Rocky Brands Inc (RCKY) 2012 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 2012 Earnings Conference Call. (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.

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 31st, 2011.

I'll now turn the Conference 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.

At the end of second quarter, we faced a significant challenge after severe storms moved through Ohio and knocked out power to much of the state, including our distribution center in Logan. As a result, we were unable to ship product for several days in late June and early July, which had a material impact on our second quarter results.

Approximately $2.5 million of wholesale and retail orders moved into the third quarter, costing the second quarter approximately $0.06 in diluted earnings per share. Our team did a great job of getting those orders shipped once power was restored, to make sure we didn't lose any sales.

Outside of this disruption, our second quarter performance was generally in line with our expectations [and] was consistent with recent quarters in terms of what's driving our business. We continued to experience gains in our wholesale business, driven by demand for new western and commercial military products, which were more than offset by softness in our hunting segment.

With regard to our outdoor hunting category -- as we said on the last call, we were pleased with the level of pre-books coming off a very mild winter. We've seen good response to new product introductions, most notably our new Rocky Athletic Mobility, or RAM, product line that targets a younger, more athletic demographic. What we are finding out, though, is that many of our key outdoor retailers are taking product close to the start (technical difficulty) [hunting] season, which has shifted some sales out of the second quarter and into the third quarter compared with past years.

As the hunting retail landscape continues to consolidate, and we have fewer small and medium-sized hunting boot customers, we believe our ability to enjoy meaningful sales in the category during the second quarter will continue to diminish. With their emphasis [in] capabilities around inventory management, big-box retailers do not have the appetite to take hunting products in advance of the season. Having said that, should we experience a more normalized winter -- that is, if it is colder and wetter than last year -- we think there is additional upside for the category later in the year.

Now, to other categories where we are enjoying success -- as we detailed on last quarter's call, we recently began a new program with Tractor Supply, one of our largest national accounts, that included expanding to roughly 1,100 doors with four styles, each of which is on a weekly auto-replenishment program. After the initial set, their footwear sales suffered from the drought conditions in the United States. But since the start of the recent rain storm patterns that have been sweeping across the Midwest, we have seen our sell-through improve.

Over the past two weeks, our comp store unit sales have increased 17.3% versus the same period last year. We expect momentum to build in the second half of this year. The product mix is skewed to wet, muddy conditions, and the all-store distribution will improve our brand awareness.

An area of our business that continues to see considerable improvement in demand is western. This is being driven by our Durango brand, and, in particular, in new products under our more fashion-forward City collection, which has created new distribution opportunities and led to more shelf space with existing accounts where we already are experiencing results at retail.

Based on extremely strong bookings ahead of the fall season, we project our sales in the brand to grow approximately 30% this year. Therefore, we expect the brand's momentum at retail to build over the back half of the year and continue into 2013, when we introduce broader fashion lines for Durango.

Another fast-growing area for us is our commercial military business. Building on the strength and popularity of our S2V product series, we are developing a larger sales base through product line extensions, such as steel toe versions; and wider distribution within the armed forces retail network of exchange base stores, with 151 locations globally. The S2V was also recently adopted by the Naval Expeditionary Combat Command, providing us with another growth vehicle for this relatively new venture.

We have also been experiencing increased demand for our C4 Trainer, an ultra-lightweight boot which soldiers prefer to wear while on-base and for travel. And the armed forces on-base stores just expanded their assortment to include a test of the C4 Trainer in 15 stores. We have the capability to meet the demand should the test go well, and ultimately expand to all stores. Further, in an attempt to improve product brand and product visibility in this after-market military channel, we recently launched a new website, rockymilitary.com. We expect our sales of commercial military boots to improve some 40% this year.

Turning to our retail business, where for the past two quarters we have been reporting improving profit contribution, 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 and direct business increased to 68% in the second quarter of 2012, compared to 48% a year ago.

We currently operate 23 trucks. A year ago, we were operating 49. As we reported on the last call, with the transformation of this business substantially complete, (technical difficulty) --

Thanks, David.

