Rocky Brands Inc (RCKY) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands fiscal 2009 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 questions. (Operator instructions). I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Mr. Brendon Frey of ICR.

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 ended December 31, 2008.

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

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

Our second-quarter sales results reflected the same challenges we, along with many of our peers, have been facing since the second quarter of last year. The difficult economic conditions continued to impact consumer demand and, therefore, our wholesale accounts are still being very cautious with their purchasing, choosing to place orders much closer to season until visibility improves. In an effort to limit our potential risk we, too, are being cautious with the level of product we are shipping several retailers, which, along with the lost sales from some bankruptcies in the first quarter, negatively affected our second-quarter performance of our wholesale business.

The environment is also impacting our retail division accounts, as accounts have been reducing their workforce and cutting their budgets in response to the economic slowdown. We knew starting the year that the first two quarters would be tough, given the comparisons we were up against. From a sales and earnings perspective the first quarter was in line with our internal projections. In the second quarter, sales were again generally on plan, and we continue to do a very good job controlling expenses. However, to help drive some incremental purchases, we incentivized many of our retail partners with reduced pricing on several styles during the quarter. Along with higher closeout sales of some obsolete product and higher manufacturing costs both at our company-owned facilities and third-party manufacturers, this contributed to a 570-basis-point decline in our gross margins and resulted in a slightly wider loss than planned.

While we have seen some signs of stabilization, we expected to begin benefiting from the stimulus spending earmarked for infrastructure projects by now. But that has not happened yet.

The good news is we move into our peak selling season with operating expenses down nearly $6 million to date and better visibility at a greater percentage of our businesses in the second half of the year are pre-booked. Based on our current shipping schedule, we are optimistic we can deliver improved profitability year-over-year in the second half of the year.

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

Let me begin with our wholesale division, where sales were $37.9 million compared to $42.5 million in the corresponding period a year ago.

Within our Work categories, which includes footwear under our own brands Georgia and Rocky, and our licensed brands, Dickies and Michelin, sales were $22.5 million in the second quarter compared with $25.2 million in the prior-year period. As you can imagine, ever since the economy went into recession, the Work footwear category has been a challenge for all retailers, both big and small.

Our 10.7 decrease in the category appears to be in line with our customers' and wholesale competitors' experience and is in line with our expectations. This category relies heavily on at-once orders. While the majority of our retailers continued to carry the breadth and assortments of our brands, most of our retailers have cut back the depth of their model stocks of our products. They are choosing to rely on our inventory to replenish their needs on a just-in-time basis. Now that our retailers' inventories are in line, we expect that our sales will improve quickly when the economy recovers.

Turning now to the Western category, second-quarter sales were down $0.5 million to $6.7 million versus $7.2 million a year ago. With respect to credit risk, Mike commented that we were being extra cautious with respect to our shipments to retailers with weak balance sheets. The Western channel is particularly challenging for us, where most of our customers are very small and where we have just a handful of large customers. We are assessing risk daily at these customers to maximize business with them, and lately we have been taking a very conservative approach, foregoing some potential business.

Now to our Hunting category. Second-quarter sales were $6.3 million, down 20% from sales of $7.9 million last year. We have some timing issues to report this quarter, in this category. Over the past few years we have seen these retailers buy close to the hunting seasons. In response to the economic conditions this year, we see an amplification of this trend, plus last year in June we made a one-time off-price shipment to a large customer, which is impossible to anniversary.

For the year, though, we are cautiously optimistic about making our internal sales plan for this category. At this point this year, we have a larger percentage of our planned sales shipped and booked than we did at the same time last year.

Now to international sales -- as you know, as part of our longer-term growth strategy, we are focused on the development of a network of European distributors for our brands. Despite the severity of the economic downturn in Europe and the challenges for our Baltic states partners with their embattled currencies, we remain vigilant in our commitments to the region. Last month we announced that we had signed a multi-year deal with a premier UK distributor of shooting sports equipment, Garlands. On August 15, we will commence shipping Garlands their apparel orders, which will represent a large increase in business in the UK versus prior years. This past weekend, Garlands showcased our products at CLA, the consumer show attended by 110,000 hunting enthusiasts in Warwickshire, England.

In mid-September we will be previewing our Durango and new Giant by Georgia lines at the MICAM show in Milan, Italy, with a view to further penetrating Europe with lifestyle products.

Turning now to our retail division, as we discussed in detail on our last earnings call, we are in the process of restructuring our retail business model. This has involved developing a web-based platform that will allow us to conduct a much larger percentage of our transactions via the Internet versus our fleet of mobile trucks. Due to this ongoing transformation, which has included reducing the number of vehicles in our fleet and the number of storage facilities from which they operate, we have reduced our expense structure significantly. We plan sales to be down year-over-year as our e-commerce initiative is still in its early stages of growth. That said, since January of this year, we've seen our sales from our websites almost double, as they are now over 9% of our total retail sales versus 4.3% last year. Our strategy seems to be working. Our industrial and hospitality customers have positively responded to both the cost savings and the convenience of purchasing their safety footwear via the web.

Second-quarter sales were $12.3 million, down slightly from the first quarter and just below plan versus $16.2 million the year before.

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

Thanks, David. Net sales for the second quarter decreased 15.4% to $51.2 million compared to $60.5 million for the corresponding period a year ago. Gross profit in the second quarter was $17.7 million or 34.6% of sales compared to $24.4 million or 40.3% of sales for this same period last year. The decrease in gross margin was primarily attributable to higher closeout sales, lower retail sales which carry a higher gross margin and increased manufacturing costs versus a year ago.

