Rocky Brands Inc (RCKY) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands third quarter fiscal 2012 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 is being recorded. I 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 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 over to Mr. David Sharp, President and Chief Executive Officer of Rocky Brands.

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

Our third quarter sales performance included double-digit percentage increases in several areas of our business, helping drive footwear sales up over 9% over a year ago. Many of the initiatives we've put in place over the past 12 months to 24 months continued to deliver strong gains. These include, one, compelling new products within our traditional western business; two, the expansion of our recently introduced Durango City line of fashion boots; and three, expanded distribution for our commercial military business.

Overall, western footwear sales were up 42% during the third quarter with our traditional Durango and Rocky business up 26%, while our Durango City line of lifestyle footwear doubled from a year ago.

We continue to experience increased sales volumes with our existing base of western retailers such as Cavender's, Boot Barn and RCC Western, along with Academy Sports, which has quickly become a much more meaningful account for us, thanks to the performance of our new flag boots.

At the same time, Durango City is opening up new distribution opportunities like DSW, Rack Room, and at the e-tailer, onlineshoes.com. We've also experienced -- experiencing expansion of several accounts, including zappos.com, allowing us to target a whole new consumer. Importantly, these strong selling results have been followed up by equally strong sell-through in the past few months.

Commercial military were up 23% in the third quarter, fueled by increased demand for our popular S2V product series and C4 Trainers. In the early success of the initial S2V boots, we've expanded this category through product extensions, including a steel-toe version and new distribution with the broader military exchange stores on the military bases.

Looking at direct business, sales were a bit softer than we expected, which resulted in a shortfall versus our topline target for the third quarter. We believe some of the missed sales were related to external factors, while execution issues were also to blame.

Work, which is our largest segment, was flat with a year ago. Anticipated sales gains were hampered by production delays on some key new products, which resulted in lost sales and potential reorder activity in the quarter.

On a more positive note, we experienced solid gains with several of our large farm and ranch chains, most notably Tractor Supply and Coastal Farm and Home, from continued door growth and assortments expansion. Unfortunately, these gains were partially offset by declines in sales of smaller independent work retailers, some of whom have either got out of business or are struggling with credit issues.

Similar to work, our hunting business was flat compared with last year's third quarter. The issue here was weather, which always plays a major role in the performance of this category. And with the warm, dry September much of the country experienced, we didn't see the level of at-once orders we had projected, because sell-through has been slow to develop.

Finally, our apparel business, which was about 5% of overall sales last year, declined approximately $2 million as shipments to one key customer continued to decline. The after-effects of last year's mild winter are still impacting our retailers' buy cold weather apparel, especially camouflaged hunting outerwear. We've seen sell-through pick up over the past few weeks as parts of the country experienced cold spell. However, we remain cautious about the near-term prospects for this business, until we get a more prolonged period of colder and weather conditions.

Now, turning to our retail business, the trend of improved profits on lower sales volumes, making progress shifting a greater percentage of retail sales to our lower-cost web-based model. For the quarter, web sales represented 70% of total retail sales, up from 55% a year ago. As technology continues to reshape the retail landscape, we believe we're well positioned to prosper from the emergence of the omni-channel and the changing ways businesses and consumers conduct transactions.

I'll now turn the call over to Jim.

Thanks, David. For the third quarter, net sales increased $1.5 million to $72.5 million from $71 million in the corresponding period a year ago. This included wholesale sales of $62.9 million this year compared to $60.2 million last year, representing a 4.5% increase. Wholesale sales were driven by a 9% increase in footwear sales, partially offset by a decline in apparel sales.

Retail sales for the third quarter were $9.6 million compared to $10.3 million a year ago, and we had no military segment sales this third quarter versus $0.4 million last year. Gross profit in the third quarter was $26.2 million, or 36.1% of sales compared to $25.6 million, or 36% of sales for the same period last year.

Selling, general and administrative expenses increased 1.2% to $18.2 million, or 25.2% of net sales for the third quarter of 2012 compared to $18 million, or 25.4% of net sales a year ago. The $200,000 increase was primarily due to higher advertising expenses, partially offset by lower compensation expense.

Interest expense for the third quarter decreased to $0.2 million from $0.3 million in the third quarter of 2011 due to lower borrowings during the period versus the same period last year.

Our effective tax rate for the third quarter of 2012 was 31.9% compared to [20.7%] in the third quarter of 2011. The higher tax rate is the result of more permanent capital investments in our operations in the Dominican Republic in 2011, which lowered our effective tax rate in that year. Net income was $5.4 million, or $0.72 per diluted share compared to net income of $5.2 million, or $0.70 per diluted share last year.

Turning to the balance sheet, our funded debt at September 30, 2012 decreased $18.2 million, or 30.3% to $41.9 million from $60.1 million at September 30, 2011. We are very pleased with our continued progress in reducing our debt levels. Inventory at the end of the third quarter of 2012 was also well managed at $73 million, down 7.4% from $78.9 million at the end of last year's third quarter.

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

Thanks, Jim. As we examine our performance through the first nine months of the year and then look out over the next several quarters, we believe 2012 will represent a turning point for the Company. The emergence of several new growth vehicles has created a lot of excitement within our organization and with our retail partners, and we're confident that the product initiatives we've recently brought to market combined with what is currently in the development pipeline can drive our business forward for many years to come.

Clearly, our focus on investments and generating sales growth is paying off. Both our western and commercial military segments have performed very well year-to-date, and enter the fourth quarter with strong momentum.

In response to these recent results, we have positioned our inventory and production capabilities accordingly to ensure we are able to fully capitalize on the opportunities we've created. Unfortunately, the two of the large and significant pieces of our business, work and hunting, haven't exhibited the same growth characteristics in 2012.

