John Wittkowske - Chief Financial Officer Tom Florsheim Jr. - Chairman and CEO John Florsheim - President and COO.

Rebecca Simmons - DRZ, Inc. .

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Weyco Group Conference Call. My name is Stephanie and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later we will facilitate a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. John Wittkowske, Chief Financial Officer. Please proceed..

Thank you, Stephanie. Good morning, everyone and welcome to Weyco Group’s conference call to discuss our second quarter 2014 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 I’ll 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 event or results might differ materially.

We refer you to Weyco Group’s most recent Form 10-K, as 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. Net sales for the second quarter of 2014 were $62.9 million, compared with 2013 sales of $65 million. Operating earnings were $3.4 million for the second quarter versus $3.7 million for the second quarter of 2013.

Net earnings attributable to Weyco Group and diluted earnings per share were flat at $2.2 million and $0.20 per share respectively for the second quarters of 2014 and 2013. In the North American wholesale segment, net sales for the second quarter of 2014 were $44.8 million compared with $47.5 million in 2013.

Wholesale gross earnings were 30.5% in the second quarter of 2014 compared to 29.9% in 2013. Selling and administrative expenses for the wholesale segment were $11.9 million or 27% of net sales compared to $12 million or 26% of net sales in 2013.

Operating earnings for the wholesale segment were $1.7 million in the second quarter compared to $2.2 million in 2013. This decrease was primarily due to lower sales partially offset by the higher gross margin percentage. Net sales of our North American retail segment which include our retail stores and our U.S.

internet sales were $5.3 million in the second quarter compared to $5.4 million last year. There were two fewer retail stores as of June 30, 2014 than there were at June 30, 2013. Same-store sales were up 4%. Retail operating earnings decreased 4% to $563,000 for the second quarter of 2014 compared with $585,000 last year.

Our other operations which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $12.8 million in the second quarter versus $12.2 million in 2013. The majority of other net sales were generated by Florsheim Australia. Florsheim Australia's net sales increased 3% for the quarter.

However, in local currency, its net sales were up 10%. This increase was driven by a 15% increase in net sales from Florsheim Australia’s retail businesses. The increase was only 3% in U.S. dollars due to the weaker Australian dollar relative to the U.S. dollar during 2014.

Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $1.1 million in the second quarter of 2014 compared with $918,000 in the same period last year. The increase was primarily due to improved performance of our Florsheim Australia’s retail businesses.

At June 30, 2014, our cash and marketable securities totaled $45.5 million and we had $10.8 million outstanding under our revolving line of credit. During the first six months of 2014, we generated $7.8 million of cash from operations.

We paid $6 million in dividends and net purchases of marketable securities of $4 million, spent $1.2 million on repurchase of our company stock and had 725,000 of capital expenditures. We expect capital expenditures will be between $1.5 million and $2.5 million in 2014.

On August 4, 2014, our Board of Directors declared a cash dividend of $0.19 per share to all shareholders of record on August 29, 2014, payable on September 30th. I would now like to turn the call over to Tom Florsheim Jr., Our Chairman and CEO..

Thanks John and good morning everyone. Overall, as mentioned earlier in the call, our North American second quarter wholesale sales were off 6%. Sales decrease was driven in large part by lower shipments to two large mid-tier department stores and a decline in our business in the off price channel.

The lower volume with department stores reflects initiatives on the part of both accounts to reduce their inventory models and accelerate product turn. Our sell-throughs at the consumer level remain strong with both accounts. And we believe that shipments will return to normal levels in the back half of the year.

The decline in the off price segment was the result of lower levels of close out inventory which make up the majority of the sales to the straight channel. Our second quarter BOGS business was up 36% with sales up across all major trade channels.

While second quarter is a low volume quarter for BOGS, we continue to be excited by the momentum the brand is showing in a number of categories outside its classic insulated boot business. We have seen a nice uptick in the BOGS hunting and work segment sales as well as with women’s and kids’ rain boot.

We believe that these categories can play an important part in BOGS’ future growth store. In the third quarter, we are shipping an expanded assortment of non-insulated footwear across the men’s, women’s and kids BOGS collections and we are looking forward to seeing sales results at retail.

