John Wittkowske - Chief Financial Officer Tom Florsheim Jr. - Chairman and Chief Executive Officer John Florsheim - President and Chief Operating Officer.

Rebecca Simmons - DRZ, Inc..

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Weyco Group Earnings Conference Call. My name is Tony and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

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

Thank you, Tony. Good morning, everyone. Welcome to Weyco Group’s conference call to discuss our third 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, I’d 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 Form 10-K identifies important factors and risks that could cause the company’s actual results to differ 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 third quarter of 2014 were $87.4 million, up 5% as compared to 2013 net sales of $83.1 million. Operating earnings increased 5% to $9 million in the third quarter from $8.6 million last year.

Net earnings attributable to Weyco Group were $5.5 million this quarter, up 2% from $5.4 million. Diluted earnings per share were $0.51 per share in the third quarter, up from $0.50 a share in 2013. In the North American wholesale segment, net sales for the third quarter of 2014 were $68 million, up 5% as compared to $64.8 million in 2013.

This increase was primarily due to higher sales of the BOGS brand. Wholesale gross earnings were 31.7% of net sales in the third quarter compared to 32.6% in 2013. This decrease was partially due to the weaker Canadian dollar relative to the U.S. dollar in the third quarter of 2014 as compared to last year’s third quarter.

Selling and administrative expenses for the quarter for the wholesale segment were $14.1 million or 21% of net sales compared to $14 million or 22% of net sales in 2013. Operating earnings for the wholesale segment were $7.4 million, up 5% as compared to $7.1 million.

Net sales of our North American retail segment, which include our retail stores and U.S. internet sales, were $5.4 million in the third quarter, up 2% from $5.2 million in 2013. There were two fewer retail stores operating during the third quarter of 2014 than there were last year. Our same-store sales were up 6% for the quarter, including U.S.

internet sales, which were up 12%. Retail operating earnings increased 25% to $638,000 compared with $512,000 last year. This increase was due to the benefit of closing underperforming stores as well as the improved performance at both brick-and-mortar stores and the company’s U.S. internet business.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $14 million in the third quarter, up 7% as compared to $13.1 million in 2013. The majority of other net sales were generated by Florsheim Australia. Florsheim Australia’s net sales were up 9% for the quarter.

This increase was driven by a 4% increase in its retail businesses and an 18% increase in its wholesale businesses. Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $936,000 million compared to $1 million in the same period last year.

This decrease was primarily due to lower wholesale gross margins and higher retail selling and administrative expenses at Florsheim Australia. At September 30, our cash and marketable securities totaled $42.4 million and we had $24.3 million outstanding under our revolving line of credit.

During the first nine months of 2014, we grew $12.3 million on our line and received $1.2 million from stock option exercises. We paid dividends of $8 million spent $4 million on purchases of our company’s stock, and our operations resulted in a net $3.4 million use of cash.

Our capital expenditures for the year have been $1.9 million and we expect capital expenditures for the full year to be approximately $2.5 million. On November 3, 2014, our Board of Directors declared a cash dividend of $0.19 per share to all shareholders of record on December 9, 2014 and payable January 2, 2015.

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

Thanks John and good morning everyone. Excuse me. Overall, as mentioned earlier in the call, our third quarter wholesale sales were up 5%. We feel good about our performance and what we see as a very choppy retail market. Many of our key accounts are being conservative with their inventory levels as they see a decline in overall store traffic.

Consumer shopping patterns meanwhile continue to evolve with customers buying later in the season and with more purchases via the internet. While our individual brand performance has varied significantly, we believe that as a company we are well positioned to pick up future market share.

Our third quarter BOGS business was up 37% reflecting both pent up demand as well as our success in establishing BOGS in new categories. As a result of last year’s harsh winter, retailers came out of 2013 with low inventory levels.

Our BOGS division is benefited from replenishment of retailer inventory as well as strong consumer interest in the category. We are seeing robust sell-throughs across our key trade channels in all segments of our business with a particularly strong performance in the kids market.

In addition, BOGS shipped an expanded assortment of women’s, kids and men’s non-insulated footwear and the consumer response has been very positive. This early success in the evolution of BOGS to more of an outdoor lifestyle brand and a wave from dependence on cold weather bodes well for our future growth.

