Weyco Group, Inc. (WEYS) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Weyco Group First Quarter 2016 Earnings Release Conference Call. My name is Dave, 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] 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 conference call to discuss our first quarter 2016 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 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 first quarter of 2016 were $78.9 million, up 1% as compared with 2015 sales of $78.1 million. Operating earnings were $3.8 million in 2016 versus $5.8 million in 2015. Net earnings attributable to Weyco Group were $2.7 million as compared to $3.6. Diluted earnings per share were $0.25 in the first quarter of 2016 versus $0.33 per share in 2015. In the North American wholesale segment, net sales for the first quarter of 2016 were $62.2 million, up 2% as compared with $61.1 million. Licensing revenues were $610,000 in the first quarter of 2016 as compared to $695,000 last year. Wholesale product margins were 28.5% of net sales in 2016 compared to 30.2% in 2015. The decrease between years was primarily due to lower gross margins in Canada. Gross margins in Canada continue to be negatively affected by the weaker Canadian dollar because inventory is purchased in US dollars. Selling and administrative expenses for the wholesale segment were $14.8 million in the first quarter compared to $14.2 million in 2015. Selling and administrative expenses were 24% of net sales this quarter versus 23% last year. The increase in US selling and administrative expenses was due to higher distribution costs, mainly an increase in temporary labor costs and additional storage costs. Wholesale operating earnings were $3.3 million in the first quarter of 2016 as compared to $4.8 million last year. The decline in wholesale operating earnings was primarily due to lower gross margins in Canada, and the higher US selling and administrative expenses. Net sales of our North American retail segment, which include our retail stores and US Internet sales, were $5.1 million in the first quarter, up 3% as compared to $4.9 million last year. Same-store sales, which include US Internet sales, were up 7%. There were two fewer retail stores operating during the first quarter of 2016 than there were in last year’s first quarter. Retail operating earnings were $246,000 in the first quarter compared to $272,000 in 2015. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $11.6 million in the first quarter compared to $12 million in 2015. The decrease between years was 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 2%. This increase was due to higher sales volumes in both its retail businesses where sales were up 1% with same-store sales up 4% and its wholesale businesses where sales grew 3%. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $236,000 in the first quarter of 2016 as compared with $700,000 in the same period last year. This decrease was due to lower gross margins at Florsheim Australia. Florsheim Australia purchases its inventory in US dollars and its gross margins have been negatively impacted by the weakness of its local currency against the US dollar. At March 31, 2016, our cash and marketable securities totaled $41.5 million and we had $24.6 million outstanding under our $60 million revolving line of credit. During the first three months of 2016, we generated $13.5 million of cash from operations. We used funds to pay $4.3 million in dividends and repurchased $2.9 million of our company stock, and to pay down $2 million on our revolving line of credit. We also paid the $5.2 million final earn out payment related to the 2011 acquisition of BOGS. Capital expenditures totaled $924,000 for the quarter. In April, we began construction to increase the capacity of our US distribution center. We expect this project to be complete in the third quarter. Including this project, we estimate that 2016 annual capital expenditures will be between $4 million and $5 million. On May 3, 2016, our Board of Directors declared a cash dividend of $0.21 per share to all shareholders of record on May 27, payable June 30. This represents an increase of 5% above the previous quarterly dividend rate of $0.20. I would now like to turn the call over to Tom Florsheim Jr., our Chairman and CEO.

