Weyco Group, Inc. (WEYS) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Weyco Group Inc. Fourth Quarter and Full Year 2015 Earnings Release Conference Call. My name is Sheila and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. John Wittkowske, Chief Financial Officer. Please proceed sir.

Thank you. Good morning, everyone and welcome to Weyco Group’s 2015 conference call. With me today are Tom Florsheim Jr., our Chairman and CEO; and John Florsheim, our President and COO. Before we 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. Our net sales for the fourth quarter of 2015 were $87.4 million, as compared to fourth quarter 2014 net sales of $95.3 million. Fourth quarter operating earnings were $11.5 million in 2015 as compared to $13.4 million in 2014. Net earnings attributable to Weyco Group were $7 million this quarter and $8.1 million last year. Diluted earnings per share for the quarter were $0.65 in 2015 and $0.75 in 2014. Earnings for the quarter and for the year included $458,000 of income representing the final adjustment to the earnout payment relating to the 2011 acquisition of Bogs. On an after-tax basis, this adjustment was $279,000 or $0.03 per share. The final earnout payment of $5.2 million will be made in the first quarter of 2016. In the North American wholesale segment, net sales for the fourth quarter of 2015 were $67.5 million, as compared to $73.9 million in 2014. Licensing revenues were $1.3 million this quarter, up from $1.2 million. Wholesale product margins this segment were 34.7% in the fourth quarter compared to 34.2% in the fourth quarter of 2014. Gross margins in the United States increased to 35.4% this quarter, up from 33.1% in last year’s fourth quarter. However this increase was offset by lower gross margins in Canada. The Canadian gross margins continued to be negatively affected by the weaker Canadian dollar because inventory is purchased in US dollar. Selling and administrative expenses for the wholesale segment were $15.2 million in the fourth quarter compared to $16.3 million in 2014. Selling and administrative expenses were 23% of net sales in the fourth quarter of 2015 versus 22% in 2014. Whole operating earnings were $9.1 million in the fourth quarter as compared to $9.8 million in the fourth quarter in 2014. The decline in wholesale operating earnings resulted from the lower operating earnings in Canada. Net sales of our North American retail segment, which include our retail stores and US Internet sales, were $7.4 million in the fourth quarter of 2015 as compared to $7.5 million in 2014. The decrease was due to three fewer retail stores operating this quarter than they were in last year’s fourth quarter. Same-store sales, which include US Internet sales, were up 5% for the quarter. Retail operating earnings were $1.4 million this quarter and $1.7 million last year. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $12.5 million in the fourth quarter as compared to $13.9 million in 2014. The decrease between years was primarily due to lower net sales at Florsheim Australia caused by the translation of the weaker Australian currency into US dollars. In local currency, Florsheim Australia’s net sales were up 5% for the quarter. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $1.1 million in the fourth quarter, and $1.9 million in the same period last year. This decrease was primarily due to lower gross margins in Australia and South Africa. These businesses purchase their inventory in U.S. dollars and their gross margins have been negatively impacted by the weakness of their local currencies compared with the US dollar. For the year, our overall net sales were $321 million in 2015 and 2014. Earnings from operations were $29.8 million this year as compared with $30.7 million last year. Net earnings attributable to Weyco Group were $18.2 million in 2015 compared with $19 million in 2014. Diluted earnings