Rocky Brands Inc (RCKY) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands' fourth-quarter and 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 call is being recorded. And I would like to turn the conference over to Mr. Brendon Frey of ICR. Thank you. Mr. Frey, you may begin.

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 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 will 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.

The fourth quarter proved to be more challenging than we anticipated. The second successive mild start to winter reduced in-season demand for insulated, waterproof boots across our work and hunting categories. Many retailers in the work and outdoor channel started 2012 with carryover inventory following last year's warm, dry winter, which they were unable to fully work down throughout the year, due to the continuation of unfavorable temperatures.

As a result, our at-one sales and reorders were below plan in November and December. In total, sales missed projections by approximately $7 million, which had a corresponding impact on net income of roughly $1.5 million. Due to the relatively small number of outstanding shares, a modest topline miss can have a substantial impact on our earnings per share, and that is what happened in the fourth quarter.

Weather has always played a role in Rocky Brands' fortunes. Our 2005 acquisition of EJ Footwear significantly reduced the Company's reliance on cold, wet hunting seasons. Since the acquisition, we have taken steps to organically diversify our operations, further indicate the impact of weather on our results.

Work on this diversification is focused primarily on Durango, leveraging the brand's authenticity and popularity into product line extensions for women and children, and expanding beyond Western into more mainstream lifestyle collections. In the past two years, we've introduced several new products with good success, including more fashion-forward boots that opened up new distribution and expanded our presence with existing accounts.

The response to Durango's 2012 product offering was extremely positive, with total brand sales up 44% for the year. Importantly, the strength was broad-based, as both in-line and new styles performed very well with most major customers. For 2013, we hope to make maintain current momentum with the brand at retail. We're again introducing many new programs.

The other area of our wholesale business that helped offset declines related to weather is commercial military. For the year, sales under the Rocky brands increased 8%. This was driven by our popular S2V products series. More recently, the introduction of our lightweight C4T Garrison training boots.

With regards to S2V demand, we did experience a slowdown in Q4, as the looming federal government mandated sequestration budget cuts dampened market appetite for additional inventory. While we believe this to be a temporary issue, sales of S2V are likely to remain soft through at least the first half of 2013, until the overhang of the fiscal cliff is behind us. That said, demand for C4T has not waned, because most of them are purchased by the soldiers on base. So we're moving quickly to fulfill orders and expand distribution within the PX channel.

Now to our retail division. As you know, over the past few years, we've transformed it into a more nimble organization by utilizing a lower cost, Web-based order platform, and direct ship model. There were a number of notable achievements in 2012 that highlight the success of this multi-year initiative.

First, we ended the year with 71% of all transactions being executed via the web, up from 59% at year-end in 2011. Second, the division's profit contribution increased more than 50%, despite an 8% drop in sales, underscoring the enhanced profitability of the new model. Lastly, fourth-quarter sales decreased versus the year-ago period, indicating that the drop in topline, precipitated by the removal of 80% of our mobile stores over the past four years, hit trough levels, and is now on an upward trajectory.

Jim will now go through the financials in detail, and then I'll return to discuss the key growth drivers in 2013. After that, we'll be happy to take questions.

Thanks, David. Before I begin, I want to remind everyone that last year's fourth-quarter results included a one-time, non-operational charge of $3.7 million, net of tax associated with the termination of our resign benefit pension plan. The year-over-year comparisons in my discussion exclude the impact of the aforementioned charge. For a reconciliation to our GAAP results, please see the table that accompanies today's announcement, which is available on our website at rockybrands.com.

Now to our results. Net sales for the fourth quarter were $58 million compared to $64 million for the corresponding period a year ago. Wholesale sales for the fourth quarter were $46 million compared to $51.7 million last year. We experienced significant growth with our Durango brand, which posted a 48% increase. This was offset by declines in our hunting, commercial military, and work categories, which decreased 27%, 25%, and 17%, respectively.

Retail sales for the fourth quarter increased to $12 million compared to $11.8 million a year ago, and there were no military segment sales versus $400,000 for the same period in 2011. Gross profit in the fourth quarter was $20.7 million, or 35.7% of sales compared to $22.5 million or 35.1% of sales for the same period last year. The 60 basis point increase in our gross margin was driven by higher margins in our retail business.

Selling, general, and administrative expenses were $16.8 million or 28.9% of net sales for the fourth quarter of 2012, compared to $16.7 million or 26.2% of net sales a year ago. Income from operations was $3.9 million, or 6.8% of net sales compared to $5.7 million, or 8.9% of net sales in the prior-year period. For the fourth quarter, interest expense was $200,000, flat with last year.

Our effective tax rate for the fourth quarter of 2012 was 31.8% compared to 29.4% in the fourth quarter of 2011. The higher effective tax rate was the result of fewer permanent [invested] in our Dominican operations than a year ago. We reported net income of $2.5 million, or $0.34 per diluted share versus net income of $3.9 million, or $0.52 per diluted share last year.

