Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter 2023 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 is being recorded. And now I will turn the conference over to Brendon Frey of ICR.

Thank you and thanks to everyone 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 and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2022. And I’ll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Brendon. With me on today’s call is Chief Operating Officer, Tom Robertson; and Chief Financial Officer, Sarah O'Connor. After Sara’s and my prepared remarks, we will be happy to take some questions. Now to our second quarter results, the challenging marketing conditions we experienced during the first quarter continued to pressure our topline, particularly within our wholesale segment. The difficult macroeconomic backdrop, coupled with the overall elevated inventory levels from many of our retail partners led to lower-than-expected sell-in during the quarter despite the fact that our sell-through for our brands remain solid. Notwithstanding the slow start at-once orders improved month-over-month as the quarter progressed and this trend continued in July, providing a good start to Q3 and leaving us cautiously optimistic that channel inventories are getting properly aligned with demand. While the retail inventory situation weighed on our reported results, consumer demand for brand portfolio has provided resilience contributing to the progress many of our key partners have made working down their total on-hand inventory. Importantly, the combination of strong full price selling and the price actions we took in the second half of 2022 helped drive a 440-basis-point increase in gross margin year-over-year. While the first half of 2023 was more challenging than we expected, we believe the business is positioned for sequential improvements in both the third quarter and fourth quarter based on sustained consumer demand, we continue to experience for our products combined with the recent conversations with key wholesale partners. Before I hand it over to Sarah to cover the numbers in more details, I want to spend a few minutes reviewing some of the drivers of our recent topline performance. Starting with our Work category, portfolio of brands. The four brands that represent our Work segment, Georgia, Rocky, Muck and XTRATUF were…

Thanks, Jason. As Jason discussed, the underlying strength of our brands at the consumer level were overshadowed by inventory-related selling pressure within our wholesale channel this quarter. Reported net sales for the second quarter decreased 38.4% year-over-year to $99.8 million. The year ago period included approximately $4.3 million in service brand sales, which we divested in the first quarter of this year. All $4.3 million of those sales occurred in our wholesale segment. On an adjusted basis, which includes returns related to a supplier dispute, net sales were $101.4 million for the quarter. By segment, wholesale sales decreased to $71.5 million, Retail sales decreased to $25.1 million and contract manufacturing sales were $3.3 million. For the second quarter, gross margin was $37.6 million or 37.6% of sales, compared to $58.3 million or 33.2% of sales the same period last year. The 440-basis-point increase in gross margin as a percent of net sales was mainly attributable to increased wholesale segment gross margin as we realize the benefit of pricing actions taken in the second half of 2022, as well as lower inbound logistics costs compared with the same period last year. A higher mix of Retail segment sales, which carry higher gross margins than the wholesale and contract manufacturing segment also contributed to the expansion in overall gross margins. Gross margins by segment for the quarter were as follows; wholesale gross margin was up 430 basis points to 35.2%, Retail gross margin was down 20 basis points to 48.7% and contract manufacturing margin was down to 5.4% from 10.5% prior year. Operating expenses were $35.4 million or 35.4% of net sales in the second quarter of 2023, compared to $48.2 million or 28.7% of net sales last year. Excluding $1.7 million of acquisition-related amortization and restructuring costs in the second quarter…

[Operator Instructions] Thank you. Our first question comes from Janine Stichter with BTIG. Please proceed with your question.

Hey. You got Ethan Saghi on for Janine. Can you hear me okay?

Yeah.

Hi, Ethan.

Hi. So first question, I’d just be interested to know more about your conversations with key wholesale partners and what exactly is driving the expectation for improvement in the back half of the year? Thanks.

Yeah. No. Great question. So I think we have -- the conversations that we’ve been able to have with many of our key retailers and field accounts is that, the inventory levels are getting back into a better place where you can even go into some of these retailers and see that there’s holes in different sizes and maybe different styles and so they’re feeling a little more confident in that area. And in some cases, it may not even be our inventory that they were high on and we’re seeing some of those inventories get right-sized. I do want to preface that, every conversation that we’ve had, everybody is still being very cautious though. So we believe that we’re going to continue to see that get better, but not probably back to the same kind of business it was in the past. So people are more optimistic, but still being very cautious about the economy and what’s happening in the marketplace.

