Rocky Brands Inc (RCKY) 2008 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to Rocky Brands fiscal 2008 third 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 questions. (OPERATOR INSTRUCTIONS) I'd like to remind everyone this conference call is being recorded. We'll now turn the conference over to Mr. Brendon Frey of ICR, please 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 10K for the year ended December 31, 2007. I'll now turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.

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

As you saw from our release, sales for the third quarter were $72.5 million, and diluted earnings per share were $0.43 compared to sales of $82.3 million and diluted earnings per share of $0.21 a year ago.

Our ability to drive significant increases in profitability on lower sales volumes reflected the many initiatives we have successfully implemented over the past year in order to create a leaner, more efficient company, including consolidating our distribution center, right sizing our retail operations, restructuring our incentive programs, and improving our manufacturing and sourcing capabilities.

At the same time we have focused on high margin sales opportunities, and with our recent military contracts we've been able to run our manufacturing plants at a higher capacity. The combination of these actions allowed us to report a 410 basis point increase in wholesale gross margins, and a $3,100,000 reduction in our operating expenses versus the third quarter of 2007. Year-to-date wholesale gross margins are up 340 basis points to 37.5% and operating expenses are down nearly $4.5 million.

Obviously the current economic conditions in the United States have created a challenging selling environment for everyone. Over the past few months retailers in general have been reporting declines in both store traffic and the average number of transactions, and with our consumer confidence levels at an all time low, and unemployment figures rising, the near-term outlook has gotten more uncertain.

We do believe the different economic conditions have impacted our top line performance, as many of our retail partners have experienced a slowdown in sales, and have become more cautious with their orders. Furthermore, specific to Rocky, we are still dealing with the disruptions caused by an ending of our relationship with a major supplier, and the resourcing of over 300 styles.

As you may recall, we stated at the start of the year that we anticipated that growth opportunities would be limited, and therefore our plan of business was conservative. We continue to be optimistic that we are well positioned to deliver improved profitability on a year-over-year basis in the fourth quarter. Importantly, our bottom line performance year-to-date has allowed us to strengthen our balance sheet and we remain comfortable with our current capital structure. I will now turn the call over to David, who will review each of the operating segments in more detail.

Thanks Mike. For the third quarter our wholesale sales were $55.6 million compared to $64.1 million last year. As Mike just mentioned, wholesale gross margins were up 410 basis points, which allowed us to generate roughly the same amount of gross profit dollars on a 13% decline in sales.

Within our work segment, which includes footwear under our owned brands Georgia and Rocky, and our licensed brands Dickies and Michelin, sales were $22.5 million in the third quarter compared with $24.5 million in the prior year period. We experienced positive gains in the sales of our Rocky and Michelin brands, which were offset by a decrease in our Dickies and Georgia brands. The shortfall in Dickies this quarter was partly due to a shift of deliveries into the second quarter combined with our inability to fulfill a portion of our scheduled orders because of a disruption with a former supplier.

Looking at the fourth quarter, the test of our new line of Dickies footwear at 400 Wal-Mart stores is on track, with product expected to be on shelves by mid-November to kick off the holiday selling season.

Turning to our western segment, third quarter sales were $7.2 million versus $9.4 million a year ago. Much of the decline has to do with out transition to a new supplier for our western footwear that Mike previously mentioned. We have expected our new manufacturing partners to be fully operational by the back half of the year. However, we are still experiencing some minor production issues and delivery delays. We estimate, had we had the inventory to meet demand, that sales would have been up year-over-year. We now anticipate to be fully inventoried by the end of the first quarter of next year.

Now to our hunting footwear, third quarter sales were $13.1 million versus $16.5 million last year. As we discussed on our last call, retailers shifted a large portion of their orders to earlier in the season, which benefited our second quarter results and negatively impacted the third. However, many of the retailers in the hunting category have had difficult seasons so far, and as a result, have been more conservative with their advance purchases than we anticipated.

If weather conditions play into our favor during the fourth quarter, we believe we are in a good position, from an inventory standpoint, to capitalize on some incremental sales opportunities.

Sales of our duty footwear were up 15% to $4.6 million from $4 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.

Now to Zumfoot, we're still in the early development stages of building this brand and its distribution. The business is small, but we are encouraged by the response and pre-booking of the spring '09 line. Bookings are up over 30% versus last year. By spring we will be featured in over 100 retail stores, and more importantly, we have received spring orders from some very influential retailers in the comfort/casual space.

