John Wittkowske - CFO Tom Florsheim Jr. - Chairman and CEO John Florsheim - President and COO.

Mitch Kummetz - B. Riley.

Welcome to the Weyco Group First Quarter 2017 Earnings Conference Call. My name is Jason and I will be your operator. 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, Chief Financial Officer. Your may begin sir..

Thank you, good morning everybody, welcome to Weyco Group's first quarter conference call. On this call with me today are Tom Florsheim Jr., our Chairman and CEO and John Florsheim, our President and COO. Before we begin to discuss the results for the quarter, I will read a brief disclaimer.

During the course of this call we may make projections or other forward-looking statements regarding our current expectations concerning future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially.

We refer you to Weyco Group’s most recent Form 10-K as filed with the Securities and Exchange Commission. The 10-K identifies important factors and risks that could cause the company's actual results to differ materially from our projections. Additionally, some comparisons may refer to non-GAAP measures.

Our SEC filings may contain additional information about these non-GAAP measures and why we use them. Net sales for the first quarter of 2017 were $69.1 million, down 12% as compared to 2016 net sales of 78.9 million. Operating earnings were 3.5 million, a decrease of 18% as compared to 4.2 million in 2016.

Net earnings attributable to Weyco Group were $2.2 million this quarter, down 17% compared with $2.7 million last year. And diluted earnings per share were $0.21 in the first quarter versus $0.25 in the first quarter of 2016.

In the North American wholesale segment, net sales for the first quarter of 2017 were $52.9 million, down 15% compared with 62.2 million in 2016.

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 $701,000, up 15% as compared to 610,000 last year.

The increase in licensing revenues resulted mainly from the licensee transition that occurred in 2016. The new licensee was operational by the first quarter of 2017 resulting in increased revenues compared with last year. Wholesale gross earnings were 30.8% of net sales compared to 29.2% in 2016.

Selling and administrative expenses for the wholesale segment were $13.1 million in the first quarter compared to $14.4 million last year. Salesman's commissions decreased in accordance with lower sales volumes.

Pension expense was also lower, which was a direct result of our decision to freeze pension benefits under our defined benefit plan as of December 31, 2016. We also decreased our advertising spending in 2017.

Despite these cost savings, selling and administrative expenses were 25% of net sales this quarter versus 23% last year due to the fixed nature of many of our other operating costs. Wholesale operating earnings were $3.2 million in the first quarter, down 15% as compared with $3.7 million in 2016 due mainly to the decrease in wholesale sales.

Net sales of our North American retail segment which include our retail stores and US Internet sale were $4.9 million in the first quarter, down 3% as compared with $5.1 million in 2016. Same-store sales which include the US Internet sales were down 7% for the quarter, due to decreased sales at both brick and mortar stores, and on our website.

There were the same number of stores operating during the first quarter of 2017 and 2016. We had closed one store and opened one during the past 12 months. Retail sales in 2017 were impacted by a later Easter this year, which caused sales to shift into April. Retail operating earnings were $43,000 in the first quarter compared to $246,000 last year.

The decrease was directly resulted from the decrease in retail sales. Our other operations which include the wholesale and retail businesses of the floor Florsheim Australia and Florsheim Europe had net sales of $11.3 million in the first quarter, down 2% as compared to $11.6 million in 2016.

The decrease was primarily due to lower net sales at Florsheim Australia. Florsheim Australia net sales were down 1% for the quarter. In local currency, their sales were down 6%. Earnings from operations at Florsheim Australia and Florsheim Europe were $250,000 in the first quarter and $236,000 in the first quarter last year.

At March 31, 2017, our cash and marketable securities totaled $45.5 million and we had no debt outstanding on our $60 million revolving line of credit. During the first three months of 2017, we generated $17.2 million of cash from operations.

We used those funds to pay $4.6 million in dividends, to paid out $4.3 million on our line of credit and to repurchase $2.4 million of our company's stock. We also had $416,000 of capital expenditures. We estimate that 2017 annual capital expenditures will be between $2 million and $3 million.

