Rocky Brands Inc (RCKY) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter Fiscal 2010 Earnings Conference Call. (Operator Instructions.) I will now turn the conference over to Brendon Frey of ICR. Thank you. You may begin.

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, 2009.

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

Thank you, and thank everyone for joining us this afternoon. With me on today's call is David Sharp, President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer. Today, we reported first quarter results that were a significant improvement over the same period a year ago. This included 12% revenue growth driven by sales gains in our wholesale and military segments, a 50% reduction in our loss per share. In our wholesale channels, we've experienced positive reaction to many of our new work lines, which is translating into healthy reorders for several top selling styles.

Over the past year, we've put greater emphasis on product design, focusing on developing innovative footwear that is comfortable and durable, while at the same time more visually appealing to the consumer, and this has helped us regain important market share. We've also improved our inventory management and increased our speed to market, which had been critical over the past 12 to 18 months as retailers are now buying closer to mark--to season. This has helped us dramatically lower our borrowing on our credit facility and is reflected in our funded debt levels being down more than $39 million, or 46%, to $46.7 million March 31, 2010, from $86.2 million on the same date a year ago.

Our retail sales were down modestly, however, it was the smallest decline in over a year as we continued to successfully transition more accounts to our direct order, direct ship platform. We began this process in earnest late in 2008 and we were up against tough sales comparisons through 2009 as we took more of our mobile shoe stores off the road. But while sales were down in 2009, expense was--expense also came down. And as we began 2010, we were well positioned to drive operating leverage in this division.

And finally, sales in footwear to the military--as sales in footwear in military increased nearly $5 million compared to a year ago, as shipments under our $29 million contract have accelerated. To date, we have shipped $8 million of the $14.5 million we have received in purchase orders under this contract, with the remaining 6.5 million to be shipped during the second and third quarter. We are currently awaiting a delivery schedule for the remaining $14.5 million.

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

Thanks, Mike. Net sales for the first quarter increased 12% to $56.1 million, compared to $50.1 million for the corresponding period a year ago. Wholesale sales for the first quarter increased 5.2% to $37.9 million compared to $36 million last year. The sales increase was driven by a 9.4% gain in our work category with our own brand, Georgia Boot and Rocky combined, increasing 14% while our licensed brand, Dickies, declined 20.6%. In addition, sales in our western category increased 13.7%. We also experienced a modest increase in our hunting category, offset by a modest decrease in duty sales.

Retail sales for the first quarter were $12.9 million, down 5.7%, from sales of $13.7 million a year ago. The modest decline was the result of our ongoing transition to a more direct order/direct ship platform and the decision to remove a portion of our Lehigh mobile storage from operating to help lower costs. Military segment sales were $5.2 million versus $0.3 million for the same period in 2009.

Gross profit in the first quarter was $18.8 million, or 33.4% of sales, compared to $20.1 million, or 40.1% of sales for the same period last year. The declining gross margin was primarily attributable to lower wholesale gross margin due to increased manufacturing cost per pair in our company owned factories, and an increase in sales of--to the military, which carry lower gross margins than our retail and wholesale divisions. We currently project gross margin to increase sequentially over the next three quarters as cost per pair in our factories decrease as a result of increased production schedules.

Selling, general, and administrative expenses decreased 9.6%, or $1.9 million, to $18 million, or 32.1% of sales for the first quarter of 2010, compared to $19.9 million or 39.8% of sales a year ago. The decrease is primarily the result of reductions in salaries and benefits, bad debt expense, and Lehigh mobile store expenses.

Income from operations increased to $732,000 or 1.3% of sales for the period, compared to income from operations of $146,000 or .3% of sales in the prior year. Interest expense for the first quarter decreased 7.3% to $1.6 million from $1.8 million for the first quarter of 2009, as a result of a reduction in average borrowings compared to the same period last year. Our net loss improved 50% to $560,000, or $0.10 per diluted share compared to a net loss of $1.1 million, or $0.20 per diluted share, in the first quarter of 2009.

