Weyco Group, Inc. (WEYS) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2014 Weyco Group Earnings Conference Call. My name is Mark, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, John Wittkowske, Chief Financial Officer. Please proceed.

Thank you. Good morning, everyone, and welcome to our Conference Call to discuss our First Quarter 2014 Earnings. On this call with me today are Tom Florsheim Jr., Chairman and CEO; and John Florsheim, 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 results or results -- 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 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 first quarter of 2014 were $74.9 million compared with 2013 sales of $73.6 million. Operating earnings were $4.9 million in 2014 versus $4.7 million in 2013. Net earnings attributable to Weyco Group were flat at $3.2 million. Diluted earnings per share were $0.29 in 2014 versus $0.30 in 2013. In the North American Wholesale segment, net sales for the first quarter of 2014 were $56.7 million compared with $55.2 million in 2013. Wholesale gross earnings, as a percent of net sales, were 30.4% in 2014 compared with 31% in 2013. This decrease was partially driven by the impact of a weaker Canadian dollar relative to the U.S. dollar in 2014. Selling and administrative expenses for the Wholesale segment were $13.7 million, or 24% of net sales, compared to $13.4 million, or 25% of net sales in 2013. Operating earnings for the Wholesale segment were $3.6 million in 2014 compared to $3.7 million in 2013. Net sales of our North American Retail segment, which include our retail stores and U.S. Internet sales, were $5.2 million in the first quarter compared to $5.7 million in 2013. There were 6 fewer retail stores during the first quarter of 2014 than there were in last year's first quarter. Same-store sales were down 1% for the quarter. Retail operating earnings decreased 5% to $418,000 compared with $442,000 last year. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $13 million in the first quarter versus $12.6 million, in the first quarter last year. The majority of other net sales were generated by Florsheim Australia. Florsheim Australia's net sales increased 1% for the quarter. However, in local currency, their net sales were up 17%. This increase was driven by 20% increase in its retail businesses and a 13% increase in its wholesale businesses. The increase was only 1% due to the weaker Australian dollar relative to the U.S. dollar during 2014. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $884,000 in the first quarter compared with $514,000 in the same period last year. The increase was primarily due to improved performance of Florsheim Australia's retail business. At March 31, 2014, our cash and marketable securities totaled $47.5 million and we had $9 million outstanding under our revolving line of credit. During the first quarter, we generated $8.3 million of cash from operations. We paid dividends of $3.9 million, repaid $3 million on our line of credit, had net purchases of marketable securities of $1.1 million, and had $300,000 of capital expenditures. We expect capital expenditures will be between $2 million and $3 million in 2014. On April 30, 2014, our Board of Directors declared a cash dividend of $0.19 per share to all shareholders of record on May 30, 2014, payable on June 30, 2014. This represents an increase of 6% above the previous quarterly dividend rate. I would now like to turn the call over to Tom Florsheim, Jr., our Chairman and CEO.

