Tom Florsheim - Chairman and CEO John Wittkowske - Senior Vice President and CFO.

Mitch Kummetz – B. Riley.

Welcome to the fourth quarter and year end 2016 earnings conference call. My name is John and I will be your 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. I will now turn the call over to John Wittkowske. .

Thank you. Good morning everyone. Before we begin, I am going to read a brief disclaimer but with me today is Tom Florsheim Jr., our Chairman and CEO. So I am going to read a brief disclaimer, then we will get going.

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 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 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 fourth quarter of 2016 were $82.1 million, down 6% as compared to fourth quarter 2015 sales of $87.4 million. Operating earnings were $8.5 million in the fourth quarter, a decrease of 26% as compared to $11.5 million in 2015.

Net earnings attributable to Weyco Group were $8.2 million this quarter, up 17% from $7 million last year. Diluted earnings per share were $0.78 for the fourth quarter of 2016 and $0.65 in 2015.

During the fourth quarter of 2016 the company evaluated the current state of its Umi business and determined that the brand did not fit our long term strategic objectives. As a result, we recorded a $1.8 million impairment charge to write off the majority of the value of the Umi trade name. On an after-tax basis the impairment charge was $1.1 million.

We are currently looking into strategic alternatives for the Umi brand. Also in the fourth quarter, we reviewed -- or the company reviewed its liquidity needs and sources of capital, including evaluating whether the company would need the cast available under corporate owned life insurance policies on two former executives.

We determined that the chances were remote that the company would need to surrender these policies to satisfy liquidity needs and as a result, reverse $3.1 million of deferred tax liabilities related to these policies.

In the fourth quarter of 2015 the company recorded $458,000 of income representing the final adjustment to the earn-out payment relating to the 2011 acquisition of BOGS. On an after-tax basis, this adjustment was $279,000. The final earn-out payment of $5.2 million was paid in the first quarter of this year.

Without these non-recurring adjustments, earnings from operations and net earnings attributable to Weyco Group would have been down 7% and 9% respectively for the quarter. Additionally, diluted earnings per share, excluding these adjustments, would have been $0.58 this quarter and $0.62 last year.

In the North American wholesale segment, net sales for the fourth quarter of 2016 were $61.6 million, down 9% as compared to $67.5 million.

The sales decline this quarter was largely due to an overall challenging retail environment particularly at our customers’ brick and mortar locations where foot traffic has declined due to the growing popularity of online retailing. Licensing revenues were $1.1 million this quarter as compared with $1.3 million last year.

Wholesale gross earnings were 34.7% of net sales in 2016 compared to 36% in 2015. Selling and administrative expenses for the wholesale segment were $15.6 million or 25% of net sales in the fourth quarter of 2016 compared to $15.2 million or 23% of net sales last year.

Wholesale operating earnings were $5.8 million in the fourth quarter of 2016, down 37% as compared to $9.1 million in 2015.

Without the non-recurring adjustments related to the Umi trade name in 2016 and the BOGS earn-out payment in 2015, selling and administrative expenses as a percent of net sales would have been 22% and 23% respectively in the fourth quarters of 2016 and 2015. And wholesale earnings from operations would have been down 13% for the quarter.

Net sales of our North American retail segment, which include our retail stores and U.S. Internet sales, were flat at $7.4 million in both years. Same-store sales which include U.S. Internet sales were down 3% for the quarter.

There was one less domestic retail store operating in the fourth quarter of 2016 than there was in last year's fourth quarter as two stores were closed and one was open. Retail operating earnings were $1.3 million in the fourth quarter compared to $1.4 million last year.

Our other operations which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $13.1 million in the fourth quarter, up 5% compared to $12.5 million in 2015. The increase between years was due to a 7% increase in net sales at Florsheim Australia.

In local currency, Florsheim Australia’s sales were up 2%. Collectively the operating earnings of Florsheim Australia and Florsheim Europe were $1.4 million in the fourth quarter, up 35% as compared to $1.1 million last year.

The increase between years was due to higher operating expenses in Florsheim Australia’s wholesale business resulting mainly from an increase in sales -- excuse me, it was higher operating earnings, not expenses. For the year, our overall net sales were $297 million in 2016, a decrease of 7% as compared to $321 million in 2015.

Earnings from operations were $21.2 million, down 29% as compared to $29.8 million last year. Net earnings attributable to Weyco Group were $16.5 million, down 10% as compared to $18.2 million last year.

Without the non-recurring adjustments discussed earlier, earnings from operations and net earnings attributable to the company would have been down 22% and 20% respectively for the year. Diluted earnings per share were $1.56 in 2016 as compared to $1.68 in 2015.

