John Wittkowske - Senior Vice President, Chief Financial Officer and Secretary Tom Florsheim Jr. - Chairman and CEO.

Welcome to the Weyco Group Second Quarter 2017 Earnings Release Conference Call. My name is Adrianne, and I'll 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. [Operator Instructions] I'll now turn the call over to John Wittkowske.

John Wittkowske, you may begin..

Thank you. Good morning, and welcome to Weyco Group's conference call to discuss our second quarter 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 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 projection. 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 were $57.5 million, up 1% as compared to 2016 net sales of $56.9 million. Operating earnings were $1.9 million in 2017, a decrease of 7% as compared to $2 million in 2016.

Net earnings attributable to Weyco Group were $1.3 million, up 26% from $1 million last year. Diluted earnings per share were $0.12 per share this quarter and $0.09 per share in 2016. In the North American wholesale segment, net sales for the quarter were $42.3 million, up 2% compared with $41.5 million.

The increase was primarily due to higher sales of our Stacy Adams and Florsheim brands, driven by strong new product sales. Licensing revenues were $592,000 in the second quarter of 2017 and $596,000 last year. Wholesale gross earnings were 31.3% of net sales in the second quarter versus 32.6% of net sales last year.

While wholesale margins were down for the quarter, they remain up slightly for the year-to-date period and are trending up for the second half of the year. Selling and administrative expenses for the wholesale segment were flat at $12 million. As a percent of net sales, selling and administrative expenses were 28% this quarter from 29% last quarter.

Operating earnings for the wholesale segment were $1.3 million this quarter compared with $1.5 million in 2016. The decrease was primarily due to lower wholesale gross margins for the quarter.

Net sales of our North American retail segment, which include both our retail stores and US Internet sales, were $4.8 million in the second quarter, as compared to $4.7 million last year. Same-store sales, which include the US Internet sales, were down 2% for the quarter, due to decreased sales at both brick and mortar stores and on our website.

Last year in September, we opened an outlet store in the Sawgrass Mills Mall in Florida. While the company closed two stores during the second quarter of 2017, sales from the new outlet store more than offset the sales volume loss from the closed stores, resulting in overall retail sales being up for the quarter.

Retail operating earnings were $184,000 in the second quarter and $228,000 in last year's second quarter. The decrease was mainly due to a slight increase in retail selling and administrative expenses for the quarter.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $10.4 million, down 3%, as compared to $10.7 million in 2016. The decrease was primarily due to lower net sales at Florsheim Australia.

Florsheim Australia's net sales were down 3% for the quarter, due to a 6% decline in its sales of its wholesale business and a 1% decline in its retail business. Earnings from operations at Florsheim Australia and Florsheim Europe were $407,000 in the second quarter, up 25%, as compared to $325,000 last year.

The increase was mainly due to higher gross margins at Florsheim Australia and Florsheim Europe. Other expense for the quarter was $55,000, down from $301,000 in last year's second quarter.

In the first quarter of 2017, the company retrospectively adopted a new accounting rule that required the company to reclassify the non-service cost components of pension expense from selling and administrative expenses to other expense in the income statement.

The decrease in other expense this quarter was mainly due to a $367,000 decrease in non-service cost components of pension expense. Pension expense decreased in 2017 as a result of freezing all benefits under the plan, effective December 31, 2016.

At June 30, 2017, our cash and marketable securities totaled $41.9 million, and we had no debt outstanding on our $60 million revolver. During the first six months of 2017, we generated $20.7 million of cash from operation.

We used those funds to pay $6.8 million of dividends, repurchased $6.8 million of our company stock and to pay off $4.3 million on our line of credit. We also had $772,000 in capital expenditure. We estimate that annual capital expenditures for 2017 will be between $1.5 million and $2.5 million.

On August 8, 2017, our Board of Directors declared a cash dividend of $0.22 per share to all shareholders of record on August 30, 2017, payable on September 29. I would now like to turn the call over to Tom Florsheim, Jr., our Chairman and CEO..