On May 2, our Board of Directors declared a cash dividend of $0.22 per share to all shareholders a record on May 26, 2017 payable on June 30, 2017. This represents an increase of 5% above the previous quarterly dividend rate of $0.21 per share. I would now like to turn the call over to Tom Florsheim Jr., our Chairman and CEO..

Thanks John and good morning everyone. As our numbers indicate, it was a difficult start to 2017. Our performance while disappointed reflected the current challenges facing many of our retail partners and wholesale payers. The retail market for soft goods meaning footwear, apparel and accessories is changing rapidly.

As well covered in the business press, the acceleration in e-commerce has reached the point where it has significantly impacted traditional brick and mortar retailers leading to numerous store closings. Meanwhile, compounding the changes in terms of where consumers are shopping, there is also a market shift in what people are spending their money on.

There's a migration of discretionary dollars away from soft goods and toward durable goods in the home and auto sectors as well as on exponential spending such as travel and dining out. Overall, we are seeing an increase in shipments to our e-commerce partners.

However, the increase is not enough to offset the current loss in shipments we're experiencing with our brick and mortar accounts. Traditional retailers are in transition shutting stores, keeping inventories tight and investing in their own e-commerce platforms.

We believe that we are in the early stages of this transition and the retail market will continue to experience disruption for the near to medium term as brick and mortar trade channels right size in line with changes in consumer behavior.

At Weyco Group, our objective is to continue to build our brands and distribute our products in whatever trade channels are consumers find convenient. We believe that our operational excellence and commitment to depth and [indiscernible] inventory gives us a long-term strategic advantage. We will be well positioned as the new landscape take shape.

In interim, we're focused on our damping to all the changes in the market. Stacy Adams was down 16% for the quarter. The brand saw a significant decrease in shipments at the department store trade channel as this sector has been under heavy pressure due to store closings and e-commerce competition.

Over the last few years, Stacy Adams has been on a significant growth trajectory. From a shipment perspective, the last three quarters have proved difficult, due largely to macroeconomic trends impacting retail. Stacy Adams sell through and performance at the consumer level remains well ahead of the industry.

Nunn Bush saw shipments drop 18% for the quarter. Similar to Stacy Adams, the brand was impacted by decreased sales in the department store segment. Nunn Bush also had a sales decrease in the off price trade channel because retailers in this sector are cutting back on special order make ups and electing to buy in the market.

With close out supplies high and market prices low in the industry, Nunn Bush pulled back on sales in the segment. We believe the back half of the year will be much stronger for Nunn Bush as transitions to new programs has been very well received by a number of key retailers. Our Florsheim was down 9%.

The Florsheim decrease reflected the general issues in our industry. However, Florsheim sales of new product at the consumer level have been robust and we anticipate an uptick in shipments as the year progresses. The Florsheim brand has evolved with styling that is relevant to today's lifestyle with more of a casual and dress casual [indiscernible].

For Florsheim, the main challenge is picking up shelf space in a market that is very conservative in his approach to non-athletic footwear. Given our current performance we are confident we will gain incremental market share over time. Our BOGS business feel 21% for the quarter.

Unseasonably warm weather and a lack of precipitation continued to negatively impact BOGS as we moved into the new year. We are focused on diversifying the brand away from its dependence on selling insulated footwear. And while we're making progress towards this end, our growth is still tied to the timing of fall and winter weather.

The good news is our lighter spring product is selling and retail inventories are much cleaner than they were a year ago, which should help BOGS in the back half of the year. Our North American Retail segment was down 7% in terms of same-store sales with lower sales in both e-commerce and our traditional stores.

As John mentioned, the late Easter this year impacted our results for the quarter by shifting some holiday sales into April. In addition, we continue to see decreases in mall traffic. Regarding our e-commerce business, our brands websites are facing a more competitive environment in terms of attracting new consumers.