Selling, general and administrative expenses decreased 13.4% or $2.8 million to $18.1 million or 35.4% of sales for the second quarter of 2009 compared to $20.9 million or 34.5% of sales a year ago. The decrease in SG&A expenses is primarily the result of reductions in salaries and benefits, freight, sales commissions and Lehigh mobile store expenses, partially offset by a $400,000 increase in the bad debt expense versus a year ago.

Loss from operations was $0.4 million for the second quarter of 2009 compared to income from operations of $3.5 million for the second quarter of 2008.

Interest expense for the second quarter decreased 20.8% to $1.9 million from $2.4 million in the second quarter of 2008 as a result of lower borrowing under our credit facility combined with lower interest rates compared to the same period last year. For the quarter, we reported a net loss of $1.4 million or $0.25 per diluted share compared to net income of $0.7 million or $0.13 per diluted share in the second quarter of 2008.

Now turning to the balance sheet, funded debt as of June 30, 2009, decreased 13.7% or $13.9 million to $87.5 million compared to $101.4 million at June 30, 2008. Inventory decreased $6.2 million or 7.3% to $79.3 million at June 30, 2009, compared with $85.5 million on the same date a year ago.

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

Thanks, Jim. As I stated earlier, we are in a good position to report improved profitability during the second half of the year, driven primarily by the reduction of our operating budget and the exceptional -- and expected leverage from higher sales volume compared to the first six months of 2009. Gross margin should also rebound from second-quarter levels as our Caribbean factory is now running at full capacity in advance of our peak selling periods, and the cost increase we received from some of our suppliers late last year have now modified.

We now anticipate that our top-line prospects will remain challenging until early next year, as any meaningful improvement in the retail environment appears a few months away. Therefore, in the near-term, we will continue to focus on things we can control, such as our expenses, inventory levels, the latter of which will help further reduce our debt levels and interest expense for the remainder of the year.

At the same time, we're developing new lines of innovative footwear for our traditional Work, Western and Hunting categories that we believe will help drive future sales, particularly once economic conditions improve. Early response from accounts of several of our 2010 styles have been very encouraging. We will also be introducing casual footwear under our established Rocky and Georgia brands, beginning next year, while at the same time targeting a more casual consumer with several of our Durango styles. This will allow us to go after new consumers and open new accounts, including big-box footwear chains and national department stores. The product will reflect our core message of durability and comfort and will be positioned with price points that offer the consumer a very compelling value perspective.

We thank you for your continuous interest and support, and we are now ready to take questions. Operator?

(Operator instructions). Mitch Kummetz, RW Baird.

This is actually [Kevin Kent] calling in for Mitch; a couple questions here.

First, you mentioned on the wholesale side that retailers are operating with leaner inventory levels. Do you guys expect that trend to continue into the second half here?

We think they will for the short-term, until their business improves, yes.

Okay. And [at first] backlog -- I know you mentioned at the end of Q1 that it was up. Is that still up in the second half, and how has that changed since you guys reported your Q1 earnings?

I believe the backlog to be -- when we said that at Q1 we were focused on futures that had been booked for third-quarter shipping, and that was up against last year. So historically, over three quarters, we are pretty much selling shoes every day. And in our Hunting category, those would be backlogged in futures, and that's really what we are referring to.

So, to answer your question, Kevin, backlog is no greater than it was the first three to six months at the first of the year. They're still playing it very tight to the vest, expecting us to have inventory upon their beck and call.

Okay, and a couple more questions here. On the retail side, when do you expect to anniversary the transition from mobile stores to Internet?

We really started the transition in October-November of last year, in earnest.

Okay. And then, as far as just guidance, what's expected in the second half sales trends to reach the improved profitability levels that you guys mentioned, and how does that break down within the wholesale and the retail business? And then also assuming a stronger -- or should we be assuming a stronger SG&A decline in Q3 than in Q4, given the easier comparisons?

I think, from the top-line standpoint, we see sales being down in the back half of the year similar to where they were in the front half, maybe a little bit less only from the standpoint of the decline really started last year, particularly in fourth quarter, in the sales. So both wholesale and retail -- we look at those to be down year-over-year in the back half of the year.

From a gross margin standpoint we feel like we've got these increased costs behind us, and we should be able to anniversary our gross margins in the back half of the year, both in third and fourth quarter. And from SG&A we'll see -- the declines we believe will still be relatively significant, but you're right; they will be -- as we start to anniversary, they will not be as strong as they were in the first and second quarters.

While we're on the subject, as far as manufacturing costs, are you guys expecting a decline in the second half?

Kevin, yes, especially in our Dominican plant. We started to gear that plant up with a lot of production, late in the second quarter. But it really wasn't to the point that it could possibly affect the second quarter. So we are running at capacity, currently.

Those expenses that we incurred and that we recognized in the second quarter because of our FIFO accounting were actually generated late last year in the fourth quarter, particularly in December of last year. So our factories are running more efficient now than they were at this time last year. And it also is not only our company-owned facilities; it was also -- particularly as we resourced a significant portion or all of our Western last year because of our problem with our distributor, we recognized some -- I'm sorry, our vendor -- we recognized some increased costs, and those rolled out to the P&L in the second quarter. And we weren't able to take any price increases on those last year.

(Operator instructions). We have no further questions in the queue at this time.

If there's no further questions, we thank you for listening in. And we look forward to meeting with you after Q3. Thank you, operator.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.