Rocky Brands, Inc. (RCKY) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands' First Quarter Fiscal 2018 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. And we will now turn the conference over to Brendon Frey of ICR.

Thank you and thank you, 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, 2017. I'll now turn the conference over to Mr. Jason Brooks, President and Chief Executive Officer of Rocky Brands.

Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. As I approach my one year anniversary as CEO, I would like to take a moment to express my gratitude toward our Board of Directors, our partners and especially our employees for helping put Rocky Brands on the path towards long-term success. Over the past 12 months I've experienced exceptional support from all our stakeholders and witnessed firsthand our teams working long hard hours to strengthen our consumer connections and deliver improved financial results. Our entire organization is committed to building on our recent accomplishments by continuing to execute the growth and profit improvement strategies currently in place. At the same time, we're implementing new growth initiatives to fuel our top line while continuing to strive for operational excellence across each of our three major segments wholesale, retail and military in order to further enhance profitability. Now to our Q1 results, while represents a very good start to the year. Our performance was highlighted by solid wholesale and retail growth. Our two highest margin segments which along with expense leverage led to a 79% increase in operating income year-over-year and earnings that exceeded our expectations. I'll review the drivers of each segment top line then I'll turn it over to Tom who'll go through the numbers in more detail. Starting with wholesale, our height and focus on our core brands in work, western and outdoor categories along with our commercial military business continues to lead to positive gains across the board. There are several drivers of our recent success. First is the product, we've invested additional time and resources in bringing great product to the market that further advance the companies long history of providing consumers with unbelievable quality, comfort and great value. Examples of recent product introductions that have sold in well include Rocky XO-Toe, Durango MUSTANG, Georgia Carbo Tec LT to name a few Second is retail support. We're working very closely with our bricks and mortar and e-tailer accounts to ensure that there are assortments resonate with consumers and that they're in stock on key styles. Finally marketing, we've redirected funds to programs primarily digital that drive consumer engagement and generate greater awareness about brands in the marketplace. By brand our Durango business was particularly strong. Increased velocity of the brands collections led by the Rebel series for both men and women along with additional shelf and stream space led to meaningful growth with our largest account such as Boot Barn, Cavender's, Academy and [indiscernible]. Georgia Boot sales were up in first quarter with solid demand for new spring styles partially offset by the shift in some deliveries out of January into December. We had a few key retailers for forward shipments of core product to replenish their inventory position ahead of the New Year following strong selling the fourth quarter. For the Rocky Brand the first quarter marked the beginning stages of our strategy to create a more holistic approach to managing the brands work, western and outdoor footwear and apparel offerings. By establishing one Rocky brand advocate per account we can provide retailers with better service and allow our teams an easier time cross selling our categories especially in the independent channel. While this process is just getting underway, early results are encouraging with solid gains for the brand across many of our brick and mortar partners. The reshaping of our sales force configuration continues to proceed smoothly and we expect it will be fully implemented by the end of the year. Staying with the Rocky brand our commercial military division had an outstanding quarter. Things came together nicely for the businesses, the US government cost a two-year defense spending bill in February while at the same time our programmed aimed at expanding our domestic retail sales to the Army and Air force exchanged service channel and accelerating our international operations are gaining traction. With our recent investment in additional S2V boot inventory, we were positioned to capitalize on the global opportunities we believe exist for this business. Shifting to our retail segments beginning with our Lehigh business which continues to generate strong growth through expansion of its CustomFit model, sales were up high single digits driven by key account growth and increased sales to existing accounts. We are very pleased with the business current momentum and we're investing in more sales people to go after more accounts and additional territories as we believe our differentiated service offering provides companies a better option for managing their safety shoe programs. We need to get in front of more buyers to highlight the advantages of Lehigh and adding staff will allow us to increase in number of calls and visits we can make on a daily basis. I do want to point out that on March 31, Lehigh concluded a multi-year agreement with the New York Transit Authority while this will be a headwind to sales until the anniversary of the termination a year from now, it does allow us to take our remaining five mobile shoe centers off the road, which will lower operating expenses and benefit operating margins going forward. Turning to our direct to consumer business, our branded ecommerce websites collectively posted a double-digit sales gain in Q1. As this channel capitalizes on recent investments aimed at increasing traffic and conversion while enhancing the consumer experience. This is included shifting dollars from our traditional advertising format to more digital programs. Broadening the product offering and introducing web only styles in order to entice consumers to shop directly with our brands. We've also provided guests with additional payment options such as PayPal and we're exploring other ways to further improve both the checkout and return process as we look to build more loyal, repeat customers. To that end, we recently upgraded our warehouse management system and can now pick and ship all ecommerce orders placed by 2 PM Eastern that same day. In addition, we're investing in software that will allow customers to see exactly when their orders will arrive which should further bolster online conversion rates. Finally, as we expected military segment sales were down in the first quarter as couple contracts expired in late 2017. However gross profit dollars were up as margins increased significant driven by improved efficiencies in our Puerto Rican factory like we discussed on a yearend call. This segment faces some headwinds in 2018 in addition to expiring contracts. We plan to utilize the excess capacity to expand our commercial military business in the US and overseas while continually aggressively bidding on all available contracts that make financial sense for the company. I'll now turn the call over to Tom.

