Rocky Brands, Inc. (RCKY) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands’First Quarter Fiscal 2015 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. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded and I will now turn the conference over to Mr. Brendon Frey of ICR. Thank you. You may begin.

Thank you and thanks everyone for joining us today. Before we begin, please note that today's session including the Q&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 and 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, our reports filed with Securities and Exchange Commission, including our 10-K for the year ended December 31, 2014. And I will now turn the conference over to David Sharp, President and Chief Executive Officer of Rocky Brands.

Thank you, Brendon. Joining me on the call today is Jim McDonald our Chief Financial Officer. We’re quite pleased with the strong earnings growth we achieved in the first quarter. The doubling of net income to $1.4 million comes on the yields of an exceptional fourth quarter and represents a very solid start to the New Year. What was particularly encouraging was the fact that we were able to deliver such a strong bottom line performance despite some temporary top-line headwinds. This was achieved through improved gross margins primarily in our wholesale channel and the lower operating expenses. Before I review the performance of each of our categories and channels, I’ll quickly touch on two broad themes which shaped our first quarter sales. First, the West Coast port situation proved to be more challenging than we expected. While the dock workers dispute was resolved in mid-February, it’s taken much longer than anticipated to work through the large [indiscernible] of ships waiting to unload their cargo which resulted in late deliveries and some missed opportunities during the quarter. With approximately 90% of our first quarter business derived from at once reorders, we have to have the right levels of inventory in stock to service the reorder business and maximize our sales potential. As we swung into the first quarter, a portion of our inventory designated as in transit that doubled versus the prior year which meant that we were out of stock on several key styles and unable to fully service demand. We have no viable way to actually record loss sales due to stock outs in the quarter; however we believe it to be in the $2 million to $3 million range. The second biggest driver of our sales performance was timing and this relates mostly to Creative Recreation. As you’ll recall, we acquired the brand 17 months ago in December 2013 and at the time the business was suffering from a number of operational inefficiencies which kept them from delivering product to retailers on schedule ahead of the start of the selling season. This meant a year ago, we shipped spring goods in the first quarter whereas now that we significantly improved Creative Rec’s supply chain, Spring ’15 deliveries went out on time during the fourth quarter of ’14 and new product was on retail shelves in Q1. These temporary factors were offset by pockets of strength throughout our business which I’ll now review in detail. Starting with the Durango Brands, sales increased 30% building on the strong momentum generated last year. We posted meaningful gains in key accounts the sell through of new styles in Rebel, Lady Rebel and little Durango collection continued to gain pace. At the same time, we are making good progress growing the brand via new accounts that are allowing us to reach a broader consumer audience. Meanwhile, sales of the Rocky Brand western footwear were down due primarily to a tough comparison from a year ago. In Q1 2014, we successfully sold in a new collection of square toed boots which have continued to perform very well at retail but we obviously didn’t fully anniversary the initial pipeline fill this year. Turning to work, Georgia Boot sales were down a few percentage points driven by the combination of stock outs and mis-deliveries of new product due to the aforementioned poor congestion. The good news is that the cold weather throughout the eastern half of the U.S. helped drive strong sell through of insulated boots at retail during the quarter meaning inventories in the channel are very clean. As we look forward to the back half of the year, we’re pleased that several of our new product lines which we delivered in the fall of booking extremely well. In fact at this point, we have several compelling new product launches that have helped fuel up a 40% increase in bookings of products for second half delivery. Moving onto hunting, the category was up modestly in Q1 on increased selling of spring seasonal product including lightweight more athletically inspired styles. Light work, sell through of insulated waterproof boots was buoyed by cold weather setting as up for a solid restocking situation ahead of the fall season. Bookings for the back half of the year for hunting are also up significantly. Now to commercial military, sales were down in the quarter as we were up against strong selling at the C4 and C5 light weight boots in the year ago period, which you recall were deemed unserviceable in the middle of last year due to changes in the army’s wear up and appearance regulations. This affected all manufacturers not just us. Helping offset these loss sales was the growing popularity of our flagship S2V boot which has become even more important to soldiers and distributors as a result of the recent changes. Looking ahead, we are on schedule for the launch of our new Rocky light weight boot which both are rugged yet lightweight platform and is fully compliant with all army uniform requirements. We expect the RLW will eventually more than [indiscernible] created by the discontinuation of the C4 and C5 boots. With regard to Creative Recreation as I mentioned earlier, many of the Brand’s initial spring shipments went out on time during the fourth quarter. This was a positive in terms of rebuilding and retail of confidence that did pull most sales out of the first quarter compared with the year ago. Our near term focus continues to be on getting Creative Recreation positioned for a long term success. To that end, we recently realigned the brand sales force bringing in an experienced team with solid relationships. They’ve had an immediate impact on opening new accounts and expanding within existing partners including [indiscernible] where we just went on replenishment with a key style 65 boots. Moving to replenishment underscores both consumer demands for the Brand and the improvements we’ve made to create a direct supply chain that now allow us to provide this level of customer fulfillment something that wasn’t possible a year ago. The spring summer selling season is off to a good start across all tiers of domestic distribution as well as in the brands international market. We're becoming more optimistic about Creative Rec’s future prospects and looks forward for further operational improvements in the quarters ahead. Turning to our retail segment, sales increase 7% driven by solid growth of our B2B channel. Sales to our CustomFit Kiosk program in both existing and new accounts continued to more than offset sales previously executed through the more capital intensive mobile store platform we inherited when acquired the business back in 2005. We ended the first quarter with 697 Kiosk installed up from 393 a year ago. The goal is now to end this year with over 1000 installations. With respect to our direct consumer business quarter gone of to a slow start due in part to some ineffective paid advertising programs. The team reacted quickly and was able to rectify the issue into quarter and return the channel to it's recent growth trajectory by March. We remain very confident that our enhanced e-commerce websites supported by more robust software platforms provide us with meaningful high margin growth opportunities in the coming years. In summary, the first quarter showcase the earnings power of our business model. In a period when sales were essentially flat with a year ago, we were able to significantly increase our bottom line. This goes well for the future as the top line headwinds from Q1 abate and our products and marketing initiatives translate into increase demand from new and existing customers across our work Western, Hunting, Commercial Military and now Casual footwear categories. Jim will now review the financials. Jim?