per share were $1.68 in 2015 as compared with $1.75 a year ago. In the wholesale segment, net sales for the year were $251 million in 2015 as compared with $243 million in 2014. Licensing revenues were $3.6 million, up from $3.2 million last year. Wholesale product margins were 31.5% in 2015, up from 31.4% in 2014. Gross margins in the US increased to 32.4% this year, up from 31.4%. However this increase again was offset by the lower gross margins in Canada. Selling and administrative expenses for the wholesale segment were $57.3 million in 2015 compared to $56 million last year. Selling and administrative expenses were 23% of net sales in both years. In 2015 we spent an additional $2 million on marketing and advertising as we remain committed to investing in promoting our individual brand. Wholesale operating earnings increased to $24.3 million in 2015 from $22.5 million in 2014. Wholesale operating earnings in the US were up 13% for the year. However, again, this increase was offset by lower operating earnings in Canada. In our retail segment, net sales were $22.1 million in 2015 and $23.3 million in 2014. The decrease was due to three fewer domestic retail stores operating in 2015. Same-store sales, which include US Internet sales, were up 1%. The retail division’s operating earnings were $2.5 million in 2015 as compared with $3.3 million in 2014. This decrease was due to lower sales at the company's brick-and-mortar locations. Our other businesses had net sales of $47.1 million in 2015 as compared with $53.7 million last year. This decrease was due to lower sales at Florsheim Australia caused again by the translation of the weaker Australian currency into US dollars. In local currency, Florsheim Australia’s net sales were up 7% for the year. Earnings from operations from our other businesses were $3 million in 2015 and $4.8 million in 2014. This decrease was primarily due to lower operating earnings at recently opened retail stores in Asia and Australia, as well as lower operating earnings at our retail store in Macau as a result of higher operating expenses. Our other expense for the year totaled $1.4 million in 2015 and $595,000 in 2014. This year's other expense included foreign currency transaction losses of $961,000 compared with $268,000 last year. This increase was due to the significant decline in the Australian dollar compared to the US dollar. Additionally, this year we recognized $473,000 of expense related to the operating losses and write-off of an investment by Florsheim Australia in a foreign joint venture. At December 31, 2015 our cash and marketable securities totaled $43.1 million and we had $26.6 million outstanding under our $60 million revolving line of credit. In 2015, we drew $21.2 million on our line of credit and received a net of $5.2 million from maturities of marketable securities. We used funds to pay $8.5 million in dividends and to repurchase $9.9 million of our company stock. In addition, our operations resulted in a net $5.7 million use of cash mainly to fund inventory purchases. During 2015 we increased our inventory levels by $28.2 million. This increase was the result of buying more inventory to meet increased backlog. In addition, we increased our stock of core products in order to meet at once demand which is particularly important for BOGS as weather can have a significant impact on the demand for its products. For the year we spent $2.5 million on capital expenditures. We expect annual capital expenditures to be between $4 million and $5 million in 2016. The increase in 2016 is due to improvements that will be made to our distribution center to increase capacity. On March 2, 2016 the company's Board of Directors declared a quarterly cash dividend of $0.20 per share to all shareholders of record on March 21, payable March 31 of 2016. I would now like to turn the call over to Tom Florsheim Jr., our Chairman and CEO.