Net sales for the second quarter were $44.4 million, compared to $52.3 million for the corresponding period a year ago. As David mentioned, approximately $2.5 million of sales shifted out of the second quarter into the third quarter as a result of the temporary shutdown of our distribution center in late June.

Wholesale sales for the second quarter were $34.7 million, compared to $40.8 million last year, with the decline driven primarily by the delayed shipments and softness in our hunting category. Retail sales for the second quarter were $9.1 million, compared to $10.9 million a year ago. Military segment sales were $0.6 million in both periods.

Gross profit in the second quarter was $15.4 million, or 34.6% of sales; compared to $20.6 million, or 39.4% of sales for the same period last year. The 480-basis point decrease in our gross margin was primarily driven by increased product costs, resulting from manufacturing variances in our Company's production facilities versus a year ago --

[We cut off.]

Operator?

(Technical difficulty) product costs, resulting from manufacturing variances in our Company's production facility versus a year ago.

This year's gross margins were in line with our expectations. Selling, general and administrative expenses declined 11.6% to $14.9 million, or 33.5% of net sales for the second quarter of 2012; compared to $16.9 million, or 32.2% of net sales a year ago. The $2 million decline was primarily due to lower compensation expense, lower operating costs of our retail business and lower advertising expenditures.

Interest expense for the second quarter decreased to $0.1 million from $0.3 million in the same quarter of 2011 due to lower borrowing during the period versus the same period last year. Our effective tax rate for the second quarter of 2012 was 35.8% compared to 35% in the second quarter of 2011.

Net income was $0.2 million or $0.03 per diluted share, compared to net income of $2.3 million or $0.30 per diluted share. As outlined in our release, the shift in sales out of the second quarter related to the power outage equated to approximately $0.06 in diluted earnings per share.

Turning to the balance sheet -- our funded debt at June 30th, 2012 was down $9.6 million, or 24.3%; to $29.9 million from $39.5 million at June 30th, 2011. Inventory at the end of the second quarter 2012 was $74 million compared to inventory of $74.4 million at the end of last year's second quarter. Compared with a year ago, inventory units were down 13.5%, offset by an increase in cost per [unit] (technical difficulty) --

We anticipate a 20%-plus increase versus the same period a year ago. To be clear, we will make up the first half earnings shortfall and exceed last year's annual earnings of $1.60 per share.

And longer term, we are even more excited about what we believe lies ahead for our brands and our business. On top of the growing momentum in the western fashion channel and expected increases in commercial military and work boot businesses, we believe our efforts to penetrate both the healthcare industry and broader outdoor footwear market will begin to yield positive results beginning in 2013 and, importantly, can help mitigate some of the vulnerability from our changing hunting business in the first half of the year. We look forward to updating you on our progress when we report third quarter results in October.

Operator, we're now ready to take questions.

(Operator Instructions) Mitch Kummetz, Robert W. Baird.

Guys, let me start with the power outage. You talked about losing sales, $2.5 million in sales, in Q2. And I guess I just want to be clear -- is it truly just a shift of those revenues into the third quarter? Or do you lose any sales because of the issue? And are retailers -- that retailers [already] canceled because the shipments were delayed? And then, again, it sounded like there was a $0.06 hit to Q2. And again, I just want to be clear -- does that mean you basically pick up the $0.06 in Q3, or is there some sort of SG&A impact in the third quarter as you were kind of catching up there -- maybe running extra shifts, things like that -- to get that product out the door?

No, I think we were pretty clear, Mitch, that we expect to -- that we will ship those -- that we did ship those sales as soon as the power came online, and that we did incur some additional overtime to accomplish that, to ship the product as soon as possible when it came back online. So those $0.06 we will pick up in the back half of this year.

Okay.

And then, David, I just want to be clear -- you provided some guidance on the third quarter and the back half. I think for Q3, you said sales up mid-teens. We were specifically referring to the wholesale business on that?

I was talking about the wholesale business.

Okay.

And then, speaking of the wholesale performance -- I don't know if you can tell us, but could you maybe run through how those kind of individual businesses perform by category? You mentioned the hunting and the shift in sales there, as retailers were looking to take product closer to the hunting season. Could you say how much hunting was down on the quarter, and then maybe talk about western and work as well for the second quarter?