Our orders for BOGS remains strong and we expect solid growth to continue in the second half of 2014. Stacy Adams sales were flat for the quarter with lower sales to department stores offset by higher sales to internet retailers.

While Stacy Adams is focused on making in roads, with jeans, family footwear, the majority of the brands sales remain in the dress category. The dress footwear market got off to a slow start in 2014 and impart due to harsh weather in the first quarter.

We have seen this trend reverse itself as the year progressed and Stacy Adams sales in the modern dress segment have been robust at our key retailers. Our Florsheim business was down 8% in the second quarter primarily due to a reduction in shipments at the partner stores and half price retailers.

From a shipment perspective, it was a challenging quarter for Florsheim, however we are enthused by the steady progress we are making in terms of moving the brand in the new categories.

Based on early reaction by our accounts for a new spring product for 2015, we expect to see continued success in repositioning the brand to align with today's more relaxed approach to addressing at the office around the weekend.

Our Nunn Bush sales decreased 18% this past quarter, primarily due to lower sales to department stores and half price retailers. The decrease at Nunn Bush reflects initiatives on the part of two major customers to reduce their inventory models across their entire footwear departments.

We believe that sales to these retailers will be more consistent with historical levels in the second half of the year. From a new category perspective, we are pleased to announce the launch of the Nunn Bush work category for delivery in November.

We feel significant opportunity exists in the national shoe chain department store and internet trade channels to market a technical service shoe at an accessible price point. The Nunn Bush Work collection will feature a light weight industrial grade slip-resistant outsole with an easy care maintenance free upper and a phone foot pad.

The Nunn Bush work program will have suggested retail of $70, originally we were going to introduce the program in the first quarter of 2015. However retail reaction was extremely positive, therefore we moved up the delivery to the fourth quarter of 2014. Our Rumi business was up 11% for the quarter.

We feel the brand has good momentum going into the key back-to-school selling season. As John mentioned earlier, our wholesale margins for the quarter improved over the second quarter last year and to-date in 2014 bid remained essentially leveled with last year. Leather prices continue to increase but at a slower pace.

The labor prices in China also continued to move up however we’re transitioning more of our sourcing to India, Vietnam and other countries where labor rates are lower. Currency has been less of a factor this year due to the U.S. dollar strengthening against the RMB and remains strong against the Indian Rupee.

We continued to raise our wholesale prices in a measured way to offset the increases in these costs as well as changes in our general overhead. Overall, we expect emergence will remain stable or slightly improve in the second half of the year.

In our North American retail segment, our second quarter same store sales were up 4%, driven by a solid increase in our ecommerce business. We’re now operating with a relatively small base of 17 stores in the U.S. market.

Our emphasis is on improving profitability by closing non-profitable stores in secondary markets, while investing in flagship stores. We’re also very focused on both the branding and ecommerce aspects of our website which has been an important source of growth for the company.

Overseas, our retail performance remained strong with same-store sales up 17% in local currency. Wholesale shipments were flat for the quarter. As we look to the second half of 2014, overall backlogs are up compared to last year at the same time. The increase is led by BOGS.

Our inventory levels were flat with December 31st are up $11 million or 21% compared to June 30 of last year, again driven by an increase in BOGS inventory. We are comfortable with our current inventory levels from an order fulfillment perspective and feel our current inventories are clean with little (inaudible). That concludes our formal remarks.

We appreciate your interest in Weyco Group and I would now like to open the call to your questions..

(Operator Instructions). Your first question comes from the line of Rebecca Simmons with DRZ, Inc. Please proceed..

Good morning, Rebecca..

Good morning. Thanks for taking my questions..

Sure..

I think I need to change my list of questions here. It seems like you anticipated a lot of them before I got chance to ask..

We write the conference call impact you don’t mind..

I could tell. So, maybe we could just talk a little bit more about I mean you talked about the inventory strategy changes that impacted your wholesale size.

I know these are [two] large customers, I mean are you anticipating maybe any other large customers or any other areas that you think may kind of follow that trend?.