Apparel sales in the third quarter declined to $7.5 million versus $9 million a year ago, due to a timing shift at Wal-Mart. We expect sales of this category to be up in the fourth quarter and flat to up slightly for the full year. We think it's important to note that, similar to our wholesale footwear business, the majority of our apparel sales this year have been executed at much higher margins versus last year.

Now to our retail division. Third quarter sales were $15.3 million versus $18.2 million the year before. More than any other category we operate in, safety footwear and the industries that Lehigh services, have been hurt by the slowdown in the economy, and cuts in the job market. Over the past several months we have seen some customers close factories, reduce headcount, and push back purchases of safety footwear, and this is reflected in our recent sales performance. Importantly, we have been in the process of right sizing our retail infrastructure, and we will continue to make adjustments accordingly as we get into next year.

Our strategy to rebrand this retail business from Lehigh Safety Shoes to Lehigh Outfitters is ongoing. In the old model the primary custom was the industrial factories, warehouses, casinos, cruise lines and restaurants, where workers are required to wear steel toe or non-slip footwear. In the old model these employees were fitted with this footwear from a fleet of trucks which we operate.

In the new model we are offering a much broader product selection, including apparel. Our new model is called Lehigh Outfitters, and our tag line is "Gear for Work and Weekends". We offer the consumers products for their casual lifestyle as well as that which is required for their workday. In markets where we're strong we're opening retail stores in prime locations where we hope to attract the millions of workers that were previously served exclusively through out network of trucks. We'll still service our customers through our fleet of trucks, but we hope to drive their employees to our retail stores or to our website to purchase their casual lifestyle needs from us also.

We piloted this new concept in Columbia, South Carolina last year. We've experienced 15% growth year-over-year for the past 90 days, and earlier this month we opened in Houston, Texas. The sales in this location are to plants, and we are in the process of remodeling our Pittsburgh, Pennsylvania and North Haven, Connecticut locations with the new concept.

Finally, we reported approximately $1.6 million in sales to the military as we continued shipping footwear under the $6.4 million contract we announced in July 2007, and we've begun the initial shipments of the $5 million contract we received in January of this year. I'll now turn the call over to Jim, who will review the financials.

Thanks David. Net sales for the third quarter decreased 11.9% or $72.5 million compared to $82.3 million for the corresponding period a year ago. Gross margins in our third quarter were $27.1 million or 37.4% of sales compared to $29.3 million or 35.6% of sales in the same period last year.

Wholesale gross margin for the third quarter was $19.7 million or 35.4% of net sales, compared to $20 million or 31.3% of net sales in the same period last year. The 410 basis point increase reflects an increase in sales price per unit as well as decrease in manufacturing costs resulting from increased operating efficiencies.

Retail gross margin for the third quarter was $7.3 million or 47.5% of net sales, compared to $9.2 million or 50.8% of net sales for the same period in 2007. Military gross margin for the third quarter was $100,000 or 8.2% of net sales.

Selling, general and administrative expenses decreased 12.5% or $3.1 million to $22 million or 30.3% of sales for the third quarter of 2008 compared to $25.1 million or 30.5% of sales a year ago. The decrease in SG&A expenses is primarily the result of reductions in compensation, distribution and advertising expenses.

Income from operations increased 200 basis points to $5.1 million or 7.1% of net sales respectively for the period compared to $4.2 million or 5.1% of net sales in the prior year.

For the quarter we reported net income of $2.4 million or $0.43 per diluted share, compared with net income of $1.1 million or $0.21 per diluted share a year ago.

Funded debt as of September 30, 2008 decreased $15.2 million or 12.4% to $107.3 million compared to $122.8 million at September 30, 2007. We are committed to further reducing our debt levels and expect to be well under $100 million at year end.

Interest expenses decreased to $2.3 million for the third quarter of 2008 versus $2.9 million for the same period last year. The decrease in interest expense was due to reduced borrowings under the Company's line of credit, as well as lower interest rates compared to the same period last year.

Inventory decreased $1.8 million or 2.1% to $83.3 million at September 30, 2008 compared to $85.1 million on the same date a year ago. I will now turn the call back to Mike for some closing comments.

Thanks Jim. I've been in the footwear business for over 40 years, 33 of those spent as President or CEO of Rocky. In that time we have endured similar periods of economic instability and challenging consumer environments. The most significant difference today is that we are a diversified company with a portfolio of authentic, well-known brands, that operate in multiple categories, including work, western and hunting, whereas only a few years ago we were primarily one brand concentrated in one market.

