Rocky Brands Inc (RCKY) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Fiscal 2009 Fourth Quarter and Year-End 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. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded. And now we'll turn the conference over to Brendon Frey of ICR.

Thanks. 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.

And now 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. With me on today's call is David Sharp, President and Chief Operating Officer, and Jim McDonald, Chief Financial Officer and Treasurer.

We are very pleased with the solid fourth quarter results we reported today after the close. Our operating performance exceeded both internal and external expectations. And when we combine the third quarter, it made for a very rewarding second half of 2009.

Our non-GAAP diluted earnings per share for the fourth quarter improved to $0.24 from $0.13 despite a modest decline in sales as we continue to benefit from a leaner infrastructure and lower interest expense. SG&A expenses were down approximately 15% versus the year-ago period. The sixth consecutive quarter of double-digit percentage declines.

During the fourth quarter, we took additional steps to right-size our operating platform by further reducing the number of mini-warehouses used to serve our fleet of mobile shoe centers and relocating the Company's customer service center from Nashville to Nelsonville.

As 2009 began, it was clear that the near-term selling environment was going to remain challenging. While we did see some pockets of improvement during the year, retail generally continued to be very cautious with their inventory commitments and bought much closer to season. Given the uncertainty about the top-line prospects, our focus in 2009 was on further reducing our expense structure, a process we began in the second half of 2007; improving our accounts receivable and inventory management; and investing in R&D to develop innovative new product lines and brand extensions.

We were confident that if we could successfully execute this strategy, we would be able to strengthen the balance sheet in a down year and better position the Company for profitable growth when the markets recover. We are very pleased with what we were able to accomplish in 2009, particularly with regards to our balance sheet, where we ended the year ahead of plan. As I stated earlier, selling and general and administration have declined more than 10% on a year-over-year basis for the past six quarters. For the full year, SG&A was down approximately 14% from more than $12 million compared to 2008 with the majority of the cost cuts coming out of our retail operations.

Since we accelerated the rollout of our direct ship program, we have been able to reduce retail personnel, reduce the total number of mini-warehouses to 19 from 49, and remove nearly 30 mobile shoe stores from our operations.

Elsewhere in the organization, we have lowered headcount, reduced our customer service center, and instituted a tighter fiscal control across the board. The direct result of these actions became apparent over the last six months of the year. We are excluding the impact from restructuring charges and tax benefits, diluted EPS improved 60% to $0.74 compared to $0.46 we reported the last six months of 2008 despite a sales decline of 7% over that same period.

Equally important was the improvement we displayed in managing our receivables and inventory in 2009. Through a heightened focus on collections, we were able to reduce accounts receivable by $14 million, or 24% at year-end. At the same time, we did a much better job of aligning inventory levels with projected sales volumes. They were down 21% compared to a year ago, slightly ahead of sales, which were down 15% for the year. These improvements combined to free up considerable amounts of cash and allow us to significantly reduce the levels of borrowing on our credit facility during the course of the year.

We ended the year with a total debt of $55.6 million, down 37%, or $32.1 million, which, in turn, lowered our full-year interest expense 20%, or $1.8 million.

Finally, we have spent a good deal of time this past year developing what we believe are exciting and innovative new styles under both our existing collections as well as our new brand extensions. The feedback from retailers have been positive with initial order commitments, giving us encouragement we can grow our top line in 2010.

David will now provide more color on each of these operating segments, and then Jim will review the financials. David?

Thanks, Mike. Again, as Mike noted, as we have been working on reducing inventories and receivables, SG&A and debt, we have also been developing top-line growth initiatives in our wholesale business that should bear fruit in the near and longer term. But before I discuss these, we would like to give you some highlights from the quarter.

Obviously, the early and sustained cold, wet winter has been helpful in stimulating sales for our hunting, waterproof, and insulted Rocky branded products. Favorable weather coupled with an increase in hunting licenses issued, the first increase in many years, offset the earlier declines in the business that we experienced through the first three quarters of 2009.

During fourth quarter, sales in our hunting footwear category increased 9%, to $6.7 million from sales of $6.1 million last year. We experienced solid sales at retail with our innovative hunting apparel and thermal underwear systems also. Sales of apparel in the fourth quarter were $4.2 million compared to $4.8 million the year before.

Our sporting goods retail partners have enjoyed sizable sales increases in the hunting category this year. One great benefit of this is that they sold out of their inventories, which were light, due to the poor economic conditions, and they are responding well to our new innovative style introductions for the fall 2010 delivery. Historically, in our hunting category, we usually experience strong orders in the year following a cold and wet winter.

