Rocky Brands, Inc. (RCKY) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter Fiscal 2017 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] I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Mr. Brendon Frey of ICR.

Thank you and thanks, everyone, for joining us. 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, and our reports filed with the Securities and Exchange Commission, including our 10-K for the year-ended December 31, 2016. I’ll now turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.

Thank you, Brendon. On today’s call with me for the first time is Tom Robertson, our recently appointed Chief Financial Officer. Tom has been a great addition to our senior management team since assuming his new role in March of this year. You will hear from Tom shortly when he reviews the financials, but I want to first discuss our recent operating performance. I’m pleased with our start for 2017. First quarter sales increased approximately 10%, driven by more than a doubling of Military segment sales to a quarterly record of $12 million. At the same time, wholesale sales were down just slightly, as trends in this channel continue to show signs of stabilizing. Importantly, gross margin for both segments improved meaningfully compared with the levels we experienced in the second-half of 2016. During the first quarter, we also realized significant savings from cost reduction actions we implemented late last year, which combined with our top line performance allowed us to deliver earnings of $0.20 a share. Before I go into the greater details on our first quarter results, I want to applaud the efforts our managers and associates here in Nelsonville and our facilities in Puerto Rico and Dominican Republic. Our ability to quickly respond to the headwinds we faced during the first nine months of 2016 and positioned the company for improved earnings starting in 2017 is a testament to their hard work and dedication. While there are still more work to do to drive profit growth consistently over the long-term, I’m confident we are headed in the right direction. I’d also like to thank the Board for their insight and dedication and decisions during this – during what has been a pivotal turning point in the company’s history. Getting back to the first quarter, starting with wholesale, our largest segment. While the retail environment remains challenging, many of our counts started the year with improved inventory positions, which have created better at once opportunities for certain of our product lines. This was especially true for Georgia Boot, as the brands spring product line has been well received by consumers. Followed the initial sell-through at retail fueled a low double-digit increase in Georgia Boot sales combined with a 100 basis point increase in product margin during the first quarter. Sales of work footwear in total were relatively flat year-over-year, as we are still comparing against contributions from our low-margin private label program, which was discontinued in the fall of 2016. Turning to Western, Durango posted a mid single-digit sales increase for the first quarter. However, this was offset by decline in Rocky Western footwear, which we believe was due primarily to the disruption caused by the 2016 restructuring of that sales force. We’re confident the internal changes we’ve made will have a positive impact on sales for both the Durango and Rocky Brands going forward, as well as the category gross margin, which was up 270 basis points from a year ago. Now to hunting, where the Rocky Brands continues to occupy a leadership position, thanks to a strong heritage history of authenticity and innovation. This said, the overall category has been very challenging due to a second consecutive warm winter and ongoing retail consolidations. This is causing a vast majority of our accounts to be very cautious with their orders, buying very close to the need and in smaller quantities. While we have experienced an increase in booking for the fall season, we want to see a gain improvement in retail sales sell-through before we get more positive on our growth prospects for the hunting in 2017. Meanwhile, our wholesale segment is also benefiting from a strong demand for military footwear and our teams are doing a good job capitalizing on the opportunity through commercial military business. Direct sales to enlisted soldiers increased high single digits in the first quarter, driven by growing demand for our popular S2V and new lightweight C7 boots. Looking at our Retail segment, sales were up low single digits, led by our e-commerce business. Our effort to grow this channel by further expanding the merchandise assortment available online and driving higher traffic to our website through additional marketing investment is – are gaining traction. Finally, our Military segment posted a record sales order as we continued filling orders under the prior contract and started delivering the initial shipments of hot weather and tempered weather boots as part of the new contract announced in January. With our extended domestic manufacturing facility now fully optimized, we’ve been able to quickly return the segment gross margin back to their historical low teen levels. And I’m confident, we can exceed this previous high watermark in the future. For 2017, we have approximately $40 million in contract military orders scheduled for delivery, and we continue to pursue additional opportunities for this year and beyond. Before I turn the call over to Tom, I want to welcome Bill Jordan and Bob Moore to the Rocky Board of Directors. I’m very confident that the company will greatly benefit from their valuable insights and experience both gentlemen have amassed during these years working in the footwear and apparel industries. We’re very glad, they’re on Board. Tom?