Thanks, John and good morning. The first quarter of 2016 proved challenging from an earnings perspective. As previously mentioned, our North American wholesale business grew by 2% during the first quarter. Overall, we feel positive about this performance in a top retail environment, but our results were mixed within our brand portfolio. On the plus side, Stacy Adams continued its nice run with 12% sales increase. We are seeing strong demand across the board for the brand including significant increases with independence, department stores and the e-commerce trade channel. Stacy Adams’ ability to deliver strong growth quarter after quarter reflects the evolution of the brand as a leader in accessible fashion. Our Florsheim business was up 8% reflecting the jump in shipments to department and shoe chain stores, while a few years ago, Florsheim performance depended on the sales of classic legacy product, today the business is partially driven by sales of new product with more of a fashion bat. The brands progression been well received at the retailer and consumer level and we experienced strong growth with our existing account base in the first quarter. The challenge for Florsheim is finding appropriate distribution point if the brand is positioned between the mid tier and premium retail channels; we are focused on developing new opportunities from both the product and distribution standpoint. Our Bogs business fell 17% for the quarter, the mild winter in the Midwest and East Coast resulted in reduced [indiscernible] business in early 2016 as retailers took conservative stance towards inventory management. We anticipate that there will be a residual impact on the Bogs business through third quarter as retailers tend to be risk adverse on winter boats when coming out of an unseasonably warm winter. We continue to diversify the Bogs business away from dependence on winter weather. Non-insulated and lightly insulated footwear becoming a larger portion of the line, so represent a relatively small but growing percentage of sales. On the positive side, we believe Bogs is performing well ahead of the outdoor category and it well positioned from a band perspective. Nunn Bush sales were down 3% this past quarter; the decline reflected a drop in shipments to mid-tier department stores. The mid-tier channel is experiencing soft sales especially in the [indiscernible] and footwear categories. And while Nunn Bush performance is well above department store averages, fill-ins have been limited based on companywide inventory mandates. While mid-tier department stores are experiencing a shift in consumer buying patterns, we are confident we will pick up lost sales in other channels such as e-commerce. Our North American retail segment was up 7% in terms of same-store sales driven by strong e-commerce business. As previously discussed, we are reducing our store count in brick and mortar but focusing on improving our presentation in flagship stores. With that in mind we recently completed the remodeling of our Dadeland Miami store and remodel for store in Orlando is now underway. Our brick and mortar store provide us an opportunity to present the moderate incarnation of the Florsheim brand which is important from a marketing perspective especially in key international tourist markets. However, our growth in our direct to consumer business will be garnered through our e-commerce site, which is a high margin endeavor for the company. Similar to many international companies, our overseas business was difficult based on the strength of the US dollar. Australia is our largest overseas market and a decrease in a foreign sales this quarter was due to the translation of the weaker Australian currency into US dollars. The global currency portion of Australia sales increased 2% including a 4% growth in our same-store retail sales. We also experienced margin erosion as our overseas subsidiaries purchased in US dollars. While we are raising prices to offset the margin erosion, we are also mindful of maintaining market share within Australia and other countries. While the situation overseas will its challenges in the short to mid term, we believe this is a cyclical phenomenon and that international markets continue to represent a long-term opportunity for the company. Our inventory levels at March 31, 2016 were $75 million compared to $61 million a year ago. As discussed in previous calls, we have increased our inventory levels of our core products across all of our brands. Retailers continue to buy closer to when they need our products, securing larger inventories as necessary to meet their demand. Our overall gross margins for the quarter were 34.4% compared to 36.8% last year down 240 basis points. Gross margins in the US were down 100 basis points and our business in Canada and Australia continued to have a negative impact on our overall margins due to the strength of the US dollar compared to local currencies. Looking ahead to the second half, we have raised our pricing in both markets which should help offset some of the currency impacts. Additionally, we are seeing some recovery in both currencies which will have a positive impact if that trend continues. Regarding sourcing, factory and other prices remained stable. That includes our formal remarks. We appreciate your interest in Weyco Group and I’d now like to open the call to any questions.

[Operator Instructions] And we do have a question and it comes from the line of Mitch Kummetz at B. Riley. Please go ahead.

I have several if I may, let me begin with Stacy Adams, obviously strong growth in the quarter, you’ve experienced fairly robust growth in this brand for the last several quarters. Talked a little bit about the drivers there, something you might be able to elaborate on that a little bit.

Hi Mitch, thanks for your question. With Stacy Adams, we actually add pretty nice growth here for seven or eight quarters. And we’re just fine we have a great niche in the business - in the men's footwear business, there are very few companies that are focused on successful fashion. And with Stacy Adams, we develop this market over time and what we’ve really have been focused on over the last number of years is moving the brand from more of a high-fashion positioning to more mainstream if that makes sense. It sounds like a subtle detail, but it’s really opened up broader distribution for us within the marketplace and we're really within the partner store overall, within the independent shoe world, within the shoe chain world, we are kind of fit for that for accessible men's - not have product shoes that have a fashion vent but is still very understandable to the mainstream.

And then on Florsheim, this is also one of your stronger quarters in terms of the year-over-year growth rate and you mentioned in your prepared remarks more of a fashion vent to the product as well that’s been received nicely by your customers. Like how early do you think you are in terms of that transition because again this is one of the stronger growth rates in that brand versus maybe last year and I am just wondering if this is, if you are early-stage as to where this type of growth is possible to continue?

Mitch, I feel like we are making good progress and you see that progress in certain quarters and other quarters, it is not as apparent. But we bought Florsheim back in 2002 and it’s been an ongoing focus of ours to reposition the brand and early on I think we found that harder than we anticipated. Now we feel like we're in a good roof right now with Florsheim in terms of understanding the brands or understanding the marketplace and where we can fit in. And I think retailers in particular are much more open in terms of where the type of products they will buy from the brands. I am not trying to give you a vigorous answer, we just we feel very good about where we are heading. We’ve got a lot of new products that’s selling, but a lot of it depends upon getting the distribution points out there in the marketplace and that is something that is hard to predict. This quarter I think you are seeing some of that. We feel good about where we are heading for year, but it’s going – I think we are still relatively early on in that process.

Okay. And then BOGS, obviously this is a difficult quarter following challenging Q4 and I would think most of that was weather related. Can you talk a little bit about where you see inventory levels at retail now for cold weather products? I’ve heard other companies talk about how Q1 was a decent quarter on the retail side in terms of clearing through some of that merchandise. Where do you think inventories stand at retail? Do you think there is a lot of carryover inventory? You can talk a little bit about that.

