Rocky Brands Inc (RCKY) 2013 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 2013 year-end 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 is being recorded and will now turn the conference over to Jim McDonald, Chief Financial Officer of Rocky Brands.

Thanks, everyone, for joining us. Before we begin, please note that today's session, 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 changes, 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, our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 30, 2012.

I will now turn the conference over to David Sharp, President and Chief Executive Officer of Rocky Brands.

Thanks, Jim, and welcome, everyone, to this afternoon's call.

We finished 2013 on a solid note highlighted by a 9% increase in wholesale footwear during the fourth quarter. In addition, our retail and military segment sales were also up over last year. Work footwear, our largest category, had one of its best quarters in some time, increasing 20%, driven by strong sell-through of our Georgia and Rocky Brands, combined with the contribution from our private label business that launched with TFC in early 2013.

We definitely benefited from favorable weather as it was cold and wet in many areas of the country throughout the fourth quarter. At the same time, we were in a much stronger inventory position versus a year ago, which allowed us to capitalize on pent-up demand for workboots following back-to-back mild winters.

We put a great deal of effort into improving our product lines to feature even more comfortable and durable styles with great value propositions. Consumers have responded very positively to our efforts which have helped strengthen our retail relationships and leadership position in the work category. For the Rocky Brand, this includes the Ironclad collection which sold through very well in Q4, and that momentum has carried over into the first quarter. Meanwhile, the early response to the Georgia brand's new Homeland collection of waterproof boots has been very positive.

There has long been a need in the workspace for quality product that can retail in the $100 to $120 range while still providing strong margins for our wholesale accounts. Excitement for the collection led us to pull forward some initial deliveries from Q1 into Q4, and consumer demand has been strong since its debut.

Finally, on work, we completed the first year of our private label program with Tractor Supply with a solid fourth quarter. The full-year results of this new venture handily exceeded expectations, and has cemented our relationship with this important account, which should help us grow our branded Georgia boot business there in 2014.

Our Rocky Hunting category also benefited from the cold, wet weather in Q4. Sell-in and sell-through were up double digits in the fourth quarter, leaving us and our retailers in a good position as we begin planning for the upcoming hunting season.

Beyond cold-weather categories, it appears that it was a challenging holiday season for much of the footwear industry. We did feel some pressure on our less-weather-sensitive categories with a result of weaker than expected store traffic at many of our retail partners. That said, there were areas of strength outside of work and hunting during the fourth quarter, most notably with our Durango brand, which has been a standout for us all year. Since evolving the product line and broadening the brand position to go after a younger, more urban consumer, we've successfully expanded distribution to more mainstream footwear retailers such as Amazon, Boot Barn and Zappo's, to name a few. Durango sales were solid during the fourth quarter across new and existing accounts, underscoring the strong response to the improved merchandise offering.

Looking at our commercial and military business, Our S2V product line continues to enjoy strong support among military personnel for its many versatile features. While we believe the demand is there, sequestration, deployment drawdowns and the beginning of another year of uncertainty within the government have created a challenging selling environment. Despite this headwind, we are seeing the S2V jungle boots being considered for wider use within the U.S. Army which, along with the development of a boot for the aviation community, I was encouraged about the category's prospects this year.

Adding to this optimism is broade4r distribution for our C4T Garrison training boot within the Army and Air Force exchange system. This includes a wider size offering and increased number of doors. And later this year, we will begin selling a C5C, Rocky's latest cutting-edge military design boot which has prebooked very well.

In analyzing our overall wholesale performance, it's important to remember that we transitioned to a licensing structure with our thermal underwear program at Walmart early in 2013. This made our topline comparisons more difficult in Q3 and Q4.

Turning to our Retail segment where we recently completed the five-year transformation of our Lehigh distribution model for multiple stores to the Web, we ended 2013 with just three shoe show mobiles compared to 21 the year before and 103 five years ago. We now interface with our customers through much more cost effective on-site kiosk locations of which we currently have about 380. This initiative drove a 40% increase in our custom fit order program in 2013 and we project this trend to accelerate as we lap easier comparisons later in the year.

The largest contribution to our Retail segment in the fourth quarter and the full year came from our Direct to Consumer eCommerce channel, where we've continued to invest time and resources in order to capture additional demand. In early November, we moved Rockyboots.com to a new platform run by Demandwear which has increased the speed of our sites, including content delivery, and significantly enhanced the overall consumer experience. The impact has had a measurable effect on sales. In addition to transitioning our Durango, Georgia boot and Creative Recreation eCommerce website for the Demandwear platform, we are now focused on optimizing the customer experience regardless of the device with which they are using to view our system services. Whether it be a PC, tablet or smartphone, we will provide a consistent, best in class experience utilizing responsive design technology.

