Rocky Brands Inc (RCKY) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands fiscal 2008 second quarter 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 the questions. (Operator Instructions).

I would now like to remind everyone that this conference call is being recorded and will now turn the conference over to Brendon Frey of Integrated Corporate Relations. Go ahead, Sir.

Thank you. Before we begin, 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 the 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 ending December 31st, 2007.

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

Thank you. Thank you and thank everyone for joining us this afternoon to review our second quarter results. With me today on the call are David Sharp, our President and Chief Operating Officer; Jim McDonald, our Chief Financial Officer and Treasurer.

As you saw from our release issued earlier today, we reported earnings of $0.7 million or $0.13 per share versus a loss of $1.4 million or $0.25 a year ago. We're very pleased with this significant improvement in profitability, which reflects a successful execution of our strategy to improve margin and better control expenses.

Some of the highlights from the recent quarter include a 250 basis point increase in our wholesale gross margin which was driven primarily by higher initial markups, coupled with higher productivity and our Company-owned manufacturing facilities. At the same time, we were able to reduce our SG&A by $1.9 million which equates to a 430 basis point improvement in SG&A as a percentage of sales. This was achieved by reducing our compensation expense and professional fees versus a year ago.

With regards to our top line, total sales increased 2.9% as we shipped $1.8 million of footwear to the military versus approximately $300,000 during the second quarter of 2007. We also experienced a modest gain in our wholesale business offset by a slight decreases in retail sales.

While sales of our branded footwear were relatively flat with a year ago, it produced substantially higher gross profit dollars due to more favorable sell-in terms with our retail partners, a lower-cost base per unit and, to a lesser extent, a lower-level of markdowns. Given the current economic environment, we remain cautious about our growth prospects during the remainder of this year.

That said, we are evaluating new distribution opportunities for our brands including International. To that end today, we announce an agreement with Rapala for distribution of Rocky Hunting Boots into Eastern Europe including Russia, Finland, Poland -- and Poland, to name a few.

Rapala, based in Finland, is a global leader in the recreational fishing market. In addition to their principal business of manufacturing and selling fishing lures, hooks, rods and other tackle, they distribute hunting products such as guns and optics, including brands like Remington, Bushnell and Plano.

We are excited about this opportunity to expand Rocky's presentation in Europe and make our footwear more accessible and affordable for consumers in these markets. We look forward to a long and a mutual beneficial relationship between our two companies.

Back to the US, we will be rolling out a line of genuine Dickies footwear at more than 400 Wal-Mart stores across the country. This will include four different styles of work footwear and we expect to have the boots on the shelves by mid-November.

I will now turn the call overt to David who will review each of our operating segments in more detail.

Thanks Mike. For the second quarter, our wholesale sales increased 1.4% to $42.5 million compared to $41.9 million last year. As Mike just mentioned, wholesale gross margins were up 250 basis points which allowed us to generate significantly more gross profit dollars on roughly the same sales volume as a year ago.

Within our Work segment which includes footwear under our own brands Georgia and Rocky and our licensed brands, Dickies and Michelin, sales were $20.5 million in the second quarter, compared with $20.9 million in the prior year period. We experienced positive gains in the sales of our Rocky, Michelin and Dickies brands which were offset by a decrease in our Georgia brand.

Outside Mike's comments about future prospects with Wal-Mart, we continued to see excellent sell through at other national retailers such as Sears, The Academy, Big Five, Shoe Carnival and Tractor Supply with our work brand.

Turning to our Western segment, second quarter sales were $7.4 million versus $8.4 million a year ago. The entire sales decline in the second quarter is attributable to a dispute with our former primary Western supplier, which has caused a shortfall in inventory needed to service the business. As we previously reported, this dispute has been settled and we expect very little disruption of supply in the third quarter and no disruption of supply of goods in the fourth quarter.

Now to our Hunting footwear where second quarter sales rose 23% to $6.4 million versus $5.3 million last year. We're obviously pleased with the strong double-digit increase in this business. However, much of the year-over-year improvement can be attributed to a shift in sales out of third quarter as some retailers took product earlier than they have historically.

Sales of our Duty footwear were up 12.4% to $4.6 million from $4.1 million a year ago, as we were able to build up inventory and capture the increased demand that we missed out on earlier this year.

With regard to Zumfoot, placement of the brand has been slower than we anticipated due primarily to the tough retail environment. We remain committed to the brand and optimistic about its opportunities, particularly given the recent feedback from independent retailers on our Spring 2009 line. It features a broader product offering and more attractive price points.

Apparel sales in the second quarter were $2.3 million, flat with a year ago. Similar to our wholesale footwear business, apparel sales for this quarter were executed at much higher margins versus the same period last year.

Now to our Retail division. Second quarter sales decreased 2.2% or $400,000 to $16.2 million versus $16.6 million the year before. Despite the slight decline, we are pleased with the performance of Lehigh, particularly given the current retail environment in the tough comparisons we were up against from a year ago when Lehigh posted a 16 plus percentage gain.