Our feeling is that retailers are getting their inventories more in line, but that there is – that there are still retailers that have inventories that are higher than they would like and that’s why we talked about the impact on third quarter. We also just think that if we’ve seen this moving floor kind of where we come off a winter that is tough and everybody is very conservative and they are planning for the next winter and if you get a good winter, meaning lots of snow, you can end up with a decent season. So the trick is that we - I think we’ve learned. We have the brand five years now and I think we’ve learned how to manage the inventories in such a way that we can garner some upside if it’s there, but we don’t get hurt if it’s not and so the short answer to your questions it is pretty mixed out there as far as the inventory levels at retails.

I think that there is an overreaction to futures that retailers tend to be overly risk-averse rather than looking at the average of the last three seasons, they will look at what happened last season. And so they tend to under-buy. As Tom mentioned, like, if weather kicks in we end up looking pretty smart. If it’s mild winter it’s unpredictable.

And so as a follow up to that comment based on retailers being cautious with their pre-buy, how will you guys be positioned with your inventory going into the fourth to potentially take advantage of favorable reorder situation especially against an easy comparison to last year?

Right, what we do is focus on our core styles, styles that will carry over into fall of '17. And so we will have plenty of extra inventory if the winter is there and we are more careful after winter like last winter on fringy items. And so we just try socket-in some of the classic product and one of the interesting things about the BOGS brand is if we are, say, out of the certain kids print, people will take other kids prints. They are not as particular about a certain style. So we try to look at the different categories of the brand plays in and have inventory in kind of very strategy places so that we can take advantage of the upside.

Got it. Okay, that's helpful. Just a few more questions, I promise. On North American retail, good result there, particularly a strong comp. Have you seen any pickup in traffic in some of these tourist markets, given that maybe the year-over-year comparisons in currency are starting to ease? And then when do you lap the closing of those two stores that you referenced in the press release?

The answer to your first question is, business retail seems to be better in the New York market. Our New York store is doing better. And that's obviously a big tourist market. And in Miami, it's faddier, where it's really hard to kind of decipher the traffic patterns because we’ll have a very good week, and then the next week won’t be so good. And so -- and then you have a situation -- we also have stores in Texas and where we do a tremendous business with business coming in from Mexico and the peso still quite weak and that really has not come back. That's probably still the weakest tourist market if you want to call it, if you want to call it that. John, do you know the dates where we’re lapping those two stores?

Not exactly, but as I recall, I think one is in the fourth quarter and one I think is June 30. The one in Philadelphia was there and then we will be closing one store on June 30 of this year, one of the Florida stores. So there will be one more store closing this year.

Got it. And then on FX, obviously that's been a pressure point in terms of gross margins, both for Tourism Australia and Canada, when does that become less of a drag, I mean we can watch currencies, but just in terms of kind of how that flows through on the product comp for you, when does that start to ease?

Really the second half of the year, I think you'll see the margin numbers be more in-line, if you looked at how the, I'm talking particularly Canada here, with the exchange rates there, the one slight difference is, last year, we had some hedging that eased that pressure a little bit. So, even as the currency is getting more consistent with where it was last year, if you look at the averages, I think the second half on a straight currency basis will be, unless something happens where the Canadian dollar really weakens and gets way up into the high-130s to 140 where it had been at one point, if it stays down around the 130 range, high-120s, that's going to be comparable to where we are and I think you’ll see that in the second half, but we did have some hedging that we did last year that foreign currency that was a gain that we don't have this year. So there is a little bit of an offset there.

Okay. And then, just as the last question, kind of a housekeeping item, tax rate was a little lower in the quarter than it was last year. Is that kind of what we should expect for the year and then share count also came down a little bit as you bought back some stock, I'm just kind of wondering how you're thinking about that as well?

I think the tax rate will be more in-line with where it was for the full year last year. The tax rate is lower this quarter because we did make some -- a specific answer is we made some product donations in the quarter and with product donations, you get an expanded deduction. So the rate for the quarter was a little lower, the impact of that, however, because it's a fixed number, will get lower as our earnings get higher throughout the year. So I think that the overall tax rate for the year will be more in line with the overall rate last year. I think it's a little bit of an anomaly this year that it’s a little bit lower, this quarter.

Got it. And share count?

Well, share count, I think we are going to -- we will continue to buy back stock as appropriate. We are somewhat limited on the buyback because our volume isn’t high, so we have some limitations there from the government. There are no real significant stock option, restricted stock amounts that are going to increase the count, so I think the share count will decline a little bit throughout the year.

Okay. And then just lastly, as a follow-up to the comment about donations, did that have any margin impact on the quarter, or is it fairly immaterial?

I would say that overall it's immaterial. And it’s a little bit, because it's a zero, but we also charge some of that to our donation expense below the line in SG&A. So if it had any impact on the numbers you’re seeing, it would be more in the SG&A line. It would not be material enough to worry about.

Got it. Okay. Thanks a lot guys. Appreciate it. Good luck.

Thank you.

So there are no further questions at this time. [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.

Just thank you again for joining us on our call and hope you have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You can now disconnect. Good day.