Thanks Jason. Net sales for the first quarter was $61.4 million compared to $63.1 million in the corresponding period a year ago which included approximately $1.9 million of sales from the creative recreation brand which we sold in the fourth quarter of 2017. Excluding creative recreation sales were essentially flat year-over-year. By segment wholesale sales for the first quarter increased 3.2% to $40.4 million compared to $39.2 million last year. Retail sales for the first quarter increased 10% to $13.1 million compared to the $11.9 million a year ago. Military sales decreased to $7.9 million versus $12 million for the same period in 2017. Excluding creative recreation wholesale sales were up 7.8% and retail was up 12.2%. Gross profit in the first quarter increased to $21 million or 34.2% of sales compared to $19.7 million or 31.3% of sales in the same period last year. The 290 basis point increase was driven primarily by the higher wholesale and military margins along with a lower percentage of military sales which carry lower gross margins and wholesale and retail segments. Gross margins by segments were as follows; wholesale, 34.7%, retail 42.2% and military 17.9%. Selling, general and administrative expenses decreased to $16.7 million or 27.2% of sales for the first quarter of 2018 compared to $17.4 million or 27.6% in the period a year ago. The decrease in SG&A expenses was primarily related to the reduction and expenses for the creative recreation brand which as I mentioned earlier was sold during the fourth quarter of 2017. Income from operations was $4.2 million were 6.9% of sales and an increase of 78.7% compared to income from operations of $2.4 million in the prior year period. For the first quarter interest expense decreased to $47,000 compared to $90,000 last year as a result of the significant reduction in our debt year-over-year. Net income increased 120% to $3.3 million or $0.44 per diluted share compared to net income of $1.5 million or $0.20 per diluted share. Turning to the balance sheet, as of March 31, 2018 we had no funded debt compared to $5.2 million at March 31, 2017. Inventory at the end of Q1, 2018 was $65.2 million down 5.3% compared with $68.8 million on the same date year ago. I'll now turn it back to Jason for his closing comments.

Thanks Tom. While we're very pleased with our recent performance and the company's current financial position our sights are firmly on the future and focused on continuing to deliver enhanced profitability and greater value for our shareholders. Looking ahead, we believe we can continue to post improve bottom line results on a quarterly basis. Although no necessarily to the magnitude we experienced in the first quarter. This is because elements of the business such as international, commercial military shipments can be lumpy and therefore can have a greater impact in certain quarters. Over the remainder of the year we expect our gross margin rate to be in the low 30% range and operating expenses on a dollar basis to be approximately in line with Q1 levels. In closing, I want to again thank our employees for their great work in getting Rocky where it is today. While the company recently celebrated its 85th year in operation I feel like we're just getting started and that the future has never been brighter. Operator, we're now ready for questions.

[Operator Instructions] our first question is from Jonathan Komp with Robert W. Baird and Company. Please proceed.

Jason I want to first follow-up on the comments you just had about timing shifts and I just wanted to clarify were there any timing shifts in the Q1 that benefited or are you more talking about potential lumpiness in the quarters ahead?

So I would say that there is more lumpiness going forward in the quarters coming ahead, we may not see the same international military comes in added to the really different rate than wholesale, sometimes it's here and then sometimes it's gone and so it's just not going to be a smooth over Q2, Q3 and Q4.

Okay and then maybe a few questions about the wholesale business. First question, in the last quarter you quantified by segment the growth rates and I'm wondering, was I missed if you could do it again across the western and work and the major segments for wholesale.

Thanks Jon. For our work category we're pretty much flat to last year from a work's standpoint. From an outdoor segment we're actually up approximately 20% and then western where Jason had mentioned we're really strong in the Durango brand, we're up 34%. Our duty was around, it was actually flat with last year and in commercial military as Jason alluded to was up significantly up 32% for the quarter.