Now to our western category, where we sell our Durango and Rocky western products. In the fourth quarter sales were $7.6 million versus $8.3 million last year. As you are aware, there is a fashion trend in western boots, particularly women's western boots. However, demand outpaced our suppliers' key styles, and we were unable to fully capitalize on the potential sales during the holiday season.

Now turning to the sales of our duty category. Sales in the quarter increased slightly to $5.1 million compared to $5 million last year. More on important growth strategies in this category in a minute.

Finally, in our work boot category, our largest volume category. Sales for the quarter were $21.3 million versus $23.5 million in 2008, by far, our strongest quarter in 2009 on a comparative basis. We were pleased to see that this consumer was back shopping, and our retailers were filling in their depleted inventories with more confidence versus earlier in the year.

So this ends commentary on our wholesale division fourth quarter sales performance. Now to just touch on growth plans in wholesale for 2010. There are four distinct initiatives. The first involves the brand and line extension of our Georgia and Durango brands. The second involves capitalizing on the growing popularity of our military boots. The third involves customer segmentation, and the fourth involves leveraging our brand equity worldwide.

So, first, brand and line extension. What we are testing here is to leverage the brand equity of Georgia boot and Durango in such a way that it is appealing to our existing consumers and dealer network and also will attract new consumers and customers. For example, the Georgia brand, we recently launched Giant by Georgia, which capitalizes on the emerging vintage American trend. With Georgia boots' tradition and reputation for classic farm and ranch work product, we believe that new consumers will appreciate the brand heritage and authenticity when selecting additions to their lifestyle wardrobe.

Similarly, we recently launched into new markets with our western Durango brand by creating the lightest-weight boots in the marketplace. Employing an athletic shoe-like construction, this collection for men and women appeals to traditional western consumers, who we already sell to today, and it will open new doors to distribution in suburban and urban markets with special styling to appeal to the fashion sensibility of this consumer. Again, central to this brand in line extension strategy is that we are able to leverage the new product offerings at our existing customers while attempting to penetrate new channels of distribution.

Our second strategy is to capitalize on the growing popularity of our military boots. With the U.S. military strategy of rapid deployment of special operations units, in some cases they have found that centralized competitive bid procurement is impractical. A large and lucrative business has developed that supplies the special requirements of these elite troops.

There's a Rocky brand tradition of rugged, technical product innovation where we are uniquely qualified to understand the needs of these specialized troops. Over the past 18 months, we have invested heavily in a grassroots effort to understand and align with the procurement system in place and to design the products with specifications to meet these service people's needs. We believe that this effort will bear fruit for us in 2010 and beyond.

Sales in our military segments in the fourth quarter of 2009 were $3.3 million compared to $1.1 million in the fourth quarter of 2008. This increase was driven by our GSA contract, which we received last year.

Our third strategy of customer segmentation in our wholesale division is being largely enabled by our new business-to-business capabilities. Today, in our western duty and work footwear segments, 70% of that business is written in the form of at-once [fill-its]. Now incentivized by rewards, dealers are rewarded for behaviors such as billing into predetermined model stocks on a frequent set time schedule. When these dealers visit the site, we are able to customize offers to them depending on their account status. We are also asking our smallest high-service, slow-paying customers to transact business with us using the B-to-B site exclusively and prepaying for shipments with a credit card.

Our fourth strategy to grow our business internationally was one that was gaining velocity early in 2008 and was derailed by the economic downturn. As 2009 progressed, we were able to rekindle interest with foreign distributors, specifically our Rocky hunting products that are now sold in 23 European countries by four high-profile distributors.

Over the next 30 days, we expect to finalize two additional distribution agreements for our Giant by Georgia boots and Durango brands -- one agreement in the United Kingdom, and the other in France, Belgium, and Switzerland. Clearly, the casual lifestyle market in Europe is a great opportunity for us with the American traditional positioning of our Georgia and Durango brands.

Finally, let me just touch on our retail business. As Mike said, we have worked hard to restructure this business for the past 18 months. We can now run this business profitably on lower sales. Our customers are responding to our new business proposition; that is, we offer the lowest-cost work for resolution delivered directly from our central warehouse. Where we can do it profitably, we still offer service through our mobile door service.

Sales in our retail division were $12.4 million in the fourth quarter versus $15.4 million in the prior-year quarter.

I will now turn the call over to Jim to review the financial results.

Thanks, David. Net sales for the fourth quarter decreased 6.5% to $61.7 million compared to $66 million for the corresponding period a year ago. We reported fourth quarter net income of $0.9 million, or $0.16 per diluted share versus a net loss of $2.2 million, or $0.41 per diluted share for the fourth quarter of 2008.

