Rocky Brands Inc (RCKY) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands' Second Quarter Fiscal 2006 Earnings Conference. [OPERATOR INSTRUCTIONS]

I would like to remind everyone that this conference call is being recorded and will now turn the call over to Brendan Frey of Integrated Corporate Relations. Please go ahead, sir.

Thank you.

Before the Company begins with its review, please note that today's discussion, 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 change, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties, please refer to today's press release and reports filed with the Securities and Exchange Commission, including Rocky's Form 10-K for the year ended December 31, 2005.

I will now turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.

Thank you, Brendan, and thank everyone for joining us on our call today to review our second quarter results and to discuss the outlook for the remainder of the year.

Participating with me on the call today are David Sharp, President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer.

As you are all aware, on July 13, we announced preliminary second quarter results of sales of approximately $57 million, an expected loss per diluted share of between $0.05 and $0.10. Our actual results came in slightly above those expectations, with sales of $57.3 million and a loss per diluted share of $0.04.

We are clearly very disappointed in our performance during the second quarter, and we are committed to taking the necessary steps to improve our results going forward. The sales and earnings shortfall for the second quarter was primarily driven by ongoing weakness in our outdoor footwear and apparel. As we have previously discussed, the outdoor segment has been negatively impacted by the -- over the past two years by warm, dry hunting seasons, and this has historically been the key selling period for the waterproof camouflage hunting footwear and apparel. While the weather will continue to play a role in the performance of this category, there are additional factors that have mitigated some of our competitive advantages and put pressure on this business.

First, over the past couple of years, there has been a sharp rise in the number of large-box retail operating across this country. This has significantly increased the square footage in the market and has reduced the traffic at many of our independent hunting retailers, which has been the main customer base of Rocky Outdoor Gear. At the same time, we have begun to witness increased competition from the private label initiative of several retailers. Much of the private label offering now includes goretex, brand new camouflage, and vibrum rubber soles, three important characteristics that are key elements to the Rocky outdoor branded products. In addition, these private label products, which resemble Rocky more now than ever, are available at significantly lower point -- price points.

Next, we are finding that retailers are buying closer to the season. Therefore, outdoor products that had historically shipped in June have been pushed back to later in the year. As a result, there is now less opportunity for reorder business in the third and fourth quarters.

Lastly, we are carefully reviewing our merchandising strategy and looking at ways to enhance our future product assortments. We are confident that the Rocky brand still occupies a premium position in the minds of our target demographic, and in fact, we are still the largest branded vendor for the majority of the retailers in this space. However, we believe we can improve our operations to develop products that better resonate with our core customers.

Looking ahead, we plan to implement a number of strategic initiatives that will improve our market positioning in order to reinvigorate the top-line performance of our entire outdoor category. We believe these initial steps, over time, will improve the position in the outdoor channel and reverse the declining trends in this business.

In 2005, outdoor footwear sales totaled approximately $47 million. We had planned that business to be flat this year and hoped to maintain it at the level going forward. While this will not be the case, we definitely do not think this business is going away, and we are implementing strategies to maintain and grow our leadership position.

With our acquisition of EJ Footwear 18 months ago, we expanded our presence in the work and western category and significantly diversified our business. However, we still only operate in approximately 13% of the total $29 billion domestic non-athletic footwear industry, with work representing 8%; outdoor, 4%; and western, just 1%.

In an effort to further penetrate the larger marketplace, we recently announced the development of two new footwear brands.

First, we have signed a licensing agreement with Sole Matters, LLC to create a line of lifestyle casual comfort footwear under the Zumfoot brand name. Zumfoot means "health to your feet." Importantly, it will provide us entrée into the $15 billion casual and dress casual footwear category, which makes up over 50% of the domestic market.

Just as important is significantly -- it significantly increases our exposure to the female consumer demographics, who make up 75% of the casual and dress casual category. We will be showing the first Zumfoot product to retailers at the upcoming WSA Show in Las Vegas, and we will be taking orders for delivery in early 2007.

We will also be developing a line of footwear under the Michelin name, one of the most recognizable and well-respected brands in the world. There is currently a small line of work and safety footwear in the market, which we plan to augment and increase and distribute it through our Lehigh retail channel, as well as target our broad network of retail accounts in North America.

