Rocky Brands Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 30, 2024

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Rocky Brands Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAllister of ICR.

Speaker 1

Thank you, and thanks to everyone for joining us today. Before we begin, please note that today's session, including the Q and A period, may contain forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks, uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10 ks for the year ended December 31, 2023.

Speaker 1

And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Speaker 2

Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we will be happy to take any questions. Our second quarter results modestly exceeded our expectations as we continue to effectively navigate unprecedented consumer environment. I'll share more detail momentarily, but similar to last quarter, Durango and ExtraTough led the way with double digit year over year gains that offset some anticipated softness in other areas of our business.

Speaker 2

It is during a less robust macroeconomic backdrops like the present that this benefits of our diversified brand portfolio stands out. Over the past several years, we have taken action to improve the company's financial profile in order to reinvest in growth and drive increased shareholder value. This is evidenced by higher gross margins and lower operating expenses, both of which contributed to the improvements in earnings. We took a significant step forward further enhancing our earnings power during the Q2 with the refinancing of our debt and simplification of our capital structure. The new credit and term facility we signed with Bank of America in April is projected to generate approximately $4,400,000 in annualized interest expense savings starting in 2025.

Speaker 2

Before I hand it over to Tom for more detailed looking at the financials, I'll take a few moments to walk through our Q2 brand and channel performance. Starting with Durango, it continues to be one of the best performing Western brands in the channel, delivering strong double digit gains this quarter. We experienced continued strength in bookings across key accounts and farm and ranch partners, along an acceleration in at once business. The team is working to supply chain with more of the brand's core in demand product, which along with a positive response to the fall 2024 line sets Durango up to build upon its strong first half over the remainder of the year. Like Durango, Extra Tough maintained its strong momentum from early in the year and again outperformed expectations with a strong double digit gain in Q2.

Speaker 2

Deliveries for spring 2024 were very healthy and we also feel numerous replenishment orders for existing products as customers' appetite for Extra Tough continues to expand rapidly. Along with strong demand for its legacy outdoor products, Extra Tough saw positive reception for new colors and collaborations with the launch of its 2024 Spring line. The brand continues to see strong demand across a number of niche outdoor verticals such as sport fishing and outdoor recreation that are leading not only in increased sales but increased distribution with large retailers that position Escher Tuff for continued success. Moving forward, the team remains focused on securing new bookings for its upcoming spring 2025 line and filling in replenishment aggressively this year while maintaining efforts to source sufficient inventory to fulfill the strong and growing demand for the brand. Muck had a good start to the quarter with the launch of its spring 2024 line.

Speaker 2

Unfortunately, the unfavorable spring weather patterns in several areas of the country led to slower retail turns and as a result slower than anticipated restocks late in the quarter. Retail partners are making progress in working through the inventory and we anticipate getting back into a more normal restock cadence. Even with the lack of adequate weather to drive demand, we continue to see strong engagement with customers throughout our new website, enhanced marketing campaign highlighting the brand's heritage and influencer partnerships that are amplifying visibility. As a result, we continue to add the Muck's account base and anticipate a rebound heading into the important fall season. Shifting to Georgia.

Speaker 2

It was a challenging second quarter for our work category and the brand wasn't immune. Georgia continues to see more over inventory pressure from smaller accounts. However, the team was able to offset much of this pressure with mid single digit increases with our key accounts business, which has largely resumed its normal order cadence with the COVID related supply chain disruptions and the excess inventory purchases that fall are behind us. Similarly, Rocky Work was also under pressure for much of Q2. However, momentum did build later in the quarter.

Speaker 2

Following a difficult April May, we saw a notable uptick with June, up nicely versus a year ago period. The late quarter rebound fueled by new and innovative product introductions in the last 12 months leaves us optimistic that Rocky Work can continue to trend positively in the second half of the year. In fact, the brand continued to expand distribution with key suppliers as well as with catalog and direct to consumer sites this quarter, positioning the brand for a stronger reach going forward. Meanwhile, our work repositioning Rocky Western with new value driven product at more competitive price points continued in the Q2. Unfortunately, it has taken longer than planned to move through the older, higher priced inventory in the channel, which is impacting sell in.