Overseas, business was down slightly at 2%, while our wholesale business grew over 20% in Australia. That increase was offset by declining retail store sales in both Australia and in the Pacific Rim. Our inventory levels at March 31, 2017 were 55 million compared to 72 million for the same time a year ago.

We continue to manage our inventory levels to make sure we have stock in our core products but it decreased our exposure to seasonal product by being more conservative in our purchases. Overall, gross margins were 36.5% versus 34.4% a year ago, up 210 basis points.

While the market is extremely price competitive right now, we continue to build our brands for the long term and are balancing the need to compete on price with the high quality standard they will not compromise.

From a sourcing standpoint, our costs continue to be stable, which helps our effort to improve our margins and to that end we saw positive results in the quarter. That concludes our formal remarks, thank you for your interest in Weyco Group and I’d now like to open the call up to your questions..

[Operator Instructions] And our first question comes from Mitch Kummetz from B. Riley..

Yes. Thanks for taking my questions. I’ve got a handful.

So maybe you could start, you talked about kind of the retail disruption, dislocation, given the sort of the challenges the environment and stores closing, is there any way to quantify or try to quantify what the impact of store closings were on the quarter and kind of how you see that impact playing out over the balance of the year? I think that you guys said that you expect that to be kind of a near to intermediate term issue..

Yeah. Mitch, in the last call, you asked about this impact and I think that in the last call, what I said was that typically whether -- when the big retailers closed stores, it’s the underperforming stores. So the immediate impact from those store closures doesn't affect us from a shipping standpoint very much.

What we've seen happening over the last few months is that the large retailers are absorbing their own private label product into fewer stores. So they planned in many cases to bring that product into the stores, before they announced these closures.

And what's happening to some degree in the current quarter that we just finished was that, it clogs up their open to buy. Meaning the private label issues clogged up their open to buy and affected them bringing in branded product from brands like ours that were performing well.

And so I think that what we're finding out is that these store closures are having a short-term impact where they have to digest this product that they can't turn off because their own private label product is bought months and months in advance and they can adjust those buys once they place them.

And so our expectation is that as we move into the second half that private label product will be digested and the buys for the second half of the year that they make for their own store labels will better reflect the number of stores they have, if that makes sense..

Yeah. It does. And just maybe a couple of quick follow-ups to that. And so I would imagine the quarter that you reported there was a fair amount of sell-in on spring orders.

So did you already kind of see that in the order book that they were shifting open to buy to private label, given kind of the lead times on private label and then as you look at your fall order book, do you see a sequential improvement there to kind of reflect what you really just sort of laid out..

Yeah. Our spring bookings were not robust. I would say I can't give you the exact number of how they compared to a year ago at this point, but it almost seemed like with some of the retailers that they had not adjusted their budgets to reflect absorbing this extra product.

So what's happened due to that is they've pushed some of the product from first quarter into second quarter and we're also seeing some of that continuing to be pushed forward.

Our fall bookings are comparable to a year ago and that's in a very conservative environment and so we're expecting that if things open up in the second half, because we're planning our core inventories to have actually inventory available for at-once shipping that we could pick up business in the second half.

And so our expectation is that the retailers will basically plan their second half in a more -- they'll be able to plan out better because they're aware of the store closings.

Now, that does have -- that it's very possible that more analysis, we're going to go through a little bit of the same thing in the second half, but as far as what's been announced right now, I expect the retailers from a budget standpoint, will have that figured in..

One other thing, Mitch. This is John. Just there's also a bit of transition with e-commerce in that the e-commerce trade channel and there’s a couple of big retailers that you're familiar with in our segment. We have been much more disciplined in terms of the inventory levels that they're carrying.

And so a year ago or so, you had much higher inventory levels in some of the key retailers and then there now, we’re watching their inventory levels and more focused on turn.

And so we came through a period where they were reducing inventory levels and now we're kind of through that and we're going to see that normalized at the back half of the year where they'll be filling in on a regular basis. We've kind of worked through the reduction of inventory levels. We've seen continued growth in the e-commerce segment.

