U.S. Markets closed

Edited Transcript of WEYS earnings conference call or presentation 7-Aug-19 3:00pm GMT

Q2 2019 WEYCO Group Inc Earnings Call

Milwaukee Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of WEYCO Group Inc earnings conference call or presentation Wednesday, August 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John F. Wittkowske

Weyco Group, Inc. - Senior VP, CFO & Secretary

* Thomas W. Florsheim

Weyco Group, Inc. - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* John Eric Deysher

Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager

* Sam Rebotsky;SER Asset Management

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the second quarter 2019 earnings release conference call. My name is Adrian, and I'll be your operator for today's call. (Operator Instructions) I will now turn the call over to John Wittkowske, Chief Financial Officer. John Wittkowske, you may begin.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [2]

--------------------------------------------------------------------------------

Thank you, good morning, everyone. Welcome to Weyco Group's conference call to discuss our second quarter 2019 earnings. On this call, with me today is Tom Florsheim, Jr., our Chairman and CEO.

Before we begin, I would 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 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.

Our net sales for the second quarter of 2019 were $60.5 million compared to 2018 net sales of $60.9 million. Operating earnings were flat at $1.9 million in both the second quarters of 2019 and 2018. Net earnings attributable to Weyco Group were $1.5 million for the quarter and $1.6 million last year. Diluted earnings per share were $0.15 per share in both the second quarters of 2019 and 2018.

In the North American wholesale segment, net sales for the quarter were $46.1 million, up 1% compared to $45.6 million in 2018. Licensing revenues were $637,000 this quarter compared with $472,000 last year.

Wholesale gross earnings were 35.1% of net sales in the second quarter and 33.3% of net sales in last year's second quarter. Wholesale operating earnings rose 27% to $2.2 million this quarter, up from $1.7 million last year, due to higher sales and higher gross margins.

Net sales of our North American retail segment, which include our retail stores and our U.S. e-commerce sales, were $5.4 million in the second quarter, up 17% compared to $4.6 million in 2018. Same-store sales, which include our U.S. e-commerce sales, were up 14% for the quarter, due to the increased sales on our company's websites. Driven by higher online sales, retail operating earnings rose to $401,000 this year -- or this quarter, up from $222,000 last year.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $9 million in the second quarter, down 15% compared to $10.6 million in 2018. The decrease was primarily due to the weaker Australian dollar. Florsheim Australia's net sales in local currency were down 3% for the quarter with lower sales in both its retail and wholesale businesses. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $750,000 this quarter compared to operating losses of $23,000 in last year's second quarter. The decline between years was mainly due to lower sales, lower overall gross margins and higher operating costs at Florsheim Australia.

On August 1, 2019, it was announced that the U.S. would impose an additional 10% tariff on certain categories of consumer goods exported from China, including footwear. As the company sources a significant portion of its footwear from China, this tariff is expected to increase the overall cost of our footwear. At this time, the expected impact of the tariffs on the company's gross margins, results of operations and overall financial statements is unknown.

At June 30, 2019, our cash and marketable securities totaled $38.5 million, and we had $12 million outstanding on our revolving line of credit.

During the first 6 months of 2019, we generated $240,000 of cash from operations and drew down $6.2 million on our revolving line of credit. We used those funds to pay $7 million in dividends and repurchased $1.8 million of our company stock.

Additionally, we had $2.4 million of capital expenditures, the majority of which was related to a construction project to expand our office space in our corporate headquarters.

We estimate that 2019 annual capital expenditures will be between $4 million and $5 million. On August 6, 2019, our Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on August 29, 2019, payable on September 30, 2019.

I will now turn the call over to Tom Florsheim, Jr., our Chairman and CEO.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thanks, John, and good morning, everyone. As John mentioned, sales in our North American wholesale segment were up 1% for the April to June time period.

Overall, we feel that it was a solid quarter and a good first half. We continue to have a strong core business as well as some nice successors in terms of moving our brands into new categories. BOGS sales were up 48% for the quarter. The second quarter is our smallest volume quarter; nonetheless, we are excited about our large percentage increase, which reflects the momentum in the BOGS business as we are selling more lightly insulated as well as non-insulated product.

We also continue to make progress in our work business, which is resulting in strong growth in the farm and agricultural trade channel. The prime shipping months for BOGS start in August. And while the brand is still dependent on the timing of fall weather, we feel we are more diversified with proven successes across a range of less seasonal footwear.

Sales of Florsheim increased 14% this quarter. As in previous quarters, the brand's growth continues to be driven by new product introduced in recent seasons. We remained focused on leveraging our strengths in the market to expand our assortment of lifestyle footwear with a more casual bet. Stacy Adams sales were down 6% for the quarter. The decrease was primarily the result of soft department store sales as this trade channel remains under pressure from small mall traffic.