I think just to add on there, we have visibility into a handful of 10 to 12 of our larger key accounts and so what we’re able to see in sell-through at Retail, it’s meeting our expectations. The retailers seem happy with the sell-through of our product and so we know this is a matter of time until the retailers move through that inventory. We get to see some of the inventory levels of those retailers and we’re seeing them go in the right direction. And just to add on as well, some of the conversations we’ve had with these retail partners is to just elaborate on Jason’s point is that, they’re going to be buying more at-once in Q3 and Q4, given their cautious approach to the last half of this year and so the inventories will normalize I believe in the second half of this year.

Got it. That’s really helpful. And then my last question, I think earlier in your prepared remarks, you talked about the progress you’ve made with some of your manufacturing partners. But I missed exactly what you said. Could you just give a quick update on that?

Yeah. So what we were referencing is we’ve been able to work with our manufacturing partners and even some of our suppliers that we have our own manufacturing facilities in the Dominican and Puerto Rico and Mainland China. And we’ve been able to work with them on negotiating better raw material prices or better finished good prices. And so as we took price increases back in 2022, we’re now going back and saying, hey, we -- our sales have slowed on this one style. We really need to get back to this kind of price point on it. Can you guys help us out from a manufacturing standpoint and they’ve been able to find some savings there for us and we’ve been able to pass that through to try to get the Retail price point at the sweet spot so where it’s turning at a faster rate.

Got it. Super helpful. Appreciate you guys taking my questions. Thanks.

Yeah. Absolutely. Thank you.

Thank you. Our next question comes from Jeff Lick with B. Riley Financials. Please proceed with your question.

Good afternoon, everyone. Thanks for taking the question. Jason, I was curious, obviously, the quarter was a little more challenging than you thought, say, going into it. I just love to get your perspective on the -- what were the things that proved to be most challenging, and as you sit here today, what are the things that you’re a little maybe even more optimistic on than you were a month or two ago?

Yeah. Hey, Jeff. Good to talk to you. Happy to take your questions. I would say the thing that really surprised -- that surprised me in Q2, more than -- I didn’t think it was going to be this. I thought the retailers would get through the inventory much quicker than we are. And so I think that’s been one that is really surprise to me. We knew they were over inventoried. I think we have taken this approach of not being terribly promotional, because our products are more of a need-based than a want base, right? They’re more of a tool. And I think the retailers -- well, I don’t think, I know they’ve even said it on some of their earnings calls that they’re not being promotional. So I do think that although our product is selling at Retail, nobody is discounting it. So nobody is buying to pair, right? They’re going in and buying the one payer they need and then they’ll come back in six months, eight months a year and by another pair. So I just think it took a lot longer than it was than I anticipated or thought it was going to take.

And in terms of as you sit here today…

And what was the second question?

As you sit here today, are -- is there anything that kind of stands out as you’re more optimistic about and see your work?

What I think -- yeah. I think what I’m -- I mean, I am really being cautious about the rest of the year. But the thing I’m really confident in is our brands are still meaningful in the categories we are in. People are still buying them. The retailers are selling our product. It’s checking at Retail. So I am still confident that our brands are meaningful to the consumers in the marketplace. We just have to navigate this crazy unpredictable time right now. And I’m listening to these retailers and they’re talking about being cautious, right? I think Tom just mentioned that, they’re not pre-booking anything for -- not anything, but they’re pre-booking less, and they’re just like, look, we’re going to buy from you when we need it at-once and you guys better out of the inventory, and I guess, the good news is we have the inventory right now. So we’re going to be ready to ship them when they’re ready to place the orders.

Yeah. I think, Jeff, just to add on for optimism besides the fact that what we see at Retail is promising. I think we see a very clear path to driving that inventory down. And as we look to the last half of this year, we’re being very cautious with our inventory buys as well and so I see a clear path in the inventory down, which ultimately leads to pay down of debt. So that’s another bright spot, I think, for the second half of this year.

Great. Thank you very much. I take the rest offline.

Thanks, Jeff.

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

Great. Thank you very much. Thank you, everybody. That was on the call today and all of our investors and I also want to send out a really special thanks to the Rocky Brands team members. We have worked hard the first half of this year through a really difficult six months and I can’t thank you all enough for sticking in there and working so hard to make it the best possible company we can and excited to navigate the rest of this year with you guys in the years to come. So thank you all very much.

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