Rocky Brands Inc (RCKY) 2014 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 2014 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 and 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 and our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2013.

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

Thanks, Brendon, and welcome, everyone. On the call with me this afternoon is Jim McDonald, our Chief Financial Officer. The solid momentum we experienced in the fourth quarter of 2013 accelerated as we started the new year, resulting in record first-quarter revenue of $65.8 million.

By a large margin, we outperformed our internal and external projections for the quarter for both our top and bottom lines. Having said that, had we not made certain investments in the quarter, our earnings could of easily exceeded last year with the strong increase in top line. These investments included the seeding program with a key retail partner, the funding of additional advertising for our Georgia Boot, Rocky and Durango brands and the startup costs of Creative Recreation.

We are focused on long-term, sustainable growth, and we are certain that these investments will yield improved profitability in the second half of the year and beyond.

Back to the quarter sales results, our best performing segment was wholesale footwear, which increased 26% over last year, including a 17% gain for our Rocky, Durango and Georgia Boot brands. This topline increase was driven by a combination of factors that include improved product offerings, favorable weather conditions in several parts of the country, leaner inventory levels in the channel and to a small degree the aforementioned seeding program with one of our major customers.

These drivers help facilitate strong double-digit percentage gains in each of our major categories -- work, Western and hunting. In addition, our commercial military and duty categories rebounded with similarly strong performances, following a challenging 2013 due to government spending headwinds.

Cold wet weather was a benefit in the first quarter. However, weather has certainly worked against us in the past. We have made a concerted effort over the past several years to strengthen our product lines, to enhance comfort and durability, all with a competitive value proposition. While we will never be fully immune to the effects of contra seasonal weather, we believe building these attributes into a broader product offering that appeals to our target consumer is helping improve our sales over the long-term.

Beginning with our largest category, workboots, our sales increased 18% during the first quarter, following a 20% gain in Q4. Our Q1 performance was particularly notable as we were lapping the initial rollout of our private label program with Tractor Supply a year ago.

The strong gains were driven primarily by Georgia Boot as demand for the brands new Homeland series has outpaced expectations. As we mentioned on our last earnings call, we actually pulled forward the initial Homeland shipments into the fourth quarter in response to retailer requests. This gives a good sense of the fast start we're off to with this exciting new series.

Rocky Work was also up during the quarter on the strength of new product introductions and renewed interest in the brand's IronClad collection, which saw a revitalization at retail throughout last year.

The story was the same in Western boots as demand for new products from Durango and Rocky, along with a restructuring of the Western sales operation, fueled a 19% improvement over last year. For Durango, the strength continues to come from the brand's Rebel collection, including a favorable response to a new kids package of leather boots.

Key finds and channel accounts have expanded their Durango offering following continued strong sell-through, and we expect this trend to continue.

With regard to the Rocky Brands in Western, we recently hired a dedicated salesforce in order to refocus our efforts on positioning Rocky Western as a work Western brand. Prior to this, Rocky and Durango were represented by the same team.

The initial results from this decision have been very encouraging, driven in part by the recent introduction of new square-toed boots that target more of an outdoor work consumer.

Now turning to Rocky hunting. On a percentage increase basis, this was our best performing segment in the first quarter as the cold winter helped fuel demand for our insulated and waterproof products. Our retail partners ended the season with very clean inventory levels, which along with compelling new product launches for this fall have us optimistic that we are well-positioned to drive strong gains for the category over the entire year.

Last year we spent a great deal of product development and marketing resources to reinvigorate this category. We excited our dealers at the shooting and hunting outdoor tradeshow, the SHOT Show, in January where we rolled out the fall 2014 line, but also experienced a good deal of at once demand for our spring turkey hunting product line, the retail sell-through of which has been exceptional.

It also helped that Field & Stream Magazine named Rocky Best of the Best in the hunting apparel category in their January edition. Prior to fall, we will conduct an aggressive direct program targeting 200,000 households with known, serious hunter occupants.

Looking at our commercial military business, there are a number of highlights from the first quarter that have us much more positive about this business than a year ago. First and foremost, sales grew approximately 22%, driven by solid gains in the Army and Air Force exchange channel where demand for our popular S2V and C4T boots has picked up significantly following the challenging selling conditions we experienced throughout much of 2013 due to sequestration and troop drawdowns.