Thank you, John, and good morning everyone. 2015 was a year of mixed results. After the first three quarters we were running with an 8% increase in our North American wholesale business but record unseasonably warm weather significantly impacted our sales in the late fall, early winter time period, resulting in a 9% decline in total wholesale sales for the fourth quarter as compared to last year. For the full year, we ended with a 3% increase in North American wholesale sales due to the challenges faced during the final stretch of the year. With warm temperatures and low precipitation across the Midwest, East Coast and Canada, our BOGS sales fell 22% in the fourth quarter but were up 3% for the year. The mild weather in the fourth quarter affected our BOGS business as we experienced significant cancellations and drop-off in at-once fill-in business. While we have focused on diversifying the BOGS business away from cold-weather products and believe we have made significant progress towards this end, the majority of sales in the fourth quarter are still in the weather boot category. Relative to other cold-weather boot brands we feel that BOGS performed well in difficult conditions and retailers remain very bullish on the brand. We are also investing significantly in BOGS advertising, doubling our spending in 2015, including our first national campaign via both traditional and digital media. In January, the US and parts of Canada finally experienced some cold-weather and snow which helped clear retail inventory and create demand as we began 2016. Our Stacy Adams business was up approximately 5% for the quarter and 11% for the year. The brand occupies a unique space in the men's footwear market with its fashion heritage, modern style and accessible pricing. Stacy Adams’ growth in 2015 was driven by strong increases in the department store e-commerce and independent trade channels and the Stacy Adams’ license product business also experienced double-digit growth. In 2016, we’re launching a new ad campaign in GQ featuring an actor and R&B artist Tyrese Gibson. Tyrese is a lifelong fan of Stacy Adams with a wide following in social media and is well known for his weird role in the Fast & Furious movies. We are excited about our partnership with Tyrese as we believe he reflects both the modern dress and casual aesthetic of Stacy Adams. Our Florsheim wholesale division was down 2% in the fourth quarter and 1% for the year. Despite the decline, Florsheim reflected a drop in sales in the off-priced channel. While top line growth eluded us, we ran a much cleaner business in 2015 with higher gross margins resulting in an increase in the brand’s gross margin dollars for the year. Our styling continues to evolve in Florsheim and we’re seeing good success with our mix of new product that includes jean friendly and weekend casual footwear. In November, we launched Florsheim by Esquivel but -- we launched the Florsheim by Esquivel line at [Barney’s] [ph] and in select Florsheim retail stores. As mentioned in our third quarter call, Florsheim by Esquivel is a collaboration with designer George Esquivel for footwear and crafted in California. The collection which features both men's and women's styles taps into our American-made heritage and provides nice exposure for the Florsheim brand. We believe from a styling and brand relevance perspective, we are well-positioned and we look forward to a solid 2016 for Florsheim. Our Nunn Bush business decreased 10% for the quarter but was even for the year. A large percentage of the Nunn Bush business is driven by weekly fill-in orders from department stores and shoe chains. With the softness in fourth-quarter retail, some accounts cut back on weekly fill-ins in order to manage total inventories. Although at Nunn Bush sell-throughs are generally well ahead of the category averages, the brand’s business was impacted by the overall push to keep stock levels in line during a challenging holiday season. The Nunn Bush business had very good momentum through the majority of 2015 and we expect business to get back on a growth track as we move into the New Year. Same-store sales in our North American retail segment, which includes US Internet sales, were up 5% in the fourth quarter. We saw a nice growth in our e-commerce business but continued to experience challenges in our brick-and-mortar stores, especially in tourist markets that are impacted by the strong US dollar. We're in the process of remodeling a number of our stores with a new format that is based on our flagship store in Milan. We feel this new format enhances the presentation of the Florsheim brand and ties into our strategy of reducing store count while investing in improved store environments in key markets. Similar with many companies, our overseas business in the fourth quarter and the entire year proved to be difficult primarily because of unfavorable currency translation. We believe we’ve built a good long term platform in many areas of the world and we’ll continue to invest judiciously for future growth. While we experienced headwinds as a result of the strong US dollar in the near term, we continue to see our international business as an important part of our strategy for Florsheim as well as select brands in our portfolio. Our overall gross margins for the quarter were 41%, flat against the year ago. For the full year, our margins were 37.9% in 2015 versus 38.4% in 2014, down 50 basis points. Gross margins in our US wholesale business increased 100 basis points for the year to 32.4% from 31.4% last year. Our overall margins for the year were both down by the weaker local currencies in Canada and Australia compared to the US dollar. Because we pay for the shoes in those countries in US dollars but the product is then sold in local currency, there is a margin impact which we saw in 2015. While we are raising prices in Australia and Canada to offset the higher cost of sales caused by the weakness of their currencies, this has to be done in a very measured way to protect our market share. In the US our prices are being increased only on select products. Regarding sourcing, factory prices remain stable. Worldwide demand has weakened due to struggling economies in Europe and Russia and this has created a situation where shoe factories in China and India are not at full capacity and are looking for additional business. Also, because the biggest part of our wholesale business is in the US market, the strength of the dollar against the currencies in the countries where we source helps to keep prices flat. One of the largest costs in manufacturing footwear is leather which is denominated in US dollars, so the impact of a stronger dollar in the US market is tampered. In countries like China and India, labor costs continue to rise and the stronger dollar helped to offset those increases. As we look ahead to 2016, we are confident about the prospects of our company. We’re coming off a very solid year in North American wholesale and we believe that all of our brands have good momentum in their respective markets. The strong US dollar will continue to present some challenges this year. However the fundamentals of our business are strong and we have worked hard to enhance our gross margins in the US. This concludes our formal remarks. Thank you for your interest in Weyco Group. I’d now like to open up the call for any questions.

[Operator Instructions] We have no questions coming through. I’d like to turn the call back to John Wittkowske.

End of Q&A

Thank you. Again thanks for listening to our conference call for 2015, and we will look forward to seeing or hearing back from you on our first call in 2016. Have a great day.

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