Results for the fourth quarter of 2009 included restructuring charges of $0.08 per diluted share associated with the closing of 15 mini-warehouses that we operated under our Lehigh retail division and the relocation of our customer service center to Nelsonville from Nashville.

Results for the fourth quarter of 2008 included noncash charges of $0.54 per diluted share for the writedown of the Lehigh and Gates trademarks. Excluding these charges, net income was $1.6 million, or $0.24 per diluted share in the fourth quarter of 2009 compared to a net income of $0.7 million, or $0.13 per diluted share in the fourth quarter of 2008.

Gross profit in the fourth quarter was $22 million, or 35.7% of sales compared to $24.8 million, or 37.6% of sales for the same period last year. The decline in gross margin was primarily attributable to the increase in sales in our military segment, which carry lower gross margins than our retail and wholesale divisions.

Selling, general, and administrative expenses decreased 14.7%, or $3.2 million to $18.4 million, or 29.9% of sales for the fourth quarter of 2009 compared to $21.6 million, or 32.7% of sales a year ago. The decrease is primarily the result of reductions in salaries and benefits, advertising expense, Lehigh mobile store expenses, and bad debt expense.

Income from operations, excluding the restructuring charges, increased to $3.6 million or 5.8% of sales for the period compared to income from operations, excluding the noncash intangible impairment charges of $3.2 million, or 4.9% of sales in the prior year.

Interest expense for the fourth quarter decreased 17.3% to $1.8 million from $2.2 million in the fourth quarter of 2008 as a result of reductions in average borrowing compared to the same period last year.

Now for the full year. We reported net income of $1.2 million, or $0.21 per diluted share versus net income of $1.2 million, or $0.21 per diluted share in 2008. Excluding the aforementioned charges, we reported earnings of $0.29 per diluted share compared to $0.75 per diluted share in the prior year.

Now turning to the balance sheet. Inventory decreased $14.9 million, or 21.2% to $55.4 million at December 31, 2009, compared with $70.3 million on the same date a year ago. Our accounts receivable decreased 23.8% to $45.8 million versus $60.1 million. And our days sales outstanding improved 14%, or 11 days, in the three months ended December 31, 2009, compared to the same period last year.

Funded debt as of December 31, 2009, decreased 36.6%, or $32.1 million to $55.6 million compared to $87.7 million as of December 31, 2008.

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

Thanks, Jim. While economic conditions have certainly improved versus this time a year ago, it appears that the recovery is going to be longer and slower than originally anticipated. That said, we are more than optimistic about our growth prospects entering 2010 than we were a year ago for a few reasons.

First, comparisons in our retail division get easier beginning in the first quarter. Second, our new products and brand extensions will drive increased shelf space at retail and opening new channels of distribution. And, third, we will have a full year of military sales from the GSA purchase agreement we received in July.

We are confident that our recent efforts to take costs out of the business and enhance the efficiency of our organization combined with our improved growth prospects will result in better bottom-line trends in 2010. Due to the timing of certain expenses, we expect modest year-over-year improvements in the first quarter with more meaningful gains being made in the second quarter. As we get closer to the peak selling season and gain more visibility, we will update you on our outlook for the back half of this year.

Finally, I would like to thank all employees for their many contributions this past year. And our shareholders -- thank you for your continuous interest and support. Operator, we are now ready to open the call for questions.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Mitch Kummetz, Robert W. Baird.

Yes, thank you. I've got a few questions. First, Mike, could you tell us where you are in your transition on the retail business to more of an e-commerce platform? I think on the last conference call it was mentioned that I think it was, like, 13% or 14% of your sales were done on the Web in your retail business, and I'm wondering if that's increased in the fourth quarter.

It did increase in the fourth quarter, Mitch. And we are looking for upwards of 25% over the Web in 2010.

Okay, upwards of 25%. Could you tell us where it was in the fourth quarter?

No. Not exactly.

Okay, but --

We'll get back to you, Mitch, on that one.

I'm guessing somewhere below 25% then?

Yes.

Okay. So as you move towards that target, a couple of things. I assume you would be able to continue to take out additional expense as you have over the last year, as you have been transitioning that business. So I guess that's the first question. And, secondly, I'm wondering, it seems as if your transition has hurt you a little bit on the sales side. So as you continue to move towards that target of 25%, should we expect to see continued pressure on the sales piece until we get there?

No, I think -- actually, I think we're at an inflection point on sales. We are gaining ground with -- we're getting new customers that were being serviced by our competitors, and attracted them with the lower-cost solution.

