Rocky Brands Inc (RCKY) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands second 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 given 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 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 the reports filed with the Securities and Exchange Commission, including Rocky's Form 10-K for the year ended December 31, 2010.

Now I'll turn the conference over to Mr. David Sharp, President and Chief Executive Officer of Rocky Brands.

Good afternoon and thanks for joining us. With me on the call is Jim McDonald, our Chief Financial Officer. Today, for the first time since the Company entered the public market in 1993, Mike Brooks will not be joining us on the call. As we previously announced, Mike transitioned to the role of Chairman of the Board on July the first. While he's not involved directly with this earnings call, he's still very much a part of our Company, just as he's been for almost 40 years, and the management team here at Rocky Brands is looking forward to benefit from Mike's guidance and wisdom in the years ahead.

After the second quarter, which represented our eighth consecutive quarter of increased earnings on a year-over-year basis, we're particularly pleased with our recent results, as a significant increase in net income on a non-GAAP basis was achieved through improved operating performance, highlighted by a 6% rise in wholesale sales, or an 11% increase from continuing operations, which excludes Dickies, and higher gross margins in both our wholesale and retail divisions.

If you look at our current profitability turnaround in stages, the first stage was driven primarily by reductions in operating expenses, because we trimmed costs from all areas, especially in our retail business, as part of that division's restructuring. In 2010, selling, general and administrative expenses were down more than $24 million compared with 2007.

The next stage of our earnings growth was fueled by a significant reduction in interest expense. We improved our balance sheet during 2009 and 2010 by retiring our high-interest term loan. We retired the loan with cash flow from operations, proceeds of our successful follow-on offering, and funds from a new, lower-interest credit facility. Our debt level at the end of last year was $35 million, down $68 million, or 66%, versus the end of 2007, and our interest expense in 2011 is projected to be approximately $1.5 million compared to $11 million in 2007.

More recently, our bottom line improvement has been aided by higher gross margins, as our own wholesale brands, which carry the highest gross margins in our portfolio, have become a larger percentage of our total sales. Gross margins have also benefited from sales programs instituted in early 2010, which encourage our retailers to purchase their replenishment boots on a weekly or biweekly basis instead of waiting for us to stimulate the sales through price promotions.

Additionally, gross margins have increased from a combination of higher average selling prices in our wholesale and retail divisions and improved efficiencies in our Company-owned manufacturing facilities. For the second quarter, gross margins were up 480 basis points compared to a year ago.

Over the past three years, we have created a very lean, more efficient Company. With the heavy lifting on expenses and the balance sheet improvements complete, we now have the financial flexibility to invest in our brands and create new opportunities to grow our top and bottom lines.

Our research and development efforts over the past 12 months have yielded some positive results. We've been encouraged by the response of several new product introductions, particularly our commercial line of military boots, and we continue to build momentum with our brand extensions in the Durango and Rocky brands. This has led to increased shelf space with several of our domestic retail partners, and we think there's still opportunity to expand our brands within their existing work, western, and hunting footwear categories.

With that said, these categories have been growing at fairly low rates in the United States over the last several years. Therefore, we've identified and prioritized other key vehicles to also expand our business in the future.

The first of these involves growth in new markets. In 2010, we generated $7.9 million in sales outside the United States through direct operations in Canada and distributors in the European Union, Russia, and Central and South America. This compares to international sales of $5.7 million in 2009, an increase of 40%. We're confident that our brands of high-quality products will continue to resonate with consumers in other countries, and we will benefit from increased distribution and new partners. Through six months of this year, our sales in international markets are maintaining the 40% sales velocity we achieved last year.

The second is growth in new categories, and this includes both footwear and apparel. We think our brands have the heritage and authenticity to extend into complementary categories. For example, as a leader in hunting, the Rocky brand has natural opportunities in other areas of the broader outdoor footwear market, beginning with fishing and camping. Similarly, we have a successful line of hunting apparel. We now need to do a better job exploiting this competency and take advantage of our retail relationships to penetrate new clothing initiatives.

For example, this fall we'll ship work apparel to select accounts that complements our successful Long Range western and work footwear. This apparel carries the same long-term comfort and durability guarantees, just like our Long Range footwear offering.

The third piece of our current growth strategy involves an acquisition. With a healthy balance sheet and improved cash flow, we are now in a position to evaluate acquisition targets. While we have no immediate plans to add to our portfolio, we are keeping our eyes open for the right company, should it cross our radar screen.

To give you an idea of what we're thinking, this would be something much smaller than our acquisition of EJ Footwear. It would provide us an entrance into a larger, higher-growth category. It wouldn't overlap with our current businesses, and it would diversify our current sales in terms of distribution and target consumers.

I'll now turn the call over to Jim, who will review the financial details for the second quarter. Jim?

Thanks, David. Net sales for the second quarter were $52.3 million compared to $55.2 million for the corresponding period a year ago. Wholesale sales for the second quarter increased 6% to $40.8 million compared to $38.5 million last year. The sales increase was driven by a 17% gain in our western category, offset by a decline in our work category, due primarily to the discontinuation of our license agreement with Dickies at the end of 2010. We also experienced a significant increase in our commercial military business versus a year ago.