Overall, we feel good about the direction of Stacy Adams as the leading accessible fashion brand in the men's market. Nunn Bush sales declined 20% for the quarter, as this business continues to be tough. Similar to Stacy Adams, the loss reflected a significant drop in shipments to the department store trade channel. We are working hard to offset the impact the department store sector, but this was clearly a challenging quarter for Nunn Bush. We expect to see the business stabilize in the back half of the year.

In our North American retail segment, overall sales were up 17% in the second quarter. Same-store sales were up 14% driven by the strength of our e-commerce business. Our Internet business continues to be a bright spot for the company as we are copying against significant growth from last year. We will continue to invest in our e-commerce platform, while maintaining a select number of flagship stores.

Earnings in our overseas businesses were down significantly for the quarter and were a drag on our bottom line. As we discussed in previous quarters, we have new leadership in Florsheim Australia, and we are taking a fresh approach to the challenges of those businesses.

We are working through inventory issues and reevaluating retail locations. It is anticipated that we will be closing or not renewing leases for a select number of retail stores in Australia in the next 12 months. At the same time, we've opened 3 new outlet stores and we're looking at other locations, where we can obtain favorable lease terms. We are experiencing rapid growth in our Internet business as we invest in our Australian e-commerce platform. We see 2019 as something of a reset year for these markets. We are confident in the new management team and are very involved in turning this business around. The situation is temporary, and we believe we will return this region to profitability sometime in 2020.

Of our inventory levels as of June 30, 2019, were $83 million compared to $57 million at the same time a year ago. As we discussed in previous calls, we have been increasing our inventory in core styles to make sure we can meet demand. Also our inventory levels increased due to an effort to bring in fall footwear due to worries about additional tariffs being imposed on footwear from China.

Overall gross margins were 40.4% versus 38.9% a year ago, up 150 basis points. Stable pricing from our factory base and selective price increases have helped to improve our gross margins.

Regarding the proposed tariffs that John discussed earlier, we intend to try to mitigate the overall impact of these cost increases through a combination of wholesale price increases and cost reductions from our suppliers. This concludes our formal remarks.

Thank you for your interest in Weyco Group. And I would now like to open the call to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from Sam Rebotsky from SER Asset Management.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [2]

--------------------------------------------------------------------------------

With the inventory being carried in the $83 million, to what extent did you increase it relative to the 10% expected tariffs and the tariffs that are going on? And what percentage of your goods are manufactured in China?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

I'll answer the first question -- the last part of that question first. So it's a little less than 70% in China. I can't breakdown the inventory exactly. If I'm understanding that question, you're wondering what percentage of the increase is due to bringing in shoes early, is that correct?

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [4]

--------------------------------------------------------------------------------

Yes, yes, yes.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [5]

--------------------------------------------------------------------------------

What we basically did was starting, I guess, in May, when the threat again became evident, we had discussions with all the factories in China and just tried to pull everything for that we could. So I can't -- we were already bringing up our inventories a bit, as we've discussed previously. But I actually don't have that breakdown, but we felt and I think it's being proving out now that it made a lot of sense to bring the inventory in early. So we are positioned pretty well. We have a good part of our fall receipts in. And so we feel that -- I think that our inventory is very clean and we're healthy. And then, we are positioned well so that we don't get hit with tariffs on product that we're going to ship this year for the most part.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [6]

--------------------------------------------------------------------------------

I assume most of the companies that are in your situation, manufacturer in China, is your 70% comparable to other companies? Or are you higher relative to China?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [7]

--------------------------------------------------------------------------------

Yes. No, I mean 70% is pretty much where a lot of companies are. You see in the athletic world, the Nikes and the Adidas have moved more out into other countries and that's something that the whole industry has been working on for years. We have a big presence in India. We make shoes in other countries like Vietnam. But obviously, we're still pretty heavily weighted in China. And we have long good relationships with factories in China, where we were getting some really good footwear. So you just want to be very careful when you're thinking about moving your supply chain out that you're not going to do anything short-term that's going to hurt. I think long term, everybody can obviously see the writing on the wall. And so we're definitely -- we definitely feel that we need to be more out of China, more diversified, and so that's the strategy going forward. But we're going to be very cautious as far as how quickly that happens. We don't want to disrupt what we have going, which is a very, very dependable, very efficient supply chain.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [8]

--------------------------------------------------------------------------------

Okay. Are they willing to reduce any of the prices to you relative to the tariffs? Or are they firm on the prices that you pay prior to tariffs?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [9]

