Rocky Brands Inc (RCKY) 2011 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 2011 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, and we'll now turn the conference over to Brendon Frey of ICR.

Brendon Frey - ICR - Investor Relations

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, 2010.

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

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

We are very pleased with our first quarter results, which represent a very good start to the year. Our performance highlights the emphasis we have put on profitably growing our business by focusing on the expansion opportunities of our higher-margin, Company-owned brands, restructuring our retail operation, and reducing our debt commitment.

As expected, total sales were down year over year due to a $4.4 million decline in sales to the military, as we completed nearly all of our current orders under our GSA contract prior to the first quarter. In addition, there were approximately $1.7 million in licensed Dickies business during the year-ago period that we did not anniversary. That agreement expired at the end of 2010. However, we were able to replace all of the lost Dickies sales with gains in our Rocky brand, both in work and hunting categories, our Georgia Boot work boot brand, and our western brand, Durango. This was achieved through a combination of unit growth and higher average selling prices.

Coupled with better-than-expected growth from our new commercial military business, we were able to grow our wholesale segment 5% year over, and do so at much better margins. This helped our earnings per share improve to $0.07 from a loss of $0.10, despite a 7% drop in overall sales and the fact that we had 33% more shares outstanding versus the same period a year ago.

Another factor was the operating results in our retail segment. Despite sales off slightly from a year ago, the profitability improved meaningfully, thanks to an increase in gross margins and higher selling prices, and lower expenses as a greater percentage of sales were transitioned via the Internet and direct shipped from our warehouse versus our fleet of mobile stores.

Finally, perhaps most notably, our interest expenses were $4.4 million less than it was a year ago as a result of the successful recapitalization effort over the past 12 months.

To underscore, our funded debt at the end of March was down more than 41% -- $19 million to $27.8 million versus $46.7 million the same date last year. Not only are the interest rates more favorable under this new facility we signed last October, but the free cash flow that historically was used to service our debt obligation is now being redirected towards working capital purposes, thus reducing our borrowing needs throughout the year.

We really started to see the benefits of our hard work during the back half of 2010. As I said on our fourth quarter earnings call, things began to fall into place nicely after several years of both internal and external challenges.

Our first quarter results are a continuation of these trends, and based on the sales, marketing, and product strategies that we have in place, I anticipate we will be able to drive year-over-year wholesale growth and improve earnings during the remaining quarters of 2011.

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

Thanks, Mike. Net sales for the first quarter were $52.3 million compared to $56.1 million for the corresponding period a year ago. Wholesale sales for the first quarter increased 5% to $39.8 million compared to $37.9 million last year. The sales increase was driven by growth of our work and hunting Company-owned brands, which more than offset the $1.7 million decline in our Dickies license business.

Retail sales for the first quarter were $11.7 million compared to $12.9 million a year ago. Finally, military segment sales decreased $4.4 million to $800,000 compared to $5.2 million for the same period in 2010. The decrease in military sales was attributable to the completion of our initial order under our contract with the GSA before the start of this year.

Gross profit in the first quarter was $19.3 million, or 36.8% of sales, compared to $18.8 million, or 33.4% of sales, for the same period last year. The 340-basis-point increase in our gross margin was driven by the decrease in sales in our military segment, which carry lower gross margins than our retail and wholesale segments, coupled with higher after-selling prices. In addition, we benefited from the higher sales mix of Company-owned brands, which carry higher gross margins than licensed brands.

Selling, general and administrative expenses were $18.2 million, or 34.8% of sales, for the first quarter of 2011 compared to $18 million, or 32.1% of sales, a year ago. The increase as a percentage of sales was attributable to the decrease in military segment sales, which carry little to no SG&A expense.

Income from operations increased to $1 million, or 2% of net sales, for the period compared to $700,000, or 1.3% of net sales, in the prior year.

Interest expense decreased 87% to $200,000 for the first quarter of 2011 versus $1.6 million in the same period last year. The decrease is attributable to reduced borrowing versus a year ago, combined with lower interest rates as a result of our new $70 million revolving credit facility signed in October 2010.

Net income for the first quarter was $500,000, or $0.07 per diluted share, based on 7.5 million shares outstanding, a significant improvement over the net loss of $600,000, or $0.10 per diluted share, based on 5.6 million shares outstanding we reported in the year-ago period.