Now, turning to the balance sheet. Funded debt as of March 31, 2010 decreased 45.8% or $39.5 million to $46.7 million compared to $86.2 million as of March 31, 2009. Our accounts receivable decreased 15.8% to $40 million versus $47.5 million. This is particularly important as the decrease came during a period when sales increased 12%, highlighting the improvement we have made managing our receivables. And inventory decreased $25.3 million or 32.2% to $53.1 million at the end of the first quarter, compared to $78.4 million on the same date a year ago.

Now, I will turn--now, David will update us--update you on the growth initiatives we are working on for this year.

Thanks, Jim. As we discussed on our last earnings call, we have four distinct initiatives that are centered on growth. The first involves the brand and line extension of our Georgia, Durango, and Rocky 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. In both Q4 of last year and Q1 of this year, we have begun to see the fruits of aggressive line extensions in our work segment with our Rocky and Georgia brands. Both brands in the quarter experienced sales increases in the mid teens. And by restructuring the way we bring new products to market, we have built a solid backlog of orders for new products scheduled to ship beginning in the third quarter. We now have four product releases a year versus one annual sales push.

Just briefly, we should touch on the pent-up demand for our basic work boot products and the effect on our reorder business. In the fourth quarter of last year, we saw blue collar consumers begin to return to our dealer's location to purchase work boots. This trend improved in Q1. Probably the most shining example of this is at one of our largest accounts, a national farm and ranch chain, where we have a mature Georgia boot business and where, in March, our retail results were up 23% and comp store sales of Georgia products were up 16%.

So with respect to the outlook for sales in our work boot category, given the sell-in of new products and the strength of our sell through of existing products, we have a great deal of confidence in replacing the Dickies sales in 2011, which as Jim mentioned, declined year over year by 20% in Q1. Also, it is important to note that the gross margins on our owned brands are approximately twice those we traditionally realized with the Dickies brand.

Similarly, we recently launched into new markets with our western Durango brand by creating the lightest weight boots in the market. Employing an athletic shoe like construction, this collection for men and women appeals to traditional western consumers who we already sell today, and it will open new doors of distribution in suburban and urban markets with special styling that appeals to the fashion sensibility of this consumer. These products were delivered in March and our key retailers are reporting strong initial sell throughs and are reordering. For example, at a major Midwest and western specialty chain these products are selling through 10% per week for the last three weeks.

Last weekend, we introduced new products to our western sales force that we will deliver for holiday. This is the first time we have introduced western products for this holiday season. This collection has already been previewed by our largest accounts and well received. We believe that this line presents a significant opportunity to increase November and December sales in this segment.

As discussed, an important facet of this line extension strategy with Durango and Georgia boot is that we are able to leverage the new product offering at our existing customers while giving us an opportunity to penetrate new channels of distribution. For example, we're pleased to report that we have been successful with this strategy at Shoe Carnival, Shoe Show, Underground Station, and Journeys.

Our second initiative is to capitalize on the growing popularity of our military boots. With the U.S. military strategy of rapid deployment and special operations units, in some cases they have found centralized competitive bid procurement is impractical. A large and lucrative business has developed to supply the special requirements of these elite troops. With the Rocky brand tradition of rugged, technical product innovation, we are uniquely qualified to understand the needs of these specialized troops. Over the past 18 months, we've invested heavily in a grassroots effort to understand and align the procurement system in place and to design the products with specifications to meet these service people's needs. We are beginning to see results. The Army and Air Force Exchange Service and NEXCOM recently committed to model inventory to key military bases, which will add incremental sales this year.

Our third initiative of customer segmentation in our wholesale division is being largely enabled by our new B-to-B capabilities. Today, in our western, duty, and work footwear segments, 70% of our business is written in the form of [at once fill its]. Now incentivized by rewards, dealers are motivated to behaviors such as filling into predetermined model stocks on a frequent set time schedule. In the past, and particularly in late 2008 and the first three quarters of 2009, dealers regularly waited for discounts to purchase their reorders. Now, most of our dealers are reordering when they need the product on a weekly or bi-weekly basis.