Thanks, Mike. Net sales for the first quarter increased 9.6% to $63.1 million compared to $57.5 million in the corresponding period a year ago. By segment, wholesale sales for the first quarter decreased 2.5% to $39.2 million compared to $40.1 million last year. Retail sales for the first quarter increased 2.9% to a $11.9 million compared to a $11.5 million a year ago, and military sales increased 107% to $12 million versus $5.8 million for the same period in 2016. Gross profit in the first quarter increased to $19.7 million, or 31.3% of sales, compared to $18.8 million, or 32.9% of sales in the same period last year. The 160 basis point decrease was driven primarily by the higher penetration of military sales, which carry lower gross margins than our Wholesale and Retail segments. Gross margins by segment were as follows; wholesale 33.3%, retail 44.8%, and military 11.5%. With respect to our Military segment, I would note that the gross margins improved as the quarter progressed and we gained increased efficiencies on higher volumes. For the year, we expect Military segment gross margins to be above Q1 levels into the mid-teens range. Selling, general and administrative expenses were $17.4 million, or 27.6% of sales for the first quarter of 2017, compared to $19.1 million, or 33.3% in the period a year ago. The $1.7 million decrease in SG&A expenses was primarily related to lower compensation expenses, following the workforce reductions we made during the third quarter of 2016. Income from operations was $2.4 million, or 3.8% of sales, compared to a loss from operations of $221,000 in the prior-year period. For the first quarter, interest expense decreased to $90,000 compared to $135,000 last year, as a result of the significant reduction in debt year-over-year. Net income for the quarter was $1.5 million, or $0.20 per diluted share, compared to a net loss of $200,000, or $0.03 per diluted share. Turning to the balance sheet. Our funded debt at March 31, 2017 was $5.2 million, a decrease of $16.4 million, or 76% from $21.6 million at March 31, 2016. Inventory at March 31, 2017 was fifty $68.8 million compared with $84.5 million on the same date a year ago. The 18.5% decrease in inventory on a 10% sales increase was the result of several factors, including higher penetration of military sales for which we do not hold finished goods, a reduction in raw materials, and a general focus on keeping inventory levels low, given the challenging retail environment. With that, that concludes our prepared remarks. Operator, we are now readyyou’re your questions.

Thank you. At this time, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mitch Kummetz of B. Riley & Company. Please proceed with your question. Mitch, your line is open. Please proceed with your question.

Can you hear me?

Yes, go ahead, Mitch. Thank you.

Sorry about that. Sorry, I was muted. So I got a few questions. Let me start with wholesale. So wholesale was down a bit in the quarter, but it sounds like there were some company specific issues, Mike, you talked about exiting some private label in Work, you talked Durango – I’m sorry, Rocky Western, the sales force restructuring. Is there any way to kind of, I don’t want to say reconcile, but is there any way to kind of think about what the wholesale run rate looks like if you try to – if you X out some of these company specific items, and do you still think wholesale could be for the year. I think that was your comment coming off of Q4?

I think it will be up slightly. I’m not comfortable saying, it’s going to be up double digits. Some divisions will be up, but it’s still so hard to be certain, Mitch, and I’m just trying to be conservative. And we will say – we will see, if we had just one brand and one division in the company, it would be easier to answer that question.

Sure.

But with multiple brands, it’s difficult.

And you mentioned that your hunting fall orders are up, I know a lot of your business isn’t really backlog-driven, it’s more sort of at once?

Yes, sir.

Is some of the opportunity for wholesale to maybe be up slightly just the easy comparison around reorders over the balance of the year, I mean, I know those were fairly challenged a year ago. And you did mention the channel inventories looked better with your customers, so…?

Yes, I think that’s correct, so that’s where we’re at. Now, years ago, we used to get the huge percentages of our hunting product booked upfront. But that’s changed also. But hunting is up for fall of 2017. But there’s still a question mark on the Cabela deal with with Bass Pro that looks that’s going through now. So there’s still some big players out there, Gander Mountain filed for bankruptcy, as we all know, and the weather has a lot to play with it – to do with it.

Yes. What is your posture with some of these more challenged retailers like a Gander, for example. I mean, are you still kind of taking orders sort of business as usual, or is there any way you guys kind of trying to protect yourself in case it goes from a restructuring to more of a liquidation or…?

We are not taking orders and we haven’t for sometime probably for three, four, five months, we started late last year. We’re still – we have some past due payables, AOS, but it’s not a huge amount. We hear they want to restructure and come back out again. So we’re just – we’re not soliciting business there. We’re just seeing what unfolds.

Got it. And then on military, you mentioned and this is consistent, I think, with what you said last quarter that you’re still looking for $40 million in revenues there that’s kind of what you have on order. Can you just remind me of kind of what the cadence of that should look like over the balance of the year? It sounds you wrapped up one contract this quarter and started another one. So how should we think about the cadence of getting to $40 million? Is it pretty even over the balance of the year?

Well, as you know, we have that big quarter now, it looks like, I’m just pulling it up here. It looks like about pretty close to $10 million or $40 million, I think it’s pretty even.

Okay.

Okay? I mean, we might hit the 11/1 quarter, but it’s yes, I mean, it’s pretty close to averaging $10 million a quarter.

Is there anything is significance coming up in terms of contracts that could really get that business well above $40 million, or do you even really want to push it just kind of, given maybe some capacity?

That’s a really good question. We wanted to be profitable and control the level, but we also do a great deal of commercial military in that same facility, which is at full margin. So we don’t want to go overboard with military, because it’s controlled margin, as we all know, you are bidding against other manufacturers.

Okay.

So it’s the net averaging.