Turning to the balance sheet. Our funded debt at the December 31, 2012 was $23.5 million, a decrease of 33% from $35 million at December 31, 2011. Inventory at December 31, 2012 was $67.2 million compared with $65 million on the same date a year ago.

David will now discuss the key growth drivers for 2013.

Thanks, Jim. We started 2013 with solid momentum in the Durango brand, which, along with other new growth initiatives -- namely our introduction of footwear for healthcare professionals, and our introduction of footwear and apparel for the extreme outdoors enthusiast -- has us well-positioned to deliver solid topline gains in the first half of the year, and further mitigate the impact of weather on our performance.

Building on the successful introductions from 2012, our upcoming product pipeline has several programs that we believe will continue to extend Durango's leading position in Western boots, and facilitate further expansion of our fast-growing lifestyle collections and continued sales momentum. Evidence of this, for example, (technical difficulty) the Tyler, Texas-based Premier Western boot chain, where we grew sales 40% last year.

On the strength of these additional programs, they have expanded their assortment by an additional 12 styles for 2013. Country Outfitters, the fastest growing online Western player, where our sales increased ten-fold last year to exceed $1 million, has forecasted the Durango line to grow by 25% this year.

Outside of the Western channel, we anticipate significant growth with Durango at DSW, Shoe Show, and Zappos.com. On the strength of our Durango brand, where we have the same sales force, we are also expecting Rocky Brand Western sales to improve next year, where we have developed new lightweight Western work boots.

In addition to continued growth from our Western lifestyle categories, we will be generating additional revenue from a new private label program with Tractor Supply, the largest retail farm and ranch chain in the US, and one of our biggest wholesale partners. Under the agreement, we are supplying seven styles to all 1193 of their doors, with the majority of initial pipeline fills shipping in the first quarter. We expect this to be a steady business going forward, given Tractor Supply's national reach and merchandising capabilities, which should help smooth out some of the seasonality in our overall business.

We're also very pleased to announce that we recently received an order from the US military to provide the Army with hot weather combat boots. It's a five-year deal consisting of guaranteed first year followed by four option years. Each year has a minimum purchase amount of 49,000 pairs, or roughly $3 million, and a maximum of 245,000 pairs, or $15 million.

Delivery of product will begin next month, when we anticipate sales this year to be at the high end of the allowable range. This contract will also help offset some of the declines we've experienced in the more weather-sensitive areas of our business.

We believe the majority of our retailers ended 2012 with cleaner inventory levels than they did the year before. And with temperatures in many areas of the US turning colder in January, along with a fair amount of snowfall, sellthrough has likely accelerated, further depleting their in-stock positions.

We think it's prudent to adopt a cautious outlook with respect to the back half of the year at this point, given the uncertainty around weather and retailer appetite for cold-weather product. However, should we experience a fall and winter season more typical than the past two years, there is likely upside to our internal forecast.

On the product cost side of the business, things are moving in our favor to start the year. As the result of increased utilization of our company-owned production facility in the Dominican Republic during the third and fourth quarter of 2012, product margins will be up in the first half of 2013 over the same period last year.

So our outlook for the first half of 2013 is as follows. Based on the growth initiatives we discussed, we anticipate sales to improve approximately 12%. We anticipate gross margin to improve by 125 basis points as a result of product cost reductions. And as a result of increased investments in growth initiatives, and the variable expenses associated with additional sales, we anticipate SG&A to increase by 10%. As we get further along in the year and gain more visibility into the back half of sales trends, we will update you on our full-year outlook.

I want to close today's prepared remarks by thanking everyone at Rocky Brands for a true team effort in 2012. The combined strength of this organization allowed us to navigate through a challenging operating environment late in the year, and emerge in a solid position to regain our momentum and drive improved results in 2013.

Operator, we're now happy to answer your questions.

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

Yes. Thank you for taking my questions. David, I know at this point, you're reluctant to give a back-half outlook, but given maybe the limited visibility that you have, I mean, at this point, are you anticipating that sales in margins will be down in the back-half, just as retailers are very cautious on pre-booking cold weather product, based on another mild winter season this past season? Is that how you're thinking about it?

No, Mitch. We're not that pessimistic. I think that we -- we've got some visibility into the hunting and the heavily insulated work products, and we're ahead of the bookings that we had last year. We think that retailers certainly ended with less inventory in their stocks than they ended the prior year.

Also, a lot of -- we're very optimistic about this Western business. Of course, that a lot of ships in the third and fourth quarter. And we do have the C.E. Schmidt business -- the private label business at GSC. That, of course, is a year-round program. And the military business, also, into the third and fourth quarters. We'll also be shipping, beginning in May and June, the healthcare products. Our bookings are ahead of our expectations at this point, and we have a lot of optimism for that program in third and fourth quarters.