John, are you going to answer that?.

Yes, I'll answer that. I mean we don't really anticipate this being something that’s wide spread across the industry. In the case of these two retailers, I think its strategy specific to them. So no, I don’t -- you don’t really anticipate that.

I mean I think in general, you saw because there is in the first quarter business was at the retail level was impacted by weather so inventory is backed up in general across a number of different retail segments. So you saw slowdown in terms of EDI reordering second quarter aside from the initiative of these two large retailers..

And I think, Rebecca, it’s Tom, just jumping in. The other thing that's important to keep in mind is we have visibility into how our sell-throughs at pretty much all the major retailers. And our sell-throughs as we mentioned in the conference calls have been very strong, we have product really across brands that is doing extremely well.

And when these initiatives occur at some of the major retailers, they do it across the whole department.

So even thought it affects us from the standpoint that they're bringing their inventories down, it really -- we get caught up in a situation where, it doesn't have anything to do with the performance of our product; it’s their general initiative to bring down their inventories, and they just do it across the board regardless of performance.

But the reason that we feel good about the second half of the year is that we have a combination of carry forward product and new product that we delivered this spring that is performing extremely well..

Okay.

So, feel pretty good overall about inventory levels going forward?.

Yes, very good, in terms of our retailers inventories and our own inventory..

Okay. And pleasantly surprised to see gross margins kind of bounced back and up over last year. I mean given the difficult environment, a lot of your peers aren’t seeing that.

Could you talk a little bit more about kind where the drivers for that were?.

Sure. I mean I think one of the things that we have really focused on the last couple of years is our forecasting. And really the key -- one of the keys to maintaining or slightly increasing our gross margin has been that we have been able to reduce our obsolete inventory.

And so when you sign last obsolete inventory to the discount channel that definitely helps your margins.

The other thing that we have done over the last several years, I’ve talked about this a little bit in the calls is rather than have wait, go two years without a price increase and then try to pass along a $2 per peer price increase what we have done is work with our major retailers to solely move up, both our price to them but also the average retailers that they were selling our product for so their margins are protected.

And I think that that approach has worked well because we are in a environment right where the growth of disposable income is not very good with middle market customers. So it’s hard to do anything drastic as far as retail prices. But by taking a slow methodical approach that seems to be working.

And in general, we are seeing our product even in brands like Nunn Bush selling at higher average retails..

Okay.

And I think you said in your prepared remarks you think that the back half of the year you can continue to kind of gain that benefit?.

I think that yes, we are going to continue on the same path. We're continuing to be careful with our inventories, where we for example in BOGS have really brought up the inventory. A good part of that is in core product that will carry forward into 2015.

And so if the winter doesn't develop, like we hope it does we will not be hurt, it will not effect our margins. And as far as the price increases, we're kind of continuing on the same path there. And we don't see from the supply side anything drastic happening, it just seems like things are settled down a bit in the raw materials market.

I think overall business in China isn't really strong right now. So the factories are being a little more measured in how they push prices up. And so, I think that all those factors lead us to feel that we're going to be able to maintain or maybe even slightly increase our margins in the second half..

Okay. And then when I'm thinking a quarter to date trends are what are you seeing more recently.

Have you already seen most of the impact from some of this inventory reworking, are things kind of back to where you want them to be or is that kind of still overhang?.

No, I think that the retailers that needed to get their inventories and might have so done so and that’s why we feel that going into the second half is going to be busy than more as usual. And I think what John was saying is part of that while is absorbing excess inventory that guy left over because first quarter wasn’t very good.

And so what we’re hearing from the major retailers is that they’re in pretty good shape and so we see much more normalized business in the second half of the year..

Okay. Well great, well congratulations on continuing to manage a very good the cold environment well and I appreciate you’re taking the time..

Thank you, Rebecca..

(Operator Instructions). We’ve no further question in queue. I will turn the call over back to Mr. John Wittkowske for closing remarks. Please proceed..

Thanks, excuse me, thank you. Thank you everyone for joining us on our call. And have a great day and we’ll talk to you in a few months. .

Thank you..

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