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Weyco Group Inc  (NASDAQ:WEYS)
Q4 2018 Earnings Conference Call
March 06, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and welcome to the Fourth Quarter and Full Year 2018 Earnings Release Conference Call. My name is Ani and I'll be the 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 will now turn the call over to Mr. John Wittkowske, CFO. John, you may begin.

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Thank you. Good morning, everyone. Welcome to Weyco Group's conference call to discuss our fourth quarter and full year 2018 results. On this call with me today are Tom Florsheim Jr., our Chairman and CEO; 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 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 decided to use them.

Net sales for the fourth quarter of 2018 were $89.6 million, up 12% compared to 2017's fourth quarter sales of $80.3 million. Operating earnings were $11.9 million, up 16% compared to $10.3 million in 2017. Net earnings attributable to Weyco Group rose 19% to $9.6 million this quarter from $8.1 million last year. Diluted earnings per share were $0.93 in the fourth quarter and $0.79 in 2017.

Effective January 1st, 2018, the Tax Cuts and Jobs Act lowered the U.S. federal income tax rate from 35% to 21%, which reduced our fourth quarter 2018 tax provision by $1.2 million and increased the learning -- diluted earnings per share by $0.12. However, in 2017, the Company remeasured its deferred tax balances to reflect the new lower tax rate, which reduced our fourth quarter 2017 tax provision by $1.5 million and increased 2017 diluted earnings per share by $0.15, excuse me.

In the North American wholesale segment, net sales for the fourth quarter of 2018 were $70.8 million, an increase of 15% compared with $61.4 million in 2017. Licensing revenues were $734,000 this quarter and $724,000 last year. Wholesale gross earnings were 40% of net sales in the fourth quarter as compared with 37.4% last year. Operating earnings for the wholesale segment increased 24% to $10.4 million this quarter, up from $8.3 million in 2017 as a result of the higher sales and gross margins.

Net sales of our North American retail segment, which include our retail stores and U.S. Internet sales were $8.2 million for the quarter, up 19% to $6.9 million last year. Same-store sales, which include U.S. internet sales were up 21% for the quarter, due mainly to higher sales through our Company websites. Driven by those higher online sales retail earnings from operations rose to $1.9 million in the fourth quarter, up from $1.1 million last year.

Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe, had net sales of $10.6 million in the quarter, down 11% from $12 million in 2017. This decrease was due to lower net sales at Florsheim Australia. Florsheim Australia's net sales were down 14% for the quarter with lower sales in both its retail and wholesale businesses. The weaker Australian dollar relative to the U.S. dollar also contributed to that decrease as Florsheim Australia's net sales in local currency were only down 8% for the quarter.

Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $333,000 for the quarter compared to operating earnings of $787,000 in the same period last year. The decrease between years was primarily due to the lower sales at Florsheim Australia. For the year, our overall net sales were $298 million in 2018, an increase of 5% over the $284 million in 2017.

Earnings from operations were $25.5 million, up 9% compared to $23.4 million last year. Net earnings attributable to Weyco Group rose 24% to $20.5 million, up from $16.5 million in 2017. Diluted earnings per share were $1.97 in 2018 and $1.60 in 2017. The lower tax rate for 2018 reduced our 2018 tax provision by $3.2 million and increased our diluted earnings per share by $0.31. In 2017, as mentioned before, the remeasurement of our deferred tax balances to reflect the lower tax rate reduced our 2017 tax provision by $1.5 million and 2017 diluted earnings per share by $0.15.

In the wholesale segment, net sales for the year were $233 million, up 7% from $217 million in 2017. Licensing revenues were $2.5 million in both 2018 and 2017. Wholesale gross earnings as a percent of net sales were 35.6% in 2018, up from 33.6% in 2017. Operating earnings for the wholesale segment increased 14% to $23.1 million this year, up from $20.2 million last year due to those higher sales and gross margins.