Now turning to the balance sheet. Funded debt as of March 31, 2011, decreased 40.6%, or $19 million, to $27.8 million compared to $46.7 million at March 31, 2010. We were able to reduce our funded debt using proceeds from the equity offering we completed in May 2010 and cash generated from operations.

Inventory increased 16.1% to $61.7 million at March 31, 2011, compared with $53.1 million on the same date a year ago. The increase in inventory is primarily the result of lower-than-desired levels a year ago due to supply chain constraints. We feel very comfortable with our current inventory position.

David will now update you on the growth initiatives we are working on for 2011.

Thanks, Jim. In summary, we have four growth strategies. They are, first, value-based customer segmentation; second, focused brand extension; third, geographic expansion outside the United States; and fourth, to capitalize on the growing popularity of our military boots.

We're making headway on all four strategies. However, in the quarter, our efforts are best exemplified by our outstanding results with commercial military boots in our duty division. These are military boots other than those made under contract to the US Department of Defense. They're sold direct to individual soldiers, usually prior to special deployments, and are procured at the AAFES and NEXCOM stores on military bases or through big private retailers that specialize in this kind of trade. Sometimes these retailers will be called upon to outfit a small unit of special war fighters.

A major difference in this type of business versus the Department of Defense contract is that we must have inventory on hand to capitalize on these high-margin, at-once opportunities. This is partly the reason our inventory is marginally higher this year than last. In the quarter in the category, we were able to ship $8 million versus $4.9 million the year before. That's an 81% increase.

Now to brand extensions and an update within our western division, where prospectively we see considerable upside with our Durango brand. Previously, we reported on the strong sales of retail of our Flirt by Durango products. They are ultra-lightweight boots, playfully styled for the core Southwestern Plains states markets, with colorful leathers and creative stitch patterns. Additionally, we have men's versions of these boots that are also retailing well at major western stores.

This month, many key retailers are reporting that they have sold through 50% of their inventory on these products. We're continuing to expand these groups with positive results, including Just Like and Mom and Dad kids' versions. At this point in time, our future bookings are up approximately 16% in our Durango brand, largely because of the broad popularity of these products.

Now regarding our international business, we continued to be successful on our plan of engaging distributors in the geographic regions targeted for expansion. In the quarter, our sales outside of North America were more than $0.5 million, up threefold from the prior-year period, and gratifying, because at this point, most of our international business is in our hunting category, which ships mainly in the third and fourth quarters.

Most notable in this quarter, we entered an agreement with the Recon Company, who will distribute our hunting footwear and apparel in Germany. They have a robust sales and distribution network, with eight salespeople servicing 300 hunting specialty retailers in the German marketplace.

Now for some more detail on the continuing improvements in our Lehigh retail business. As Mike and Jim have commented, we continued to improve our operations and profitability at this enterprise by emphasizing our low-cost, Web-enabled solution for companies who put their workers in footwear designed for specific on-the-job needs.

In the quarter, we again reduced our investment in the legacy business model and enhanced our growing e-commerce capabilities. Specifically, we closed nine of our stories or mini-warehouses in the quarter. In April of 2010, we operated 15 stores. We are now operating three stores, which are all profitable. In April of 2010, we operated 62 Shoemobiles. Today we are operating 51. In the quarter, we reduced our outside sales force from 18 to 12, and at the same time, we've beefed up our inside sales force and hired key personnel to further support our growing e-commerce business and social marketing initiatives.

At this point in time, 27% of our retail business is transacted through our e-commerce site versus 18% in the first quarter of last year. We're very optimistic about the future of our new retail business model and the investments we've made over the past 24 months.

Before I turn the call back over to Mike for his closing comments, we know you will be interested in learning how we believe increased per-product costs might affect our margins during the balance of this year. As we've reported on earlier calls, tactically, we are engaged in re-engineering some products and re-sourcing others to offset increased raw material costs.

Further, it should be noted that we ramped up the facility we own in the Dominican Republic in 2010, and we're on our way to ramping it up again this year by another 50%. This year, this facility will supply approximately 30% of our footwear needs, so we'll enjoy some fixed cost leverage from this dramatic increase in production.

All this production in our owned facility will also mitigate problems with supply that we've experienced over the past 18 months, as our Chinese vendors rationalize and struggle with labor, political, and economic issues which have constrained their capacities.

As we stated on our 2010 year-end call, regardless of where inflationary pressures take us this year, we believe we will remain competitive because of our diverse supply base and strong brands.

Now Mike will give his closing comments. Mike?