We recently began shipping our newest product, the C5 combat boot, and initial sell-through has been far better than our expectations. The C5 provides the service member with an extremely lightweight offer, coupled with a functional multidirectional outsole that can be worn in theater. And, lastly, it was recently announced that a variance of our very popular S2V boot, a version specially developed for jungle warfare, will be tested by an operational unit for field performance.

Finally, with regard to the newest wholesale brand in our portfolio, Creative Recreation, this was the first quarter of our operating the business. We are pleased with the progress we have made integrating the pieces of their organization that moved over in the transaction, and we are encouraged by our conversations with major retailers about the strength of the brand.

As a reminder, these are accounts that we haven't been able to target in the past, such as Barney's, Nordstrom's, Bloomingdale's, Journeys and Tilly's to name a few. Therefore, we are very excited about the opportunities that Creative Rec represents for the Company, especially within this much larger casual footwear market.

As expected, we are still working through some of the supply chain kinks that impacted the business prior to the acquisition. That said, we feel very confident we are on top of it and that Creative Recreation remains on track to hit the sales and profit contribution we budgeted for 2014. Longer-term, we believe that the brand will benefit from our sourcing and logistics capabilities and access to capital to deliver sustainable sales and earnings growth.

One other issue regarding wholesale, the aforementioned seeding program. This national retailer has agreed to expand their brand offering from just Georgia Boot to include Rocky and Durango. This means by the end of this year we will go from three styles to seven styles in all doors, and we will be testing another 10 styles regionally.

In Q1 to help accommodate this expansion, we helped the account rationalize a markdown in their current assortments.

Now turning to our retail segment, sales were up slightly as gains from the custom fit kiosks and branded websites helped to offset the reduction in mobile stores, which was part of the final phase of our multiyear retail transformation. During the first quarter, we placed an additional 150 kiosks on top of the 284 in the field to start the year, helping drive a 41% sales gain for the program and an improved operating performance for the entire retail segment.

We are currently ahead of schedule to add a total of 500 new kiosks in 2014.

The other major initiative within retail is to drive more volume through our direct-to-consumer e-commerce channel, which was up double digits in Q1. This task got underway in earnest late last year when we moved rockyboots.com to a new platform run by Demandware, which has increased the speed of our sites, including content delivery, and it has significantly enhanced the overall consumer experience.

We recently transitioned georgiaboots.com and durangoboots.com to the Demandware platform also, and we will roll out responsive design. That is the ability to format what the customer sees on their device, depending on the type of device it is viewed on. So, whether a consumer visits our sites on a PC, tablet or mobile phone, their experience will be optimized, enabling a high conversion rate.

As I just outlined, there were a lot of positives from the first quarter. We are very encouraged by the strong sales momentum we are experiencing and believe we are well-positioned to further capitalize on the opportunities we are creating through our product, marketing and distribution strategies.

I will now turn the call over to Jim.

Thanks, David. Net sales for the first quarter increased 22.5% to $65.8 million compared to $53.7 million for the corresponding period a year ago. Wholesale sales for the first quarter increased 26.4% to $53.1 million compared to $42 million last year. The $11.1 million increase was driven by a 16.8% increase in our legacy brands.

Retail sales for the first quarter increased to $11.1 million compared to $10.8 million a year ago, while military segment sales increased to $1.6 million versus $0.9 million for the same period in 2013.

Gross profit in the first quarter was $21.9 million or 33.2% of sales compared to $18.7 million or 34.8% of sales for the same period last year. The 160 basis point decrease was driven by a combination of factors. They included lower wholesale margins, primarily due to the aforementioned seeding program.

We expect this headwind to ease as we get into the back half of the year. First-quarter gross margins were also down due to an increase in military segment sales, which carry lower gross margins than the other segments, as well as the shift to our web-based retail platform, which carries lower gross margins than our previous mobile store structure, but lower operating expenses as well.

Selling, general and administrative expenses were $20.5 million for the first quarter of 2014 compared to $17.2 million a year ago. The $3.3 million increase in SG&A was driven primarily by additional expenses associated with the Creative Recreation brand, which was acquired in December of 2013; higher variable selling expenses resulting from the sales increase; and higher advertising expenses to enhance awareness of our brands.

As a percentage of net sales, SG&A improved 80 basis points to 31.2% from 32% a year ago, driven by leveraging expenses on higher sales. Income from operations was $1.3 million or 2% of net sales compared to $1.5 million or 2.8% of net sales in the prior year period.