Thanks, John. And good morning, everyone. The extension of severe winter weather well into March, and a shift in the retail calendar related to the Easter selling season, impacted our overall business during the first quarter. In light of these challenges, we are pleased with our start to 2014 as 3 of our 4 major brands ended the quarter with sales increases. Our first quarter of BOGS business caught a nice boost from the cold and snow across large parts of the country, as the brand had a gain of 23% in the first quarter. We also continue to diversify the BOGS business with increased sales and non-insulated rain boots for spring. As we look towards fall, the relatively low inventories in the winter boots segment at our retailers, in combination with the extension of the BOGS business into incremental categories that are less weather-dependent, puts the brand in a good position for future growth. In addition, we remain excited about the growing consumer interest in BOGS, as we have experience strong direct-to-consumer sales both on our own e-commerce site, as well as with other online retailers. Our Florsheim business was up 4% in the first quarter, with sales driven by an increase in shipments to department stores, national shoe chains and e-commerce retailers. As a category, dress shoes have been sluggish. However, Florsheim has managed to increase sales through new product divisions mainly in dress casual and casual categories. As sales of plastic legacy styles remained flat, the infusion of successful new products is important to the future growth of the brand. We believe that we are making significant progress towards this add. In addition, the Florsheim Kids business is off to a very good start to the year. While Florsheim Kids is a relatively small part of the Florsheim division, we are enthused by the robust sales at retail of our Kids products. Nunn Bush sales were up 3% in the quarter where sales to national shoes chains accounted for the majority of the increase. Sales continue to be strong at the consumer level and we feel confident in the brands positioning, as a leader in men's comfort footwear for the mid-tier segment. For the back-to-school selling season, we're introducing Nunn Bush all-terrain comfort kids shoes. We believe that there is a sizable opportunity in branded boys casual footwear to market a quality product designed to hit the $39.99 to $49.99 retail price point. This underdeveloped segment is situated above generic private label product, but below premium outdoor brands that are not sold in the mid-tier channels. With the Nunn Bush ATC boys footwear, we can leverage the styling and comfort features of the ATC men's line, as well as the knowledge of the children's footwear market that Weyco has developed over the last few years. With the addition of Nunn Bush ATC Kids, Weyco will now have 5 brands with representation in the kids' category: Nunn Bush; Umi; BOGS; Florsheim; and Stacy Adams. Nunn Bush ATC boys has been well received with test orders from a number of major retailers. Our Stacy Adams sales decreased 5% this past quarter, primarily due to lower sales with national shoe chains. The decline in Stacy Adams can be attributed in large part to Easter shipments falling more in April this year versus March last year. Within the Weyco portfolio, Umi and Stacy Adams are the brands most impacted by the timing of the Easter. With the benefit of April shipments, we've already made up a significant portion of this business. Stacy Adams continues to have strong sell-throughs at retail. And solid growth in the e-commerce trade channel for the quarter -- I'm sorry, solid growth in the e-commerce trade channel for the quarter reflects good consumer acceptance of the product. Looking towards fall, 2014 and beyond, we are focused on duplicating the success we have had in the Modern Dress segment by further developing our modern and casual component of Stacy Adams. Our Umi business was down 8% for the quarter. We believe this can be attributed to the timing of Easter shipments. With the addition of April sales, Umi is now up in volume for the year. As John mentioned, sales in North American -- in our North American Retail segment were down 1% in terms of same-store sales. The decrease in sales was due to the late Easter, as same-store sales are now running ahead of 2013. Our strategy in the U.S. remains consistent. We're committed in investing in flagship stores and key markets, which we believe are important from a branding perspective. Overseas, our retail performance remains solid with the same-store sales up 19% in local currency. Wholesale shipments were also up significantly, with the Pacific Rim registering the strongest growth. International growth remains a significant opportunity for our Florsheim brand, and we continue to invest in this area with 2 additional stores slated to open in Australia in 2014. This concludes our formal remarks. Thank you for your interest in Weyco group and I'm now going to open the call to your questions.

[Operator Instructions] Your first question comes from the line of Rebecca Simmons from DRZ Inc.

I wanted to know if you could give a little more color on what you're seeing quarter-to-date so far for the second quarter?

I think that we're seeing, as we talked about the call, that with Stacy Adams and Umi we had a pickup in business. I think that when you look at our other brands, it's a bit more of the same that we saw in the first quarter. As retail has gotten off this year, to a bit of a sluggish start. A lot of our accounts, the big retailers across the country are not feeling great momentum right now and we're feeling that a little bit. And so we're hoping that as spring breaks -- it's kind of one of those springs where you don't feel like the weather is breaking. But -- I know you're down at Florida, but in the Midwest and across most of the country it has been pretty cool and rainy. And so we're hoping that as the weather breaks, we'll see more momentum at retail.

What about the promotional environment? What are you seeing there? Is it seem to be getting -- is it still pretty challenging?

The promotional environment, I would say, is challenging. I think that the retailers react to business being slow by throwing in a lot of promotions. And so I think that's going on right now. And in a sense, I think that it's good that they're doing that, because it means they're trying to maintain their volume. And when they maintain their volume, they buy more shoes from us. And so that's actually helping the situation right now, but it puts more price pressure on everybody.

