Rocky Brands Inc (RCKY) 2014 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 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 Mr. David Sharp, President and Chief Executive Officer. Thank you, Mr. sharp. You may begin.

Thanks, Manny, and welcome, everyone. On the call with me this afternoon is Jim McDonald, our Chief Financial Officer, who will read our Safe Harbor statement.

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 any 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 our 10-K for the year ended December 31, 2013. I'll now turn the call over to David.

Thanks, Jim. We're delighted to deliver a second consecutive quarter of strong double-digit growth. Revenue increased 16% to a record $68 million. Our wholesale business grew 24%. This is the second consecutive quarter above 20%, and the growth included a 17% gain for our legacy brands. We believe our momentum is being fueled by positive consumer response to our broader, more compelling, more innovative footwear that we've introduced over the past several seasons, expanding our shelf space with existing accounts, and opening up new distribution.

This is evident in our three major categories: work, western, and hunting, each of which increased double digits over a year ago. At the same time, sales trends in our commercial military and duty businesses accelerated from the first quarter. There is pent-up demand in these channels following the government headwinds in 2013, which is driving strong replenishment orders and expanded distribution for our products.

Many of our major retail partners entered the second quarter with much cleaner inventory levels compared with a year ago, following a cold, wet winter that fueled strong sales of our boots in late 2013 and early 2014. This was especially true in our largest category, work, which posted sales gains of 20% and 18% in the last quarter of 2013 and the first quarter of this year, respectively.

While temperatures were warmer and drier in the second quarter, we continued to experience positive response to several of our new work footwear lines under both the Georgia and Rocky Brands, helping drive a 6% gain for the category over last year. Georgia's performance was highlighted by our new Homeland series that we introduced late last year, ahead of schedule, based on retailer requests. Sell-in and sell-through of this product line, which features an extremely flexible but durable outsole, have exceeded projections. And with a solid inventory position having into the back half of the year, we expect the current growth trajectory to continue.

Overall, Georgia is receiving great support from the farm and ranch channel, industrial safety distributors, and in key accounts such as Tractor Supply, which is on pace for solid growth with the brand, as well as new distribution at Academy Sports and Fred Meyer, to name a few.

Regarding Rocky-branded work boots, sales were driven by the highly anticipated delivery of our new Elements collection. This is trade-specific footwear designed for the different trades and the elements they encounter in their specialty. We have four differentiated products, one each for those who work with wood or brick and block or steel or dirt. This delineated product series has been met with great support, reflecting great sell-in results. Our new BigFoot series of work boots, made in extra-large sizes and wide widths, also contributed to the category's overall performance. And in addition, the business is being supported by the ongoing expansion of our everyday best-selling Mobilites and IronClad collections throughout the industrial work channel.

Turning to Western, where sales momentum accelerated in the second quarter as demand for the Durango brand drove a 26% gain for the category over last year. This is one of the best quarters for Durango since we acquired the brand as part of the EJ Footwear acquisition in 2005. Shipments were up meaningfully at all major accounts, including Amazon, Boot Barn, Dick's Sporting Goods -- a new account for the brand -- and Tractor Supply, where as you will recall from the last earnings call, we are in the process of expanding our shelf space through a new seeding program that will see our style count more than double from 2 to 5 over the course of this year. We also saw nice increases with several of our farm and ranch accounts. What's especially encouraging about Durango's performance is the fact that it's coming on top of strong gains a year ago and the year before that, demonstrating the growing strength of the brand and the growing popularity of the Western lifestyle market.

Now to Rocky Hunting, which had one of its strongest quarters in some time, as sales increased approximately 55% from a year ago. The response to several of our new products has been fantastic, which has us excited as we get set for the start of hunting season in September. In 2014 we've introduced updated styles from our heritage-rich CornStalker boot collection that includes our traditional insulation, waterproof and protected toe features, along with great comfort and a compelling value proposition. The other standout collection for Fall 2014 is our SilentHunter line of innovative, lightweight rubber and lace-up boots that are being carried at national accounts such as Bass Pro, Cabela's, along with several key regional dealers across the country.