Thanks, David. Net sales for the first quarter were $65.5 million compared to $65.8 million the corresponding period a year ago. Wholesale sales for the first quarter decreased 4% to $51 million compared to $53.1 million last year. Retail sales for the first quarter increased 6.8% to $11.9 million compared to 11.1 million a year ago, while military segment sales increased to $2.6 million versus $1.6 million for the same period in 2014. Gross profit in the first quarter increased to $22 million or 33.6% of sales compared to $21.9 million or 33.2% of sales in the same period of last year. The 40 basis point increase was driven by higher wholesales gross margins, partially offset by an increase in military segment sales which carried lower gross margins in our wholesale and retail segments. Selling, general and administrative expenses were $19.6 million for the first quarter of 2015 compared to $20.5 million in the year ago period. The $950,000 decrease in SG&A expenses was primarily related to our reduction in expenses and lower trade show and advertising expense compared with a year ago. As a percentage of sales, SG&A improved 130 basis points to 29.9% compared to 31.2% last year. Income from operation was $2.4 million or 3.7% of net sales compared to $1.3 million or 2% of net sales in the prior year period. For the first quarter interest expense was $165,000 compared to $219,000 last year. Net income for the quarter increased $0.7 million to $1.4 million or $0.19 per diluted share compared to $0.7 million or $0.10 per diluted share last year. Turning to the balance sheet, our funded debt at March 31, 2015 was $36.7 million compared with $36.6 million at March 31, 2014. Inventory increased 6.2% or $4.8 million to $83.1 million at March 31, 2015 compared with $78.3 million on the same date a year ago. We feel comfortable with our current inventory position based on our current sales trend and the full order book. Operator we're now ready to take questions.

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Jonathan Komp from Robert W. Baird. Please go ahead with your question.

Just a couple of questions to start off with on the quarter itself and maybe a bigger picture one and had the risk of oversimplifying here. If I look at the quarter of last year Q1 ’14, it looks like the revenue growth on an organic basis was pretty strong and the margin also was pretty weak year-over-year and it looks like you seen a little bit of the opposite this year with lower revenue performance but strong margin performance. So I’m just wondering other than the couple of factors that you called out, is there anything else impacting that comparison on the top or bottom line?

Yes, from the top-line Jon, we had – well and the bottom line really, we were affecting a seeding program with TFC in that first quarter which was a very nice sales number and but with the seeding there was some margin concessions and which affected the bottom line the margin in bottom line and that was a record sales a quarter that we were going against last year.

And then maybe a few clarifications on some of the factors that impacted the quarter this year. First just on the West Coast port issue understanding, likely it difficult things that to quantify but wondering if you could just give more color on how you came up with the 2 million to 3 million sales estimate that you mentioned and then also whether or not there’s any inventory overhang related to the issues or if that’s really not a factor looking ahead?

The way we went about computing this was we just looked at the styles that were stopped out in the period that we -- and really at the skew level we expect our customers order and looked at the period that they were stopped out for where we had merchandize sitting on the ocean waiting to be processed through the port and that’s how we came up with that estimate. It’s very difficult to do it from the demand side because if a customer calls for an at once product – for an at once order and we don’t have that item in stock we don’t record that sale of course, they move on and buy an alternative product maybe from a competitor. I think Jon as we started the quarter to our in transit David said our in transit inventory was double of what it was a year ago and as we move through the quarter and certainly January and February were in the quarter were our most difficult sales months and then if you moved into March and the inventory started to arrive here and we’re in much better shape as far as the amount in transit as we ended the quarter and we were at the beginning of the quarter that our sales velocity started to pick up in March as compared to last year some.