Net income was $0.7 million or $0.10 per diluted share compared to $0.9 million or $0.12 per diluted share a year ago.

Turning to the balance sheet. Our funded debt at March 31, 2014, increased to $36.6 million from $20.3 million at March 31, 2013, primarily due to additional borrowings to fund the Creative Recreation acquisition.

Inventory increased 14.7% or $10.1 million to $78.3 million at March 31, 2014, which included approximately $2.5 million in Creative Recreation inventory compared with $68.3 million on the same date a year ago. Based on our current sales momentum and fall order book, we feel comfortable with our inventory position as we head toward our busier second-half selling season.

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

Thanks, Jim. Overall we are very pleased with our start to 2014. With our acquisition of Creative Recreation, investments in product development and demand creation and the transformation of our retail division, the pieces are in place to grow this business.

We're also pleased with the initial performance of the Creative Recreation brand, which provides us with a vital platform to penetrate the broader casual footwear market.

We are committed to investing in our brands to drive sustainable growth. The initiatives that impacted first-quarter profitability, the seeding program with a key retail partner, the funding of additional advertising and the startup costs at Creative Recreation will yield improved profitability, particularly in the second half of the year and beyond and greater shareholder value over the long-term.

Operator, we are now ready to take questions.

(Operator Instructions).

I got a few questions. Let me start with the seeding program. I just want to make sure I understand this correctly. So the national retailer, some of you guys have been doing business with, I guess, for a while, so you're adding styles to that retailer. Did that -- that already occurred in the first quarter and it builds through the year? I just want to make sure I --?

No, we haven't shipped any new styles yet. We shipped some current styles to replenish current inventory levels at reduced margins to help them liquidate their inventory position, and, frankly, our inventory position as they reset. And the reset will transpire in the third and fourth quarters. It will take us from currently three styles to seven styles in all stores. And they will be testing 10 styles, another 10 styles regionally by the end of the year. So, it really kicks in, Mitch, in the second half of the year.

Got it.

And it really sets it up nicely for 2015.

Okay. And then, Jim, with the margin impact in the quarter as you help them rationalize some of that inventory, what was that again? Did you say that in your comments? I didn't know if you did or if I just didn't catch it or --?

I didn't, but we had 160 basis point decrease in our margin, and that was -- just about half of that was related to this. So, what is happening, Mitch, is in the first half of the year, we experienced most of the cost of this. We are able to get most of the benefit in the second half of the year.

Got it. Should we see a similar negative impact on gross margin in the second quarter, or was most of the inventory rationalization taking place in Q1?

I would say it would be pretty similar to the first quarter, maybe a little bit lighter, but pretty close to the first quarter.

Got it. Okay. Thank you for that. The second question, just on your fall order book, I would imagine at this stage it is pretty well complete. Could you just maybe provide a little bit more color on it? I don't know if you would care to give us a sense as to what the year-over-year increase is or maybe talk a little bit about the order book in terms of some of your key segments or -- I suspect, again, it is probably pretty solid, but is there any way that you can elaborate on that?

Yes, it's very solid, and it is usually parsed out over delivery dates. And, so, the later delivery dates are susceptible to cancellation based on weather, but as it sits right now, we are extremely pleased with where it is. Very strong double-digit gains really across the board in all segments.

Okay. Great. That's good to hear. Jim, just in terms of the gross margins by segment on the quarter, do you happen to have those?

Sure do, Mitch. Wholesale was 31.3%, retail was 45.2% and military was 13.2%.

Okay. What was the Creative Rec impact on the wholesale gross margin?

It really was kind of neutral there. A significant portion of theirs was international business, which has lower gross margins, but not a lot of SG&A associated with it.

Okay. And then just maybe in broad strokes, can you talk a little bit about where you expect sales and margins to flow for the year? I know coming off of Q4 you guys were pretty positive on how the year was setting up. It sounds like if anything you have more confidence today even then than you did then. So, just in terms of how the business sets up, wholesale versus retail, and just margins across the business, I mean I know you are not providing earnings guidance. Is there any kind of P&L insight that you can provide to help us model out the year?

I think, Mitch, on a margin standpoint, margins in the second quarter will be similar to where they were in the first quarter. Even on a segment by segment basis, they will be pretty similar, and then they will start to improve as we move to the back half of the year, both in wholesale and retail. And I think for the year in total, our margin will be up. We will have some improved margins in total and on most segment basis, other than military, which will stay right around where it is at now.

