WEYCO Group Inc (WEYS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Weyco Group second-quarter 2016 earnings release conference call. My name is David. I will be your operator for today. (Operator Instructions)

Now I'd like to turn the call over to Mr. John Wittkowske, Chief Financial Officer. Please proceed, Sir.

Thank you, David. Good morning, everyone. Welcome to Weyco Group's second-quarter conference call.

On this call with me today are Tom Florsheim, Junior, 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 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. The Form 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 2016 were $56.9 million, down 11% as compared with 2015 sales of $63.9 million. Operating earnings were $1.6 million for the quarter versus $3.3 million in 2015. Net earnings attributable to Weyco Group for $1 million this quarter as compared to $2 million in 2015.

Diluted earnings per share were $0.09 in 2016 versus $0.19 in 2015. In the North American wholesale segment, net sales for the second quarter of 2016 were $41.5 million, down 14% as compared with $48.1 million in 2015.

Sales were down across all of our brands. Our Stacy Adams, Nunn Bush and Florsheim brands were all impacted by soft consumer spending in the footwear and apparel segments.

Our BOGS brand has a large winter boot component and due to last year's mild winter, retailers carried over more inventory which has impacted both 2016 shipments and has caused retailers to become conservative with fall 2016 orders.

Wholesale gross earnings increased to 32.6% of net sales in the second quarter, up from 31% in 2015. The increase is the result of our ongoing efforts to selectively raise our selling prices to improve our overall margins.

Selling and administrative expenses for the wholesale segment were $12.5 million or 31% of net sales in 2016 compared with $12.7 million or 27% of net sales in 2015. The increase in selling and administrative cost as a percent of sales reflects the fixed nature of many of our operating costs.

Operating earnings for the wholesale segment were $1 million this year compared to $2.2 million in 2015. This decrease was primarily due to the lower sales volume.

Net sales of our North American retail segment which include our retail stores and US Internet sales were $4.7 million in the second quarter, down 6% compared to $5 million in 2015. Same-store sales which include the US Internet sales decreased 2% for the quarter.

There were two fewer retail stores operating during the second quarter of 2016 than there were in last year's second quarter. Retail operating earnings were $228,000 compared with $489,000 in 2015. This decrease resulted from lower sales volumes of the Company's brick and mortar stores.

Our other operations which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $10.7 million versus $10.8 million last year. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $325,000 in the second quarter, down from $650,000 last year.

This decrease was primarily due to lower gross margins and Florsheim Australia. Florsheim Australia purchases its inventory in US dollars and its gross margins have been negatively affected by the weakness of its local currency against the US dollar.

Other income for the second quarter of 2016 was $155,000 compared to the expense of $348,000 last year. This quarter's other income included foreign currency transaction gains of $138,000 compared to $240,000 of losses in the same period last year.

These gains and losses mainly result from the revaluation of an intercompany loan between our US business and Florsheim Australia.

At June 30, 2016, our cash and marketable securities totaled $40 million and we had $15.2 million outstanding under our $60 million line of credit. During the first six months of 2016, we generated $29 million of cash from operations. We used those funds to pay $6.5 million of dividends, repurchase $6.1 million of our Company's stock and to pay down $11.4 million on our line of credit.

We also paid the $5.2 million final earnout payment related to the 2011 acquisition of BOGS.

To date in 2016, we have spent $3.5 million on capital expenditures. During the second quarter we remodeled our retail stores in Dadeland and Orlando.

In the third quarter, we will complete the construction project to increase the capacity of our US distribution center and will begin construction on our new outlet store in the Sawgrass Mills Mall in Florida. We expect total 2016 annual capital expenditures to be approximately $5 million.

On August 1, 2016, our Board of Directors declared a cash dividend of $0.21 per share to all shareholders of record on August 29, 2016, payable on September 30.

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

Good morning, everyone. As John mentioned, sales in our North American wholesale segment were down 14% for the quarter.

It was a tough quarter across the board for our brands. With our BOGS brand the loss resulted from the carryover of inventory by our retail accounts and as a byproduct of last year's mild winter.

Overall, however, the retail environment was soft for two primary reasons. First, consumer spending habits cycled away from footwear and apparel and towards durables such as automobiles and home goods as well as increased expenditures on entertainment and travel. Second, the shift toward the e-commerce trade channel continues to accelerate, creating an uncertain landscape for many of our brick and mortar retail partners.

We see the fallout from both phenomenon as temporary. Retail cycles come and go and eventually people go out and invest in a new pair of shoes. While the shift in consumer buying patterns has longer term implications we believe we are well-positioned to grow our brands in whichever channel consumers choose to purchase footwear.

After eight consecutive quarters with strong quarter over quarter increases, Stacy Adams had an off quarter. Sales decreased 5% compared to last year with the loss coming mainly from the department store and off-price channels.

