Rocky Brands Inc (RCKY) 2012 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 2012 earnings conference call. At this time, all participants are in 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 will now turn the conference over to Brendon Frey of ICR.

Thank you. 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, 2011.

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

Thanks, Brendon. Good afternoon, and thanks for joining us. With me on the call is Jim McDonald, our Chief Financial Officer.

We're off to a solid start in 2012, with first quarter sales and earnings that were slightly ahead of our expectations. Our overall performance was consistent with recent quarters. The year-over-year improvement was driven by sales gains in our wholesale segment and a better operating performance from our retail division.

The first quarter is primarily a reorder period for many of our basic work product lines. In light of the mild temperatures that continued in many parts of the country, we're pleased with the level of demand that we experienced. This underscores our belief that the innovative new products we bought to market are resonating with consumers and further distinguishing us in a competitive environment.

Our focus on innovation is leading to greater distribution for our brands, both with new accounts and existing customers where we are gaining shelf space and adding doors. The biggest growth driver in the quarter though came from our expansion within Tractor Supply, already one of our largest national accounts. In 2011, we were in approximately 700 of their doors with between two to six styles of our basic Georgia Boot work product depending on the location. We are now in all 1,119 locations with the four best performing core products, all of which are on a weekly order replenishment program.

This had a very positive impact on Q1 sales and should continue to positively affect our topline as we move through the year. However, this initial rollout negatively impacted gross margins due to temporary price concessions, [CD] expansion and the high concentration of sales to this large account in the quarter. Our initial markups are typically lower Tractor Supply as a result of their annual volumes. As sales to them returned to more normalized levels, as a percentage of our total sales, we expect the drag on margins to be much less pronounced. This first quarter of the year is also when we receive initial commitments from retailers for our new fall lines.

In addition to growing our core work, western and hunting categories, an area of focus for us has been on extending our brands into new categories and opening up new channels of distribution. Much of our recent work around this initiative was centered on our Durango brand. Building on the brand's authentic position within the western market, we've developed more fashion-forward footwear to appeal through a wide commercial audience, particularly in urban centers where the potential consumer populations are obviously much larger.

Some of these products are already at retail where they're performing quite well, which validates that our product is trend-right. For example, at Zappos.com where we enjoy a substantial business, our shipments to the accounts were up 23% and our bookings were up 120% year-to-date.

We're also encouraged with new accounts that will have Durango in their fall assortment, major retailers such as DSW.com, Title Nine and Famous Footwear. Further, we are seeing many of our current Durango accounts, accounts like Shoe Show and Shoe Carnival increasing their orders and placing the new Durango City collection.

Fall pre-books for our outdoor and hunting category are up nicely despite coming off a very mild winter season. Like our western business, bookings are being driven by new product introductions, including our new athletic-inspired Rocky Athletic Mobility product line that targets a younger demographic and has led to increased shelf space with retailers like Bass Pro Shops, Gander Mountain and Academy Sports.

We also introduced several new core value priced products that booked very well with our independent account base. Lastly, within our wholesale segment, our commercial military business maintained its strong growth trajectory. During the first quarter, sales increased more than 29% year-over-year. We continue to capitalize on the growing popularity of our S2V and C4 Trainer product series by developing our distribution and introducing new styles such as a steel toe version to create additional demand.

Now turning to retail. There are two very positive storylines going on here. The first being that the profit contribution from this division continues to improve even on lower sales volumes, as more and more transactions are executed via the web and we are able to take additional expenses out of the business model. As a percent of total retail sales, the web direct business increased to 60% in the first quarter of 2012 compared to 42% a year ago and was up 24% in total dollar sales over the same period.

Second part of the story is the progress we're making securing new customers in an effort to bring more scale to this business model. In the first quarter alone, we executed contracts to provide safety shoes exclusively through our online Custom Fit program to workers at several large national employers, such as Chesapeake Energy, Boeing, Princess Cruise lines, Darling International and Grainger to name a few. On whole, we are converting or signing up new web business at nearly twice the rate as a year ago, and based on this trend we expect retail sales to actually increase in Q3 and Q4 of sales increase since we began this transition back in 2009.

I'll quickly touch on our international operations before turning it over to Jim. The overseas markets continue to be a big opportunity for our brands and we're deploying strategies to successfully increase our presence in select countries and regions.

We recently signed a distributor agreement for Durango in the UK and we'll be partnering with a London-based PR firm to promote the brand and product lines in both the equestrian and fashion industries. Elsewhere, demand for our Rocky and Georgia work lines in the Middle East, Central America and the Caribbean continues to grow and is expected to increase further, as we add more countries to our distribution platform in the near term.

With that, Jim will now go through the financials.

Thanks, David. Net sales for the first quarter improved to $53.3 million compared to $52.3 million for the corresponding period a year ago. Wholesale sales for the first quarter increased 6.5% to $42.4 million compared to $39.8 million last year.