Finally, with regard to Creative Recreation, the acquisition closed on December 13 and we moved quickly to relocate the brand's inventory to our 3PL in Washington state by year-end. We are still integrating the pieces of their organization that moved over in the transaction while at the same time ramping up the selling process. We feel good about where we are on both fronts, and continue to be very excited about the long-term potential of the deal.

Creative Recreation has several compelling attributes that make it a great fit for us. The brand has significant growth opportunities. It doesn't overlap with our existing brands. It provides (technical difficulty) in a much broader casual market, and it targets a different consumer.

Since the acquisition in mid-December, we've been working hard on onboarding the company onto our ERP and other systems which will help the brand compete and serve their customers better. Further, due to approximately two years of financial stress which Creative Recreation experienced prior to the acquisition, we are busy fixing supply chain process issues, specifically late deliveries.

The Creative Recreation US sales team just attended the Agenda and Liberty fair shows in Long Beach, Las Vegas and Manhattan. And we had people in attendance of Bread and Butter in Europe. Here in the US, we have been encouraged by the commitments from retailers like Urban Outfitters, The Buckle, and Nordstrom to expand their number of doors featuring the brand this fall season.

Outside of the US, we are experiencing strong growth with the brand, strongest in the United Kingdom where we anticipate doubling sales this year. And our distributor there was also licensed for an apparel test last year and sold $0.5 million for the winter season and the retail customers reported very good sell-through.

We expect to derive 50% of Creative Recreation sales this year outside of the United States. We already have 20 distribution agreements in place, and we had meaningful discussions at the Bread and Butter show with new distribution partners to fill in the missing gaps to complete the European distribution map. In terms of the future, we believe, over time, that Creative Recreation will benefit from our operational capabilities and access to capital to expand the brand's top line in a profitable and meaningful way.

I will now turn the call over to Jim.

Thanks, David. Net sales for the fourth quarter were $61.6 million compared to $58.3 million for the corresponding period a year ago. Wholesale sales for the fourth quarter were $47.7 million compared to $46.2 million last year. The $1.5 million increase was driven by a $3.8 million or 9% increase in footwear sales partially offset by a $2.3 million decrease in apparel sales. As David referenced earlier, the decrease in apparel sales was the result of our decision to transition some apparel to a licensing model in early 2013.

Retail sales for the fourth quarter increased to $12.9 million compared to $12 million a year ago. Military segment sales increased to $1 million versus no military sales for the same period in 2012.

Gross profit in the fourth quarter was $21.8 million, or 35.4% of sales, compared to $20.9 million, or 36% of sales, for the same period last year. The 60 basis point decrease was driven by increased military sales versus the year-ago period which carry lower gross margins.

Before I discussed expenses and the bottom line, I'd like to mention that the fourth quarter of 2013 included a one-time expense of $1 million and a one-time income gain of $600,000 related to the acquisition of Creative Recreation which closed on December 13, 2013. Also included in the fourth quarter of 2013 were expenses $172,000 associated with the ongoing operations of Creative Recreation.

Selling, general and administrative expenses, excluding Creative Recreation, were $18.4 million, or 29.9% of net sales, for the fourth quarter of 2013 compared to $16.8 million, or 28.8% of net sales, a year ago. The 110 basis point increase in SG&A was driven primarily by the reversal of incentive compensation accruals in the fourth quarter of 2012.

Income from operations (technical difficulty) expenses I just mentioned was $3.4 million, or 5.6% of net sales, compared to $4.1 million, or 7.1% of net sales, in the prior-year period. For the fourth quarter, interest expense was $0.2 million, flat with last year.

Our effective tax rate for the fourth quarter of 2013 was 27.4% compared to 31.8% in the fourth quarter of 2012. The lower effective tax rate was the result of additional permanent capital investment in our Dominican Republic operations in 2013.

GAAP net income was $1.8 million, or $0.24 per diluted share. Excluding all expenses and income related to Creative Recreation, net income was $2.2 million or $0.29 per diluted share versus net income of $2.5 million or $0.34 per diluted share last year.

I'll just quickly touch on a few highlights for the full year. Net revenue for 2013 increased 7.1% and included a 5.1% gain in our footwear -- our wholesale footwear business. The strongest performing categories were Western and work which were up 21.2% and 11.4% respectively for the full year. Excluding the expenses and one-time gains associated with the Creative Recreation acquisition, full-year net income was $7.9 million or $1.04 per diluted share.