Retail sales for the second quarter were $10.9 million compared to $11 million last year, and military segment sales were $0.6 million versus $5.7 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 the year.

Gross profit in the second quarter was $20.6 million, or 39.6% of sales, compared to $19.1 million, or 34.6% of sales, for the same period last year. The 480-basis-point improvement in gross margins as a percentage of sales was primarily attributable to the decrease in sales in our military segment, which carry lower gross margins than our retail and wholesale segments.

We also benefited from a 290-basis-point increase in our wholesale segment and a 250-basis-point increase in our retail segment, driven by higher average selling prices and improved manufacturing efficiencies.

Selling, general, and administrative expenses were $16.9 million, or 32.2% of sales, in the second quarter of 2011 compared to $16.2 million, or 29.3% of sales, a year ago. The increase was primarily attributable to an increase in planned advertising expenses.

Income from operations increased $3.8 million, or 7.2% of sales for the period, compared to $2.9 million, or 5.3% of sales in the prior year period.

Interest expense for the second quarter decreased to $0.3 million from $2.1 million in the second quarter of 2010. Last year's expense included one-time fees of approximately $0.9 million pre-tax associated with the early prepayment of a portion of our senior-term term loan. Excluding the one-time fee from a year ago, this decrease is attributable to lower interest rates as a result of the new $70 million revolving credit facility signed in October 2010.

We reported net income of $2.3 million, or $0.30 per diluted share, versus net income of $0.5 million, or $0.08 per diluted share. On a non-GAAP basis, excluding the aforementioned one-time fee of $0.6 million net of tax, net income for the second quarter of 2010 was $1.1 million, or $0.17 per diluted share.

I'll quickly touch on a few of the highlights from our year-to-date results. For the six-month period ended June 30, 2011, wholesale sales increased 5.5%, and excluding Dickies, wholesale sales were up 10.6%. Gross profit margin improved 410 basis points to 38.1%, with wholesale gross margins up 210 basis points and retail gross margins up 310 basis points.

Interest expense was down $3.3 million, and net income improved over $2.8 million, and diluted EPS was $0.38 per share compared to a loss of $0.01 last year for the same period.

Turning to the balance sheet, our funded debt was $39.5 million at June 30, 2011, versus $36.9 million at June 30, 2010. Inventory increased 20.4% to $74.4 million at June 30, 2011, compared with $61.8 million on the same date a year ago. The increase in inventory is primarily the result of an increase in cost per unit. We feel comfortable with our current inventory position as we head into our busiest selling period of the year.

Operator, we are now ready to take questions.

Thank you. (Operator Instructions.) Mitch Kummetz, Robert W. Baird and Company.

Yes, thanks, and congratulations on a good quarter. Just a few questions. Jim, I'll start with you. On the gross margin, I know you talked about mix and military dropping as a percentage of your overall sales. First of all, can you just remind us what the military gross margin was in the quarter? Was it in that 13% range like it has trended historically?

Yes, it was 12.9% for the quarter.

Okay, 12.9%. And then, when you look at the benefit or the improvement that you saw, both on the wholesale and the retail side, could you maybe speak to some of the benefits that you saw there in terms of Dickies coming out of the mix, and then some of the things that you're doing on the Dominican end in terms of production? And then maybe what the impact is, the net impact of cost increases versus what you're doing on a pricing side.

Yes, I think that the Dickies, the mix certainly was Dickies on wholesale. Had a substantial play there, where we were recognizing about net 20% gross margins on the Dickies business versus approximately 40%. It's almost double on the other business, our own Company-owned brands. And so that definitely played a role, and fairly significant, as well as our improved efficiencies down at the factory, where we've increased production quite a bit, and we've been able to offset by moving some of our production from our factories in China, our third-party factories in China. We've been able to increase the margin on those by lowering the cost on those. So I would say that would be the second piece.

And then the third would be that we've had better transactions, as David talked about, with the way we're having our customers order and have them be less promotional. So I think that's the ranking of how they affected this quarter.

Okay. That's helpful. Can you just remind us where you guys stand in terms of your price increases? I know you took some in the first half of the year. I know you're contemplating taking some in the back half. And to start that, could you just say what was the net impact of cost versus the price increases in the first half and how you're viewing that in the back half?

I think our--we raised our prices approximately 5%, which was in line with our cost increases that we saw as we headed into the beginning of this year. And that price increase was effective mid-December of last year. We're reevaluating now, because costs have gone up since the beginning of the year on our source product, so we're reevaluating that and looking at a potential price increase as we move to the back half of this year.

And what are the price increases outside the cost increases on the back half? Are they up like 10%?

No, I think we're looking more in the 3% to 5% range for the back half.

Oh, okay. Got it. And then, David, in your prepared remarks, you talked a little bit about what you're doing on the international side. I know it's still a small part of your overall business, but can you maybe talk about where you are in terms of where you've built out your international business? What distributors are online now? What's in the pipeline? Where's that 40% growth coming from year over year?