Even more compelling, we are developing a new line of footwear in order to target the casual adventure market, which includes light hiking, trail running, and rock climbing.

We will look to distribute this product in the non-hunting outdoor channels. While it is still early, we believe both the Zumfoot and Michelin brands provide our Company with compelling long-term growth opportunities, particularly given the size of the casual footwear market and the broader outdoor recreational footwear category.

I want to be clear about something. Much time and careful consideration went into our decision to launch these two additional brands, and this is something we've not rushed into. In fact, Zumfoot has been in the works for over a year, and we are not looking at this as a short-term solution for our outdoor business, and we plan to take -- and we plan to take our time nourishing both into a complementary business as we look to the future to expand our portfolio of leading brands.

I will now turn the call over to David Sharp, who will review the performance of each of the operating segments.

Thanks, Mike.

Beginning with our wholesale business, total sales for the second quarter were $43.1 million, compared to 45.5 million a year ago. Again, the weakness in our wholesale business was related to our outdoor footwear and apparel, while our western, work, and duty segments combined were up double digits compared with last year.

Before I review each segment, I want to update everyone on where we are with regard to leveraging our retail customer relationships. As a reminder, when we completed the integration of the Rocky and EJ sales forces, there was overlap in roughly 600 accounts out of a total of 14,800 accounts. Since the first of the year, we have cross-pollinated over 1,500 of these accounts. We are very pleased with the progress we've made penetrating our work and western account base by looking at ways to replicate the success in our outdoor channel for next year.

Now, for each of our business segments.

For our outdoor footwear category, sales were down approximately 16% to $6.2 million, versus $7.4 million in the year-ago period. As Mike mentioned, there were a number of factors that contributed to these results, and we're evaluating our long-term outlook for this category. We had been planning this business to be flat and now expect sales to be down versus last year.

Our apparel business, which includes both outdoor and work apparel, was down 42% to $3.3 million from 5.7 million. Again, this was driven by weakness in our outdoor camouflage apparel.

Our western footwear category was up 19.9%, with sales increasing to $9.1 million from 7.5 million last year.

Our Durango business was flat, as women's fashion boots have slowed compared to last year. However, this was more than offset by a 66% gain in our Rocky western footwear, which, like Rocky work footwear, is performing well from the increased distribution in Durango accounts.

Now, turning to our duty footwear category, where sales increased 9.5% to $4.5 million, compared to $4.1 million in last year's second quarter.

During the quarter, we began shipping our new athletically inspired footwear for U.S. postal workers, and we're encouraged by the initial sell-through of this product line.

Sales of our work footwear category, excluding Dickies, increased 4% to $17 million, compared with 16.3 million in the second quarter of '05. Sales of Georgia were flat, while Rocky work was up 30%, which continues to benefit from the cross-selling. Dickies' sales were up slightly during the quarter, and the brand remains on track for 50%-plus growth in 2006.

Looking at our retail division, sales were $14.2 million, flat with last year. During the quarter, we made a number of strategic changes that we believe will benefit this business in the future.

Lastly, we are still waiting on three outstanding bids with the military that total approximately $42 million. We'll certainly update you when and if we receive any orders.

I'll now turn the call over to Jim, who will review the financials in more detail.

Thanks, David.

As discussed, our sales for the quarter declined 12.5% to $57.3 million, compared to a record $65.5 million a year ago. Excluding the $5.8 million of military sales in the second quarter of last year, sales were down 4%.

Gross profit was $24.1 million, or 42% of sales, versus $25.7 million, or 39.3% of sales, in the second quarter of last year. The 270 basis-point improvement in gross margin was attributable to the decline in footwear sales to the military, which carry lower gross margins than our branded business.

Gross margin in our wholesale business was up slightly in the quarter to 38.4%, and gross margin in our retail business was also up slightly to 53.1%.

SG&A expenses were $21.5 million, or 37.4% of sales, compared to $19.5 million, or 29.7% of sales a year ago. The increase in SG&A was driven by higher healthcare costs, trade show expenses, and professional fees.

Operating income for the second quarter was $2.6 million, or 4.6% of sales, versus operating income of $6.2 million, or 9.5% of sales.