From a sellthrough perspective, Stacy Adams remains one of the top performing brands in the men's non-athletic industry. And we are confident that Stacy Adams will get back on a growth track in the near term.

Nunn Bush sales were down 17% compared to the second quarter last year with a large decrease in sales to department stores and the off-price channel. Nunn Bush does a significant share of its business in the midtier department store channel, which has been hard hit with the rapid shift toward e-commerce sales.

Department stores have reacted by lowering inventory models which impacts a brand such as Nunn Bush that relies on shipping weekly just-in-time inventory to its retail partners. At the consumer level, Nunn Bush continues to have good sellthroughs and we believe that the business will bounce back over the near to medium term.

While the change in retail dynamics are real, we believe the reaction of certain key retailers was accentuated this past quarter with temporary inventory model adjustments. Moving forward, we feel that these retailers will support brands with strong consumer sales with a more normalized inventory flow.

Nunn Bush should also pick up significant business in the e-commerce channel that we expect will replace lost brick and mortar business.

Florsheim sales decreased 5% in this quarter -- and this quarter's narrative is similar to that of Nunn Bush. The department stores and chainstore sales were down. Meanwhile, sales in the e-commerce channel are growing but were not enough to make up this quarter's deficit.

From a product perspective we feel good about where we are with Florsheim. Both retailers and consumers are responding positively to the new design aesthetic of the brand, which builds off the heritage of Florsheim but is updated for today's lifestyle trends.

BOGS sales were down 47%. As a fall-oriented brand, the second quarter is a low-volume quarter for BOGS representing less than 10% of annual shipments. As mentioned, the loss was driven by excess inventory in the market from the previous mild winter.

The weather boot category is feast or famine and BOGS is experiencing the latter. We are taking steps toward softening this cycle. We are maintaining good inventories encore BOGS product that carry over from year-to-year to maximize upside should there be favorable weather trends this fall.

Based on last year, retailers are extremely risk-averse when it comes to weather boot inventory and, in the event of a normal winter, we will be well-positioned to meet increased demand. We also continuing our focus on diversifying BOGS.

While our sandal sales were small this spring, we are building momentum for future seasons and have already received a positive reaction from merchandisers to our spring 2017 assortment. In addition, we recently created a new position to focus on the agricultural and industrial sector and hired an industry veteran with an extensive background in these areas to lead this effort. Both of these segments are considerably less dependent on the weather.

BOGS currently has a beachhead in both sectors and we believe we can further develop these two areas into a sizable opportunity.

In our North American retail segment, overall sales were down slightly in the second quarter as we temporarily closed two of our larger stores in the Florida market for remodeling, thus impacting sales. Our e-commerce business continues to experience strong growth which helped offset the decrease in brick and mortar sales.

Our overseas business was off slightly as we experienced a 5% drop in our largest market group, Florsheim Australia, which was offset somewhat by increased wholesale shipments in our European division. In local currency, Florsheim Australia sales were flat.

While currency translation continues to have a negative impact on sales and margins we are committed to supporting the long-term opportunity we perceive in international markets. Toward that end, we are opening an additional store in Sydney and a store in Paris, both in the third quarter. This aligns with our strategy of having flagships in key tourist markets.

In addition, a partner flagship store was opened in Santiago, Chile in July, the sixth Florsheim store in that country.

Our inventory levels as of June 30, 2016 were $77 million compared to $86 million at June 30, 2015. Much of the decrease is in BOGS where we have brought inventories down to coincide with our lower backlog.

However, as I mentioned earlier we are still carrying extra inventory encore carryforward BOGS styles so we have an upside so we have upside potential if the weather cooperates this year. Our legacy brands -- in our legacy brands we are also continuing with our strategy of carrying heavier inventory encore products to meet the requirements of many retailers who want just in time fulfillment. This is especially true as our business with many e-commerce sites grows.

Overall, gross margins were 39.2% versus 38.2% last year, up 100 basis points. While there still are headwinds due to the strength of the dollar and our overseas markets, we have had some success in raising pricing and seeing positive results.

Factory pricing remains stable which is helpful to our effort to improve our margins.

That concludes our formal remarks. We appreciate your interest in Weyco Group and I would now like to see if there are any questions out there.

(Operator Instructions) Mitch Kummetz, B. Riley.

Thanks for taking my questions. I've got, like, a handful so let me begin.

I think in the press release you had mentioned that you are now expecting BOGS sales to be down 25% for the year which implies a similar decline in the back half. I know you guys just made some comments about your outlook around core inventory and being well-positioned for at once orders, assuming normal weather.

I'm just curious in that outlook for BOGS. You know, what are you assuming for weather? I'm guessing you are not assuming normal weather is and any big at once business in the fourth quarter. But maybe you could help me out with that.