Okay and the work side, the flat I think it was up 10% or so in the fourth quarter. And I think you talked about some shifts put forward into December from January, was there anything else going on, to the work business?

No I really think that was one of the big shifts that happened for us in Q1 particularly in the Georgia brand. There was just quite a few customers that wanted their product earlier and who are we to tell them, no.

Yes certainly and then similar question on the western side. I think you quantified the growth. In Q4 you just said that [indiscernible] but 34% seems quite strong, so do you have any more color on what's driving that sustainability.

So we're very excited about the western market. We're seeing something's changed in the marketplace from more traditional western, right? So the fashion western business is still not good. But we're seeing some nice increases and then we're also seeing it on our work western kind of stuff. So we're seeing some key retailers engage us or us engage them in a very positive way and so we're excited about what's happening there. It's a pretty strong quarter, so I don't know that we would see that kind of strength going forward, but we still think there's a lot of upside there.

Okay and I guess a bigger picture question on the sales. If I look at the last three quarters, kind of everything ex-military it have been pretty negative for a while leading up to most of the 2017, but then selective in the fourth quarter was up mid-single digits and that in the first quarter it looks up pretty solid high single digits, if you excluded creative recreation. So it's clearly an improving trend there. I'm curious, how you think about those businesses combined and the growth potential as you look forward.

So I just want to make sure I understand the question Jon, so you're just asking from our wholesale business we saw a little change in Q4. We're seeing a little better change in Q1, do you think that we'll continue to see that, is that the basic question?

Yes, [indiscernible] retail. I mean I was thinking that was two combined so everything excluding the contract military business is inflected.

Yes, I mean I think we're continually want to be cautiously optimistic. We believe that our product is right. We believe that our relationships with our retailers and then from a retail standpoint is strong and so we still think that we can continually increase but we're still in a very functional business, it's not a fashion business. So I don't think you're ever going to see this thing take off and double-digit kind of increases. So I think this mid-single-digit increase we think we can maintain Q1 was pretty strong though. Q1 was pretty strong.

Jon, I wanted to correct you on something real quick too. I got my lines crossed up here when I gave you that western number. We were not up 34%, we were actually up little over 8% so sorry if I misspoke there.

Okay, yes 34% [indiscernible].

As soon as I heard, [indiscernible] yes.

Yes, nothing to sneeze out though. And then just a couple of cost and margin related questions. SG&A I just wanted to clarify, so it was $16.7 million in terms of dollars in Q1 and you said that would be a good run rate for the full year on average for the backed quarter so on average, so those should be about $16.7 million, is that right?

I would say, it might come in a little higher than that. But yes, that's a good run rate.

Okay great and then on the gross margins. I know you're closer to the mid-30s in Q1 and there's obviously a lot of shifts with this segments that can happen but any reason why you wouldn't be able to sustain. I think you just called out low 30% range going forward, but what's the thought there?

So I was just going to say for the first quarter we obviously we did came in really strong for Q1 and I think those higher margins are generated by some of our international commercial military sales. Given the lumpiness as Jason alluded to, we're not expecting to see quite that rate in the quarters moving forward.

Okay and maybe last one for me then just uses of cash I know, it's starting to build up on the balance sheet a bit and you did authorize more of a repurchase program after the prior one expired, but do you think you'll get a chance to repurchase stock or kind of what's - thinking about best uses of the cash balance?

Well I would hope we can't buy any stock back because it better get low [ph]. I think that's always an option Jon. I think we do have a nice dividend out there and then I think we want to always continually invest in the business. We want to find ways whether it's the Lehigh business or our core brands and then if we were able to come across an acquisition that makes a lot of sense for us then we would be in a position to hopefully be able to pull something off there. So I've always said it's never bad to have cash in the bank.

I guess to state my question a little bit friendly. Is there some sort of valuation sensitivity to your repurchase? Your willingness to repurchase stock or how should we think about that potential.

I think from our standpoint I mean we're - something we're constantly monitoring. I mean if we look back historically we've kind of bought stock back in the mid-teen earnings. We're constantly evaluating those, I wouldn't say there's specific number that we're targeting.

Got it. Makes sense. Okay that's it from me. Thanks guys.

[Operator Instructions] there are no more questions at this time. I would like to turn the conference back over to management for closing remarks.

Thank you again for the time. We're excited about where we're headed and look forward to 2018 and beyond. Thank you very much.