Without the previously discussed non-recurring adjustments, diluted earnings per share would have been $1.36 in 2016 two and $1.65 in 2015. In the wholesale segment, net sales for the year were $228 million versus $251 million in 2015. The decline in wholesale sales was largely due to lower sales at our BOGS and Nunn Bush brands.

Licensing revenues were $2.8 million versus $3.6 million last year. This decrease resulted mainly from licensee transitions that occurred during 2016. Wholesale gross earnings as a percent of net sales were 32.1% in 2016 two and 32.5% in 2015.

Selling and administrative expenses for the wholesale segment were $56.7 million or 25% of net sales compared to $57.3 million or 23% of net sales in 2015. Wholesale operating earnings were $16.4 million, down 32% as compared to $24.3 million.

Without the non-recurring adjustments, selling and administrative expenses as a percent of net sales would have been 24% and 23% respectively in 2016 and 2015. And wholesale earnings from operations would have been down 24% for the year due mainly to the decrease in wholesale sales.

In our retail segment, net sales were $21.9 million in 2016 and $22.1 million in 2015. Same-store sales which include the U.S. Internet sales were up 1% for the year. There were three fewer domestic retail stores operating this year than there were last year as four stores were closed and one was open.

Earnings from operations for the retail segment were $2.1 million in 2016 and $2.5 million in 2015. This decrease was mainly due to lower net sales at our brick and mortar locations. Our other operations had net sales of $47.5 million in 2016, up 1% as compared to $47.1 million.

This increase was primarily due to higher net sales in Florsheim Europe wholesale business. Florsheim Australia’s net sales were down 1% for the year. In local currency, Florsheim Australia’s sales were flat. Collectively the operating earnings of Florsheim Australia and Florsheim Europe were $2.7 million in 2016 and $3 million in 2015.

This decrease was primarily due to lower sales and operating earnings at our retail location in Macau. Other income for the year totaled $514,000 as compared to expense of $1.4 million last year.

This year's other income included foreign currency transaction gains of $513,000 resulting mainly from unrealized gains on foreign exchange contracts entered into by Florsheim Australia. Last year other expense included $961,000 of foreign exchange losses primarily due to the significant decline in the Australian dollar compared to the US dollar.

At December 31, 2016 our cash and marketable securities totaled $39.4 million and we had $4.3 million of debt outstanding under our $60 million line of credit. During 2016 we generated $46.9 million of cash from operations.

We used funds to pay down $22.4 million on our line of credit, repurchased $11 million worth of our company's stock and $8.9 million to pay dividends. We also paid $5.2 million for the final earnout payment relating to the acquisition of BOGS. In 2016 we spent $6 million on capital expenditures.

During the year we completed a construction project which increased the capacity of our U.S. distribution center. We also remodeled two of our retail stores in Miami and Orlando and completed construction on a new outlet store in the Sawgrass Mills Mall, all in Florida.

We expect that capital expenditures will be between $2 million and $3 million in 2017. On March 7, the company's Board of Directors declared a quarterly cash dividend of $0.21 per share to all shareholders of record on March 20, 2017 payable on March 31 2017. I would now like to turn the call over to Tom Florsheim Jr., our Chairman and CEO. .

Thank you, John and good morning everyone. Our North American wholesale business was down 9% for the quarter and 10% for all of 2016. We are disappointed with our performance for the quarter and year. Our sales decrease reflects the current disruption in the retail environment driven by changes in consumer behavior.

The acceleration in e-commerce has resulted in a decrease in retail foot traffic and has impacted the business model of retailers across multiple channels.

In addition, overall footwear and apparel sales have been sluggish as consumer discretionary purchases have migrated away from soft goods and towards larger durable goods purchases, as well as towards expenditures on experiences such as vacations or dining out.

This shift has caused many key brick and mortar accounts to reassess their inventory levels and store counts. While the performance of our brands at a consumer level remained strong relative to the non-athletic industry, wholesale shipments throughout the year faced headwinds based on these well documented challenges.

Over the long term we believe the non-athletic footwear market will stabilize and return to growth as both e-commerce and brick and mortar retail evolve and find their appropriate levels. In the near term we are focused on navigating these changes in the retail environment and building our brands.

BOGS sales fell 7% in the fourth quarter and 23% for the year. While BOGS sales picked up with the cold and snow of December, overall it was a difficult year for BOGS. The unseasonably dry and warm end to 2015 resulted in high inventory levels at retail being carried into 2016.

The inventory levels at retail adversely impacted our wholesale shipments throughout the year. The good news is that the winter weather that much of the country experienced this year end helped clear inventory and set the stage for growth in 2017.