And then on sales, Mitch, I think we are comfortable at this point talking in the 10% to 12% range for the legacy brands.

Got it.

Then we still see Creative Rec in that $18 million to $20 million.

Yes. Okay. That's very helpful. Great to hear. Thanks and good luck.

(Operator Instructions). Mark Cooper, Pacific Ridge.

Thanks for taking the call there, Jim. On the margin picture that Mitch just asked about, historically we have been anticipating that the north of 35%, 36% range gross margin is attainable here in the Company. I know we have talked about that in the past. Is that what you are anticipating getting back to here by the second half of the year? You suggested there is going to be some expansion that we should see at that time?

Yes, I think in total we will be -- for the back half of the year, we will be back to hopefully certainly above the 35%. I am not sure we will get to the 36%, but we will be for the back half -- back more to the 35%. And then -- and our retail margins will begin to improve as we do more of our B2C business versus our Lehigh business, and they will have substantially higher margins than our Lehigh business does.

Okay. And then is it longer-term -- does the gross margin -- or, said another way, let's say the operating margin, the business cannot still settle around, get up to the 7% range? Is that out of the question in the marketplace today, or is that still something that you think you can get to?

No. We certainly feel like we can get to 7% or, hopefully, a little north of 7%. Certainly north of 7%.

Okay. And a bit of a housekeeping item here. Do you have -- although I can see some of it from the balance sheet here -- do you have the cash flow and the CapEx number for the quarter?

Yes, the cash flow was -- we generated -- cash from operations we generated $5.8 million.

$5.8 million? Okay.

Yes. And the CapEx was $3 million.

$3 million? And still how much -- you might have addressed this, but how much did that increase in the receivable on the inventories line is a result of the acquisition? Or is this a buildup of --?

In the inventory, it is $2.5 million of the increase, and in the receivables, it is in the neighborhood of probably around $2 million. I don't have that exact number, but it is about $2 million.

Okay.

So, our increase -- our increase in sales in the quarter was $12 million, $13 million, and our receivables went up $10 million. So, our aging is starting to improve on those.

Okay. Do you anticipate that should continue to improve?

Yes.

Okay.

We are also trying to improve the turns in our inventory some, so, we anticipate generating -- hopefully generating some cash from our inventory this year also.

Okay. And then one last question here. I know that you have talked about your business when looking at the sales numbers, looking at the first half and the second half. And last year there was some in that June period you had that tremendous comparison from June 2012 on the wholesale side. I think it was north of 30% in sales increases.

Right.

Can you remind us what generated that?

Sure. In June of 2012, we had a major power outage here in Ohio that affected our second-quarter 2012 shipments because we couldn't ship for the last two or three days of the quarter. So, those sales fell into the third quarter of 2012. And, so, if you look back last year in 2013, we had a great sales increase in second quarter, but then -- and then sales decreased. But looking at the two quarters together, they were still with an increase, but not to that level. So, I guess what I am saying, is 2013 -- 2013 was a normalized year.

Yes, okay. All right. Well, that's great. Thanks a lot for taking the questions.

Alexander Renker, Sidoti & Company.

Just a quick question. How much of the 20% SG&A growth was attributable to the sales growth versus Creative Rec expenses, other investments that you expect to see pay dividends later, et cetera?

The sales of the $3.3 million, about a third of it was related to the sales growth, the variable selling expenses, so a little over $1 million.

Okay. So, that's the run rate that we should think about for later quarters in the year?

Right, yes. Usually our variable expenses, selling expenses run about 15% of sales, and that's your commissions and handling and freight charges.

Okay. Fantastic. Thank you.

Mitch Kummetz, Robert W. Baird.

Just a quick follow-up on the seeding program. I just want to tie that back to your sales outlook on the legacy business. So, if you are saying up 10% to 12%, I run the math, it looks like maybe $25 million to $30 million of additional legacy sales in 2014. What do you think the contribution will be from the seeding program, particularly as it hits in the back half? Are you talking about a couple, $3 million, or is it more or less than that?

It is a little bit more than that. It is more like $5 million.

Okay. All right. Great. Thank you.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any closing remarks.

Well, thank you, gentlemen, for joining us today. We look forward to a good quarter in Q2 and speaking to you in 90 days from now. Thank you.

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