Thank you, David. We are very encouraged by the start of 2011 and continue to be optimistic about our prospects, both over the remainder of the year and longer term.

As previously announced, I will be transitioning to the role of Executive Chairman of the Board on July 1, and David will be taking over as Chief Executive Officer. While I will still be involved in shaping the strategic direction of the Company, it will be David who will be overseeing the day-to-day operations.

David has been with Rocky Brands for more than a decade, and during his time, he has been intimately involved with all areas of the business. Since being appointed President in 2005, he has spearheaded many of the initiatives that are fueling our recent improvements. I can't think of anyone more qualified for the job. In addition, he will be supported by a deep bench of seasoned executives, beginning with Jim McDonald, as well as our newly appointed heads of wholesale, retail, and international.

As I prepare to turn over the stewardship of the Company my great-uncle started more than 79 years ago, I am confident it is on the right track towards sustainable, long-term sales and earnings growth, and that our employees and shareholders will benefit from the future leadership team we have assembled.

Operator, we are now ready to take questions.

Thank you. (Operator Instructions.) Reed Anderson, D.A. Davidson.

Nice quarter. A couple of follow-upper questions, I guess. First off, Mike, remind me the timing and magnitude of the price increases you've taken so far and also what you're thinking as you look into early next year on that front.

We took a price increase, Reed, January 1, of 5%. And frankly, we're evaluating whether we would take a second one this year or not, and that hasn't been determined at this time. But I'm sure that we would be taking another one at the end of this year or the beginning of next year, in '12.

Okay. And that was a more or less across-the-board type of thing?

Yes, yes. About 5% across the board, yes.

Okay, good. And then also shifting gears, looking at the Durango piece, you talked a lot about that, and it's great to see that new product. I've seen a lot of demand there in the sell-through rates. What I'm curious about is I'm suspecting the majority of that is through existing customers. That's a very well defined channel. I'm wondering if there's been some broader distribution there that's helping or if that's just literally the products doing so well in existing distribution. Just some color on that would be helpful, please.

Reed, currently we're selling the customers that we have sold in the past. And we're not reaching significantly any new distribution. So we're stealing shelf space from our competitors in existing distribution. However, we recently engaged with a research firm who helped us explore what Durango could be in the future in terms of expansion.

And back in the late '90s and up to 2000 and 2001, Durango's business enjoyed a large business in the fashion end and distribution, particularly in the I-94 corridor. So we're developing product right now that will help us approach that market once again, and we're pretty optimistic the trade and consumers still remember the Durango brands for that kind of product.

The former owners of Durango, EJ Footwear, jettisoned that business before we purchased it. They did it in 2005.

Sure, that's great. In terms of inventory, a lot of people in your industry and footwear and apparel companies are reporting big inventory increases. Now, so yours actually was relatively modest by some standards. And I'm just wondering if you feel like you have enough inventory, or are we at a point where we're building a little bit higher level of inventory to support some of your initiatives, and it's going to level off later? Just a sense of where we are as you look out the next couple of quarters, what we might look like a year from now.

Reed, I think we're right where we should be. Last year, as we reported, we struggled, like many others, to get adequate inventory from China. We were transitioning more and more production to our Caribbean Dominican plant. And then, of course, the big change in the military, which was the DoD business was make-and-ship, so we were holding very little inventory there.

So I feel a lot better this year than where we were last year. And there were many things out of our control, and we lost sales because we had not enough inventory last year. We're trying to balance that, and I think we're in pretty good shape. David, I don't know if you have any extra comments?

Yes, that's good.

And you feel that inventories at retail are very clean at this point as well?

Yes, retail sales have held up pretty well. I don't see any pushback. We made another running change over the last year to year and a half, but to filling our independent back with reorders every two weeks, every 14 days. And that helps move our inventory out, and we think theirs as well.

Good. And the Dominican facility, the expansion there, where are we at? Is that up and running? What's the timing on getting that in place?

We had to take over new buildings in the last 18 months, which we've completed. We're running both of those new buildings, making good quality footwear, and it was difficult, the second half of last year, to get there. But I'm happy to report we're up and running and in good shape the first quarter of this year.

Okay, good. And then just one more. I was curious. David was talking about some of the things, the good things happening at Lehigh and how that business is shifting more. You've finally really seen the shift to the e-commerce piece there. I'm just curious, does the transaction size look similar when somebody does an e-commerce order versus when you would sell to them onsite, or is that actually a little bit bigger order, smaller? I'm just curious on that.