And with respect to any risk with inventory building, we’re very pleased with where our inventory levels are currently and I think with the types of businesses that we’re in with Creative Recreation of course is a fashion business which we don’t speculate on inventory that we only buy what we sell. Durango, there’s a little fashion, the rest of the business is very basic and whenever we had inventory build in the past we just shut down the faucet a little bit bring inventories back in line as an extremely long shelf life.

Yes and as you will see our inventories went down from December 31st till March 31st our inventories were down a couple of million dollars so we’re starting on that trend downward at this point.

That’s what I would have expected. And then one more question backward looking and then a few on the outlook. Just on the Creative Recreation time in factor with the spring sell in, I may have missed it but I don’t think you quantified the sales impact in the quarter from that timing shift. I don't know if you have any more color there?

It was a $1 million.

Yes, one million share sales.

Got it, okay and then maybe just looking to the outlook. I think on the last call you talk kind of broadly about a point of reference of growing full year revenue at a pretty healthy cliff for the year or being able to maybe in that 5% to 7% growth range. I wanted to kind of pair that up with your results so far in the first quarter whether you think now that those kinds of growth rates are possible for the year or how you would kind of frame up the context of growth within the full year?

I think we're still very pleased with that sort of a projection where we sit today. We're pleased with the way to full order book is coming in. A lot of [indiscernible] so this extremely cold winter and the retailers enjoying very good sales through. But we'll know more as we move through Q2 and we continue to harvest orders third and fourth, we'll know more third and fourth as we approach the end of second. But I think where we are right now 5% to 7% is a good number.

Got it and then do you have any more color right now that you mentioned the first quarter of 90% of the business in the wholesale side is that ones orders. What is that look like to the balance of the three quarters or really just trying to get more context on that backlog number and how meaningful that is and how much insight that gives?

Yes, towards the end of second and beginning of third we shift a lot of our advance bookings. Overall the business is a 70%-30%, 70% at once 30% futures.

The backlog number usually is the highest at the end of second quarter, to helps through the first quarter and then the lowest obviously at the end of the year and then next lowest is at the end of third quarter.

Great and then maybe a couple more modeling questions on the outlook, when you think about gross margin for the year, obviously lot of moving parts there and you just saw some modest expansion or base in expansion the first quarter. What are the major moving parts as you see them in the next few quarters or for the full year on the gross margin side?

I think the gross margin is we've an increase in the first quarter and significant portion of that came from that ceding program we had a year ago where we got lot of increase sales, but took lower margins on that, that will be have us slight effect in the second quarter and then as we move for the back half of the year our margin that program is over. So I think that are margins on a segment basis and again [indiscernible] about this each of our segments have different gross margin within. I think on a segment basis we'll be relatively flattish in the back half of the year we made some improvement in second quarter but more flattish as we move through the rest of the year on segment by segment basis.

Great and then on the SG&A spend obviously down year-over-year for this quarter. But if I look for last several quarters it's been anywhere from 19.5 to 20.5 million in terms of the run rate. Is that a useful range looking ahead or do you outside of that range?

I think that's a useful range. But as you model it our SG&A the base that you had from the previous year is pretty consistent. But then our variable SG&A is about anywhere from 12% to 15% of sales growth. So as we move sales up, we've up our variable expenses of commissions and distribution expenses and things like that. So that's usually increase in SG&A on a year-over-year basis based on the variable portion of the sales increase.

Yes, whereas we did move there was a time in some advertising expense about $200,000 of advertising expenditure from first and the second this year. Overall we do plan on spending 10% more on advertising this year than we did last year.

Got it. And then the last one from me. When you add up all the pieces you are little hard to tell on the first quarters and get through profit so much on a slight down revenue quarter. But when you look at the full year if you were to get to that 5% to 7% revenue range. Is there any reason why the earnings throughout for the year, I think maybe previously you've talked that a high level of getting close to that high 18's or close to 20% range on that type of revenue increase longer term. Is there any reason that you disconnect for the full year that you see?

No, I think we're confident that if we can get as we've modeled this that we can get the 5% to 7% it should drop down to a 20% increase in the earning.

Thank you. [Operator Instructions] ladies and gentlemen, we have no further questions over the phone lines at this time. I would now like to turn the conference back over Mr. David Sharp for closing remarks.

Thank you operator and thank you everyone for joining us on the call today. We'll continue to work hard to deliver [indiscernible] a quarter. We'll speak again in 90 days. Thank you.

Thank you. Ladies and gentlemen this concludes our teleconference for today. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.