Okay, and when I'm thinking about your merchandising initiatives or product launches for the year, is the main focus on Kids, or do you have any other initiatives that you're working on?

A big focus is on BOGS in terms of what we talked about with incremental categories. Moving to all other product, what we're doing, we're introducing all other product, for both Women's and Men's, we're expanding what we're doing in BOGS Kids. So those are big -- those are significant initiative around BOGS. In terms of taking to equity we have in that brand name and the royalty from our consumer -- from our consumer base and extending that into other categories. And we think that's got a lot of potential. You got to move carefully with that because it's step-by-step, but the early signs are very good. And then, from -- in terms of our other brands, it's a little bit what we touched on in the -- earlier what Tom was talking about. We're moving more into on casual and Stacy Adams; we feel that it remains as a progress there. With Nunn Bush, we're actually looking at moving it more into a work category, into the service category. We're going to talk a bit about that, as we move the into the second and third quarter. So we have a lot of new product initiatives going on at the moment that we feel are very positive from what we're trying to do with our brands.

Okay. And then when I'm thinking about foreign exchange, it seems like that was a pretty big impact in the quarter for your international business. Are you seeing any easing from that? Or how's that pressure?

I'm going to let John Wittkowske, answer that.

Yes. I think in the Canadian side, no. The Canadian dollar is still been hovering $1.09, $1.10. Seems like the expectation there is that, that it's going to stay around, or it may even get a touch worse. But I don't think it's going to be significantly worse. So I think we've sort of stayed settled into that range right now. But on a comparative basis, it will get better as the year goes on because the rate didn't just jump on January 1. The rate was moving up a little bit, or down from their end, throughout 2013. So if you get my -- if we stick around $1.09, $1.10 for Canada, the comparative number will get better, does that makes sense to you?

Okay, yes.

The comparative in the first quarter was the worst because the rate is still about $1.10-ish in the quarter compared with a much lower rate of about $1.0 in the quarter -- in the first quarter of 2013. As that number moves up, the comparison will get better. So I think you'll see that have less of an impact as the year moves on. But it's there, and we don't really see that changing throughout this year. I'm not a foreign exchange prognosticator, but that's just what we see right now.

Got you. Okay, and then looking at cost pressure that seems like leather is beginning to move higher. I mean, is there any raw material or labor pressures that are getting worse or better for you guys?

It's pretty much, I'd sound a little bit like a broken record here unfortunately, but I think we've seen the same pressures continuing. The only thing that's giving us a little bit of relief is that the fact that the U.S. dollar has increased in value against the RMB, which we haven't seen in quite a while and if you look at the year-to-date increase, the dollar is about 3.4%, 3.5% stronger against the Chinese currency. Which does help. I think that eases the pressures on the factories over there and it mitigates price increases of that. And we're just continuing to try to move more product to India, where there is less cost pressure, and we're also exploring new places. Because I am convinced that long-term, China's just going one way, and that's up. And so we're trying to, from a long-term strategy, find more sourcing opportunities outside of China.

And lastly for me, how do you feel about inventory levels right now?

Our inventories are in good shape. We were down a little bit compared to the first quarter a year ago. We're in the process right now of building our inventories again as we move into fall. I mean spring is -- February, March are big months for us. And I think that the way that we planned our inventory, I think we talked about Chinese New Year in the last call. Chinese New Year was earlier this year, so we brought in a lot of product earlier. And I think that we've been in pretty good shape through the first quarter from an inventory perspective and very little obsolete inventory in our -- that in the inventory effects we could probably use more closeouts to sell right now. It sounds like a funny statement, but we have accounts that like to buy closeouts for us, and we are extremely clean right now. And then, I feel that our orders came in -- our orders have come in nicely for fall, and so we're in the process right now building our inventories so that we're in a good shape, as we move into the big fall months. So the answer -- the short answer to your question is: We're in good shape.

There are no further questions in the queue at this time.

Okay, then we'd like to thank everybody for their time, and we will talk to you next quarter. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.