This is Jim. I think that we're -- as David said, we've kind of plateaued out here as far as the sales decrease. There may be some modest decreases but certainly not to the magnitude that we had in 2009. And as far as the cost structure, we've aligned that now. It's pretty visible to us when a mobile store is not profitable, and that we can make the appropriate action to make sure that it doesn't become a drag on our profitability.

Mitch, it was an old business model that the competition has been -- become very fierce and extremely difficult to make any profit, on average. And so we had to make these changes. They were the right changes to make, and as we grow the business through the Internet or through our direct shipping of our warehouse in a single location, our -- number one, we're passing on a major savings to the manufacturer, who is paying for the footwear, and we're able to maintain margin. So tough decision, right decision. And I think, as David said, we have passed a point that we believe we're going to return very nicely to profitability. The sales increases are going to be difficult to come by, but they are going to come because we are offering such a great deal, they can buy shoes much cheaper over our direct shipping than they can through a truck.

Okay. And then on the military business and this GSA piece, which is $3.3 million military in the fourth quarter. I think on the last conference call you were expecting Q4 to be bigger than Q3, and I think, Mike, you were talking about even ramping beyond that into the first half of 2010. Is that the case? And what kind of run rate should we be expecting from this in -- in this year?

Well, we have this GSA order that was basically half, a little over 200,000 pair, which is a little -- about $16 million that we are aggressively manufacturing as we speak. I'll have to get back to you on the differentials -- not coming to mind -- between the first two quarters of last year, and this year. I can get you those numbers, or Jim can.

It will be a sizable increase, and we are still waiting to hear on the large DoD business. We bid on $100 million Department of Defense business over a five-year period that has been out there now for 18 months. We had the last bid opportunity about six, eight weeks ago, right before we saw you out at ICR. So we still haven't heard on that one. And then as David was mentioning, we're picking up more and more high-margin business with our specialty forces product, which is still going to military, but it's more a full-margin business.

Okay. And then let me ask one last question. On the SG&A, you guys have done a nice job managing that down to $3 million-plus in the quarter, and down $12 million-plus for the year. How shall we be thinking about that in 2010? I'm guessing you'll see some additional cost savings as a result of closing these mini-warehouses. But I'm also wondering how we should be thinking about certain line items in the SG&A, like salaries and benefits and advertising expense, which you guys called out in the press releases as being down. Do those come down even further? Or are you starting to think about reinvesting in certain areas as we go into 2010?

This is Jim. We are -- we do have some cost savings coming from the closing of these mini-warehouses, and the release we put out, we estimated them as approximately $2 million. We are planning -- we have been cutting back on advertising expenses over the last -- particularly the last year and even going back into '08. So we are planning on reinvesting back in some advertising of the brands. And so those two are, for the most part, are a wash there.

So I think SG&A, going forward, will be -- we've kind of hit steady state on that, maybe have some savings there, and the only increase in SG&A would be for our variable SG&A as we move forward, which is our commissions and our distribution expenses.

(Operator Instructions) Dan Meyers, D.A. Davidson & Company.

I'm just wondering if you had any more details on the increased shelf space and new channels of distribution at retail -- kind of where you see this happening? Thanks.

For example, with the new line extensions we've done, the lightweight product that we've done in our western Durango brand, we've had a lot of interest from Genesco at Underground Station and Journeys for fall of 2010. We currently have the product at Shoe Carnival and just received reorders and commitments to more stores for fall of 2010. We are seeing quite a bit of interest in our kids' line in western, and we've had interest from retailers like Nordstrom's, and retailers like David Z in New York has indicated interest in the new line extensions in Durango. So these are all -- our business is substantially today in the core western market, and these are all outside of the core western market.

Okay, thanks. Any details on the outdoor category? Have you seen impacts from any retailers going out of business or any pickups in certain areas of that channel?

So, Dan, this is Mike. Last year, not '09 but '08, was the worst year I have ever seen in retailers -- large retailers in the outdoor business going out of business and bankrupt. But that did not recur in '09, which is good news.

But there are not a lot of new players in the outdoor market. But, really, what we're seeing there is that the appetite is much greater in verbals and in hard orders, and the pipeline is pretty thin. So it is our -- it's the majors, it's the Bass Pros and the Gander Mountains and Cabela's in a smaller way, but it's the majors that are -- Dick's Sporting Goods -- that are committing to a higher percentage than we have seen in some time. So we are encouraged with that, obviously.

Mitch Kummetz, Robert W. Baird.

