John F. Wittkowske - SVP, CFO, and Secretary Thomas W. Florsheim, Jr. - Chairman and CEO.

Analysts:.

Welcome to the Weyco Group Third Quarter 2017 Earnings 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 everyone and welcome to Weyco Group's conference call to discuss our third quarter 2017 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 of 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 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. Our net sales for the third quarter of 2017 were $76.9 million, down 3% as compared with 2016 net sales of $79.1 million. Operating earnings were $7.8 million in both years.

Net earnings attributable to Weyco Group increased 7% to $4.9 million this quarter, up from $4.6 million. Diluted earnings per share were $0.48 per share this quarter and $0.44 per share last year. In the North American wholesale segment net sales for the third quarter of 2017 were $60.7 million down 2%.

The decrease between years was primarily due to lower sales of our Stacy Adams, Nunn Bush, and BOGS brands which was offset by higher sales of our Florsheim brand. Our licensing revenues were $527,000 this quarter and $525,000 last year. Wholesale gross earnings increased to 33.9% of net sales in the third quarter up from 32.2% in 2016.

Selling and administrative expenses for the wholesale segment were $13.2 million this quarter compared to $13.3 million last year. Operating earnings for the wholesale segment increased to 11% to $7.4 million compared with $6.7 million in 2016. The increase was due to higher wholesale gross margins and lower selling and administrative expenses.

Net sales of our North American Retail segment which include our retail stores and U.S. Internet sales were $4.3 million down 9% as compared to $4.7 million last year. Same store sales which include our U.S. Internet sales were down 10% for the quarter due to decreased sales at both brick and mortar and on the company's website.

The lower sales caused retail operating earnings to drop to $17,000 this quarter compared with $313,000 through 2016. Our other operations which include the wholesale and retail businesses of Florsheim Australia and Europe had net sales of $11.9 million down 3% as compared to $12.2 million in 2016.

The decrease was due to lower net sales at both Florsheim Australia and Florsheim Europe. Florsheim Australia's net sales were down 2% for the quarter and were down 6% in local currency due to decreases in sales at both its retail and wholesale businesses.

Collectively the operating earnings of Florsheim Australia and Florsheim Europe were $369,000 in the quarter versus $731,000 last year. The decrease was primarily due to lower operating earnings at Florsheim Australia's retail businesses. Our other expense for the quarter was $53,000 down from $311,000.

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

The decrease in other expenses quarter was primarily due to a $316,000 decrease in non-service cost components of pension expense. Pension expense decreased in 2017 as a result of freezing benefits under the plan effect of 12/31 of 2016.

At September 30, 2017 our cash and marketable securities totaled $36.3 million and we have $4.8 million outstanding under our $60 million revolving line of credit. During the first nine months of 2017 we generated $16.4 million of cash from operations.

We used funds to pay $9.1 million of dividends, repurchase $11.6 million of our stock, and purchase $4 million of marketable securities. We also have $1.4 million in capital expenditures. We estimate that our annual capital expenditures for 2017 will be between $1.5 million and $2 million.

On October 26th our Board of Directors declared a cash dividend of $0.23 per share to all shareholders of record on December 4, 2017 and payable on January 2, 2018. I will now turn the call over to Tom Florsheim, Jr., our Chairman and CEO. .

Thanks John and good morning everyone. While overall North American wholesale sales fell 2% we are pleased with our increase in gross margin. The gross margin pick up was in part due to tighter management of our inventories resulting in a lower percentage of obsolete product.

As a result the company experienced a reduction in shipments to the off price channel where sales typically generate lower profitability. In addition from a financial perspective we are in a cycle in which non-athletic dress and casual shoes are losing market share to fashion athletic brands.

The non-athletic shoe market is currently trending down about 5% year-on-year. While we are not content with our volume decline, we believe we are picking up market share in the categories where we compete. Florsheim sales are up 9%. Within the industry Florsheim is perceived as a bright star in a difficult dress and dress casual market.

What is gratifying is that the increases we're seeing in Florsheim are driven almost entirely through strong consumer acceptance of new styles that we've brought to market over the last couple years.

We continue to move the Florsheim brand further along the casual continuum always mindful that new designs need to be relevant to today's trends but also connect with the brands heritage. We're excited about the positive results and look forward to more success and product innovation as we head towards 2018. Our Stacy Adams business was down 3%.

Stacy Adams' performance at retail continues to be very good. The slight decrease in sales reflects the reduction of overall dress shoe inventory on the part of key brick and mortar retail partners.

Stacy Adams is experiencing significant growth in the e-commerce trade channel and we feel that the brand is positioned well to get back on a growth track in the near future. We remain focused on developing a more casual dimension for Stacy Adams.

This is a long-term process but we do believe we're making progress evolving the brand beyond the dress category. Nunn Bush sales were up 9% in the quarter. This fall we delivered over 400,000 pairs of new Nunn Bush styles representing our most significant new product season in many years.

The early read on the new styles is extremely positive and Nunn Bush should carry strong momentum into 2018 despite challenges in the mid-tier department store sector which is Nunn Bush's most important trade channel. The central position of Nunn Bush remains as relevant as ever.

Athletic shoe comfort and a dress casual or casual footwear platform at moderate price points. The near-term objective for Nunn Bush is to increase our penetration in other trade channels including e-commerce and the family shoe chain segment in order to offset the losses we've experienced due to the declines in traditional mall traffic.

Our BOGS business was up 4%. As a result of the late winter weather the nation experienced the last two winters retailers continued to bring in inventory later and also maintain conservative models. The good news is our BOGS Kids and Baby BOGS are off to an excellent start this season and we are selling out on a number of styles.

The BOGS adult business however remained slow as more men and women are following a buy now wear now strategy in terms of their seasonal purchases. Fourth quarter weather will play a significant role as far as how the BOGS brand finishes the year.

We feel the brand has great product and a strong loyal consumer following, we just need a little assistance from Mother Nature. As always we are working to diversify the BOGS brand to be less dependent on cold temperatures and precipitation.

These efforts include the relaunch and expansion of our work line as well as the introduction of more fashionable women styles with light to no insulation. As John mentioned our retail business in the U.S. was down 10% in same store sales during the third quarter.

Over half of our brick and mortar retail stores are located in Florida and Houston and were significantly impacted by the recent hurricanes. We are starting to see business in these areas come back as life returns to normal and tourism resumes. Our Internet business was down -- was also down for the quarter.

While we do sell some clearance inventory on our websites, we primarily feature our footwear at full price and utilize our sites as marketing vehicles to show the breadth of our brands. Increasingly maintaining full price on our e-commerce platform puts us at a disadvantage at a price driven Internet world.

We are attempting to mitigate this discrepancy by segmenting our brands to ensure more price integrity across our different brands. Our inventories as of September 30, 2017 were 58 million compared to 71 million a year ago.

Our strategy of being conservative on seasonal items and putting more inventory behind our best selling performers is paying off from the standpoint of higher margins due to fewer markdowns.

Also with retailers being careful about their inventory levels we're benefiting from more at once business on core styles by having extra inventory on our best selling shoes. With regards to sourcing our costs remain stable from our factory phase. So our price increases to our retail partners are limited. 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:.

Thank you all for listening to our conference call. And we will talk to you after the first of the year. Have a great day..

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