Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands' First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded and we'll now turn the conference over to Brendon Frey of ICR. Please go ahead, sir.

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, 2023. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Thank you, Brendon. 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. We are pleased with our first quarter results as sales and earnings came in ahead of our expectations. Following the implementation of several cost saving initiatives throughout last year, we have reinvested a portion of the savings into additional advertising programs, which fueled stronger than anticipated growth and meaningful expense leverage. I'll go into more detail about the drivers of our top-line performance momentarily. But we are encouraged by the momentum we experienced across our business highlighted by double digit gains for our Durango and our XTRATUF brands. While the macroeconomic outlook remains uncertain, we continue to be cautiously optimistic that the business is well positioned to generate enhanced profitability and increase shareholder value as 2024 unfolds. Before Tom covers the numbers, I'll spend a few minutes going through the first quarter sales performance by category and brand. In our wholesale channel, the majority of retailers have rightsized their inventories and reorders are now more closely aligned with sell-through bringing greater stability to our sell-in cadence to start 2024. While this has benefited the Work, western and outdoor categories to different degrees, based on partner inventory levels, we are pleased to see this start to return to normalcy across the industry. Our Work category which includes our Georgia, Rocky and select styles under the Muck and XTRATUF brands had several bright spots in the quarter. Georgia Boot delivered a single digit sales increase in the quarter driven by strong demand for our legacy product and several new product launches. Last year's selective price decreases on certain Georgia styles are resonating with consumers, leading to faster sell-through. Importantly, Georgia sell through…

Thanks, Jason. As Jason discussed, we are optimistic about the start of 2024 as the diversity of our product categories and steady consumer demand for our brands has allowed us to adeptly navigate the current retail environment. Reported net sales for the first quarter increased 2.2% year-over-year to $112.9 million. Excluding the service brand net sales from the year ago period, net sales increased 7.6% or 9.3% when you also factor in the Canadian distribution model change we made in late 2023. By segment, wholesale sales excluding the service brand and the Canadian distribution model change were up 8.5% to $79.8 million. Retail sales increased 5% to $30.4 million after factoring in the Canadian distribution model change. And contract manufacturing sales were $2.7 million. Turning to gross profit. For the first quarter, gross profit was $44.1 million or 39.1% of sales compared to $43.8 million or 39.6% of sales in the same period last year. Gross margin in the first quarter of 2023 benefited from a net $1.3 million tariff recovery. Minus the recovery, gross margins were up 70 basis points year-over-year, driven by the divestiture of the service brand, which carried lower gross margin than the rest of our product portfolio. Reported gross margins by segment were as follows: wholesale, down 20 basis points to 36.4%, retail flat at 48.7% and contract manufacturing up to 11.7% from 8.1%. Excluding the tariff recovery, wholesale margins were up 140 basis points. Operating expenses were $36.2 million or 32% of net sales in the first quarter of 2024 compared to $39.6 million or 35.9% of net sales last year. On an adjusted basis, operating expenses were $35.5 million this year or 31.4% of net sales and $38.8 million or 35.2% of net sales a year ago. The decrease in operating expenses was…

[Operator Instructions] Our first question is from Jonathan Komp of Baird.

Tom, first question, if I could follow up just on the guidance commentary. If you look at the underlying growth rate you highlighted, I think, in the press release, you indicated up 7% excluding the non-comparable revenue last year and the guidance for the year now is the higher end of $450 million to $460 million, which would be, I think, 4% underlying growth. So any color as you look ahead, if there's something in the first quarter that was unsustainable or what you're building into the outlook in terms of the moderated pace of underlying growth for the year?

I think as we look at Q1, there were a couple of opportunities that we took advantage of from a closeout perspective, which is why our margins probably came in slightly under where we had internally forecasted them. And so I think some of those sales were certainly incremental. If those opportunities arise in the future, we'll continue to take advantage of those. So we'll convert inventory to cash. But we don't necessarily bake it into our model. And I think there's just overall just kind of a sense of being cautious here about the future and what it holds for the rest of the year, but we feel good about the higher end of that range that we guided to.

Yes. I would just add, Jon, that with the election year, election years always seem to be an odd year. So depending on where that kind of ends up as the year goes through, I think we're just being cautious and that was one other reason why.

Yes. One other thing that jumped in my mind, too, Jon, is that Jason called out in his remarks that we were at the end of a contract for our commercial military product. And so we see that if there's another opportunity, we'll certainly bid on them and try to win those. But that's something that we won't see or we don't have planned in the next 3 quarters.

And if I can follow up on the wholesale performance. Is there any way to talk maybe across? Maybe there's differences across brands or segments or categories, but how would you characterize the first quarter performance as it relates to underlying consumer demand? Any changes that you're seeing in sort of the sell-through indications versus really sort of a catch up in the sell-in versus the sell-through and how should we think about those dynamics going forward?