Yes, sure.

The hunting business was down versus last year $3 million, off a base of $5.6 million.

Yes.

So that was a big hit. And if we look at our business with three customers in particular, our three largest customers, our business in total with those customers really hasn't dropped; it's shifted.

Okay.

And we had a -- year-on-year, for the past probably seven or eight years, we've had a declining customer base here in this consolidating retail environment. So as Cabela's and Bass Pro Shops and Dick's Sporting Goods and Gander Mountain -- particularly those four -- are a much larger part of our business, they of course have the systems and the fiscal responsibility to manage their inventories much tighter, and are playing deliveries much closer to their needs.

But in total, we're pretty pleased with where we are. We're still off the pace of total orders for the year. We're still off the pace of last year at this time. We believe that's all related to conservatism after the very warm conditions last year and the pitiful season that a lot of retailers had. We know from prior seasons that that's short-lived, once the weather conditions are more seasonal, and they're colder and wetter than the year before. And that's why we noted in the comments, in the prepared comments, that we -- there is upside to our business for outdoor.

Western continues to outpace our expectations. We talked about a 30% sales increase for this year. We're certainly on pace to do that. The new product lines are really looking at retail, both in our existing customers and in some of these new doors that we've managed to open. We're very optimistic about western.

Our work business in the quarter, frankly, was a little disappointing. In total, we were down -- off a base of $18 million, we were down about $1.5 million. A lot of that is around -- although when you read retail reports, they talk about the warmer weather being favorable for retailers, but when it comes to [six and eight, it's murky]. Particularly in these very, very hot conditions, it can slow down the pace of work boots. And we've heard a lot about in the farm and ranch channel, where Georgia is so strong, that retail business has been a little soft as some of these farmers struggle with the drought.

Okay.

And then, I spoke at length pretty much on commercial military -- it's still a star performer. We ended last year -- we've talked about this on calls before -- we ended last year at about $20 million, off $10 million the year before. And we project around $28 million right now, so it's another kind of 40% --

Yes.

-- trajectory there.

So in apparel, the largest part of our apparel business today is hunting apparel. And we suffer there, just like we suffered, I think, a little bit with outdoor footwear. So we were down about $600,000 off a base last year of $1.8 million. Some of that is going to shift in closer. But some of the key account business that we expected didn't stack up the way we thought it would. So we'll be a little soft there by year end.

That's very helpful, really appreciate that color.

And then maybe, just as a final question, Jim, could you just run us through the segment margins on the quarter -- just wholesale, retail, military?

Yes. Wholesale for the -- wholesale margin was 31.9%, retail was 46.7%, and military was 4.7%.

Great. Thank you very much. Good luck.

Thank you.

Thank you.

(Operator Instructions)

Operator?

One moment, sir.

John Sullivan, Olstein Capital Management.

Just trying to drill down a little bit more into the sales -- it seemed like they were obviously fairly weak in the quarter. And you guys are giving pretty decent forward look for the third quarter. Now, is this just expectations that you guys have? Or is this something where you've got some of your bigger accounts with firm orders in place, where you know it's really coming through, versus just hoping?

Yes, John, the large portion of our business is at once. Over the year, it's 7%. However, the quarter where we have the best vision is in Q3, where we pre-book a lot of the insulated products early in the year, and then we ship them in Q2 and Q3. So we have -- this is not just us sitting around rubbing our stomachs and feeling good about the business. I think we have a very high level of confidence about our ability to deliver what we just talked about in Q3 and Q4.

Thank you very much.

Thank you.

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

Well, thank you.

First, let us apologize for the little hiccup mid-call there. We did have -- we've talked to you from a conference room that has a window in it. And somebody came to that window and said that nobody can hear us on the call. So we thought the call had dropped. But fortunately, it hadn't.

And we enjoyed sharing with you our prospects for the back half. We're obviously disappointed with our results in Q2 but feel fairly good about Q3 and Q4.

So we look forward to speaking to you 90 days from now. We'll work hard to make it a much better quarter. Thank you very much.