Our commercial military and western segments posted the strongest percentage gains in the quarter, up 29% and 17% respectively, while our largest segment, work, was up 5% led by an 11% increase in Georgia brand sales. Retail sales for the first quarter were $10.5 million compared to $11.7 million a year ago. And military segment sales were $0.4 million versus $0.8 million for the same period in 2011.

Gross profit in the first quarter was $18 million, or 33.8% of sales compared to $19.3 million, or 36.8% of sales for the same period last year. The 300 basis point decrease in our gross margin was primarily driven by lower initial markups on the product sales associated with the rollout to all Tractor Supply stores.

Selling, general and administrative expenses declined 8.2% to $16.7 million, or 31.4% of net sales for the first quarter of 2012 compared to $18.3 million (sic - see press release), or 34.9% of net sales a year ago. The $1.5 million or 350 basis points improvement was primarily due to lower compensation expense and operating cost of our retail business, partially offset by an increase in advertising expenditures.

Interest expense for the quarter decreased to $0.1 million from $0.2 million in the first quarter of 2011 due to lower borrowings during the period versus the same period last year. Net income improved $0.2 million to $0.7 million, and diluted earnings per share increased 43% to $0.10 in the first quarter of 2012.

Turning to the balance sheet. Our funded debt at March 31, 2012 was down $6.3 million or 22.5% to $21.5 million from $27.8 million at March 31, 2011. Inventory at the end of the first quarter of 2012 was $64.1 million, an increase of 4% compared to inventory of $61.7 million at the end of last year's first quarter. The increase in inventory was the result of an increase in cost per unit partially offset by a decrease in units of footwear.

I'll turn it back to David for his closing comments.

Thanks, Jim. In addition to the near-term growth initiatives I discussed earlier in the call, we continue to develop strategies aimed at leveraging our core competencies into new market segments. This includes healthcare, which is projected to add more than 5.6 million jobs over the next decade.

We recently met with two of the largest medical footwear and apparel retailers, Life Uniform and Scrubs & Beyond, to outline our product development concepts and prototypes, including our new Rocky For Your Sole clogs for nurses and doctors, who are on their feet for the majority of their shifts. The response was extremely positive. They felt that we had hit upon some unfulfilled needs and we believe that we will secure [cast] orders from them and other retailers of medical footwear to ship later this year and into early 2013.

So in closing, we're very pleased with the pace of our business to start the year and we're excited about the many near and long-term opportunities we see ahead for our brands and products. Based on current visibility, we expect sales growth in our wholesale division to accelerate from Q1 levels and increase in the high single digits over the remainder of the year compared to the same period last year.

We also expect our retail performance to improve versus the decline we reported in the first quarter, with sales projected to be up slightly during Q3 and Q4 and to be flat for the year. Military segment sales are expected to be immaterial for the remainder of 2012.

With regard to gross margin percentages, they should be down slightly particularly in the second quarter for two reasons. One, we are not yet fully recognizing the positive variances that we're currently experiencing in our plants due to significantly improved efficiencies. And two, it is in the back half of the year when we will have all customers converted to our new price lists.

With respect to SG&A for the balance of the year, we expect it to only increase in proportion to the variable portion of our incremental sales. We look forward to updating you on our progress when we report second quarter results in July.

Operator, we're now ready to take questions.

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

Yes, thank you. And thanks for taking my questions. Let's see, let me start with the Tractor Supply expansion. You talked about the impact of gross margins in the quarter. Can you talk about sort of what volume it added in terms of revenues for the quarter, kind of what you see that adding for the year and then how should we think about gross margin impact of that business over the balance of the year? [You nearly talked] about your gross margin expectations for the second half, you kind of talked about pressure in Q2 or so.

Well, I'll talk to the volume, Mitch, and then turn over to Jim on the margin. We added about a $1 million order.

Okay.

And last year, we did approximately $5 million with that account. This year we expect to do more in the -- like $7 million.

Okay.

Jim, you want to speak to the margins?

Yes, Mitch, I think it'll -- we had planned our margin percentages to be down slightly for the year based on the price increase and -- the cost increase that we had last year and the price increase that we took. But I think that this will -- so we plan them to be down slightly based on that. But I -- this will be down -- not as certainly as dramatic in the first quarter, but it'll have maybe a half a point, 50 basis point effect on the margins as we move to the back half.

With the second quarter, the primary thing there is our recognition of the positive variances [that we have] in the factories. We're still recognizing the inefficiencies we had last year and they'll continue through the second quarter and then we'll start to realize some of the positive variance as we move into the back half of the year.

Okay. That's helpful. And then on the SG&A, David, you mentioned that you expect the variable piece for SG&A to grow kind of in line with the variable piece for the balance of the year. But in Q1, your SG&A was down like $1.5 million despite wholesale up. So I would imagine your variable expense was up, but there are other pieces of the SG&A that were down. I mean you're still going through this retail transition, so I would think that could help you, so maybe you could just speak to that a little bit.

Yes, in 2011, we took a lot of actions in terms of reducing headcount. In fact, we reduced our sales force by 50%. And also we took centers and [chalked out of] operation in the first quarter of last year. But we didn't realize the savings because of severances and closing costs. So you're seeing a little bit of tail there year-over-year.