Our fourth initiative to grow our business internationally was one that was gaining velocity early in 2008 and was derailed by the economic downturn. As we reported on the last call, as 2009 progressed we were able to rekindle interest with foreign distributors. We also reported that our Rocky hunting products are sold in 23 European countries by four high profile distributors. We're pleased to announce today that we just signed an additional distributor for Rocky hunting boots called "ABC Fitted" in Norway, Sweden, and Denmark.

With respect to Georgia lifestyle products, since our last call we have signed new agreements with distributors called [Asap] in Italy, and Dune for France, Belgium, and Switzerland. Clearly, the casual lifestyle market in Europe is a great opportunity for us with the American tradition positioning of our Georgia and Durango brands.

Finally, we'd like to just comment on the progress we are making in our Lehigh retail division, where we continue to have success migrating the business with a lower cost B-to-B web platform. In the quarter we saw 19.1% of our Lehigh sales come through the web versus 6.2% a year ago in the first quarter. Importantly, we are being rated with a high degree of satisfaction from those customers who used to procure from us through legacy global truck service. So we believe that this growth velocity in web sales as a percentage of total sales will continue.

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

Thank you, David. After what has been one of the most difficult retail environments that I can remember, during which our primary focus has been on reducing our expense structure, it is very gratifying to begin 2010 with a double-digit sales increase. Despite the top-line challenges of the past two years, we have remained confident in the strength of our brands and their leadership position in the work, western, and hunting markets. However, we have had to alter our wholesale and retail growth strategies in order to adapt to the changes brought on by the recent recession, particularly with regards to how consumers are spending their income and the greater emphasis put on quality and value.

We think we have the right plan in place to expand our business this year, while at the same time keep our costs down. As we get into our key selling seasons, we would expect better operation--operating expense leverage to translate into improved profitability beginning in the second quarter.

With that, Operator, we are now ready to take calls. Thank you very much.

Thank you. (Operator Instructions.) Our first question comes from the line of Kevin Kim with Robert W. Baird. Please proceed with your question.

Hey, guys. Can you hear me?

Yes, Kevin.

Hey, congratulations on the quarter. It sounds like things are moving in the right direction now.

They sure are. Thank you.

So a couple modeling questions first. In terms of the sales outlook for the balance of the year, I know--I think you said Q2 and Q3 should see some military sales. I think the $6.5 million, and then it sounds like there is 14.5 that could possibly hit sometime this year. But can you guys help us model out what you are seeing in terms of the wholesale versus retail in military sales throughout the balance of the year?

Kevin, this is Jim. With regards to military, I think that we have 6.5 million left to ship of the 14.5 million that we got--we've got purchase orders on already. There is another 14.5 million part of that contract that we--we're waiting to see when they want that shipped. That can be shipped anytime over the next four years. And hopefully, we'll have some information on that soon. I think we will continue at about the rate in the second quarter that we had in the first quarter, and then the balance of the 6.5 million will be shipped in the third.

Okay.

And hopefully, some of the other 14.5 million, but we just don't know at this point.

Okay.

With regard to wholesale and retail, we still feel good about those, particularly wholesale having--continuing to have increases in sales as we move through the next three quarters on a year-over-year basis. At retail, a little bit less until we anniversary the higher sales that we had in the first quarter--the first two quarters last year, because we hadn't removed some of the trucks from operations at that point.

Okay. So for retail Q2 and Q3, just to be clear, we're not--we're probably not going to see any increases in sales?

I think that would be fair, yes.

Okay. And then, gross margin outlook. You guys provided some detail there. But in terms of the SG&A, I think it was down about a little over $1 million this quarter year-over-year. What are you guys expecting for the balance of the year?

Well, I think as we--we're starting to anniversary some of the reductions we made last year, which we started in late first quarter. So--and we're also planning, as we told you before in the fourth quarter call, that we're planning on reinventing some in advertising. So we may see some modest decreases, but certainly nothing to the level that we saw in the first quarter.

Okay. So would it be fair to see a decline in Q2 and Q3 and then maybe an increase in Q4 with the ad spend?

Maybe more flattish in Q2, and then probably more flattish throughout the rest of the year.

