Weyco Group, Inc. (WEYS) Q3 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Third Quarter 2019 Earnings Release Conference Call. My name is Inaya, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Mr. John Wittkowske, Chief Financial Officer. Mr. Wittkowske you may begin.

Thank you. Good morning everyone and welcome to our third 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 of 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 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 third quarter of 2019 were $82.5 million, up 5% compared to last year's $78.4 million. Operating earnings were $8.5 million for the quarter, up 5% compared with $8 million last year. Net earnings attributable to Weyco Group increased 5% to $6.6 million for the quarter, up from $6.3 million. Diluted earnings per share were $0.66 per share this quarter and $0.60 per share last year. In the North American wholesale segment, net sales for the quarter were $67.8 million, up 7% compared with $63.2 million in 2018. Licensing revenues were $630,000 this quarter and $531,000 last year. Wholesale gross earnings increased to 35.9% of net sales up from 34.4% of net sales last year. Operating earnings for the wholesale segment increased 25% and $9.5 million this quarter, up from $7.6 million in 2018 due to the higher sales and higher gross margins. Net sales of our North American retail segment which include our retail stores and U.S. e-commerce sales were $5.2 million in the third quarter of 2019, up 4% compared with $4.9 million in 2018. Same-store sales which include U.S. e-commerce sales were up 3% for the quarter due to those increased sales on the company's websites. Retail operating earnings were $365,000 this quarter and $428,000 last year. While operating earnings from the company's e-commerce business is increased. This increase was more than offset by lower operating results at the company's brick-and-mortar locations. Our other operations which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $9.5 million in the third quarter down 7% compared with $10.3 million in 2018. The decrease was primarily due to the weaker Australian dollar, as Florsheim Australia's net sales in local currencies were down 3% for the quarter due to lower sales in its wholesale businesses. Collectively Florsheim Australia and Florsheim Europe had operating losses totaling $1.4 million this quarter compared to operating earnings of $7,500 in last year's third quarter. The decline between years was mainly due to lower sales, lower overall gross margins, and higher sales expenses. Both expenses also included approximately $350000 of one-time costs to exit an underperforming retail store in Australia. On August 23, the U.S. government announced it would impose an additional 15% tariff on footwear sourced from China. The tariff on leather footwear which primarily impacts our Florsheim Stacy Adams and Nunn Bush brands took effect on September 1. The tariff on rubber and other non-leather footwear which primarily impacts the BOGS brand is expected to take effect on December 15, 2019. In an effort to mitigate the overall impact of the tariff cost increases the company negotiated wholesale price increases with many of its customers and price reductions from many of its Chinese suppliers. While the tariff had a minimal impact on the company's third quarter 2019 financial results the ultimate future impact of the tariff on the company's gross margins, results of operations, and overall financial statements is unknown at this time. At September 30, 2019, our cash and marketable securities totaled $32.1 million and we have $16.9 million outstanding on our $60 million line of credit. During the first nine months of 2019, we used funds to pay $9.4 million in dividends and repurchased $4 million of company stocks. Additionally, our operations resulted in a net $4.2 million use of cash mainly to fund inventory purchases. During the first nine months of 2019, we spent $4.6 million on capital expenditures primarily due to the expansion of office space within our corporate headquarters. The project is due to be completed in February of 2020. We estimate that 2019 annual capital expenditures will be between $5.5 million and $6.5 million. On November 5, 2019, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on November 29, 2019, and payable on January 2, 2020. I would now like to turn the call over to Tom Florsheim Jr. our Chairman, and CEO.

Thanks, John, and good morning everyone. As John mentioned, our Wholesale business was up 7% for the quarter. We're very pleased with the overall performance of wholesale this past quarter with both Florsheim and BOGS having strong double-digit increases. Our Florsheim business was up 22% in the quarter which is on top of a large increase last year. The sales gain was across all major trade channels and reflects the strong retail sell-throughs the brand is experiencing with numerous product collections. Florsheim continues to pick up market share in the dress and dress casual categories. It is also making progress in terms of pushing into the casual lifestyle segment. We are very excited about the momentum of the Florsheim business. Our BOGS brand was up 12% in North America as we entered the key fall selling season. BOGS continues to make significant progress diversifying its line into lighter insulated active footwear as well as into work boots both categories which are less dependent on inclement weather. While we are still very happy when there is snow in the forecast across the country we feel better positioned in the event of a mild winter. Our Nunn Bush business was down 2% as in previous quarters Nunn Bush's decline is primarily due to the challenges faced in the department store trade channel. And other key trade channels for Nunn Bush business is solid and Nunn Bush continues to introduce successful new product especially in the casual arena. Stacy Adams had a difficult quarter with sales down 5%. The majority of the decline came from a decrease in the off-price channel. Stacy Adams has been our most consistent growth story over the last few years. In our shrinking dress shoe market brand has been able to buck the trend and remain very relevant by offering a unique fashion perspective at accessible price points. In order to get back on a growth track, we are focused on diversifying Stacy Adams to include more versatile jeans-oriented footwear to leverage the strength of the brand in today's more casual market. In our North American retail segment, our e-commerce businesses are experiencing good growth. We continue to invest in our e-commerce business in North America as well as other key global markets as internet direct-to-consumer sales are becoming an important dimension of our business model. Our overseas business was down 7% for the quarter with all the loss coming from a 9% decrease in our Florsheim Australia business which encompasses Australia New Zealand the Pacific Rim and South Africa. We experienced significant challenges in our Hong Kong retail and wholesale business based on the disruptions from the protests in that market. Our Australia business also continues to be difficult as we're working to clean up obsolete inventory and a exit on profitable leases. We believe that we'll be in a position to reset this business and look forward to an improved bottom-line for international businesses in 2020. Our inventory levels as of September 30, 2019, were $81 million compared to $60 million at the same time one year ago. The main driver for increased inventory levels is our strategy to bring in as much product ahead of the dates where additional duties are imposed on Chinese footwear. On leather upper shoes the effective date for the initial 15% duty was September 1 and we were able to cover much of our 2019 needs on leather shoes at the old rate of 8.5%. The additional 15% duty for BOGS rubber boots is set to go into effect December 15. So we are covering much of our needs for 2020 on core boots by bringing these in early as well. The cost of carrying the extra inventory is much cheaper with additional 15% tariff. Overall gross margins were 39.2% versus 38.8% a year ago. Stable pricing from our factory base and selective price increases have helped improve our gross margins. However, as explained we are facing increased duties on leather footwear and will incur increased duties on BOGS product later this year. We have worked with our Chinese suppliers to get discounts and have raised our pricing to customers to offset some of the impact from the additional duties. We are also working to transfer some products and further diversify our supply chain moving forward. The ultimate impact this will have on our 2020 results is not known at this time. This concludes our formal remarks. And thanks for your interest in Weyco Group and I'd now like to open the call to your questions.

And I'm not showing any questions at this time.

Okay. We will end the call.

Thank you. And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.