In our retail segment, net sales were $22.7 million, up 9% from 2017. Same-store sales were up 13% for the year, due mainly to increased sales through our Company's websites. Earnings from operations for the retail segment were $2.7 million in 2018, up from $1.4 million in 2017, due mainly to higher sales at our Company's websites.

Our other operations and net sales of $42.3 million, down 7% from 2017. The decrease was primarily due to lower sales at Florsheim Australia. Florsheim Australia's net sales were down 10% for the year with lower sales at both its wholesale and retail businesses. The weaker Australian dollar also contributed to the decrease as Florsheim Australia's net sales in local currency were down 7% for the year.

Collectively, Florsheim Australia and Florsheim Europe had operating losses of $379,000 compared to operating earnings of $1.8 million in 2017. Again, this decrease was primarily due to lower sales at Florsheim Australia. During the third quarter of 2018, the minority interest shareholder of Florsheim Australia provided notice intended to the company his shares, which represented a 45% equity interest in Florsheim Australia.

Accordingly, the Company purchased the minority interest in Florsheim Australia for $3.7 million on August 30th, 2018 and the Company now owns 100% of Florsheim Australia. Other expense totaled $638,000 in 2018, up from $248,000 last year. The increase in expense was primarily due to foreign exchange losses recognized from the revaluation of intercompany loans between the Company's North American wholesale segment and Florsheim Australia.

At December 31st, 2018, our cash and marketable securities totaled $43.2 million and we had $5.8 million of debt outstanding on our $60 million revolving line of credit. During 2018, we generated $13.1 million of cash from operations, and drew down $5.8 million on our line of credit. We repurchased $11.4 million of our Company stock, paid $9.3 million in dividends and paid $3.7 million to acquire the minority interest in Florsheim Australia.

Additionally, we spent $1.4 million on capital expenditures. To accommodate our continuing growth and potential future acquisitions, we are planning an expansion of our office space within our corporate headquarters in 2019. Including this expansion, we expect capital expenditures to be between $3 million and $4 million in 2019. On March 5th, 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per share to all shareholders of record on March 15, payable on March 29.

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

Thomas W. Florsheim, Jr. -- Chairman and Chief Executive Officer

Thank you, John and good morning, everyone. Our North American wholesale business was up 15% for the quarter and 7% for the year. We are pleased with the momentum in our wholesale business as we are picking up market share in the categories in which we compete. Over the last few years, there have been numerous changes in our industry and in retail, and we believe that we have made good strategic and tactical adjustments that have enabled us to prosper in a difficult environment. Our Florsheim wholesale division was up 23% in the fourth quarter and 20% for the year. The success that Florsheim experienced this year can be attributed to two major factors. First and most important, great product. Over the last several seasons, we have introduced new product is performed exceptionally well at retail and allowed us to build momentum across all trade channels. And Florsheim brand has evolved further down the casual continuum with the introduction of last lifestyle product that fits the Florsheim DNA, but permits the brand to move well beyond the traditional dress and dress casual categories.

The market in traditional dress is not growing, but it remains an important category, and retailers and consumers are increasingly gravitating toward Florsheim, as the brand of choice for dress and dress casual footwear. The second factor driving Florsheim success is that today's consumers are seeking out the authenticity associated with heritage brands. Florsheim fits this bill and we have strongly embraced our heritage positioning over the last several years, changing our logo back to the original script of 1890's, and reinforcing the history of craftsmanship that goes into our brand, even as we pivot to more modern and casual product.

We were especially encouraged to find that Florsheim appears to be developing among younger fashion-conscious consumers; all in all, a great year for Florsheim. BOGS sales rose 34% in the fourth quarter and 10% for the year. We had a great finish to 2018 for BOGS. Some of this increase was driven by favorable weather patterns. We have relatively early cold and snow this fall across a good part of the U.S. and Canada, which helped jump-start to insulated boot business at retail.

BOGS benefited from the early winter, especially as many retailers went into the back half of the year with clean inventory positions in this category and needed to respond to consumer demand. In addition, 2018 new product introduction resonated with consumers. Importantly BOGS has been able to diversify its offerings and build-off it's classic foot foundation with more fashionable versatile product. We also have introduced a number of successful wider insulated styles that are less dependent on fourth quarter selling.