Looking at our commercial military business, it posted the second-largest percentage gain for the second quarter. Sales of our flagship boot, the S2V, along with growing contributions from our C4T Garrison, boot and our most recent product introduction, the C5 Combat boot, helped drive a 30% increase over the year-ago period. We continue to experience solid sell-through in the Army and Air Force exchange channel. And we are pleased to announce that we recently inked an agreement to supply NEXCOM, the US Navy's retail distribution network, which presents us with a large incremental opportunity for the back half of this year and on into 2015.

Following a challenging 18 months due to sequestration efforts and troop draw downs, the military market has stabilized and the outlook for the next few quarters appears positive. Adding to our optimism is the development of our S2V Jungle boot, which is now in its third of five test phases. Based on a successful outcome, the boot has the potential to be selected as the premier jungle boot for future jungle operations.

Our international division also posted solid gains during the second quarter. A good portion of the increase came from Canada, as we continued to make inroads building distribution and awareness for our brands. We are also having success outside North America, primarily through new distributor agreements covering the UK, Europe, and the Middle East.

Finally, with regard to the newest wholesale brand in our portfolio, Creative Recreation, we are still working through some of the supply-chain taints that impacted the business prior to the acquisition. That said, we feel very confident we are on top of the operational issues and the brand remains on track to hit the sales and profit contribution we budgeted for the back half of 2014.

Turning to our retail segment, sales were up slightly as our initiative to drive more volume through our direct to consumer e-commerce channel continues to take hold. As you will recall, we've recently transitioned several of our branded websites to Demandware, a leading e-commerce, web-based software that has increased the speed and functionality of our sites. And in the next few weeks we will be ready to implement responsive design, which will optimize the viewing experience of our sites across a wide range of devices, from mobile phones to desktop computers.

These enhanced features will improve the overall consumer experience and improve conversion rates and result in higher sales. Our growing web direct business has helped offset the planned decline of our legacy Lehigh business, which in the second quarter was down due to the fact we had 10 less mobile stores in operation. We now only operate three mobile stores. In the meantime, we continue to make good progress recapturing these sales through our CustomFit kiosks, branded websites, which provide us and our customers an easier, more efficient way to transact this business. Year to date we have placed over 400 kiosks in the field and we remain ahead of schedule to have 750 deployed by the end of the year.

To summarize the quarter, it was characterized by strong sales trends in our wholesale business across every category. We believe our performance year to date is the result of the investments we've made in our sales and marketing and product development platforms, and we're confident that they should continue to yield positive returns over the year and long-term.

I'll now turn the call over to Jim.

Thanks, David. Net sales for the second quarter increased 15.8% to $68.8 million compared to $59.4 million for the corresponding period a year ago. Wholesale sales for the second quarter increased 23.7% to $56.7 million compared to $45.8 million last year. The $10.9 million increase was driven by a 16.8% increase in our legacy brands and the contribution from Creative Recreation, which we acquired in December 2013.

Retail sales for the second quarter increased to $10.1 million compared to $9.8 million a year ago, while military segment sales decrease to $2 million versus $3.8 million for the same period in 2013. Gross profit in the second quarter was $22.6 million, or 32.8% of sales, compared to $20.3 million, or 34.2% of sales, for the same period last year. The 140 basis point decrease was driven by a combination of factors. They included lower wholesale margins due primarily to the seeding programs at Tractor Supply we announced in the first quarter. As a reminder, we expect this headwind to ease as we get into the back half of the year. Second-quarter gross margins were also down due to our shift to the 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 million for the second quarter of 2014 compared to $17.4 million a year ago. The $2.6 million increase in SG&A was driven primarily by additional expenses associated with the Creative Recreation brand, which we acquired in December 2013, and higher compensation expenses related to a new midyear bonus programs that we implemented this year for the first time. Potential annual bonuses under this new management incentive program are similar to the potential payments under the previous annual program. As a percentage of net sales, SG&A improved 30 basis points to 29.1%, from 29.4% a year ago, driven by leveraging expenses over higher sales.

Income from operations was $2.5 million, or 3.7% of net sales, compared to $2.9 million, or 4.8% of net sales, in the prior year period. For the second quarter, interest expense was $225,000 up from $147,000 last year due to higher borrowings related to the acquisition of Creative Recreation. Net income was $1.5 million, or $0.20 per diluted share, compared to $1.8 million, or $0.24 per diluted share last year.