Thanks, John, and good morning, everyone. As John mentioned, sales in our North American wholesale segment were up 2% for the quarter. After a difficult first quarter, we are pleased with a turnaround in our business.

While the environment remains challenging, we were able to increased our share in the men's non-athletic footwear market, and we feel we have good momentum in important segments of our business. Stacy Adams bounced back this quarter, with a 10% increase in sales.

Spring seasonal footwear sales accelerated throughout the quarter, and the brands at One Stone [ph] business was strong across most key retailers. Industry wide dress shoes have been a declining business, but Stacy Adams has managed to buck the trend by introducing fresh, versatile footwear that bridges both a dress and casual lifestyle.

Sales of Florsheim were up 10% this quarter. As we've mentioned in previous conference calls, we are making significant progress with Florsheim via new product, and we believe we are at the beginning of a good run in this regard.

In particular, new Comfortech as well as jeans-friendly footwear have helped create a more diversified core of successful Florsheim shoes at retail. 2017 marks the 125th anniversary of the founding of Florsheim, and we are excited that this year is one of resurgence for the brand. Nunn Bush sales were down 13% for the quarter.

The mid-tier department store trade channel has been impacted by e-commerce to a greater degree than any other channel. Nunn Bush derived significant sales volume from this sector, resulting in sales declines over the past year.

While this challenge is ongoing, we believe that the brand is starting to gain traction as Nunn Bush experienced its largest selling season of new product in years, for fall 2017.

The influx of new product, along with a strong focus on growing other trade channels, including e-commerce, should position the brand to get back on the growth track in the near term. BOGS sales were flat for the quarter.

The second quarter is our small volume quarter for BOGS, but we are pleased with the solid sell-throughs we had with our non-insulated spring product, which should help us expand BOGS' placement for 2018. A key focus of ours is to transform BOGS into a year round brand, and we believe that we are making progress towards this end.

In terms of coming up with innovative products, it sells beyond the fall and winter seasons. The work segment is a seasonless bill end driven business, and we are relaunching BOGS work for spring of 2018, with an enhanced line, featuring lightweight boots, utilizing BOGS' proprietary rebound comfort technology.

The early read has been good, and we are optimistic that over time BOGS work will develop into an important segment for the company. The third quarter represents the beginning of the key shipping period for BOGS.

Retail inventories are currently very clean, and we are hopeful that with normal fall weather patterns, we will have a strong back half of the year. In our North American retail segment, overall sales were up 1% in the second quarter. As John mentioned, our same-store sales were down slightly in both brick and mortar and on our e-commerce sites.

From a brick and mortar perspective, the sales decline can be attributed to a reduction in mall traffic as consumers are shifting more purchases to e-commerce. Regarding our e-commerce sales, we are seeing increased price competition, which at times, translates into a lower conversion rate on our sites.

We are careful to make price [technical difficulty] in order to protect the image of our brands and have resisted the trend on the web to price aggressively. Our overseas business was down 3% for the quarter, primarily due to a decline in wholesale sales in the Pacific Rim.

Sales in Asia have been difficult based on the general downshift in consumer demand for the last several years. Florsheim has a long history in the region, and we are committed to building the brand in Asia over the long-term. In our largest overseas market, Australia, sales were down slightly in both retail and wholesale.

Our inventory levels, as of June 30, 2017, were $61 million compared to $77 million that same time a year ago. As explained in previous calls, we continue to manage our inventories to reduce our downside exposure on seasonal merchandise while maintaining a strong stock position of our core shoes.

Regarding sourcing, our cost for factories [ph] remain stable and price increases to our customers are very limited. This concludes our formal remarks. We appreciate your interest in Weyco Group, and I would now like to open the call up to your questions..

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Okay. Thank you for joining us on our second quarter conference call, and have a great day..

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