Speaker 2

That said, we are encouraged by the initial reception of our new, more affordable product and remain confident that our current strategy for Rocky Western will continue to gain traction with consumers, retailers over the coming quarters. With respect to Rocky Outdoor, last year's poor hunting season continues to weigh on the business, limiting the typical bulk shipments that typically occur in the Q2 ahead of the start to the new season this fall. While the hunting market overall remains challenging, we saw our non hunting footwear led by rugged casual styles trend positively this quarter. This is helping to expand the brand's retail partner base and reach a broader consumer audience. Lastly, in wholesale, our commercial military duty segment was down in line with our expectations as we completed the 2023 military blanket purchase agreement in Q1.

Speaker 2

A delay in the military budget release for 2024 is also impacting our sales cadence versus last year. Solid gains in our duty fire collection and our postal business helped to partially offset the current military headwinds. Shifting to retail, our branded e commerce sites continue to trend nicely positive. Double digit revenue gains from our extra tough Durango, Georgia and Rocky sites led the way for our digital channel. We also utilized our dotcom business to move some overstock inventory in the quarter ahead of restocking our large wholesale channel with many of our brands' best sellers.

Speaker 2

Lastly, our B2B Lehigh business was flat compared to the Q2 of 2023. However, key customer account spending improved for Q1, driven by a shift in focus to exiting account retention and growth. Last year, we shared that we implemented a significant realignment of our sales organization to improve our sales pipeline and provide greater continuing in account setup, rollout and implementation. These changes are driving results, leading to an improved sales pipeline that positions Lehigh for a return to growth in the second half. Before I turn the call over to Tom, I wanted to thank the entire Rocky team for their continued hard work this quarter and a solid first half of the year.

Speaker 2

While the operating environment remains a challenge, I am pleased to see our efforts with top line expansion and expense management along with our improved balance sheet deliver positive results and begin to translate into value for our shareholders. As we look to the second half of twenty twenty four, I am cautiously optimistic that we can continue to build on our momentum and drive continued success. I'll now turn the call over to Tom to cover the financial details. Tom?

Speaker 3

Thanks, Jason. As Jason discussed, we are pleased with our results as many of the drivers of our positive first quarter performance continued in the 2nd quarter. Reported net sales for the Q2 were $98,300,000 down 1.6% compared to $99,800,000 in a year ago period. Excluding certain non recurring sales from the year ago period for sales related to the manufacturing of surface product following the divestiture of the brand in March of 2023, our change to the distributor model in Canada in November of 2023 and temporarily elevated commercial military footwear demand throughout 2023, net sales increased 6.1% year over year. Excluding these non recurring items by segment, wholesale sales were up 2.3% to $68,300,000 retail sales increased 6.1 percent to $26,100,000 and contract manufacturing sales were up 3,500,000 dollars were $3,500,000 up $2,600,000 from last year.

Speaker 3

Turning to gross profit. For the Q2, gross profit was $38,000,000 or 38.7 percent of net sales compared to $37,600,000 or 37.6 percent of sales in the same period last year. The 110 basis point increase was driven by higher wholesale gross margins as well as higher percentage of retail net sales, which carry higher gross margins in our wholesale and contract manufacturing segments. Gross margins by segment were as follows: wholesale, up 200 basis points to 37.2 percent retail down 180 basis points to 46.9 percent and contract manufacturing up 420 basis points to 9.6%. Operating expenses were $33,500,000 or 34.1 percent of net sales in the Q2 of 2024 compared with $35,400,000 or 35.4 percent of net sales last year.

Speaker 3

On an adjusted basis, operating expenses were $32,800,000 this year or 33.4 percent of net sales and $33,600,000 or 33.2 percent of net sales a year ago. Income from operations was $4,500,000 or 4.6 percent of net sales compared to $2,200,000 or 2.2 percent of net sales in a year ago period. Adjusted operating income was $5,200,000 or 5.3 percent of net sales compared with adjusted operating income of $5,700,000 or 5.6 percent of net sales a year ago. For the Q2 of this year, interest expense was $6,100,000 inclusive of a $2,600,000 one time loan onetime loan extinguishment charge compared with $5,600,000 in the year ago period. On an adjusted basis, excluding the 2.6 $1,000,000 one time term loan extinguishment charge, interest expense for the Q2 of 2024 was $3,500,000 The decrease in interest expense on an adjusted basis was driven by lower debt levels and interest rates resulting from the debt refinancing completed in April of this year compared with the Q2 of 2023.