Okay. No, that's actually very helpful. But, again, as I'm trying to frame this and work it through my models, should I then assume that maybe sales in margins aren't up as much in the second half as the first half, because you have some headwinds on hunting and work?

Yes. Yes, I think that's (multiple speakers) a good assumption.

Okay. All right. That's great. And then I just want to drill down a little bit more on a couple of these businesses. So, you mentioned the strength of Durango and then Western in general. Can you just give us any -- provide some context behind that? How big is either a Durango or your overall Western business right now? And what type of growth rate are you anticipating in 2013 on that business? And to what extent are you seeing the new accounts come into the fold on that business?

Well, specifically, Durango -- we ended Durango at about $25 million and -- I'm sorry. Hang on a second. Yes, $25 million, $26 million. And the Rocky portion -- the Rocky Western portion is about $14 million. And we're modeling a 25% sales increase in Durango for 2013.

Okay. And then on the new Tractor Supply private label contract, can you -- it sounds like you'll benefit from channel sales in the first quarter, but do you have any numbers you can put to that business, in terms of your outlook for 2013?

Yes, we have that modeled at around $8 million to $10 million.

Okay. All right. And then maybe lastly, on this new military contract. If I heard you correctly, you said that you expect it to be towards the high end or at the high end of the -- I think the high end is $15 million on the year? Is that -- or what's the high end on that? Or what's your expectation for this military contract to contribute to 2013 revenues?

Yes, the high end could be $12 million. It's about a $50 million annual, but we're not getting started -- we're not starting shipping until February.

Got it. And so, again, you would think in year one that that would be around $12 million?

That's right.

Okay. No, that's great to hear. I think that's it and I appreciate it. Good luck.

Okay. Thanks, Mitch.

(Operator Instructions) There are no further questions -- we do have another question coming from the line of Mitch Kummetz. Please proceed with your question.

All right. Thanks. Let me just -- one last thing. Just in terms of -- maybe two last things. In terms of margin, it sounds like there are a lot of moving pieces here. These different businesses have different margins structures. So, as we think about, like, gross margin on the year, I know that in terms of Tractor, the private label in military, those are lower gross margins businesses. So how should we think about gross margins as they play out through the year?

And then, also, I guess on SG&A, Jim. You know, you guys were -- I think you were down on SG&A for 2012. I think you're sort of fairly flat in the quarter, if I'm not mistaken. So how should we think about that? Does that build, especially if you have some of these newer programs with like the healthcare piece? Or just a little help on that would be great.

Yes, I think the margins, taking out the Tractor Supply for wholesale, I think those margins will be up based on the reduced product cost. Not as much in the second half of the year, certainly, as they were in the first half of the year. So up slightly in the second half of the year. And then the Tractor margins are in the mid-teens on those -- mid to upper-teens, so that's what I would factor on that. And then the military is other traditional margins of about 12%, 13%.

Right.

So that's how I would look at the -- and I think the retail margins kind of hit where they're going to be now as we move almost all of that business over to the -- that has lower gross margins, but higher operating margins from this new platform that we have.

So, on the SG&A, I think that we are -- as we said, we're planning the SG&A up. Looking at the increase in sales, you would look at about 15% on that for the variable portion of it. But we're also having some increases in our investments in advertising and selling expenses for our new endeavors that we're (technical difficulty), and some additional sales people.

And then the other thing is, is we made some significant investments, as we've installed a new ERP over the last couple of years here that we're starting to have to recognize a depreciation on that. So we're going to have some additional depreciation of about $1 million year-over-year that will hit SG&A, so.

Between that and additional investments, the advertising and the depreciation, we're probably talking about probably about $3 million. And then the variable -- so that's $3 million to $4 million of additional SG&A.

Okay. So what were the segment gross margins for the quarter?

Yes. It's -- the wholesale was 32.6% and the retail was 47.4%. And we didn't have any military sales in the quarter.

Got it. And then maybe one last thing. On the retail business, I know, David, you mentioned that this was the first quarter in a while where that business was actually up a little bit, so it sounds like the sales have troughed in terms of your transition there. So, I mean, at this point, are you basically done with your transition? And do you think that the sales can be sort of flat to up as we go forward in that business?

Yes, we've projected them up mid-single digits for this year.

Okay. And, again, does that imply that you're basically done with the transition? Or is there still a little bit of work to be done there?

There's still a little bit of work to be done, yes. Yes.

I think the other thing, Mitch, that's happening there is we're expanding our B2C business. And that -- so that's [up] in our retail segment, so that's why you're starting to see the sales help to offset any further declines in the Lehigh business.

Okay. That's good to hear. Thanks again, guys.

Okay.

There are no further questions in the queue. I'd like to turn the call back over to Mr. Sharp for closing comments.

Okay. Well, thank you -- thanks for listening in. We'll continue to work hard to deliver a strong first half and 2013. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.