Thanks for your question. This is John.

You know, we are conservative in terms of how we look at the back half. Our backlog is now in terms of our open orders with customers, but you know, as we mentioned ,we think there is a bit of an overreaction in the market. You know if you get any type of normal weather, people are going to be looking for boots.

When you look at the projections out there, there is a buzz around La Nina which should result in colder weather and increased participation but -- you know, you can't count on that.

So I think that there is some upside in our numbers. But, it is weather-dependent. So, I think you are seeing industry other numbers from other companies and you know the weather boot category is definitely [as you saw] the first half of the year.

But we believe that it's kind of a temporary phenomenon in that it bounces back when you get a little bit of weather. There is an overreaction on the downside and there's sometimes an overreaction on the upside, too.

Got it. And then in terms of the retail inventory levels, clearly, it seems like there's some excess inventory kind of coming through the second quarter at retail and that it impacted all of your brands. But it sounds like with your comments that you expect some improvement in your legacy brands going forward.

Do you feel like some of that --? Do you feel like inventory levels have improved kind of coming out of Q2 versus what they were in the quarter to give you a little bit of confidence that there should be some modest improvement in the legacy businesses? Or how are you thinking about that?

I think what we saw in the second quarter was that -- one thing that retailers could control is their inventory levels. And because business was soft in the second quarter, a lot of the major retailers were very determined to come in on their plans at the end of the quarter. And we saw people making pretty substantial adjustments which cuts off the flow of the weekly EDI orders that we get or reduces those orders.

We believe that, as we move in -- well, we are into the third quarter -- in the third and fourth quarter that's going to be much more normalized because those adjustments to the levels have taken place already. So now things are going to be more business as usual.

The caveat to that is some of the retailers have lowered their plans slightly. But that will not have the same impact as what we saw in the second quarter.

The other thing, Mitch, just to add to what Tom said is for whatever reason this year was the year that the e-commerce guys -- the e-commerce accounts decided they were going to focus a little bit more on turn. In previous years, they would say well, we're going to have this huge increase. We're going to bring in inventory and be ready for this increase.

Now there's much more focus among the big e-commerce players on turn. So, they've ratcheted down their inventories and we experienced that the first half to some degree.

And so now, as sales come through and they react just in time, we are well-positioned for that. So, we should pick up some pretty nice sales in the back half in the e-commerce sector, based upon what they did to their models in the first half.

Got it. And then maybe two last questions. On your retail stores I know that prior quarters you've talked about some challenging tourist traffic. I was kind of curious where that stands now, particularly as it relates to Brexit and kind of what that's done to some currencies, particularly the pound and, then, even the euro.

I think we've seen tourist traffic stabilize to some degree and a lot of our business -- we have a concentration of stores in the Miami area and a lot of that that this is actually more Central and South American than European and those currencies have come back a little bit this year which, I think, is healthy. And so I would say in general, we've seen it stabilize.

We have not experienced any kind of like major effect from Brexit. I mean mostly that would affect on Madison Avenue store, I think. And we really have not seen that.

Okay. And then, last question. I know that the Florsheim Australia gross margins have been challenged because of currency and we've seen some improvement in the Australian dollar and I think that, from a year-over-year standpoint, some of the comparisons there start to look more favorable as soon as -- this third quarter. Does that -- did that help the margins in that business right away or does it take a while for that to flow through? Can you just kind of walk me through that?

Mitch, I think you are right. And we've actually, in our minds thought the same thing that in the second half of the above in Canada and Australia, particularly Canada, I think the comparisons are going to be -- there won't be the impact on a year-over-year basis on the margin. It will be what on a comparative basis it is what it is.

There isn't going to be that it was lower this year or higher last year. And I think that's going to be the case in Australia as well. So I do think there will be a little bit of a favorable vis-a-vis the first quarter where we said, geez, our Canada margins really dragged us down because of the exchange rate which they did.

That won't be the case, really, in the third and fourth quarter. On a straight comparison.

The one slight benefit we had last year that we don't have this year is we did do some hedging last year in Canada. And we had some favorable hedges because we had -- the year prior had gone out.

So we won't get the benefit of those which will have a slight impact on the margin in the second half. But on a straight pure, forget the hedging standpoint, yes. I think they will be comparable year over year in that, without exchange impact.

Got it, okay. All right, that's all I had. I appreciate you guys time and good luck in the quarter.

Sir, you have no further questions at the moment. (Operator Instructions) There are no further questions coming through so I'd now like to turn the call back to Mr. John Wittkowske for closing remarks.

I just want to thank you for joining us on our conference call and we will talk to you at the third quarter. Have a great day.

Thank you for your participation in today's conference call. This concludes the presentation and you may now disconnect. Good day.