No, the transaction size is about the same.

Okay, good. All right. Best of luck. Thanks, guys.

Mitch Kummetz, Robert W. Baird.

Thanks and congratulations on the quarter. So we have a handful of questions here. Let me start on the western business. David, I think on the last conference call, you had said that you expect that business to be up high single digits this year. It sounds like the bookings are coming in at, what did you say, 16%, at least on the Durango side? So are you still looking for high singles, or have your expectations improved since the last call on that piece of the business?

Because so much of our business is still at-once, Mitch, I'd be reluctant to say it could be stronger than 9% or 10% at this point. We actually could have had a much better picture in western in the first quarter. We didn't comment in the prepared statements about the Rocky western business. We have a new program that we hoped to deliver in that quarter, but it's now making it into the stores. It came in late, didn't make the quarter end, a pretty big program that we've launched in Rocky western boots. And I think that, for the balance of the year, that Rocky western can also end the year in the strong single digits also.

Okay, that's helpful. Thank you. And then, Jim, on the gross margin could you break out gross margin by operating segment for the first quarter -- wholesale, retail, military?

Yes, sure. Gross margin on wholesale was 33.5%, retail was 49.6%, and military was 13.2%, for an overall 36.8%.

Okay. So when I look at the wholesale piece -- actually, both wholesale and retail were up. So how much of the improvement in wholesale was attributable to Dickies coming out of the mix this year, versus last year, versus price increases or anything else that might have moved that up?

I'd say about half of it was attributable to each. We're up about 140 basis points there on wholesale, and we had higher average selling prices. We took our price increase, as we said, in January, but we're still selling the goods that were in inventory last year, which we bought at a lower price. And then the other is the Dickies business, which was a net margin of about 20% versus our regular margins on wholesale in the low 40 on our Company-owned brands. So that's it, about a 50/50 split, I'd say.

Okay, great. And then, Mike, I think you had said in your prepared remarks that you're expecting sales growth over the balance of this year. I don't know if you meant that it in aggregate or for growth in each of the next few quarters. You still have some tough comps on the military side, and then you're also lapping the Dickies business. I just wanted to make -- first of all, clarify your comments, and then if there's something that you're seeing out there that's an acceleration of some of the other pieces that would make up for the tough military comp and the Dickies loss?

I think I said on our wholesale brands specifically. We don't want to get too excited. I'm pleased with what we've been able to accomplish. Obviously, a lot of things out there in the marketplace is out of our control. But I think we're going to see, on the wholesale side, a sales increase this year, led by all the Rocky brands and our owned brands. The sales increase that we gave up on Dickies, as we've stated many times before, just wasn't profitable or at the same level as our owned brands. And the military isn't profitable, either, on the DoD business. But this special military boot business is quite profitable that we're selling under the Rocky brand as well.

Okay.

Mitch, I think, as we stated before, we look at our retail business being relatively flat with last year. It was down a little bit in the first quarter, but I think it will be relatively flat as we move forward here. And our military business, what we have in orders right now, it may gross about $2.5 million for the year unless we get some more. The DoD military segment. And we did about $17 million last year, so we're looking at about a $15 million delta there.

Okay, last question, and I guess this one's for you, Jim. On the interest expense, I think you had said, previous call, $1.5 million for the year. Are you still looking for that or maybe something a little less at this point?

$1.5 million?

Yes.

I think we're, provided interest rates stay where they're at, we might be a little bit less than that, but not tremendously significant. Right now we're paying, we're at the lowest point on interest spread. We're at LIBOR plus 150 basis points. So I think we did $250,000, but this is when our borrowings are at their lowest, and they'll start to go up as we move towards the second half of the year to fund our working capital for that period.

Okay. Let me ask one other question. On the hunting business, I think on the last call, too, you said that you were encouraged by how the bookings were looking on that business. I would imagine you have a pretty full fall order book in at this point. Are there any comments you could make on that piece as you think about the back half of this year in terms of the pre-book?

The bookings have come in pretty well. I think the sustained winter, the colder weather we had, really, our retailers had a great season, particularly some of the key retailers we have, had a great season with us. So the bookings are up, yes, versus last year.

Okay. Thanks. Good luck.

(Operator Instructions.) I have no further questions in queue. I'd like to turn the call back over to management for closing remarks.

We thank you very much for listening in, and David and Jim look forward to speaking to you in about 90 days. Thank you very much.

This concludes today's teleconference.