Turning to the balance sheet, our structured debt at December 31, 2013 increased to $38.4 million from $23.5 million at December 31, 2012, primarily due to the acquisition of Creative Recreation. Inventory at December 31, 2013 was $78.2 million, which included approximately $1 million in Creative Recreation inventory, compared with $67.2 million on the same date a year ago.

I will turn it back to David for some closing comments.

Thanks Jim. 2014 has gotten off to a good start. The prolonged cold and wet weather has helped drive sell-through in our work and outdoor retailers during the first quarter, reducing their on-hand inventory and freeing up more open to buy dollars that will now be dedicated to new product introductions. The strength of our evolved product lines in work, Western, and outdoor has fueled our best prebooked period in some years.

Our excitement is being a bit tempered by the uncertain retail environment. However, we feel confident that the momentum in our core businesses, combined with the addition of Creative Recreation, has us well-positioned to improve our top and bottom line performance for the year.

As we previously discussed, we expect Creative Recreation sales to be approximately $20 million this year, and to be modestly accretive to earnings. And as previously mentioned, we are currently focused on strengthening Creative Recreation's operating platform, particularly with respect to supply chain issues. And therefore we expect any accretion to be primarily in the back half of the year. In our core business, we are planning our topline to increase in the mid to high single digits throughout the year.

Operator, we are now ready to take questions.

(Operator Instructions). Mitch Kummetz, Robert Baird.

Thank you. I've got a handful of questions. Let me start, David, you made the comment in your closing remarks that this is your best prebooked period in years. Could you just elaborate on that? How far into your fall orders are you and can you give us a sense as to how much those orders are up year-on-year?

We are seeing in the range of 8% to 10% of those customers where we know there isn't a difference in timing. We're seeing about 8% to 10%. I'm talking fall/winter delivered.

Right. Okay. Is that concentrated in any particular part of the business? In hunting and work, or also in Western?

Hunting and work are heavily insulated product. Our retailers obviously have, as we mentioned, have experienced great sell-through. And that's where we are seeing a lot of upside right now in the order book.

Okay. And then I think you said that you expect the core business to be up mid to high single digits for the year. First of all, did I hear that correctly? And how does that kind of break out by wholesale versus retail versus military in terms of how you're planning the business?

Yes. In work, where any of this weather-related business, there's a pretty large appetite. So we planned that out closer to the 10%, 11%, 12% range.

Yes.

Where we are seeing -- and obviously our Western business, the trend there has been good year-on-year for three years planning stuff. Where we are concerned that we don't have the visibility is in our commercial and military business because of sequestration and government shenanigans, in our duty business because of what's going on with the Postal Service. And that pretty much speaks to our wholesale business.

The retail business we have planning around 5% now with the visibility that we have.

Okay.

At our military business, we have planned flat. It may be down a little bit but we don't know what the orders are going to be on the second year of the contract we have right now. So the best we have right now would be flatter or possibly down slightly.

Got it. Jim, how should we be thinking about margins for the year? I don't know how much that changes with Creative Rec coming into the fold.

I think margin will be -- wholesale margins probably with Creative Rec might be down slightly because of I think on our ongoing Rocky business, it will be pretty flat with (technical difficulty) in 2013, but Creative Rec might be down a little bit because of doing so much business with distributors. Internationally, we would have lower margins and, again, have lower SG&A associated with that.

Yes. And then how about retail margins? Pretty consistent, or do you see much change in that?

No, I think that we will be pretty flat there. We've now got this transition from the truck to the web in auto, and so this will be the last year where we hopefully after this we will start to see margins go up as we go to more true eCommerce business where we've got significantly higher margins than our Lehigh business.

Got it. And do you happen to have what the gross margins were for those three businesses in the fourth quarter, wholesale, retail and military?

I do. 32.8% for wholesale, 45.8% for retail, and 16.3% for military.

Got it. Lastly, you're talking about $20 million of a benefit from Creative Rec in 2014. Just to give that some context, could you tell us on a pro forma basis where that business came in for 2013?

Yes, about the same, a little less. (inaudible)

Okay. Thank you very much.

(Operator Instructions). John Sullivan, Olstein Capital.

Hi. In your prepared remarks, you guys called out pulling forward of some inventory into fourth quarter on one of your hotter new products. Did you guys quantify that at all for us?

That made up about -- I think that was about $800,000.

Okay.

-- in a Georgia product.

Great. Thank you.

(Operator Instructions). There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you and thank you for joining us on the call today. We will be here in Nelsonville, Ohio working hard for the next quarter. Thank you.

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