Expanding the range to multi-season sales is an important step and ties into our long-term effective of making BOGS a year-round brand. Our Stacy Adams business was up 6% for the quarter and 5% for the year. It was a record year for Stacy Adams, an extremely strong second half and -- with an extremely strong second half of 2018. The brand maintains a leadership position, an accessible fashion and primarily in the dress market. Similar to Florsheim, Stacy Adams has parked the sluggish trend in dress, shoes and continues to pick up market share in this category.

Interestingly, a good part of Stacy Adams growth, was in the department store trade channel, which has been a difficult area of the business. Stacy Adams stands to benefit, when retailers rationalize duplication in their assortment and look for brands like Stacy Adams with a more unique point of view. Our Nunn Bush business decreased 2% for the quarter and 3% for the year. As discussed in previous calls, Nunn Bush's concentration in the mid-tier department store channel has negatively impacted the brand in the last few years.

2018 was no different as two important mid-tier accounts, Bon-Ton and Sears, filed for bankruptcy. On a positive note, Nunn Bush product performance has been strong and consumers are responding positively to

the brand's new product launches. Nunn Bush experienced a fastest growth of all Weyco Group in the e-commerce trade channel with over 30% -- with over a 30% increase from last year. ECommerce is now the number two trade segment for the brand.

Same-store sales in our North American retail segment, which includes U.S. internet sales were up 21% in the fourth quarter and 13% for the year. We continue to invest resources toward building in our e-commerce business while maintaining a limited number of flagship, brick and mortar stores in key tourist markets. This strategy resulted an impressive top and bottom line growth in our direct to consumer business. We continue to have good momentum in e-commerce as we headed to 2019. Net sales in our overseas business decreased to 11% for the fourth quarter and 7% for the year. As John mentioned, in August of last year we assumed 100% ownership of our Australian subsidiary, which includes our businesses in Australia, New Zealand, the Pacific Rim and South Africa.

In January of this year, we hired Damian Walton, as President of Florsheim Australia. Damian has vast experience in retail, most recently as an Executive at Myer Department Stores in Australia. In addition to a strong knowledge of the Australian retail and wholesale industry, we are impressed with Damian's leadership skills, which will provide a focused collaborative environment for Florsheim Australia. We are excited to have Damian on-board to address some of the challenges we are experiencing in this business.

While we have a strong market position in Australia, we need to leverage some of the processes and tools that have worked for us for Florsheim, work for Florsheim in the U.S. and other markets. We believe that our prospects for turnaround are very good at Florsheim Australia, and it will take some time -- it will take some time and we see 2019, as the year where we reset the course.

Florsheim Europe had good top line growth for the quarter and a strong top and bottom line -- and strong top and bottom line growth for the year. We are focused on growing new channels of distribution in Europe, especially in the e-commerce sector. Overall, gross margins were 40.2% in 2018 versus 39% last year. This increase was driven by an increase in North American wholesale margins from 33.6% in 2017 to 35.6% in 2018. As stated last quarter, factory pricing remains stable and the dollar has stayed strong against the currencies, where we source our product.

Our inventories at December 31st, 2018 were $73 million compared to $60 million a year ago, given the momentum of our brands in North America, we have brought our inventory levels up to meet higher sales demand. Retailers expect us to have availability on core styles for immediate shipment, and we have strengthened our in-stock position to ensure high service levels.

This concludes our formal remarks. Thank you for your interest in Weyco Group and I would now like to open the call to your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And I'm not showing any audio questions at this time.

Thomas W. Florsheim, Jr. -- Chairman and Chief Executive Officer

Okay. We'd like to thank everybody for their participation and have a great day. Bye now.

Operator

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

Duration: 19 minutes

Call participants:

John F. Wittkowske -- Senior Vice President, Chief Financial Officer and Secretary

Thomas W. Florsheim, Jr. -- Chairman and Chief Executive Officer

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