With regard to our traditional hunting business, we need to get used to this becoming a smaller percentage of our overall business due to the shorter selling season and the continued growth of private label as many of our large national partners.

That said, the opportunity exists to leverage the strength of the Rocky Brands into faster-growing areas of the outdoor footwear market. Our new extreme collection is being well received and we've just signed up four sales agencies, who are familiar with the channel and have relationships in the channel, and will help us with placements.

While private label is presenting challenges in hunting, it's providing an opportunity in work. We've recently signed an agreement with Tractor Supply to manufacture their in-house work footwear program beginning in 2013. The additional sales will help offset declines from the continued contraction of our independents account base as the uncertain economic outlook makes it more challenging for several of these mom-and-pop shops and small chains.

Importantly, the additional volumes will help drive greater efficiencies in our Company-owned factory in the Dominican Republic, and therefore, improve overall gross margin, despite the lower product margin on this new revenue stream.

Given that these new outdoor and work initiatives won't contribute to our results until next year, combined with the fact that it's still unseasonably mild in many parts of the country this late in October for the second consecutive year, we believe it's prudent to take a slightly more cautious stance with our outlook for the fourth quarter. Based on current expectations, we believe we can achieve diluted earnings per share equal to the non-GAAP diluted EPS of $0.52 we reported a year ago.

We're confident that if we get a normal winter, meaning something not as warm and dry as last year, but not as cold and snowy as 2010, we'll begin 2013 in a good position to grow the categories that have been a bit sluggish this year.

On top of this, our faster-growing categories led by western lifestyle and commercial military, along with other new initiatives such as our entrance into the medical industry, which is on track to deliver product in the second quarter, are providing the foundation for long-term sustainable sales growth and enhanced profitability.

Operator, we're now ready to take questions.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Mitch Kummetz, Robert W. Baird.

Yes, thank you. Thanks for taking my questions. So, I got a few. Jim, let me start with just the segment margins for the third quarter, if you have those.

Sure. Wholesale was 34.6% and retail was 46.1%.

46.1%, okay. And then, David, you mentioned some impact from some production delays on the work business in the quarter. Could you quantify the impact of that, and could you tell us if those issues have been resolved?

Yes. Mitch, the issues are resolved. We have the goods now, and that was for the tune of about $2 million.

Okay. And then, on this new Tractor Supply program, can you talk about what sort of volume are you talking about that? Is the margin structure, I'd assume it's a little different than your current wholesale business? And is there opportunity to do this with other accounts, maybe on the hunting side with some of those customers?

Yes. The volume we expect in the first year to be around $8 million, in that neighborhood, and there would be initial set in the first quarter in the -- from the $2.5 million to $3 million range.

Okay.

And regarding margins, I really wouldn't want to discuss those and from time to time, Mitch, we have done private label for other customers in the hunting market, Bass Pro. In fact, we still do a little bit for them. In terms of the facility in the DR, we're actually at capacity. Next year, we'll be at capacity. So I don't think we'll go and chase any private-label hunting business.

Okay. And then, lastly, Jim, just if you can give us a little more -- give us some color on how to get to the fourth quarter guidance? I know, David, you said $0.52 is what you did last year pro forma. I mean, how should we be thinking about that in terms of growth, wholesale versus retail? I know for the third quarter, you were talking about sort of mid-teens wholesale growth. You came a little short on that and you talked about those issues. I mean, how should we be thinking wholesale, retail in Q4, maybe gross margin and SG&A in Q4 as well?

I think that before in the last call, we talked about the third quarter being higher growth based on some of the sales we missed in the second quarter.

Right.

But more of what we had in experience, which was mid-to-upper single-digit growth on our wholesale business. We think that will be a little bit -- about half of that now what we've thought before and that's primarily related to reductions from what we thought before in our hunting footwear and our apparel businesses, which are more sluggish than we had thought. We continue based on what's going on with the weather now.

And I think margins on a segment basis will be similar to what we had last year other than we had an inventory adjustment in our -- at our retail store last year that we won't have obviously this year. So I think the retail margins will be similar to what we saw in the third quarter of this year.

Okay.

And with regard to sales, we think for retail, we'll be flattish with last year and we don't have any military segment sales though.

Okay.

In the fourth quarter.

[What about] SG&A? I know as of last quarter, you were saying about $3 million of additional SG&A for back half and for the second quarter, it was only up maybe a couple hundred thousand. So, has that outlook changed for Q4, kind of what's implied?

I think that the SG&A will be up a little bit more in the fourth quarter with -- we saw have some additional advertising expenses that we're trying -- we're planning on for the fourth quarter that we've already committed to. So I think that $3 million was based on the higher sales projection and the variable SG&A that went along with that. So I think it would be up higher in the fourth quarter than it was in the third quarter. But not certainly the $3 million for the quarter.

Got it. That's helpful. All right. Thanks, guys. Good luck.

Thanks.

(Operator Instructions) John Sullivan, Olstein Capital Management.

Hi, guys. Just going to the fourth quarter, being your cash flow kind of quarter, I would say, where you really kind of reversed the rest of the year. Do you guys see any issues with the level of cash generation approximating earnings, now given that I guess the sell-through hasn't been what you've been expecting?

No, I think that our -- we're still going to generate the same amount of cash as we do. What typically happens with our business is our cash needs go up mostly through second and third quarter as we buy inventory and then turn it into receivables, and then a lot of -- and particularly in our hunting segment, there's a lot of -- the cash comes due in the fourth quarter, late fourth quarter. So we should -- we still anticipate our cash -- our free cash flow to be equal to our net income with depreciation and capital expenditures being about equal, in the low $6 million range.

Okay, great. Thanks.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Yes, well, thank you. We'll continue to work hard by growing the business in this -- in the final quarter. We'll talk to you next quarter. Thank you.

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