--------------------------------------------------------------------------------

No, we have been working with our factories in China, a week about in that regard, and yes, there is flexibility. People -- we have very long-term relationships, as I just said. And the factories in China want to work with us. They understand the situation. And so there, we will be able to achieve some price reductions from the factory base, absolutely.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [10]

--------------------------------------------------------------------------------

Okay. And one thing relative to, I think, your shoes are basically not style changes all the time. Your shoes are more stable, relative to maybe some other shoe manufacturers. Is that a fair assumption?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [11]

--------------------------------------------------------------------------------

That is a fair assumption. We have a lot of what we call core product that will continue on for several seasons. And so you see some brands, where they almost start over every season. We are kind of the polar opposite of that, where we introduce seasonal styles, but the biggest part of most of our brands will continue for many seasons.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [12]

--------------------------------------------------------------------------------

Okay. Should I ask more questions or are there anybody else in queue?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [13]

--------------------------------------------------------------------------------

That I don't know, but you can go ahead. I mean we're happy to answer questions.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [14]

--------------------------------------------------------------------------------

Okay. So now as far as -- I mean you're very financially sound. You've been -- your brands have been well known, your balance sheet is always strong. You've made acquisitions where it seems desirable. Are you looking at anything else to acquire? Or is there anything that appears of value to you at this present time?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [15]

--------------------------------------------------------------------------------

We constantly are evaluating potential acquisitions. I can tell you, right at this time, there's nothing that's really out there that we're looking at. But that doesn't mean that something might show up next week that we would look at. We are very disciplined in our approach in evaluating these acquisitions. And one thing that we've run into last few years is there's a lot of money out there chasing these brands that come up for sale. And so we have certain multiples that we stick to. And so I guess the quick answer is there's nothing on the horizon immediately, but we have built what we think is a very good platform here, and we would wait through over the years to add brands.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [16]

--------------------------------------------------------------------------------

And the Stacy Adams, which has been a fashion, you have a licensee that manufactures clothes under the Stacy Adams name or how does that work?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [17]

--------------------------------------------------------------------------------

Right. We manufacture the shoes and then we have a number of different licensees in Stacy Adams for different accessories like belts, hats, jewelry, suits, ties. There's a couple I just missed in that list, but yes we license that. We license basically everything but the shoes.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [18]

--------------------------------------------------------------------------------

Is there any room for women's to license that product or put that name on women's brand? Or is it solely the men?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [19]

--------------------------------------------------------------------------------

It's much more of a men's brand. We've actually tested the waters there before. And I think that the women's business in the U.S. is extremely competitive, so you really have to have a unique niche to do well. Stacy Adams men's has an extremely unique niche. So I mean that's a conversation that we would have. But right now, we're really focused on the men's business.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management, [20]

--------------------------------------------------------------------------------

Okay. I have been a shareholder for long time.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [21]

--------------------------------------------------------------------------------

Well, we appreciate the questions.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) And we do have a question from John Deysher from Pinnacle.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [23]

--------------------------------------------------------------------------------

Regarding the inventory, I was just curious, I know a lot could happen between now and year-end, but do you anticipate being back to inventory levels that you had in December of 2018 year-end, I think $72 million or $73 million or what you are thinking in terms of the inventory by year-end?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [24]

--------------------------------------------------------------------------------

I think that we may actually end up a little higher than that because we're going to continue to bring in shoes as early as possible because even though the date right now that we've heard, it's not in the Federal Register yet, is September 1 on these tariffs. There is talk that they could get ratchet it up higher. And so we're going to continue to bring in inventory. So I do think it's going to be a little bit higher at year-end. But as we discussed in the questions with the last caller, most of our inventory is core. So what we're doing, I think, it's important to understand, is bringing in core product. We're not inflating the amount of seasonal product, we're not buying more of that. We're focusing on shoes that are going to go on for the next 3, 4 seasons. So we don't feel that we're bringing in anything that's perishable, and that is basically looking at the cost of money, which is relatively inexpensive right now versus the cost of these tariffs -- additional tariffs, which could be relatively expensive. So we think that it is prudent to continue to bring the inventory in.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [25]

--------------------------------------------------------------------------------

Okay. That make sense. And in terms of the customer base, are there any customer -- you referenced lower sales to department stores and national shoe chains, are there any customers that you are perhaps pulling back from at this point in terms of credit? I'm thinking JCPenney, for example, are there any other ones that you are monitoring from a credit perspective?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [26]

--------------------------------------------------------------------------------

I am going to let John answer that.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [27]

--------------------------------------------------------------------------------

I don't think we've got anybody on -- we're always watching it, of course, but there's no one that we've highlighted right now that we've changed terms with significantly at this point in time. I mean we know we had a situation way back with Sears. And we have seen that coming in, so we've changed our business with them, and so we don't have anything in that realm right now that we see.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [28]

--------------------------------------------------------------------------------

Okay. So you're comfortable with the credit quality of your...