Speaker 3

On a GAAP basis, we reported a net loss of $1,200,000 or $0.17 per diluted share compared with a net loss of $2,700,000 or $0.37 per diluted share in the Q2 of 2023. Adjusted net income for the Q2 of 2024 was $1,300,000 or $0.17 per diluted share compared with breakeven a year ago. Turning to our balance sheet. At the end of the 2nd quarter, cash and cash equivalents stood at $4,100,000 compared with $4,500,000 at December 31, $3,100,000 a year ago. Total debt was $152,400,000 a decrease of 12% since December 31 and a decrease of 31.3% since June 30 last year.

Speaker 3

Inventories at the end of the second quarter were $175,000,000 up slightly compared to $169,200,000 at the end of 2023 and down 20% compared to $218,300,000 a year ago. With respect to our outlook, we still expect net sales to be toward the high end of our initial range of $450,000,000 to $460,000,000 The only thing that has changed since our Q1 call in late April is our view on gross margins. Due to the rising ocean freight rates, volume shift within our wholesale channel to more of our larger key accounts, we now expect gross margins for 2024 to be slightly less than last year's 38.9 percent adjusted gross margin versus our prior guidance of a slight improvement. In terms of how this impacts the second half by quarter will depend on the timing of when the product sells, but we currently anticipate Q3 gross margins to decrease sequentially from Q2 gross margins before rebounding in the 4th quarter due to our mix of retail sales. That concludes our prepared remarks.

Speaker 3

Operator, we are now ready for questions.

Operator

Thank you. We will now be conducting the question and answer The first question is from Janine Stichter from BTIG. Please go ahead.

Speaker 4

Hi, good afternoon. I want to ask a bit about supply chain. I think you talked about chasing inventory for Durango and Extra Tough. If you could just comment on the current state of the supply chain environment, your ability to chase and kind of where we are in terms of bottlenecks or where the how the inventory flow stand? And then with that, I would just love a little bit more color on what you're seeing with ocean freight rates, how much you have locked in and how much visibility you have there?

Speaker 4

Thank you.

Speaker 3

Yes. Hi, Jeanine. Thanks for being on the call. So as we talk about chasing some inventory for Durango and Extra Tough, the sales for those brands have exceeded our expectations a little bit in the first half of this year. We are seeing a little bit of delays from a supply chain perspective.

Speaker 3

But we feel as you can see with our inventory being up where we've a lot of inventory coming our way, manufacture our own inventory to prepare us for Q3 and for Q4. And so we're trying to catch some inventory on those 2 brands. But I think our inventory is well positioned for the last half of this year. As it relates to container prices, we definitely have seen an increase, particularly in the month of June. They've gotten a little softer in the month of July so far, but we're monitoring that and that's why we've been a little cautious with our margin guidance for the rest of the year.

Speaker 4

All right, great. And then maybe just one more on the Work brands. It sounds like you're seeing some pressure there, but it's really more on the smaller accounts than the national accounts. Can you just comment on what's going on there? How much of it is the end consumer or general softness in the Work market versus the retailers that you're selling into?

Speaker 4

I would just love to understand the dynamics there.

Speaker 2

Yes, absolutely. Thanks for the question, Janine. So what we are finding that we call mom and pops, the independents are just being a little bit more conservative. Our brands are still checking at retail. As we stated online or on the call here too, our key account business is actually doing significantly better.

Speaker 2

And so same kind of product, it's being sold. But what we believe is the mom and pops are just being more conservative. So if they have 3 size tens and they sell 1, they used to buy back into it, but now they're saying, I'm going to wait and I'm going to get down to 1 pair or maybe even 0 pair and then I'll buy back into it. So we're not concerned with the brands at all. We're just watching the retailers be very conservative.