I am confident that the steps we have taken, namely the acquisition of EJ, which shifts the mix of our business to a more work than hunting, and are most recently right sizing of our cost structure, will continue to benefit us well during the near term as the projected demand for discretionary items, like footwear and apparel, slows.

Long-term, I believe our prospects remain bright and that we have the right people and systems in place to capitalize on the opportunities that lie ahead. Thank you. Operator?

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Mitch Kummetz. Please state your company name followed by your question.

Robert Baird; hey guys. Let's see; a few questions. First of all, on the Q3 wholesale performance, could you give us a sense as to -- I guess it was down about $8.5 million, year-over-year. How much of that was due to the supply disruption and how much of that was just due to deterioration in the macro? That might be difficult to break out but could you just give me a sense as to the impact that those two items had on the sales decline?

Mitch, I think that about $1 million was due in -- are we talking in the work category?

Well, just overall. I think it was --.

About $1 million in work and about -- somewhere between $4 million and $6 million in western. So, somewhere between $5 million and $7 million.

Okay; that was from --.

This company made all of our western footwear; 100%. So, western got hurt the worst. But, what I'm trying to -- the majority of it was lack of supply.

Okay.

But we also had some challenges on the wholesale side.

Okay. And it sounds like you wouldn't expect that to be rectified until the first half of next year. How much impact would you expect this disruption to have on the fourth quarter performance?

David and I just got back from China 10 days ago and visited a multitude of factories, as you might expect. Actually, we're recovering partially in the fourth quarter and, really, we believe it'll be completely behind us -- and we're trying to be conservative here, by the end of the first quarter of next year.

Okay; all right.

I think, Mitch, the impact on the fourth quarter will be less than it was in the third quarter but there still will be an impact of this in the fourth quarter of this year. But it won't be quite as great as it was in the third quarter, probably.

Okay, that's helpful.

[Significant, though].

And then how about, I mean, the retail business was off as well, top line and that sounds like, I mean, David, you made some comments there about your customers and I would imagine that that, you wouldn't anticipate that getting any better in the fourth quarter?

Is that a fair assessment?

That's a good assumption, yes.

Okay. And then, just quickly, on the margins, you saw a nice pick up on the wholesale gross margin, versus a year ago. But if I recall correctly, last year in Q3, you granted customers some price concessions. And, it looks like your gross margin, even for Q3, was still down a bit on the wholesale business from where it was in the first half.

I know that you've got a tougher gross margin comparison in Q4 so; I guess I'm trying to understand how to be thinking about that particular part of the business.

I know that you started to have some military business creep into the fourth quarter last year, which I know has helped your wholesale gross margin. So, would you expect to see continued improvement in those operating efficiencies that's going to continue to drive a greater margin there? Or you wouldn't expect to see quite as much of an improvement as you saw, or you captured, in the third quarter?

I think that, Mitch, in looking at your margins, on a quarter-over-quarter basis, you said our margin was, wholesale, down in the third quarter, versus what it was in the first half. And that's right because we shipped -- you know, our product mix is more work and western products, which carry higher margins than hunting products.

They begin to shift in the third quarter, as well as, we do a lot of shipping to our major retailers, which we have lower margins on in that. So, I think our margins will begin to come back to what they were in the first and second quarters, closer to that than what they were in the third quarter because that will, again, switch back a little bit more to more work and western business as we move into the fourth quarter.

Okay.

And frankly the largest loss was in western and that's where some of our best margin is.

Yes.

They might not be quite as strong as they were in the first and second quarter but, certainly, up from where they were in the third quarter.

Okay, that's helpful and then, maybe, last question for me, just kind of housekeeping. It seemed like you had tax benefit in the third quarter. How should I be thinking of taxes in Q4? And then, with your funded debt dropping a good chunk, how should I be thinking about the interest expense? I would imagine that continues to trend down, going from Q3 to Q4.

As far as the taxes, we're accruing an effective tax rate; we estimate our tax rate, on income for this year, to be about 36%. So, that's what we're currently estimating our effective tax rate to be for the year.

Okay.

And, our effective tax rate for, you know, year-to-date, is made up of that 36%, less the one-time adjustment that we have in the third quarter here.

Okay.

So, as far as interest expense, you're right. I mean, we anticipate our debt levels to be down, continue to be down, year-over-year. And as well as interest expense, interest rates are continuing to run somewhere a point-and-a-half and two points less than they were running last year, at this point, on our revolving line of credit.