Our interest expense increased to $3 million from $2.1 million last year due to an increase in interest rates versus a year ago. The $3 million of interest expense this year includes $400,000 charge to write off prepaid financing charge incurred in our January 2005 financing.

In an effort to reduce our interest expense, we recently refinanced our six-year $30 million term loan. We expect this to save us about $1 million over the life of the loan, with the majority of the savings coming in the first two years.

For the second quarter, we reported a net loss of $0.2 million, or $0.04 per diluted share, compared to a net income of $2.8 million, or $0.50 per diluted share, in the corresponding period of 2005.

Now, turning to the balance sheet --

Inventories at June 30 increased -- inventories at June 30, 2006 increased to $94.3 million, compared with $85.4 million a year ago. The increase is primarily to fund the growth of our work and western footwear categories.

Our funded debt at the end of the second quarter was $109.7 million, compared to $110.7 million a year ago.

Now, to guidance --

Based on second quarter results and current business trends, Rocky Brands now anticipates net sales to be approximately $265 million for the year ended December 31, 2006. If the Company achieves net sales of at least $265 million for 2006, the net earnings are anticipated to be approximately $1.25 per diluted share for the year ended December 31, 2006, including a non-cash charge of approximately $0.07 per share related to stock option expensing. This compares to the Company's previous guidance of net sales between $287 million and $292 million and dilutive earnings per share in the range of $2.28 to $2.38.

Rocky sales and earnings for the full year 2006 are subject to all the risks set out in the Safe Harbor statement of this release and are also subject to audit by the Company's independent public accountant, so there can be no assurance that actual earnings will be as presently anticipated by the Company.

I will now turn the call back to Mike for some closing comments.

Thanks, Jim.

As you can tell from the guidance, we have lowered our expectations for the back half of the year. Right now, there are a lot of moving parts to our business, especially with regards to outdoor category. In addition, the economic environment and current world events are creating a lot of uncertainty in the marketplace, and therefore, we think it is prudent to take a more cautious approach for the near future.

I want to reiterate that we continue to be very confident in the validity of all of our brands, and our entire organization remains committed to improving our results and capitalizing on all of our long-term opportunities we believe exist for the Rocky Brands.

Operator, we will now open the call up for questions.

Thank you. [OPERATOR INSTRUCTIONS]

Heather Boksen, Sidoti and Company.

Good afternoon, guys. Can you talk a little more in detail about the initiatives that you're going into to reinvigorate outdoor and maybe a little bit about what we can expect to see in the coming quarters?

Heather, thanks for the question. This is Mike, and Dave or Jim can jump in, also.

We really talked a lot about that, whether we would divulge that. You just don't know who's on the conference call, and we've got customers out there, and we've got competitors, and so I don't think we want to go into that right now. We've worked on the plan for a long time, and we're moving forward, and that will become more public a little later. David, I don't know if that's --

No, it's just something that we're not comfortable sharing right now.

Heather, I think the other part of your question is in the quarters to come. Certainly, with the seasonal business that we have, those kinds of strategies you implement don't take immediate effect, so they're not short-term solutions; they're more long-term into next year.

That's correct.

So we would see some wholesale revenue year-over-year declines in the back half of the year?

That's correct.

And the second part of my question, the retail business was flat year over year. I know earlier on previous calls you had talked about it being up low single digits, I think, this year. Is that still the [expectations]? What's going on in that segment?

I think, Heather -- this is Dave -- we plan -- we're planning that business flat. We did have a slight increase in first quarter, and we grew the business about 5.5% last year. But we're currently changing a lot of things over there, particularly in IT systems, to give us better visibility of inventory, better customer interfacing, electronic invoicing, and aligning the sales force around the accounts, the better sales people around the better accounts, and we're very focused on growing that business. But we think through the end of this year -- at least we're planning right now to be flat.

I think that, Heather, we also recognized when we bought that, bought the company, that we had to make some changes to that business model, which we're making those changes, which may hurt us in the short term as far as growing the business, but we think those changes we're making will help us grow that long term.