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [29]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [30]

--------------------------------------------------------------------------------

Yes. We keep a close eye on it, however, and the situation with China obviously will affect the retailers, and so it's something that we are monitoring very carefully.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [31]

--------------------------------------------------------------------------------

Okay. And finally, you bought that $1.8 million stock, I think, during the quarter, could you remind us again how much is left on the buyback program?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [32]

--------------------------------------------------------------------------------

It's about little bit a 0.5 million.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [33]

--------------------------------------------------------------------------------

Yes, it's in that range, 600,000 or so. I'm just actually looking to see...

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [34]

--------------------------------------------------------------------------------

And that buyback was the first half, not just the second quarter, the numbers that we gave.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [35]

--------------------------------------------------------------------------------

Right. That's total, that's first half. I was certainly more -- I'm just looking to see -- it strikes me off the top of my head that it's in around the 500,000 to 600,000 share number right now. I don't have it right in front of me.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [36]

--------------------------------------------------------------------------------

Okay. And the $1.8 million was about how many shares at this point?

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [37]

--------------------------------------------------------------------------------

While that would be about, I'll give you that number right now. It's -- there we go, really about 60,000 - 65,000 shares or so.

--------------------------------------------------------------------------------

John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [38]

--------------------------------------------------------------------------------

Okay, gets you to the $1.8 million. Okay. So I mean if you have 600,000 shares left, I mean, that's a pretty big appetite assuming the price is right.

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [39]

--------------------------------------------------------------------------------

Right. That's correct.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [40]

--------------------------------------------------------------------------------

And we're careful with that. I mean as we've said in the past, we'll buy the stock back when we feel the price is appropriate, given the timing. And we think it's a good use of the cash. And I think over time, it'll prove to be a good investment of our excess cash. So we are just monitoring that right now.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

(Operator Instructions) And we did have [Harry Sheen].

--------------------------------------------------------------------------------

Unidentified Analyst, [42]

--------------------------------------------------------------------------------

I just had a quick question following up on what was said earlier, 70% are from China. You said India and Vietnam. Can you give the percentages of that? And also you said you're going to reduce the China exposure for the tariffs? Any possibility of bringing back any manufacturing back to The United States? And what's the time line of reducing that China exposure, assuming these tariffs are still in place for another year or 2. Would that -- what would be the guidance on that? How long would it take basically to reduce that realistically?

--------------------------------------------------------------------------------

Thomas W. Florsheim, Weyco Group, Inc. - Chairman & CEO [43]

--------------------------------------------------------------------------------

Yes, okay. The first answer I'm going to give you is regarding the U.S. manufacturing. We were 100% U.S. manufacturers going back 30 years. And so we know quite a bit about manufacturing in the U.S., and there is very little possibility about bringing it back here. I mean there are just -- there aren't any component makers. You can't buy shoeboxes in the U.S. And so that we don't see happening. I mean you have a few people that continue to make shoes here, that are the very high-end shoes. But it is -- I don't think this country really wants to make shoes. So while there's some talk of that, something like 2% of the shoes sold in the U.S. are made here, and so it's a -- that's a very difficult prospect.

As far as the percentages in other countries, these are ballparks because I don't have those exact numbers. But I'd say that India is close to 25%, and Vietnam is probably about 5% and we still make a little bit in Europe, we make a little bit in the DR, Dominican Republic. And as far as the moving -- diversifying out of China, one of the things that we've been doing is talking to our factory base in China about moving some of their operations into other countries where they have relationships. And so that would be the first thing that we would do. And so, in other words, if we're making shoes in a town in China where the factory, we've done business with, are for a long time, they are working on plans to move some of that production to Vietnam, to Cambodia, where they can do that fairly quickly. And so they would still control those operations and which is what we are -- which is very appealing us because they've been very good dependable suppliers. And also as opposed to starting with new people on Cambodia, we would much prefer to do the business with our current partners in China, but in other countries. So that can happen over a, say, year to 2 year time period, really quickly, that we could get our percentages down in China.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And we have no further questions.

--------------------------------------------------------------------------------

John F. Wittkowske, Weyco Group, Inc. - Senior VP, CFO & Secretary [45]

--------------------------------------------------------------------------------

Okay. We thank you for your questions and your attention and we will speak to you next quarter. Have a great day.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.