I think we mentioned in the conference call, it doesn't make up for what -- the decrease we’re seeing in brick and mortar, right, you should see that pop back up at the back half of the year..

Okay.

And I may have asked this on a prior call, but could you tell us what your sort of split of sales is pre-book to at-once and I would imagine that kind of again the way you sort of laid this out, the opportunity would be more Q4 oriented, given that I would imagine kind of Q3, your sale sort of skews more towards selling in your fall order book and then Q4 would be more sort of replenishment oriented.

Is that sort of a fair way to think about it?.

That is a fair way to think about it. And so is your question how much at-once business..

Yeah.

I’m just kind of typically, particularly like in Q4, how much of your sales in the quarter are at-once versus prebooked?.

The number that we give you right now is going to be a guess, because we got really, I would say that if the weather cooperates and everything's wonderful, you could pick up 10%. It's not a gigantic number, but it's a very meaningful number to us. Overall, and then like a brand like BOGS would be, it’s probably between 20% and 30%..

And then you guys made the comment that your objective is really to kind of distribute product wherever the consumer is shopping.

I had another company that recently kind of came out with their five year plan and interestingly, all of the wholesale growth that they were planning was coming out of the digital channel and I'm just curious how you guys are thinking about that. Obviously, we've got some pretty significant shifts happening in terms of how consumers are shopping.

Is there any way you can sort of quantify, when you look at your wholesale business, how much of your sales are to the digital channel versus sort of traditional bricks and kind of how you're pursuing the growth opportunity with digital so that you're better aligned with kind of where more of the growth is coming from in the industry?.

Yeah. I mean like right now, if you look at the direct to Consumer channel from a wholesale perspective, I might not get this exactly right, but it’s somewhere in the 16%, 17% range for our company. And that's probably doubled in the last five years. And I won't be surprised if it doubles in the next five years.

It's a hard thing to, no one has a crystal ball on this, but there's -- you're definitely going through a period where retail, the whole model is changing and there's a restructuring going on. Brick and mortar is still going to be important and that you'd be foolish to look solely at e-commerce as where all the activity is.

That being said, we're spending a lot of time these days understanding how we can best grow that e-commerce segment and that’s not only working with some of the big pure plays, but also partnering up with our brick and mortar accounts to understand how we can help them grow and we've done that very successfully, because we've got really known in the industry as having good operations, carrying inventory, the ability to kind of tailor our programs to what retailers are going to be looking.

So we have some large retailers that have partnered with us who are experimenting with different things on line where they're seeking to grow their business. So we're really -- we feel that we want a lead on this rather and partner -- rather than just accept the direct to the market.

So it's a big focus of what we're doing right now throughout our whole organization..

And then a last question on North America retail. Anyway you could quantify the impact of the Easter shift and whether or not you just kind of expect the sales to hit Q2 and then also just thoughts on tourist traffic. I’m just wondering what you might be seeing trend wise there, particularly as we kind of come into the bigger sort of tourist season..

Sure. I think that overall, even with the Easter shift, we’re going to be down a little bit when you put the two months together. We've looked at that and we're down very low single digits. And so it does even out somewhat, but not 100%.

As far as the tourist business, we are still seeing issues with that in New York, because one of our biggest stores is on Madison Avenue in the city and traffic is definitely down right now in New York City.

And to some degree, we're seeing it’s still -- the other big market for us is Miami and in Miami, we do a tremendous amount of Central South American tourist business and there are still issues in those countries, the currency in some of them has come back a little bit and that’s stabilized I'd say, but we're still feeling it at that, but those stores are doing better.

The biggest impact that we're seeing from a tourism standpoint is in the city, is in New York City and we're hearing that from other retailers there as well..

And I have no further questions in the queue..

Okay. Then, we would like to thank everyone for their time and look forward to talking to you next month or next quarter. Have a great day..

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