Yes. I think we're pretty well distributed now in hunting in Europe and the Baltic and Balkan states. And now we've really turned our focus to work boots and western boots. And we seem to be--we had some traction in South America and Central America there. And in fact, we're currently in discussions with a manufacturer in Brazil that would be licensing our brands.

So depending on the region of the world, Mitch, we're looking for the business transaction that would bring the consumers the best value. So in some cases, it might be a licensing arrangement or a distributorship arrangement. But we're on track to deliver what we had planned, a pretty aggressive plan for international sales through the end of this year.

Okay. And then lastly, on the retail business, I know you've been going through that transition there in terms of shifting out the mobile stores to the Web. Could you just remind us where you are, how many mobile stores you still have, where's that headed to the end of this year, and then how much of your--and what percentage of your revenues, maybe Q2, were on the Web and what the plan is by year end?

We're running, currently, close to 30% of our revenues are coming through the Web. The rest are coming through the trucks and through direct sales. We're operating about 60--48 mobile stores right now, trucks. And we're in a position now that we're able to know just how profitable they are through our investments in technology. And when they become--if they become unprofitable, they'll be retired.

Obviously, our plan is to leverage this investment we've made in the Web just as much as we can, so that's where we're focused now.

Okay. All right, thanks a lot. Good luck.

Thank you. Reed Anderson, D.A. Davidson and Company.

Good afternoon, and let me also add my congratulations. A couple of questions. David, you've talked about, or just in the last questions, you had mentioned again the licensing opportunity in footwear. You've done some other things in accessories. We've seen some recent announcements. But clearly, there's more of an emphasis on licensing. And I'm just curious. I don't know if you want to quantify it, but just give us a sense of how that might play out here over the next year, what the opportunity is for that to boost sales and profits, et cetera.

Here in the US, we've been working with a third party and trying to leverage, particularly in what Rocky stands for in the outdoor market. So you saw some of those announcements we made. And we're in discussions now for more licenses in some other consumer products categories that will bring more revenue this year.

I think that that's a little speculative, though. I don't think we'd want to put a number on that right now, Reed.

Sure. No, that makes sense. But clearly, it's a new avenue you're pursuing to get some additional growth, it sounds like.

Yes, it is.

Reed, just licensing revenues we report as other income, so we don't report those as top line sales.

Okay, that was going to be my next question, so we'll kind of watch it there. That's good. I think that's a good development, though.

And secondly, David, in your prepared remarks, you kind of articulated some of the strategic focus, et cetera, and talked about acquisitions. And I guess my question there is when you're thinking about what's a good fit, would you want something that's all in and would run itself or stands alone? Or would you just be more looking to get a brand or something like that, that you could just strap onto your existing platform and existing channels, that kind of thing? Give us some thoughts there, please.

I think what we're looking to do is to not do more of what we're doing, to get into the casual markets. And obviously, we've developed a pretty nice sourcing, manufacturing, and distribution capability. And if there was a company that would be a good fit with us that has the front end pretty well accomplished, I think that would be a good fit for us.

Okay, that makes sense. On the western business, I think, Jim, you had said that was up about 17% in the quarter. And I guess my question there is does that reflect just a lot of some of the newer products and some of the demand or excitement around that? Or is it more distribution? A combination of both? Just clarify that, please.

That was almost entirely attributable to new products in the Rocky line, a new product called Long Range, which has been very well received and now is at retail and retailing really well, too. We're getting nice reorders.

That's great. And then my last question is just, thinking about the timing, now you're coming up, or you're in your big quarter of the year, if you will. We've probably got an early read on that outdoor channel. That's going to be more important. I'm just curious, David, what your thoughts are. I mean, a lot of the people in that area seem to be performing well. Are you seeing that look equally good at this point? I'm obviously just a little ways out yet, but I'm just curious, your initial thoughts here.

Yes, I think that we're cautiously optimistic. Last year was a very good year, which produced very strong comps. We had weather early in the season and it was sustained throughout the season. So we think that the back half wholesale can hold about the same trend that we've achieved in the first half, if there's no surprises in the economy.

Good. That's great. Well, best of luck. Thank you.

(Operator Instructions.) Mark Cooper, Pacific Ridge Capital Partners.

I wanted to come back to the inventory comment that you mentioned. I think inventories--you suggested they were up entirely due to pricing, not to actually units held. Is that correct?

Mark, this is Jim. It was primarily the result of that. Probably about 75% of the increase was because the, as we've been talking about, costs per unit have gone up pretty substantially over the last year, which we offset with a price increase. So that's about 75% of the increase. The other 25% is related to more units.

At this time last year, we were still in a position where we--two things. We were in a position where we didn't have, really, an adequate supply in our wholesale and retail businesses. And then the other thing, we were shipping a substantial amount of military business last year, which is basically you make it and ship it, so you don't carry any inventory. So although our overall sales are down, our wholesale, particularly, business is up, so we need some more inventory to support that.

Oh, okay. All right, thank you.

Thank you. (Operator Instructions.) It appears there are no further questions at this time. I'd like to turn the call back to management for any closing comments.

Okay. Thanks for joining us on the call this quarter. We'll look forward to speaking to you again in 90 days. Thank you.

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