As we head into the back half of the year where comparisons get even tougher, we are looking at ways to further reduce the operating expense of this business without affecting service levels. Over the past year, we have been working closely with many of our customers on transitioning their business to an e-commerce platform where there are obvious economies in SG&A. And we hope to expand this initiative in the coming months.

Further to to our success of our Lehigh Outfit, a concept pilot store located in Columbia, South Carolina, we are expanding this concept to more markets during the third and fourth quarters namely Houston, Texas, North Haven, Connecticut, and Pittsburgh, Pennsylvania.

Finally we reported approximately $1.8 million in sales to the United States military as we continued shipping footwear under the $6.4 million contract we announced in July of 2007 and began the initial shipments of the $5 million contract we received in January of this year. Just last week, we received a $6 million extension on the July 2007 contract as well as a new $1.2 million contract.

This most recent US military contract is for a Special Ops boot, which we developed called the S2V, which we believe could be meaningful volume in the years ahead.

I will now turn the call over to Jim who will review the financials. Jim?

Thanks, David. Net sales for the second quarter increased 2.9% to $60.5 million, compared to $58.8 million for the corresponding period a year ago. Gross margin in the second quarter was $24.4 million or 40.3% of sales, compared to $23.9 million or 40.7% of sales for the same period last year.

The prior year's results include a $500,000 reimbursement of expenses incurred in prior periods related to a canceled military contract. Excluding this onetime reimbursement, second quarter 2007 gross margin would have been 40%.

Wholesale gross margin for the second quarter was $15.7 million or 36.9% of net sales, compared to $14.4 million or 34.4% of net sales in the same period last year. The 250 basis point increase reflects an increase in sales price per unit as well as a decrease in manufacturing costs resulting from increased operating efficiencies.

Retail gross margins for the second quarter was $8.6 million or 52.8% of net sales, compared to $8.9 million or 53.6% of net sales for the same period in 2007.

Military gross margin for the second quarter was $0.2 million or 8.6% of net sales, compared to $0.6 million the same period in 2007.

Selling, general and administrative expenses decreased 8.4% or $1.9 million to $20.9 million or 34.5% of sales for the second quarter of 2008, compared to $22.8 million or 38.8% of sales a year ago. The decrease in SG&A expenses is primarily a result of reductions in compensation expense and professional fees.

Income from operations increased $2.4 million or 390 basis points to $3.5 million or 5.8% of net sales, respectively, for the period compared to $1.1 million or 1.9% of net sales in the prior year.

For the quarter, we reported net income of $700,000 or $0.13 per diluted share, compared with a net loss of $1.4 million or $0.25 per diluted share a year ago. Funded debt as of June 30, 2008, decreased slightly to $101.4 million, compared to $102.7 million at June 30, 2007.

Interest expense decreased to $2.4 million for the second quarter of 2008 versus $3.3 million for the same period last year. The decrease in interest expense is primarily due to the write-off of prepaid, financing costs totaling $800,000 relating to the refinance of the Company's term loans in the second quarter of 2007.

Inventory increased $1.5 million or 1.9% to $85.5 million at June 30, 2008, compared with $84 million on the same date a year ago.

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

Thanks, Jim. Again we are very pleased with the progress we have made improving our wholesale gross margin and removing cost from the business.

Because of the challenging market condition, we realize our near-term growth opportunities to be limited and, therefore, we will remain focused on maximizing the profit contribution of each sale. We are also committed to containing costs, particularly in our retail division as we look to transform that business model to a higher percentage of Web-based sales.

We are confident this strategy will allow us to report year-over-year margin improvement and drive increased profitability in the next two quarters. Long-term, we believe our portfolio of brands provides us with compelling expansion possibilities both domestically and overseas, and we will continue to explore ways to reinvigorate our topline in a profitable manner.

Operator, we're now ready to take questions.

(Operator Instructions). Reed Anderson with D.A. Davidson.

Couple things here. Mike, on the -- you commented in your prepared remarks about your -- the national retail customers seem to be doing actually quite well. You have got a Wal-Mart program rolling out.

I'm curious if you look at more the specialty side of your customer base, particularly the outdoor retailers, I mean are you seeing a lot of the weakness there or the cautious ordering that everybody else is? Or are you seeing something different?

Well, there's probably -- there's cautiousness everywhere. You know I'm not trying to say that we pointed out some strength on key brands at Sears, we've been working diligently for a number of years on the Wal-Mart Dickies rollout.

There's concern at some of the major sporting good accounts. We're treading -- trying to get everything we can and treading lightly. My answer is there is not a great deal of difference.

Okay. That's fair. That's helpful (multiple speakers).

I've got some notes on our key account business. We are actually up year-to-date 9% over last year.

I'm sorry I didn't -- you said you were up 9% in which business?

With our key accounts which you were talking about, you know, the larger --.

