting from that. Not only on our own sites, but we're expanding the business that we're doing with e-commerce sites across the industry -- e-commerce sites that are pure plays; e-commerce sites that are attached to brick-and-mortar retailers.

So have you guys pegged your legacy brands as low single-digit growth? What do you think BOGS is?

It's hard to say. You know, we don't like to give specific guidance in terms of incremental growth. We're very optimistic about the growth of BOGS. We want to also be careful to manage it in the proper way.

We're entering a number of new categories and we want to make sure that we are successful in those new categories as we expand. But we think that there's certainly potential for double-digit growth in BOGS, hopefully in 2014 and beyond.

Okay, and then the percentage of sales that are due to BOGS is what percent now of overall?

We're looking up that number.

I'll give you that number.

That number -- in our total North American wholesale division, the percentage right now is about 18%.

And that does not include e-commerce. Right?

No, it does not, right. (multiple speakers)

It does not add the e-commerce numbers.

That's just wholesale business, right. That's just North American wholesale business, that's correct.

We're also starting to get some traction overseas with BOGS. We launched BOGS in Australia and so we are starting to penetrate that market. And then we're starting to build a nice distribution network overseas, as well. That's more of a long-term play, but it's happening.

All of those numbers and percentages will be in the 10-K, which will be issued here in a couple of weeks. You'll be able to get all that detail from there.

Okay, thank you guys, appreciate it.

Thank you, gentlemen. We have no further questions in the queue.

All right, I'd like to thank everybody again for their time and interest in Weyco Group and have a good day. Thank you.

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