Weyco Group, Inc. (WEYS) Q2 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Weyco Group Second Quarter 2016 Earnings Release Conference Call. My name is David, 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] And now, I would like to turn the call over to Mr. John Wittkowske, Chief Financial Officer. Please proceed sir.

Thank you David. Good morning everyone and welcome to Weyco Group’s second quarter conference call. 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 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 were $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 all 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 source and U.S. internet sales were $4.7 million in the second quarter down 6% compared to $5 million in 2015. Same-store sales, which include the U.S. internet sales decrease 2% for the quarter. There were two fewer retail stores operating during the second quarter of 2016 than they 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 volume at 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 margin at Florsheim Australia. Florsheim Australia purchases its inventory in U.S. dollars and its gross margin have been negatively affected by the weakness of its local currency against the U.S. dollar. Other income for the second quarter of 2016 was $155,000 compared to expense of $348,000 last year. This quarters 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 inner company loan between our U.S. business and Florsheim Australia. At June 30, 2016, our cash and marketable security 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 $9 million of cash from operations. We used those funds to pay $6.5 million of dividends, repurchased $6.1 million of our company stock and to pay down $11.4 million on our line of credit. We also paid the $5.2 million final earn out 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 U.S. distribution center, and we 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 the cash dividend of $0.21 per share to all shareholders a 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.

Thanks, John and good morning. 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 a carryover of inventory by a retail accounts as a byproduct of last year's mild winter. Overall however, the retail environment was soft for two primary reasons, first consumer spending average cycled away from footwear and apparel and towards durables such automobiles and home goods, as well as increased expenditures and 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 fall 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 gas longer-term implications, we believe we are well positioned to grow our brands in whichever channel consumer choose to purchase footwear. After eight consecutive quarters, with strong quarter-over-quarter increases Stacy Adams had not ordered. Sales decreased 5% compared to last year, with the loss coming mainly from the apartment store and off-price channels. From a sell through 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 year with large decrease in sales to department store and the off-price channel. Nunn Bush does a significant share of its business in the mid-tier department store channel, which is been hard hit with the rapid shift toward e-commerce sales. Department stores have reacted by lowering inventory model, which impacts our 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 sell through and we believe that the business will bounce back over the near and 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 face loss brick and mortar business. Florsheim’s sales decreased 5%, and this quarter’s narrative is similar to that of Nunn Bush. The department stores and chain store sale were down. Mean while, sales in the e-commerce channel are growing, but were not enough to a makeup this quarter’s deficit. From a product prospective, we feel good about where we are with Florsheim. Both retailers and consumers are responding positively to the new design ecstatic of the brand, which builds up the heritage of Florsheim, but is updated for today’s life style 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 towards softening the cycle. We are maintaining good inventories and core BOGS product that carryover from year-to-year to maximize up side, should there be favorable weather trends fall. Based on last year, retailers are extremely risk-averse when it comes to weather boot, inventory and in the event and in the event of a normal winter, we would be well positioned to meet increase demand. We are also continuing our focus on diversifying BOGS, while our sandal sales were small this spring, we are building momentum for future seasons and we 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 motor 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 a long-term opportunity we perceive in international markets. Towards that end, we are opening an additional store in Sydney and the store in Paris both in the third quarter. This aligns with our strategy of having flagships in key tourist markets. In addition, our partner flagship store result in the Santiago, Chile in July. The six 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 broad inventories down to coincide with our lower backlog. However, as I mentioned earlier, we will still carrying extra inventory on core carry forward BOGS styles, so we have upside potential if the weather cooperates this year. In our legacy brands, we are also continuing with our strategy of carrying heavier inventory of core product 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 for us. Overall, gross margins were 39.2% versus 38.2% last year up 100 basis points. While there is still are headwinds due to the strength of the dollar and our overseas markets, we have hit some success in raising pricing and seen positive results. Factory pricing remain 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] this comes from the line of Mitch Kummetz at B. Riley. Go ahead please.

Yes thanks for taking my questions. I have 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. And I know you just made some comments about your outlook around core inventory and being well positioned throughout ones orders assuming normal weather. I’m just curious in that outlook for BOGS, what are you assuming for weather, I’m guessing you are not assuming normal weather and any big at once business in the fourth quarter, but maybe you could help me out with that?

Hi thanks for your question its John.. We are conservative in terms of how we look at the back half, our backlog is down in terms of our open orders with customers, but we think there is a bit of an overreaction in the market. You get any type of normal weather, probably are going to be looking for boots. When you look at the projections out there, there is a buzz around [indiscernible] which should result in over weather and increased participation, but you can’t count on that. And so I think that there are some upside in our numbers, but it is weather dependant. So I think you are seeing the industry other numbers from other companies and the weather boot category is definitely due to softer first half this year, but we believe that it’s kind of temporary phenomenon and then it bounces back when you get a little bit of weather. There is a overreaction on the down side and there is some time an overreaction in the upside too.

Got it, and then in terms of retail inventory levels, clearly it seems like there are some excess inventory kind of coming through the second quarter retail and it impacted all of our brands, but it sounds like with your comments that you expect some improvement in your legacy brands going forward. I mean do you feel like inventory levels have improved kind of coming out of Q2 versus what they were in the quarter to give a little bit of confidence that there should be some modest improvement in the legacy business or how are you thinking about that?

I think that, 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 second quarter, a lot of major retailers were very determined to come in on their plans at the end of their 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 lower their plans slightly but that will not have the same impact as what we saw in the second quarter.

The other things just to add to that for whatever reason this year was the year of the e-commerce guys. If the e-commerce accounts decided they were going to focus a little bit more on turn and if previous years they said well we are going to have this huge increase, we are going to bring in inventory and you are ready for this increase. Now there is much more focus among the big e-commerce players up on turn. So if they broke it down their inventory, we experienced that in the first half to some degree. And so now if sales come through and they react just in time we are well positioned for that. So we should pick up, some pretty high sales I think in the back half in the e-commerce sector based upon what they did in there models in the first half.

Got it, may be two ask questions on your retails store, I know that in prior quarter you have talked about some challenging tourist traffic. Just kind of curious where that stands now, particularly as it relates to Brexit and kind what that’s done to some currencies particularly the pound and even the Euro?

Yes. I think that 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 lot of that business is actually more Central and South American and then European and those currencies have come back a little bit this year which I think is helping. And so I would say in general, we've seen that stabilized we have not experienced any kind of like major affect from Brexit, I mean mostly that would affect our [Madison Avenue] (Ph) store I think and we really have yet not seen that.

Okay and then last question. I know that the Florsheim Australia gross margins have been challenged because of currency and we have seen some improvement in the Australian dollar. I think that from a year-over-year standpoint, some of the comparison there start to look more favorable as soon as this third quarter, does 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 into that?

Mitch I think you are right and we have actually in our minds thought that same thing that in the second half of the year both in Canada and Australia, particularly Canada I think the comparisons are going to be - there won’t be the impact on year-over-year basis on the margin. On a competitive 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 favorable - vis-à-vis the first quarter where we said these are 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. But one late 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 the year prior had gone out. So we won't get the benefit of those which will have a slight impact on the margins in second half. But on a straight peer forget the hedging standpoint, yes I think they will be comparable year-over-year without exchange impact.

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

Thank you.

Thank you.

[Operator Instructions] there are no further questions coming through. So I would now like to turn the call back to Mr. John Wittkowske for closing remarks.

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.