So, those two combined, we anticipate our interest expense to be down, certainly, somewhat similar to what it was down in the third quarter, year-over-year.

Okay, that's helpful. Great; thanks and good luck.

Thanks, Mitch.

Thank you. Our next question comes from the line of Reed Anderson. Please state your company name followed by your question.

D.A. Davidson; good afternoon.

Hi, Reed.

Hi. Hey Mike; I was just curious; you know, if you could just talk a little bit about, you know, timing in terms of how the quarter progressed. I mean, was it just steadily getting worse? Or did you, like a lot of people, kind of -- we got into September and just got dramatically worse and it's continued sort of that pathway here into October? Just a sense of timing.

No, Reed, that's not the case. And, this major supplier, we received our last shipments from this supplier in July.

Okay.

So, we didn't see a huge decline in orders. We had some orders that we couldn't deliver; there were some declines. It didn't all occur the last two weeks of the quarter at all.

We were in the struggle for the whole quarter but there was not a lot we could do about it, other than try to cut cost. [That's something] we've been working on all year.

But again, if you were to ex out that abnormal supply issue, it wasn't -- you didn't see a dramatic swing late in the quarter or anything like that?

Just gradually; I mean, the largest decline in our business, versus last year, really, and the one that couldn't have been caught by supply, was we just didn't have orders for our outdoor business, outdoor footwear.

And, you know, we've seen a steady decline in that business over the last three years. And we've talked about the reasons for that decline on other calls.

And was that, particularly if you look at the outdoor piece, was that fairly consistent, you know, the weakness there across, kind of all your major sellers of that? Or were there some areas that might be a little bit worse than others?

The answer is, I'm not going to name customers, but there were some positives, nice double-digit increases on a very positive note. And there were a number of negatives. So, it wasn't across the board, which is interesting. And it typically never is.

There're always some people that can figure it out a little ahead of others.

And the positives, would they be more isolated on a certain regional basis, that kind of thing?

No. Our largest positive is with the national chain.

I'm talking national chains that would have distribution throughout the country.

Okay. In terms of inventory, I just -- your comment there, I mean, do you feel comfortable with that? Do you feel it's all, given sales, where they've trended it's a little heavy? Or do you feel like you've got a good handle on that, at this point?

Well, even with the sizable miss in top line sales, we had an inventory reduction in the quarter. So, I think if we'd have picked up some of the -- if we had the proper inventory in the proper place, we would've picked up some additional sales.

We continue to look at that inventory; we want to turn it tight, more times. We've got a logistics team looking at inventory turns. We're going to shrink the inventory by the end of this year and we're going to continue to shrink it in the next year. And it's all about reducing debt and turning inventory and doing a little bit more with less.

Okay and then, lastly, I was just -- could you just, Mike, remind us, or whoever, of just what kind of -- the Wal-Mart program, the 400 stores, just specifically what we're going to see in there?

You're going to see a genuine Dickies product offering of four styles on work boots. And Williamson-Dickies, the Dickies apparel, is a sizable, sizable product offering on work apparel, jeans and pants and shirts at Wal-Mart stores and we're going to be combining some of the marketing on Dickies apparel and Dickies footwear.

We've been trying to make this happen for a long, long time; two, three years and we're so excited to get those products in there before the holiday selling season. And the anticipation would be that, if that's successful, no reason, even in these economically challenged times, more people are going to Wal-Mart, instead of less; we see no reason that we won't have a successful rollout and we'll add the stores over the next 12, 18 months, add more stores and, therefore, more pairs.

And remind me again, when is that going to be in the stores?

It'll be on the shelves before Thanksgiving. I mean, three weeks away, three, four weeks away. [They're] in transit right now and should be in the stores around the 15th of November.

And what's kind of the average price point on that product you'll be selling?

Oh, probably around the $60 a pair.

Okay.

I mean, they're upper-middle price for a Wal-Mart customer but they're branded goods and a very good quality product.

All right, that's it for me. Thanks.

Thanks, Reed.

Thank you. (OPERATOR INSTRUCTIONS)

And at this time, there are no additional questions. I'd like to turn it back to management for any closing remarks.

Thanks, Vince. Well, thank you ladies and gentlemen for listening in and we look forward to reporting to you again in three months. Thank you very much, Operator.

Thank you, sir. Ladies and gentlemen if you'd like to listen to a replay of today's conference, please dial 1 800 405 2236, using the access code of 11121442 followed by the pound key.

ATC would like to thank you for your participation. You may now disconnect.