In general, BOGS performed well at retail and we received a very positive reaction to our fall 2017 line, including the first offering of our revamped occupational product.

While retailers are currently much cleaner than last year at this time, our sense is that they will continue to take a conservative approach towards inventory levels given the inconsistency of the weather the past couple of winter seasons.

We remain focused on diversifying our product mix with less reliance on heavy insulated boots and are confident in our long term formula for success with BOGS. Our Stacy business was down 11% for the quarter and 2% for the year. After a number of years of strong growth, Stacy Adams was not immune to the issues facing our brick and mortar account base.

Stacy Adams’ fourth quarter decrease primarily reflected lower shipments to the family shoe chain channel and the brand was slightly down in the department store and off-price channel.

Stacey Adams’ positioning as the leading accessible mainstream fashion brand in men's footwear remains compelling and we are focused on getting back on the growth track in 2017. Our Florsheim wholesale business was down 6% in the fourth quarter but up 1% for the year.

In a very difficult market we are pleased that Florsheim managed a slight increase in 2016. Florsheim has more strong new product at retail than at any time in recent memory as we continue to build upon our heritage of craftsmanship with relevant footwear that fits today's lifestyle.

The brand has good momentum going into 2017 and given the expansion of proven new programs we expect to have a nice increase with Florsheim. Our Nunn Bush business decreased 9% for the quarter and 13% for the year.

The Nunn Bush loss mirrored the retail challenges facing the mid-tier department store segment which is the brand’s most important retail channel. The sales loss was exacerbated by several large transitions of programs at the end of their product life cycle.

We have retooled the Nunn Bush talent for fall 2017 and we believe that we are on the right track in terms of refresh product offerings. However the near term will be somewhat dependent on shoring up our sales in the department store segment and increasing our penetration in both the e-commerce and family channels.

Same-store sales in our North American retail segment which includes US internet sales were down 3% in the fourth quarter but up 1% for the year. The decline was the result of soft mall traffic in the fourth quarter particularly in key markets like Florida that normally get a boost from tourism.

We continue to maintain a focused retail strategy in flagship markets while investing in growing our e-commerce business. Net sales in our overseas business increased 5% for the fourth quarter and 1% for the year driven by higher wholesale sales in Australia for the quarter and Europe for the year.

Strong wholesale shipments were tempered by weak sales in our own retail stores in Australia, Hong Kong and Macau as overseas retail markets faced some of the same challenges we were experiencing in the U.S. in terms of weak mall traffic.

Florsheim opened one new retail store in the fourth quarter outside Melbourne which is the first Australian representation of our new store design based on one [ph] flagship store. Our European sales decreased 6% for the quarter but increased 10% for the year driven by the wholesale business.

Our inventory levels at December 31, 2016 were $70 million compared to $97 million at December 31, 2015. During 2016 we lowered our inventory levels by managing the flow of our shoes to better match the timing of our orders to customers and also to reflect a more conservative position based on the overall retail climate.

We have continued to focus -- we have continued our focus to make sure we are in stock on all core items across all brands to meet at once demand. Our overall gross margins were 37.7% in 2016 versus 37.9% last year. Our focus on improving our margins continues and we selectively raised pricing during the year.

We are however very mindful of the challenge in retail environment and price sensitivity. Regarding sourcing, overall factory costs remain stable. Also the US dollar remains strong against the Chinese and Indian currencies, the two principal countries where our shoes are produced.

The strong dollar helps mitigate any price increases due to increased labor costs. That concludes our formal remarks. We appreciate your interest in Weyco Group and I'd now like to open the call to your questions. .

[Operator Instructions] And we have a question from Mitch Kummetz from B. Riley. .

Let’s see, it’s going to be a handful of questions.

Maybe to begin with, I don't know if there's some way you can kind of remind us as to what your channel exposure is, I don't know, if you can’t give percentages but maybe you can kind of rank order the channel and I don't know if the department store is the biggest, then family, then independent; I don't know how that, kind of that order works for you guys.

.

Mitch, why don’t -- John is going to grab that data and we give it to you, we give you some ballpark numbers for that.

And so why don't we move on to your next question and then circle back to that one?.

Sure. Talk a little bit about -- you mentioned kind of challenges at bricks and mortar. Obviously some of that is -- a lot of that is just the migration to online.

But how much are you guys also seeing some negative impact just as retailers are closing stores?.

So far we're not seeing much impact from that because the stores that they're closing are the underperforming stores. And so if you look at our business with any of the major department stores you can kind of apply the 80:20 rule where we're doing a huge percentage of our business in their top half stores.