Stacy Adams sales were up 10% for the quarter as we continue to see strong sales in the dress shoe market, the largest segment of Stacy Adams business.

In men’s footwear, we were seeing more interest in refined dress casuals and colors, especially cognac, as shoes that can be worn as a jeans shoe as well as footwear appropriate for work or more formal occasions. As a leader in accessible fashion Stacy Adams benefits from this trend.

From a design perspective, Stacy Adams continues to be focused on enhancing the brand’s penetration of the casual category. We believe Stacy Adams is making progress towards this end and this remains an important opportunity for future growth.

Our Florsheim business was down 9% in the third quarter reflecting in part a decline in shipments to a major mid-tier account that is unable to support the brand’s price points across a large number of its stores. Florsheim is in the process of right sizing this business to ensure better inventory productivity and future success.

Otherwise, the brand’s performance at retail has been good. Similar to Stacy Adams, Florsheim has picked up business in the modern dress and dress casual market capitalizing on the trend towards colors, with versatile cognac footwear among the brand’s best selling product. Our Nunn Bush sales decreased 12% this past quarter.

The decline in Nunn Bush sales was the result of inventory reduction initiatives on the part of two major customers. We mentioned these initiatives in our second quarter conference call with the expectation that sales would normalize in the second half of the year.

Shipments to these two accounts remain down in the third quarter, but we believe that this trend will reverse itself in the fourth quarter for the larger of the two accounts which had helped narrow the gap in Nunn Bush’s sales decrease.

The brand’s sell-throughs at the consumer level continue to be strong and we are enthusiastic about Nunn Bush’s new product pipeline including the introduction of our Nunn Bush work program in November. Nunn Bush work is focused on the service sector and features a lightweight industrial grade slip-resistant outsole and a maintenance free upper.

We believe there is a void in a number of our trade channels for quality service shoes at accessible prices. In our North American retail segment, our internet business continues to perform well and our brick and mortar stores showed improvement in the quarter.

Our emphasis continues to be on improving profitability by investing in our flagship stores and closing underperforming stores. Last week on November 1, we closed one store and we plan to close another on January 31, 2015. This will leave us with a base of 15 stores in the U.S. market.

We are also focused on both the branding and e-commerce aspects of our website, which has been an important source of growth for the company. Florsheim Australia’s wholesale businesses were up this quarter driven by a significant increase in the Asian market and a relatively smaller increase in the Australian market.

Its retail businesses also remain solid with same-store sales up 1% for the year. We believe that international growth is an important long-term opportunity for the company across our portfolio of brands.

As John mentioned earlier, our wholesale margins were off slightly in the third quarter against the year ago and are down 60 basis points year-to-date. He discussed that the strength of the U.S. dollar against the Canadian currency has impacted our North America gross margins. However, from the standpoint of purchasing for the U.S.

market, the dollar has been stable against the Chinese currency and the Indian rupee this year. During the past several years, the U.S. dollar has weakened against the Chinese currency, so the fact that the dollar has been flat has been helpful. We buy in U.S.

currency and when the dollar weakens, the factories tend to build into the prices of factor anticipating continued weakening. With regard to the Indian rupee, the U.S. dollar is at a strong level, which mitigates some of the pricing pressures from that country.

While many commodity prices have fallen this year, leather prices continue to move up, but at a slower pace as I discussed in the last conference call. Increasing labor prices in China and India continue to be a driver of price increases and we don’t see that changing in the near future.

We continue to offset our cost increases with increases to retailers, but the somewhat sluggish retail environment makes it incumbent on us to take a methodical approach, where we target increases for specific shoes rather than an across the board increase. We expect fourth quarter margins to be similar to the third quarter.

So far, the fourth quarter is off to a solid start and our backlog is off compared to the same period last year. The increase is led by BOGS. Our inventory levels are up $12 million or 20% against September 30 last year driven by an increase in BOGS inventory. We are comfortable with our inventory levels from an order fulfillment perspective.

Last year, with the polar vortex, we experienced throughout much of the country, we ran short on BOGS product.

This year, we have supplemented our inventory and core product to make sure that we can take advantage of the upside or cold winter, but we have put the extra inventory and carry forward type product, so that if the winter is mild, we will not be hurt with obsolete inventory. Overall, our inventories are very clean.