Okay. And can you give any details as to what those changes are? I mean just going back to --

Most of them are inventory controls, software, hardware. It's a -- the business had just never been invested in for a long time. We've been working on this for some time. This is not just occurring in this -- the last weeks. We've been working on it all this year. It's just taken a little more time to implement, but we need those tools so that we can have better vision of the inventory, as David said, and expand the business more rapidly.

We're still excited about the business. We're investing in it. We think we can -- we just need the tools to really make it a faster, quicker, more customer-friendly business.

And with regard to the inventories, it looks like it was up about $9 million versus the end of the second quarter last year. Can you -- is that just a reflection of the poor sell-throughs of outdoor? What is going -- can you give some color into that number?

Heather, this is Jim. I think that if you go back -- and we talked about on the first conference call for the first quarter that we recognized that our inventories were a little heavier than we would like them to be. And at that point, we were $14 million up year over year in our inventories, where now, we've made progress through the second quarter and got that down to 9 million, and we're -- we still recognize that we have room to go to bring those down and are currently anticipating that those inventories will be less than -- by the end of the year will be less than what they were at the end of the year of 2005. So I think we're on target to bring those inventories down in line where we would like them to be by the end of the year.

And is that out of function of just marking down products and to move it? Are you buying less for the back half -- are you planning to buy less for the back half?

Heather, this is David. That's exactly what we'll do. Our inventory is a little high in our work businesses and our retail business. This is a work business, and the way you bring that inventory in line is just buy less. And those goods are not perishable. They have an extremely long shelf life.

On your question regarding the outdoor business and that inventory, we went into this year very, very clean, and then in the first quarter, we really don't purchase anything until we have orders. So we know what the orders are now. We'll just purchase what we need and nothing more than we need. So -- and that is actually more perishable than the work business, so we don't have any -- we're not vulnerable there.

Okay. Well, thanks, guys. I'll listen.

Thanks, Heather.

Peter Larson, Columbia Management.

Heather took away most of my steam here, but with respect to -- are you seeing the same impact on the outdoor business in your company store and the store up in Wisconsin as you've seen through the other retailers?

Yes, especially in the store in Wisconsin, and when I say that, the Nelsonville store is a little unique, but it also is hitting a similar slowdown, a lot of competition. These big-box stores are drawing from a huge radius, maybe 150 miles or greater, and our independent retailers are feeling it, and our company stores are feeling it, also.

In regard to the military, is -- you indicated there are three open bids.

Yes, there are three open bids, Peter.

Have any been lost, or have any gone away?

Yes, they have, that we did not get.

Okay.

So it's kind of a moving target. Probably if we looked back at the notes three months ago, we may have stated there were five bids.

The good news here is that this time last year, the military had overinventoried. They had too much footwear, military footwear. They started a slowdown and cut their orders dramatically, and actually, the contract we had last year, we were contracted to make and hold and ship wherever they wanted those goods in the world. We'd been holding large quantities of that inventory all of this year. They've been made, invoiced, paid for, but they didn't need them anyplace in the world. We've just gotten notice that they need those boots some weeks ago. Those have been scheduled to be shipped out. Also, they rolled out three bids that were originally bid three years ago, and they're extensions of bids that were already out there, which also tells me that they need more footwear. So I think maybe we can start back up, and also, the new budget comes out the end of September. New money will become available in October. So I think you'll start to see some bids being let and some orders being obtained, and hopefully, one will land here -- land here at Rocky.

Okay. That's all I have. Heather took everything else.

Thanks, Peter.

Steven Martin, Slater Capital.

Some of this has been asked, but you have reduced your outlook for revenues substantially. Are you comfortable that you've built in enough reduction in both the outer -- the outdoor area and the work area and wherever else you may need it?

Yes, we are, but, boy, that's -- that certainly has been our plan, and we think we have. We think we have. We've just now got to finish running the race, Steve, as you know.

Okay. And with the lower volumes in mind -- and you and I talked about this two weeks ago -- what are you doing to address the cost structure, if any? And the corollary to that is you've got a couple of new initiatives that you've talked about. You're obviously spending some money on that. Can you quantify what got -- what's being spent on that?

Well, we are looking at cost reduction throughout the whole business model, wherever our expenses are, where we can shave it, and we've got some initiatives that we've gone forward with, some in personnel, the one that Jim just did on the $30 million loan is -- that we were working on most of the spring of this year with the interest rates.