Got it. Two last questions. One, I know last year reorders were pretty weak in the first quarter, some of that was weather related. But some of that also you guys at the time talked about some challenges in oil and gas economies. I’m wondering if you’ve seen any improvements there as kind of rigs have come back online and maybe even the employment picture is steadily getting better?

I think it’s getting better, but I don’t see a skyrocket in rigs coming back. There’s some slight improvement. But as I mentioned in my comments, our Georgia Boot line is doing extremely well for this year. We’re very pleased with that and that’s a lot of new product and historical product. The Rocky product is not doing as well, as I mentioned, and that’s primarily in my opinion, because we didn’t freshen the product up much of it is seven, five, six, seven years old. We brought our new – we brought our old designer back, as I mentioned last time, Mark Ritchie, he’s wonderful. He’s working diligently on freshening that line up and what I see is good.

Got it. And then lastly, a question for Tom on the SG&A side. It sounds like most of the year-over-year dollar decline was really related to workforce reductions. I know those kind of started up in the back-half of last year. How much opportunity is still left before you anniversary that? And then what is the SG&A line kind of look like going forward once that’s been lapsed?

Yes, I mean, from the SG&A perspective, from a wages and benefits standpoint, I think we’ve kind of – we’ve made a lot of the reductions in Q3 of last year. And so I think, we’ll anniversary that pretty much right at Q3 of 2017. We’ve had a little bit more reduction and since September of last year, so maybe a little bit more than what we saw in Q4. But from that – from SG&A standpoint too, we – we’ve also made some reductions in some advertising and travel expenses too. So it’s not all just the compensation.

Got it. Okay. All right, guys. Thanks and good luck.

Thanks, Mitch.

Our next question comes from the line of Jonathan Komp of Robert W. Baird. Please proceed with your question.

Yes. Hi, thank you. A couple of questions on the wholesale side. First one, just more short-term. Yes, I know that – I know the wholesale business has been negative year-over-year for sometime now. And I’m just wondering, do you think the first quarter of 2017 is the last negative quarter we’ll see. Do you think, I’m just trying to gauge maybe the pace of improvement you’re expecting for that business?

I think there’s opportunity there. I don’t think retail is tough, but we’re seeing increases online. So I’m not in a depressed mode at all. I’m in a happy mode. Product is right, price is right. Taking a lot of cost out of the business. We just got to go out and get our share of the business and maybe some more. So sales team is working hard and marketing team is working hard. I think, we – I think we’ll see a slight increase.

Got it. And then when I look at the work business, if I look at 2016 versus peak, I think in 2014, the revenue down in order of about $20 million on an annualized basis, for the work piece, specifically. And I’m just wondering, how you’re thinking about the ability to recapture that amount? How much of that’s dependent on the external environment versus some of the internal drivers that you might have?

Well, again, I’m going to repeat, but – for me, it’s new product, fresh product development separating yourself from your competitors. And we’ve got some really attractive new product out in our Georgia division, it’s performing extremely well. And so I – there’s talk about pretty more Americans back to work. So that hasn’t materialized in any big numbers at this time. But we’re focused – we brought a consultant to help us understand how to grow our business online. She’s added a lot of value, and so we see increased sales there. So as a whole, I think, we’re going to be successful and grow the business.

Got it, okay. Last one on the work side. Last month, one of your larger peers that’s publicly traded had an Investor Day where they outlined plans to your rededicate behind some of the work categories. And I’m just wondering kind of your overall take on the competitive landscape and how your brands fit within that?

Well, it’s always been competitive. I mean, I’ve never known when it wasn’t competitive. Everybody wants a piece of the pie, but the Work segment’s a major portion of our business. And so, yes, it’s – but it has to do with the ability to develop unique lightweight, comfortable, durable, priced-right product, and get it out through your retail customers and online. And I think we have one of the best designers in the business today.

Great, that’s helpful. Last one for me then it’s just – the question on the wholesale gross margin for the year. I know the – I guess, maybe if you can clarify how much your wholesale inventories are down currently? And maybe it sounds like some parts of the channel are a lot cleaner. So I’m wondering how much margin rebound you might expect for the wholesale business this year?

Yes, from a margin standpoint, Jon, I think we see – I think we feel pretty comfortable with where the margins came in in Q1, we feel pretty confident about those margins moving throughout the rest of the year, from an inventory perspective big decrease in inventory, I would say, 10% or 11% of that was our finished goods inventory, predominantly all of that is wholesale. So I feel really good about our inventory levels. And from a margin standpoint, the one thing we have to think about wholesale obviously, as Mike mentioned is, we – we’re not doing the private label anymore, which is a lower-margin product. So hopefully, we’ll benefit – we will benefit from that for the rest of the year.

Okay. Thanks for taking my questions.

Okay. Thanks, Jon.

[Operator Instructions] There are no further questions over the audio portion on the conference. I would now like to turn the conference back over to management for closing remarks.

Well, Tom and I thank you very much. We’re excited about the balance of the year and to deliver for our shareholders. Thank you.

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.