Exactly, okay, so you are actually up year-over-year about 9% with those types of customers?

Yes.

Then as it pertains to gross margins, they're again -- continue to be trending outboard a little bit less than I had thought maybe, but still at a nice trend. In the second half, should we still see that sustain year-over-year as on reported basis gross margins or is it going to get normalized a little bit here in the back half?

I think that in the back half we still see gross margin improvement on a year-over-year, particularly on our Wholesale segment as we had in the third quarter. And our Retail business we see as being flat year-over-year on a margin percentage as it was in the first half of the year for the most part.

So I think that what affects us is as the blend changes, the more wholesale business or more military business that it could affect the overall margin. So I think you really need to look at that on a segment by segment basis.

But we do anticipate particularly Wholesale to be -- to continue to be up year-over-year as it has been in the first half of the year.

That makes sense and then, lastly, on the SG&A side which was very well-managed, are those sustainable? Will we see that flow into the second half too? I mean, obviously, you've let some people go or you've made some changes to comp and professional fees. Does that carry forward in the second half or were there some anomalies in the second quarter?

Well, certainly, on professional fees our biggest advantage we got there was in the second quarter where we had very heavy professional fees in the second quarter of 2007. But we think our year over we'll still be able to contain those costs in the back half of the year and hopefully come in still under last year's numbers in the back half of the year.

Okay. That's it for me. Thank you.

(Operator Instructions) Mitch Kummetz with Robert W. Baird.

This is actually [Kevin Kim] calling for Mitch. I just had a couple of quick questions. As far as the sales in EPS guidance for '08, could you guys give a little bit more detail? I know on the Q4 call you said that sales should be up about the single digits. Is that still an accurate number there?

I think on the sales side we -- on our Wholesale business, we are looking at more like flat sales for the back half of the year. And retail, I think because we are going up against such tough comps, we had a real surge in the back half of last year due to a demise of the No. 1 player in that space. You know I think those are tough comps given the economic climate right now.

Of course, the other -- we do have hard orders from Military this year that we didn't have last year, so there will be sizable increases in Military, but it is going to be a tough year to see increased topline sales. So we are focused on making it the old-fashioned way.

And then as far as the way Military is going to pan out between Q3 and Q4 is that, I guess, are you guys providing a number there? And if you are is there any upside since we still do have some time before the year-end?

Well, there probably is not a lot of upside. We've got those factories pretty full for the next three months. The benefit is really -- is cost savings and running the factories full versus they were 40% full last year. So there are some indirect benefits.

I would anticipate Military sales to be up slightly from what we reported in the third quarter -- I'm sorry, second quarter -- in both those quarters going forward so --.

That's helpful there.

There will be some benefit there.

Then as far as the retail, I guess -- you guys mentioned that obviously the second half in comparison has become really tough. Are there any specific plans in terms of making sure -- I guess we were just wondering what your plans were for the second half?

As we said in the prepared remarks where expanding on the pilot concept that we did in Columbia, South Carolina that is showing really good comps year on year. A retail format basically touting year for work and weekends. So head to toe presentation of apparel and footwear for the working man and working woman. And we will be doing that in three new markets between now in the end of the year.

The other focus is leveraging this investment that we made over the last year in particular in Web capability, and allowing our customers to instead of going to the worksite with a truck rather than being able to buy the goods off the Web at reduced cost. Which of course in turn reduces our costs very favorably.

I think we continually look at having the right amount of assets to support that business. And as things continually changes with our dynamic it's been over the last year and a half now, we've been looking at that all along so -- and we don't have any plans to change that. So we will continue to look at the correct amount of assets to support that business as we go forward.

That's fair and just one last question. I know last year at this time you guys provided a backlog number which was fairly strong. Are you guys providing that again?

No, we're not. We have some vision, but we are just kind of -- we aren't not forecasting our earnings this year as you are aware and we are not forecasting backlog numbers. It just -- it doesn't benefit us.

And certainly a significant portion of our business is [at once] anyway so is not a real meaningful number for us.

Jim, that's a good point. We are in the work shoe business. The overwhelming percentage of our business is work boots. And Kevin, as I have told you before, we are not going to have huge double-digit increases and we are not going to -- it's not going to fall off on the negative side also.

So we are working hard. We are in a service business. Customers don't forecast and cut orders in the future, they expect us to have inventory as they need inventory.

All right. That's it for me. Congratulations on the great quarter.

(Operator Instructions) We have no further audio questions. I would like to turn the conference back over to Mr. Brooks for any closing statements.

Thank you. Ladies and gentlemen, thank you for listening in. Difficult times. We are tightening our belts and we are doing everything possible to return this Company to strong probability.

Thank you for your support and look forward to speaking to you again in the not too distant future. Thank you, Operator.

Ladies and gentlemen, this concludes the Rocky Brands fiscal 2008 second quarter earnings conference call. You may now disconnect and thank you for using ATT Conferencing.