And so if you've got a thousand store chain and they close 150 stores, that doesn't have too much impact on our sales to them. .

And then, I would have guessed that maybe you're kind of agnostic as to whether or not your product’s being sold in the store versus online, is it just that you have less of your product online or is this too much -- let’s put it this way, you don't have enough product online with kind of your core customers, is it they're selling online or is it because too much of the business is like transitioning trying to maybe an Amazon or somebody like that where maybe you don't have the same kind of representation?.

Yes, I mean, we are somewhat agnostic as to where -- whether it's e-commerce where our product is sold or brick and mortar.

To kind of sum up the general problem with the retail environment right now is a lot of our major customers have made this gigantic investment in their brick and mortar stores and as the business transfers to e-commerce, the business overall is not as profitable for them because the model -- people just haven't figured out the model yet.

You've got a lot of discounting that is done on the web, you have free freight and so it's more difficult for the large brick and mortar retailers who made all this investment to just transition their business to e-commerce and sell the same profitability level.

So that's just thrown the whole retail market into a state of trying to figure out what the new model is. And I think that in the short term that -- they're struggling -- brick and mortar businesses are struggling with their businesses, so that has an impact on us.

Whether we I think long term will sell as much product as business transfers to e-commerce, on department stores websites and pure plays websites and so people are still going to buy shoes -- and your point in the beginning of whether they buy on the web or they buy in the stores doesn't really impact us that much.

But what impacts us is that our major customers are struggling with this transition. So I'm not sure -- I hope that answers your question; it was a little bit of a rambling answer, so I apologize for that. .

That's actually very helpful. I appreciate it. And then on the Umi brand you guys announce that you're going to explore strategic alternatives for that. I mean it's a relatively small brand for you guys.

Is there any way you can say -- I'm guessing it's losing money; is there any way you can say if that's the case and how much? And like if you can't find a buyer for it, I mean would you consider just shutting it down or --?.

Yes, I think we can talk about that. Umi has basically been a breakeven proposition for us. If you look at the brand historically it's been breakeven. And we just think that we can utilize our resources that are elsewhere and so if we don't -- if we don't find a buyer for the brand, yes, we will probably shut it down..

And then lastly it sounds like you're optimistic that some of the brands can return to growth this year. You talked about BOGS getting back to growth, I mean you said -- expect an increase in Florsheim, there's all sorts of things that you're optimistic around with Stacey and Nunn Bush.

How much of that optimism is just a function of the channel inventories are now a lot cleaner than a year ago, or are you seeing something in your pre-books already that kind of leads to a belief that you'll see growth in your pre-books, or is it more a function of you guys just like what you're doing product wise and you think that you can maybe take some share across these brands?.

It's really the latter. I mean we're kind of in the middle of our selling season right now. It's too early to say that our pre-books are up. But we are seeing very good selling particularly in Stacy Adams and Florsheim with some of the new product. We've had a great reaction to the new Nunn Bush line.

We changed our senior designer in Nunn Bush a year ago and we're seeing some very positive results from that. And so it's more just a factor of feeling good about where we are with our key brands, and thinking that that we're going to be able to grow our market share even though the overall market is not growing right now. John is back.

I think he can give you some numbers to your first question..

Yes, Mitch, and again I'll just sort of give you some rough numbers, I don't -- these are actually very consistent between 2015 and 2016. So there's been very little change.

Department stores still represent the biggest part of our business, in the upper 20s percent of our business and the next two categories are the shoe chain stores and the Internet retailers, and they both are about the same as well, sort of around the 17%, 18% range.

And then independents and the off-price and some of those are at the lower end of that, on that spectrum but they've been very consistent between two full years. .

And then maybe just as a last question, a follow up to that. Are you seeing more challenges across one channel versus another? I mean it seems like the department store channel in general we continue to hear is particularly difficult. .

I mean, the other channel, the department store channel is definitely one that has its challenges. But the other place where we're seeing -- saw decreases in 2016 was in the discounters.

And what's happening there is a lot of brands, from the standpoint of managing their inventories I think are struggling with this new retail dynamic and dumping goods.

And so in order to do business with some of the discounters you really have to sell extremely low prices and fortunately we've been in a position where we have managed inventories well and we haven't had to sell our clothes outs at fire sale type prices and so that's hurt us in that channel and that's just business that we messed but we walked away from, because it doesn't make sense below a certain cost -- below a certain price, yes.

End of Q&A.

[Operator Instructions] And I have no further questions at this time. .

Okay. Then we thank everybody for your time and look forward to talking to you after the first quarter. Have a great day. .

Thank you ladies and gentlemen. That concludes today's call. Thank you for participating. You may all disconnect..