Yes, that's a great question, Jon. I think it's something that we continue to evaluate, right? We -- I think we talked about this on the last earnings call; we have data that we gather from some of our retail partners about their sell-through. And in particular, in the Durango brand and the XTRATUF brand, we're seeing really great sell-through. So the sell-in then to the retailer is being positive. The Work category is probably the one area, right? And that touches Georgia and Rocky. It might even touch Durango a little bit, but it's a phenomenon as western just seems to be a little more hot right now. And then the Muck brand as well. So from a Work standpoint, sell-through at retail is not as good. And so I think that's why we're seeing the sell-in not quite as hot. And then the worst category is the outdoor hunting category. And that really just took a -- the weather was bad and hopefully, we'll see some stronger weathering patterns come this year and be able to pick some up there. But I think that covers and hopefully answers your question.

Yes. I think the only other call out there that I have is that a meaningful increase that we saw kind of across the board was with key accounts. So key accounts performed very well for us and started to buy back in. And as Jason alluded to earlier, more of that normal cadence. And so we're starting to see more normalized behavior, which is good for Q1 and hopefully the rest of the year.

And can you remind me, have you given a rough split how much of your business is key account oriented versus non-key accounts?

We have not shared that, Jon before, and we'll probably keep that one to ourselves for now.

Last 2 just modeling questions. Tom, any color, Q2 revenue, should we expect it to be the low point, and I think you're cycling a fair amount of non-comparable business yet. So any color there you can offer? And then SG&A, I know you're still talking to deleverage for the year after achieving pretty big, pretty meaningful leverage in the first quarter. So how should we think about the quarterly progression on the SG&A spend?

Yes. So from a top line perspective, yes, we have Q2 being our low point for the year and then obviously accelerating in the third and fourth quarter, which are typically our strongest quarters. We have the fourth quarter given what we've seen in the e-commerce space is our largest quarter for 2024. As SG&A spend relates, I think that you'll see kind of a low point from an SG&A spend in the second quarter as well. You'll see a lot of those investments that we've talked about. A lot of that being digital spend. You'll see that when we hit our peak season in Q3 and in Q4 as well. I think we talked about a slight deleverage with a slightly increased SG&A spend in 2024. One thing I just wanted to make sure we got across on the call is, is that we're protecting -- we're trying to protect our operating income comparability to the prior year. And so as we see what happens with sales throughout the rest of the year, we'll adjust our plan, and we've learned how to flex that muscle like we did last year, and we can pull back on discretionary spend to help protect that operating income for 2024.

The next question is from Janine Stichter of BTIG.

A couple for me. First on the -- it sounds like you took some of the cost savings and redirected that into higher advertising spend. Can you just talk a little bit more about that? From our standpoint, it seemed like some of the upside or most of the upside was on the wholesale side versus the retail side of the business. I just want to understand if this is something that impacts both channels or how to think about where the benefit is there?

Yes. So I'll start. Tom probably will add on. It is more of a wholesale play. And for us, it's really about just staying in front of the consumers. We want to make sure that the consumers are aware of our brands, are aware of our new products that we're introducing and continuing to drive that business to our retail partners and also drive them to our own websites, where obviously, we make a little bit better margin. But we feel like we have to continue to drive the brands and support the brand. So investing back in them is important. And it really focuses mainly on wholesale. We go a little bit from a retail standpoint from the dot-coms, but not the budget that we did for Lehigh has really stayed about the same.

And then it sounds like you were chasing in XTRATUF and Durango. You were able to fulfill some of those with at-once orders. But is there any of that, that spilled over into Q2? And then I guess, bigger picture, how is the fact that you're seeing out of stocks and having to chase? Is that encouraging your wholesale partners to place orders earlier or just how to think about that dynamic of at-once for subprime orders?

Yes, I'll take this one and Jason can certainly add in. I think that there was maybe a slight spillover, but not much into Q2. Particularly proud of the team for getting all the inventory here and getting it turned around towards the end of the quarter. So we saw a phenomenal turn of that inventory in March. I'm very proud of the team for that. I think what we're seeing is we're stepping on the gas pedal. Our in-transit inventory is up, particularly on the styles that we're chasing. And yes, you're dead right, we are telling every account to book it if they want it. I think if you think about what's happened with supply chain over the last few years with the everything pulling back on inventory, particularly in Asia over the last year or 18 months, getting these factories back up, getting them restaffed to production levels from 2 years ago is taking a little bit more time. So we're trying to -- particularly for the Muck, core styles of the tour boot and the XTRATUF and the Durango product, we're trying to get people to book that as aggressively as they can for fall before our busy season.

Ladies and gentlemen, we have no further questions in the queue. And I would like to turn the call back to Jason Brooks for some closing remarks.

Great. Thank you very much. Just want to again reiterate Tom and Is appreciation to the Rocky team. We are excited about Q1 and 2024 and how we've executed in the first 3 months of the year, and we look forward to finishing strong and we thank our investors for their commitment and thank you all so much.

Thank you very much, sir. Ladies and gentlemen, that then concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.