Okay. All right. And then, in terms of the inventories, you've got it very clean. How does that work out with the 12% increase during the quarter and what are you guys planning on doing with inventory for the balance of the year?

Oh, Kevin, I think you will not see the drastic decreases in inventories that you've seen over the last 12 months. I think we've got our inventory in a pretty good position. I frankly would like to see a little more inventory.

Okay.

The inventory is in great shape. There is some pressure from Asia on getting deliveries. Nothing out of control. But the question is, will your inventory continue to decrease? No, it will not. With our sales increasing, our inventory actually has to start to increase.

Okay. Okay, that makes sense. And in terms of the debt, very good in terms of paying that down. What do you expect over the balance of the year there?

I think the year-over-year decreases, like in inventory, are going to be last, because we're starting to anniversary--we really started to decrease the inventories last year and then the debt came along with that as we moved into the second, and then really into the back half of the year. So on a year-over-year basis, those differences will be certainly different than we were at the end of the first quarter of this year.

Okay. All right. Mike, Jim, David, thanks a lot.

Thanks, Kevin.

Thank you. Our next question comes from the line of Reed Anderson with D. A. Davidson. Please proceed with your question.

Hi, guys.

Hi, Reed.

Hi, Reed.

I joined the call a little bit late, so maybe you covered some of this, and I apologize if that's the case. But a couple of things I want to touch on. In terms of gross margin, I saw the comments in the press release, but there's been some people in your industry talking about a little bit higher costs in the second half or some--maybe some things coming back. Just curious like what are you seeing? Is that the case for you? And if not, when might you anticipate some more costs coming back into the product side?

Well, we're aware of what you're hearing. And in fact, David and I leave tomorrow for China for our annual trip over. There is certainly indication that there is some inflation going on on the sourcing side from leather to rubber outsoles to labor. But the good news is we're bought through. We go out quite a ways. We're bought though October this year. There is no doubt in my mind late this year, early next year, there will be higher prices I believe across the board for all footwear segments. But we're fairly confident. We are monitoring it everyday.

Sure.

It's coming. I just can't tell you when its coming, but our hope would be we wouldn't have to do anything this season.

It sounds like--that sounds like you're pretty well planned out. And then, in terms of pricing, what's been your experience with--I mean, obviously order cycles picked up here and that's been a reflection of things you've done as well as the overall market picking up. But pricing wise, what's kind of been going on there? I'm just curious.

Well, in footwear pricing, the wholesale pricing, there was a lot more--there was a lot of pushback all last year. We had to influence purchasing by discounting. That's relieved itself a little bit.

Okay.

We have to be price competitive with our competitors, we've got to control costs, we've got to control--we engineer these shoes for price points.

Yes.

And we've been through this before. I think we're going to move into an inflationary period, and those are not all bad for industry or business, so we'll just have to manage it to the best of our ability.

Okay. But at this point relative to where we are today versus your goal, at least some stability back in place.

Maybe, David, you want to--.

--Yes. I mean, our average selling price in all categories is up versus last year.

Okay.

So it's--pricing--customers that want to buy good quality, comfortable, well engineered shoes, they will search out the quality brands and buy from them.

And then, lastly, just--I mean, seeing your business kind of come back and just [sentiment]--I mean, are you actually hiring people now or are you kind of keeping a lid on that? I'm just curious kind of what your view just overall on stuff like that is, Mike.

Well, Reed, corporately we're not hiring. Our hiring is in our plants. We still have a number of plants and we make a large--probably 20% of our sales. So we have been increasing our own manufacturing plants. And frankly, that's another bet against inflated--inflation coming from China.

Yes.

So, no, we're not looking to hire corporate, but we will increase manufacturing capacity through hiring where needed.

Good enough. Hey, that's it for me. Thank you much. Good luck.

Thanks. Thanks, Reed.

Thank you. (Operator Instructions.) Gentlemen, it appears there are no further questions. Do you have any closing comments?

No. I thank you very much for listening in and we'll look forward to reporting to you at the end of Q2. Thank you, Operator.

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