So we've got a whole menu of cost reductions we're working on. I don’t want to go into heads and all that.

The two new rollouts of the two new brands, Zumfoot and Michelin, one of the reasons we went that direction was that the start-up would be relatively smaller numbers, and we're going to see our customers next Tuesday, Wednesday, Thursday. We'll probably have a little better feeling after that next week. David, I don't know if that --

Steve, I think it's important to remember that a significant portion of our SG&A is somewhat fixed, and so there is not a significant short-term solution to that. And part of -- the variable part, especially as we get to this point of this year, a big variable part we have is obviously advertising dollars, and we -- when you look at it from this year, we've committed a lot of those dollars at this point. There are some opportunities, and we'll take advantage of those opportunities as we can, but where we can be more conservative on those dollars is as we move into next year probably.

All right. Thank you.

Thanks, Steve.

[OPERATOR INSTRUCTIONS]

James Ragan, Crowell, Weedon.

Just a follow-up to the Rocky -- the outdoor business weakness in both the -- on the footwear side and in apparel. And as you look at the -- one of the issues, Mike, you discussed was a private label competition. Are you seeing that on the apparel side as well? And then, also, when you -- as you look at your initiatives going forward to improve the outdoor business, are you still -- is the apparel side still going to be a part of your strategy?

Jim, good question; yes. Now, we didn't see that last year. There wasn't much cannibalization from the private brands, but it was out there, but it -- maybe it was just that we had a small business and a growing business. But this year, we saw it strong. We are not walking away from that. We still think the head-to-toe strategy is the right strategy and the long-term strategy, and we have to separate ourselves from our competition, and our competition in this case may be our customer. And I mentioned some of those elements that we always used in Rocky -- goretex, camouflage, branded camouflage. You'll see us with some other camouflage that separates us from our -- from the others and some other waterproofing products, in combination with the branded [camou] and the goretex. So we've got a whole list of new things that we're just starting to roll out now for spring of '07 and fall of '07, so time will tell.

Okay. And then a little bit more just on the SG&A. I've been a little concerned over the last couple of quarters just with the -- a bit of an uptick in SG&A, 1 million 2 in Q1 and a couple million dollars in second quarter. Understand Jim just addressed that a little bit; the significant percentage of that is fixed. But with the Zumfoot and the Michelin brand and going into the casual footwear, just a little concerned that that side of the business takes more SG&A commitment to launch, and I just -- I think we'd be more comfortable if we just felt like there's certainly going to be a strict control on some of the SG&A spending levels going forward.

Jim, this is David. Just relative -- Jim, just relative to Zumfoot, for example, I mean we occupy a very large booth at WSA, and we're not -- Zumfoot will be there, but they'll be in space that we've stolen from the other brands. We've already done the product development, so that's already hit, and any advertising that we'll be doing to -- we're delivering this product in January of 2007, so any consumer advertising will be in 2007.

But, Jim, just so we're clear, we are -- any discretionary spending we have in the short term, we are controlling that.

[Cap].

We are controlling that and looking at not doing whatever we cannot -- you know, we don't have to do in the short term. So it's not like we're just going to keep spending as we were. We're going to make adjustments wherever possible.

Okay, well, that's great to hear. And then also on the same line with the little bit lower interest expense going forward, do you have an estimate of what your interest expense will be in the third quarter?

I don't have that with me, but I can try and get that for you. Just to give you an idea of what the interest rates -- when you -- to give you some guidance on the interest rates, we changed our -- we had a $30 million term loan that was financed at LIBOR plus 8, and we took 15 million of that and financed it at LIBOR plus 3, and this other 15 million is at LIBOR plus 6.5 now. So that's really where our interest rate looks for the back half of this year.

Right. Okay, thank you.

Thank you. Management, I'm showing there are no further questions. I'll turn it back to you for any closing comments you may have.

Well, I thank you, and we look forward to our trade show next week and reporting future information to you. So if no other questions, Operator, we'll end the call.

Thank you. Ladies and gentlemen, that does conclude today's teleconference, and we thank you again for your participation, and at this time, you may disconnect.