Speaker 2

I think there's probably a little bit of play here with the election year also. We typically see the mom and pops in particular get a little antsy around the last year. So we think we're in good shape here and we just got to kind of mold through the cautiousness.

Speaker 4

All right. Thanks so much.

Speaker 2

Thank you.

Operator

The next question is from Jonathan Komp from Baird. Please go ahead.

Speaker 5

Yes. Hi, good afternoon. Thank you. Tom, I was hoping you could share a little more as you look to the back half, what type of underlying wholesale growth you're expecting and any more color to the order book support that you have sitting here currently?

Speaker 3

Yes. So I think for our wholesale business, if you're looking at it from a non recurring perspective, which is how we're viewing it this year with the changes with the Canadian distributor and the commercial military contracts. We're targeting that mid single digit type of growth in wholesale. And then probably a little bit more in that retailer, particularly in the e commerce channel. So I would say, we're still targeting that $450,000,000 to $460,000,000 range, the high end of the range.

Speaker 3

And so we're not making really any provisions upwards, but the key account growth is certainly going to help us get to that mid single digit growth that we talked about.

Speaker 5

Yes, great. Thank you. And when you look at the Western category specifically, either based on indications you see in your retail business or sell throughs at some of your key partners. What's your best sense of the health of that category? And how are you thinking about sort of the end market rate of sell through overall?

Speaker 2

Ed, this is a great question. I think everybody is kind of aware what's kind of happened in the Western business or maybe even if you think about the country music business is really kind of spiked some stuff there. So we believe that we are seeing a little bit of that, but not a lot. Single digit kind of partial growth there from the popularity of what's going on with country music and Western boots. But our boots are still just really functional boots.

Speaker 2

And I think a lot of the people that are buying the other kind of boots, they're just going to Amazon looking for a cheap boot and it looks like they want to look and so they're buying that. So I think it will affect some of those kind of brands more so, but I think the traditional brands like we are, I think we'll be okay. And right now, we don't see it slowing down this year and we'll keep a close eye on it for next

Speaker 3

year. Yes, I think John, we have limited visibility into some of the sales of our recent retail customers. And we're seeing good sell through there. I think we're seeing a greater wholesale sell in as people start to normalize their inventories a little bit as well. That's my take on it.

Speaker 5

Yes, very helpful. Maybe last one just related to the margin. Could you maybe quantify what type of increase you're seeing or building in from a freight perspective and the gross margin update? And then is there any ability or willingness to pull back a little on SG and A? Are you still expecting to delever slightly based on investments in the incentive comp?

Speaker 5

Thanks again.

Speaker 3

Yes. So container prices, we saw container prices almost 2x what they were in June from May, right? Again, they've started to soften a little bit. This is the ocean container pricing, softened a little bit in July. So we're watching price, we're watching our peers.

Speaker 3

We haven't really seen anybody take pricing adjustments yet. If I were to kind of quantify, we're probably a couple of 100 basis points difference over LY just on the ocean freight piece of it. But we're continuing to monitor that And really that will depend on when and what product sells. As John, you know, you've followed us a long time. We source a significant amount of our product from the Western Hemisphere.

Speaker 3

So we're bringing a lot of product from Puerto Rico and from the Dominican Republic. So we'll probably be less impacted than some of our peers, that source more predominantly or exclusively from Asia. But we're continuing to monitor it and it will certainly have an impact on us. We're going to try to mitigate that. As it relates to operating expenses, we are still trying to manage to the operating income goals we said at the beginning of the year.

Speaker 3

So yes, we are looking for areas where we can cost to try to maintain that operating margin. And so that's the goal for the next 5 months.

Speaker 5

Okay. Thanks again.

Speaker 2

Thanks, John.

Operator

There are no further questions at this time. I would like to turn the floor back over to Jason Brooks for closing comments.

Speaker 2

Great. Thank you. I just want to reiterate one more time a big thanks to the Rocky team. Everybody is working really hard to navigate this year, a complicated year. And also want to say thanks to our shareholders and all their support.

Speaker 2

And we look forward to finishing out a good year in 2024 and continuing to grow these brands in 'twenty five in the future. So thank you very much.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Rocky Brands Q2 2024
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