Actually, I've got a few more for you guys if you don't mind. Jim, on the debt, down $32 million-plus for the year funded by working capital management as the inventories come down. I think it was down, what, 21% at year-end? How are you guys thinking about inventory in 2010? I mean, is that down to a level where you're just kind flattish, going forward, on a year-over-year basis? Or is that still a source of cash for you guys to continue to pay down debt as we work through the year?

I think it's still a source of cash for us as we move forward but not to the extent that we had in 2009. So there will be some sources of cash there but not to that extent.

Okay, thank you. And then on the gross margin, the gross margin was down in the quarter year-over-year and, Jim, you mentioned that a lot of that came from the military. If I did my math right, if I stripped out the military, it still looks like your gross margin was down a tad. Could you address that or give us what the gross margin was by the retail and wholesale segments? And then how are you thinking about gross margin in 2010? Obviously, still some pressure from mix, particularly in the first half on the military, and I don't know if you're seeing some pressure from product costs coming into the back half of the year. We've heard that from some other companies.

Yes, our gross margin in our wholesale business was 34.8% in the fourth quarter. That was actually up from last -- from 34% in '08. Our retail margin was 45% versus 51%, and as we move more to this direct ship, we give incentives, as Mike said earlier, to our customers. So our operating margin was up, but our gross margins were down, because we took expense out of it.

Got it. And then I would imagine that you'd see a similar impact from retail, at least through the first half of 2010, is that right, as you continue to give incentives but benefiting on the SG&A side?

Yes, I think as we continue to -- as the direct shipment order -- the direct ship business continues to grow, you'll see margins come down as it becomes a bigger percentage of our business. But operating margins go up.

Okay. And then a final question for David. In your remarks, you talked about the hunting business and the benefits that you saw there from weather, and in a typical year when that happens, that that positively impacts your pre-books the following year. I think you guys -- you've been to SHOT Show and some other tradeshows, I would imagine. What are you seeing in terms of fall pre-books for the hunting business, or at least some preliminary conversations there? And is that kind of typical cadence of the past? Should that -- you know, would you expect that in 2010 or are we just in a different environment now?

I think we're probably benefiting from the retailers went into the season very, very lean based on the economic conditions and the short season, fees, and nature of the hunting business. And were very conservative, and they had a very, very good -- they had a blowout season at retail because of the weather, hunting licenses were up also.

So actually SHOT Show was the busiest show that I've attended in probably five years of any shows -- WSA or the Denver Western Market. It was an extremely busy show with a lot of confidence expressed from retailers, both big and small. So I think we're going to see our business improve with most of the majors if not all.

I think all the majors.

And we've also become better aligned in the last 12 months with some buying groups, and those shows have been going very well, too. So I think that we're, at this point, we're pretty optimistic about fall/winter 2010 in our hunting business.

I'll just echo David on the SHOT Show. It was so exciting to see interested, crowded aisles and interested customers. And then the SHOT Show has evolved from the hunting and sporting goods side, really, to military. The world comes to the SHOT Show and buys military. We have a separate booth for our military and duty line, and that booth was packed, and so it's a dual -- if you haven't been in a while, Mitch, and I know you probably don't need another show to go to. But if you had been there for a day, you would feel what's going on.

Secondly, or lastly, you mentioned price increases possible, you're hearing. We're hearing that also, but I don't think it's going to affect us greatly this year. I think we'll be able to get through 90%-plus of the year without having to pass on a price increase. But it's definitely coming, and probably more concerning than pricing or as concerning as pricing is the availability of all the footwear -- getting product made on a timely basis.

Okay. Let me ask you one other question. On the Durango business, it sounds like you're having some success placing these line extensions, and I'm just wondering, it would be more on the core business. It seemed like this past holiday season, we had kind of a broader women's boot trend again, and I think that did encompass western boots to some extent. I know that we went through this period, I don't know, three or four years ago, where western was trending well. How do you think about that business? And I don't know if there's anything you can say in terms of the pre-books there, you know, with midyear retailers wanting to increase their orders on just women's fashion boots, in general, including western?

I think one good indicator of our business there is that -- this business is very fragmented at retail. You have, one, small independent retailers, and just a handful of large regional players. And our business with those regional players, we're getting more and more shelf space there. I think that the smaller independents continue to be conservative because of the economic conditions. But it's certainly an area that we are very focused on from a product development standpoint and a marketing standpoint. I think that we are in a good position because competition-wise, there are very few players in the market that have the sourcing, the design sourcing, marketing capabilities that we have. So I think that's playing well for us.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Thank you very much for calling in and listening. We look forward to building our business and increasing our profits this year. Thank you, Operator.

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