Turning to the balance sheet, our funded debt at June 30, 2014, increased to $43.4 million compared to $31.4 million at June 30, 2013, primarily due to the acquisition of Creative Recreation. During the quarter, we paid out $750,000 to shareholders in quarterly dividends. Inventory increased 6.5%, or $5.3 million to $86.4 million at June 30, 2014, which included approximately $2.8 million in Creative Recreation inventory, compared to $81.2 million on the same date a year ago. Based on our current sales momentum and full order book, we feel comfortable with our inventory position as we head towards our busier second-half selling season.

Now I will turn the call back to David for some closing comments.

Thanks, Jim. It's been an encouraging start to 2014. For several years we struggled to grow, but we were able to improve profitability through cost-cutting measures and debt reduction actions. With sales trends now heading in the right direction, we need to find a balance between driving sustainable top- and bottom-line growth simultaneously. As we told you on our last conference call, we are convinced we have the right strategies in place to better leverage the investments we've made in the business to achieve this objective starting in the second half of the year and beyond.

Now, with another quarter under our belts, we reiterate that we will improve earnings year on year in the second half. Operator, we are now ready to take questions.

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

Thanks and good quarter. I've got a handful of questions, guys. And I want to start with just thinking about the year. I think coming off the last earnings call you were talking sales guidance in the 10% to 12% organic growth range, and it looks like you are ahead of that pace through the first half. I'm just wondering if there's any updates on that.

I think at this point, Mitch, we will stay in the 10% to 12%.

Okay. And then how about the seeding program? Again, there I think you had said that that should be incremental to revenues by about $5 million for the year. Is that still kind of what you are looking for out of that?

Yes, it is.

And are there any other -- that's probably the biggest piece in terms of incremental revenues hitting the P&L this year. Is there other stuff as well in addition to that seeding program that we should be thinking about?

There are other key accounts, Mitch, that we are experiencing pretty dramatic growth with. Amongst those are Amazon and Boot Barn and Dick's Sporting Goods.

Okay. And then on Creative Rec, again, I think coming off the last call, you were talking about $18 million to $20 million in revenues from that business this year. Is that still the plan or has that changed at all?

I think, based on our experience in the first half -- and what's gone on there is we've been very hindered by late deliveries from our vendors. So, in order to hold onto the sales, we've had to -- and placate customers -- we've really had to make concessions, [fly] a lot of product, do some pricing. So, based on all this and based on what we know about delivering the future seasons, I think we are looking more like $17 million to $18 million.

Okay. When should that improve? You talked about concessions and all of that based on late deliveries from the manufacturers. When will you guys be able to kind of change that trend and really improve upon that?

Well, we're out there right now selling the Spring of 2015, which we can deliver as early as December of this year.

Okay.

And we are getting very favorable early reads on that. But I don't think we are far enough into the season to move off this $17 million to $18 million (multiple speakers). (technical difficulty) four seasons a year, so we can turn this very quickly once we have the right vendor structure.

Okay. And then just a couple of last questions. Jim, maybe on the gross margin side, if you can give us the segment gross margins on the quarter?

Sure. Wholesale was 32%, retail was 41.3%, and military was 13.3%.

Okay. And if I recall correctly, you were looking for or expecting some gross margin improvement in the back half and for gross margins to maybe be up modestly for the year. Is that still the plan at this point?

Yes, I think gross margins for the back half of the year will be up year-over-year, particularly in wholesale. Retail, I wouldn't think they will be, because we are still anniversarying those mobile store that had higher gross margins but higher operating expense. So, I think that will still be flat in the back half of the year. And wholesale will be up and military will continue to be what military is, and that's pretty consistent.

All right. That's all I have. Thanks, guys. Good luck.

(Operator Instructions). We have no further questions in queue at this time. I would like to turn the floor back over to management for any closing remarks.

Okay. Thanks, Manny. We thank you for listening in this afternoon and your interest in Rocky Brands. Everyone here is focused on enhancing shareholder value and we look forward to reporting improved results 90 days from now. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.