Okay. All right.

Jim, you want to comment on the variable?

Yes, the variable, Mitch, you had mentioned in the first quarter, we should have seen some more variable, but our increase in sales there primarily came from these key accounts. Supply being about half of it and those accounts, the variable expense is pretty low, just some distribution expense. There's no freight expense as they pick up their own goods, and no salesman commissions on those because they're in-house salespeople. So we didn't experience a significant increase in variable expense based on those increased sales.

Got it. And then, Jim, could you just quickly run through the segment margins for the quarter?

Sure. For the first quarter it was 30% -- 30.5% for wholesale, 48.3%, and 4% for the military.

Got it.

(inaudible).

Okay. And maybe one last question. You provided a wholesale outlook for the balance of the year. It sounds like you're feeling pretty good about the order book. And it sounds like, I think in one of the last calls, you weren't yet sure how the hunting business might play out, but it sounds like that order book is trending well, their western book is trending well and then also commercial military. I mean, could you speak to kind of what the overall backlog looks like at the end of Q1? And am I correct to assume that your backlog shows increases in all three of those businesses?

That is correct. Despite the carry-over and the weather, the -- and the [reticence] that you see in the outdoor business, our bookings are up about 5% in footwear, but down a little bit in apparel. There was more carry-over in the channel there. Western, we're very, very pleased with where our western order book is, particularly in Durango and the work business is pretty solid, too.

Okay. That's helpful. Thanks, guys. Good luck.

Yes, thanks.

Thank you. Dorsey Gardner, Kelso Management. (Operator Instructions).

Yes, thanks for taking my call. Clearly, the inventories were up 4.5%, sales were up, I guess, 2% in the quarter and inventory looked pretty heavy going into the quarter or at the end of last year, again with the pressure on margins due to markdowns on inventory, I guess, is my first question.

The second question is with the military business declining or really nonexistent, I would think that gross margins would go up going forward, but in fact there's continued pressure on gross margins.

And then, third, I guess it's really early in the game, but could you comment on the outlook for the Internet business and what you think you can do there? And also is there a pushback from your normal channels? Do people feel that perhaps they shouldn't carry your lines because you're selling them now direct or what kind of reaction you get on that? I guess it's just, the times have changed and everybody is doing it and it's a reality, but -- I guess that's a lot of questions. Thank you.

Yes. With respect to inventory, 70% of our business comes at once, in other words, customer calls, they need a size and they want to ship the same day. So inventory is perhaps higher than some of our competitors, but it's because of this, the nature of our business. Year-on-year we're pretty pleased where the inventory is right now. We did sell some obsolete inventory in the quarter, particularly in our western business. We liquidated some inventory there, but our discontinued inventory at this point is extremely low. So we're happy where the inventory is.

With regard to -- at the end of the year, our units of footwear year-over-year were down about 95,000 pairs and at the end of the first quarter year-over-year they're down about 140,000 pairs. So we're continuing to make progress in bringing the units down. And the increase year-over-year is smaller at the end of the first quarter than it was at the end of last year. So it's all related to the price increase. We had a significant increase in our cost last year and we won't anniversary that until we get to about third quarter.

And then with respect to margins, we give you a lot of transparency into the margins and we report them by segments and we just went through that as we answered Mitch's questions. And I think we've explained pretty fully why -- what happened with the margin this first quarter. It wasn't due to military, it was due to our wholesale business and these large shipments to this very large customer with (inaudible).

And then with respect to your question about our direct business, our direct business is really not around our wholesale brands. We have a retail business that we're transforming to more of a web-based delivery system. And in fact, now 60% of the business is direct through the web. We're very bullish on this business. The operating margins are twice what they were in the first quarter of 2011. We're very pleased with it and we're investing in it. And we don't think it affects our wholesale business at all, they're two separate businesses.

Do you feel it's incremental business? And I mean, what -- do you expect in couple of years to be doing $50 million in this business or what's possible?

We're currently doing -- I think the plan this year is north of $40 million. And it's a fifth of our business today. We are remaking it, retiring an old business model. It was very labor-intensive and very capital-intensive. And we're getting this inflection now in the sales through -- we've been remaking it since 2008. We've had declining sales, but improving operating margin. And in the back half of this year, we're now forecasting the sales to actually -- the sales trend, downtrend to reverse. So the business can be much larger than it is today.

Did I see some of your product on Zappos, is that -- do you sell through them or how does that work?

Zappos.com is a large customer, yes.

I think, do you drop ship for them? I mean, do they give you [the orders, do you] ship it or how does that work?

We ship for many dotcoms, but in Zappos' case they actually stock the product.

I see.

[In that way, yes].

Well, that looks encouraging. Thank you very much.

Yes. Thank you.

Thank you. (Operator Instructions) Mr. Sharp, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Okay, well, we thank you for your interest and your questions and we look forward to speaking with you in another 90 days. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.