Our legacy brands are off to a solid start in the fourth quarter. While lot still depends on the overall retail climate this holiday season, our backlog currently indicates that sales for these brands will be comparative or up slightly in the fourth quarter. That concludes our formal remarks.

Thanks for your interest in Weyco Group and I am now going to open the call to your questions..

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

Hi, thanks for taking my questions..

Good morning, Rebecca..

Good morning.

Could you talk about the environment remains difficult and pretty promotional, could you talk about how you are managing in the current environment or if you are anticipating any promotional pressures going into the holidays?.

I mean, we basically conduct the business in working with our accounts. We anticipate that this is going to be a promotional holiday. It doesn’t probably change the way we approach our accounts.

It just – as Tom mentioned, there is pricing pressure out there at the retail level based upon that retailers is sluggish, so we are just mindful of when we have pricing pressures on the supply – at the supply chain level that we are methodical in terms of how we go about moving those price increases to our accounts.

So we are – the short answer is it probably will be a very promotional holiday season. I don’t really see it changing our approach..

Okay.

And then you mentioned some issues with some key department stores, could you give a little more color on what’s occurring there, it sounds like you still expect some impact going into the fourth quarter, but the lessening – does anymore color would help?.

Yes. I mean, we don’t like too much on specific accounts, but in the mid-tier I mean I think you can guess some of that issues that are out there in the mid-tier. We have two important retailers to us that are very – being very careful in terms of how they are managing their cash flow.

So they are keeping their inventory levels relatively conservative as they enter into the fourth quarter. We are seeing good sell-throughs of these accounts.

Our performance is very strong and we are now seeing as we go into the fourth quarter with larger retailers, a big pickup in terms of our filling business, which is the business that we get on a weekly basis based on sales at the register. And then they are also building their model inventory stocks as they head into the holiday.

So we are – we feel that we are kind of coming out of this, but there are unknowns as we look at 2015 with a larger of our two accounts we feel that that’s very stable. And with the other account we feel that that’s stable with the overall level of business is not going to get back to the level it was a year or two ago.

Did that give you a little more background?.

Okay, yes. I know it’s helpful. Okay.

And then the international business, it sounds like it continues to do well, could you talk about where you are in the process of expanding that business or any initiatives that you have going on there?.

Sure. In Australia, we have continued to open stores. I think we opened three this year. I think we have opened two already we are opening one in the fourth quarter. We are trying to continue to grow the wholesale businesses both in Australia and Asia.

And we also initiated a joint venture about a little more than a year ago with the company in Mainland China. And we are continuing to open up stores within stores and I would say that that is going just so slow, it’s kind of the product is still out on that, but we are hopeful that that’s going to be an avenue for growth as we move forward.

And so we – that’s basically what I mean it’s a combined retail wholesale strategy in both regions and we are having a decent year and we would definitely see good growth opportunities in both areas..

Okay.

And lastly, could you give insight on how you are feeling as you leave the holidays into 2015 or any other initiatives outside of international that you are going to be working on?.

Sure. I mean, we have publicly said that we continue to look at acquisitions. And we are continuing to do that.

And so there has been a little more activity in that area as of late and so we are hoping that – we are hoping that there is going to be an – I don’t want to make a few promises, but we are hoping that there is going to be an acquisition happening in the near future..

The other thing I just want to add, we have seen a lot of momentum in our BOGS business both at the retail level in terms of new categories we are going into. And so we feel very, very positive about that being a nice growth vehicle in 2015. In the other brands, it’s been a little bit inconsistent, but we do. We are seeing good signs at retail.

I mean, I think a lot of it has to do with more from a pipeline build that made some of our accounts as I discussed earlier but there is good signs there. So, I mean, like overall the BOGS business should be very good in 2015 and we are optimistic that we will get some growth out of our legacy brands as well..

Okay, that sounds good. That’s all I had guys. Thanks..

Okay. Thank you, Rebecca..

(Operator Instructions) There are no further questions in the queue at the moment, sir..

Okay. We will just thank everybody for being with us on our call and we look forward to talking to you after the end of the year. Have a great day..

Ladies and gentlemen, thank you so much for your participation. You may now disconnect and everyone have a great day..