Rocky Brands Inc (RCKY) 2014 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 fiscal 2014 earnings conference call. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Jim McDonald, CFO of Rocky Brands.

Thank you. And thanks, everyone joining us today. 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 uncertainty 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 31, 2013.

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

Thanks, Jim. Our fourth-quarter results represented a great way to wrap up a very good year for Rocky Brands, a year in which we grew earnings 31%. Overarching our improved financial performance is the response to the product and marketing strategies we have implemented in our core Western, work, and outdoor categories.

The trade is responding positively to our new product introductions, driving strong, full-priced selling with key accounts throughout our wholesale distribution channel. At the same time, the work we've done to improve Creative Recreation's supply chain and infrastructure since we acquired the brand a year ago is yielding improved results.

We also experienced increases in our retail division, driven by gains from our enhanced to direct-to-consumer branded e-commerce websites. Our overall effort led to one of the strongest periods of growth for our Company, as fourth-quarter sales grew 28% over the same period a year ago. This strong top-line performance allowed us to meaningfully leverage our improved operating expense structure and grow fourth-quarter earnings per share by 146%.

As we said on our last earnings call in October, our outlook for fourth quarter was for sales and earnings to reaccelerate. This happened; and as a result, our earnings in the second half exceeded expectations by 10%. With respect to our reporting segments, our improved sales were led by our wholesale division, which was up 30% over last year.

Starting with work, our largest category, sales increased 15%, driven primarily by the Georgia Boot brand and, to a lesser extent, the Rocky Brand. Georgia Boot's performance was fueled by continued demand in key work categories such as farm and ranch, logging, and industrial. This led to increased shelf space with our big-box retail partners and independent dealer network. Of note, Georgia's new Homeland series, which was introduced at the start of 2014, has quickly become a meaningful business. This underscores our belief that the combination of quality, value-priced product and a trustworthy, authentic brand name is a winning formula with work boot consumers.

Colder weather late in the quarter also helped drive demand for our Rocky-branded Elements collection of trade-specific footwear, another new introduction that has performed very well.

Moving to Western, which is our second-largest category and delivered our strongest fourth-quarter performance: sales increased 47% versus a year ago, driven by strong gains for both the Durango and Rocky brands. This business has been on a rapid growth trajectory, with momentum accelerating in the fourth quarter, driven by both new distribution and an increased velocity at existing accounts.

What is particularly encouraging is the fact that most of the growth has come from increased demand in the core Western and farm channels, whose customers wear Western-influenced products regardless of trends. Having these channels of distribution validate our brands means that we are building a reliable business, even when Western cycles out of the mainstream. This core market customer is extremely brand-loyal and a discerning consumer who will only buy from those brands that he or she considers authentic. So it is great for us to win them over.

We also saw solid growth in our Durango City line of more fashion-forward boots in Q4, again, distributed mainly to our existing accounts. We are looking to further build out this brand extension with a new collection of value-priced boots launching in 2015 and the recent establishment of a dedicated lifestyle team within the Company, which I'll speak more to later in the call.

Turning to hunting, which also delivered a fantastic quarter: sales increased 33%, driven by both unit growth and higher selling prices. Product highlights included our new and improved CornStalker and SilentHunter collections, both of which provide today's outdoorsman with unique features in addition to Rocky's traditional insulated, waterproof protection that the brand pioneered over 30 years ago. These core attributes are also what continues to drive demand for many of our all-time best-selling hunting boots, like the Sport Utility and Bear Claw, especially as favorable cold-weather conditions arise in November and December. From a channel perspective, growth was broad-based and included national outdoor and sporting goods retailers like Cabela's, Bass Pro, and Dick's Sporting Goods as well as our strong network of regional and independent dealers across the country.

Looking at our commercial military business, sales trends reversed dramatically, up 27% in the fourth quarter following some temporary challenges in the third quarter. As we disclosed in our last call, our C4T boot was reclassified as unauthorized due to changes in Army wear and appearance regulations around lightweight boots. This obviously has had a major impact on sales of this popular style.

Fortunately, we were able to move quickly to capture this lost share with our flagship boot, the S2V. And late in the quarter, we introduced the Rocky Lightweight, a fully uniform-compliant, multipurpose, lightweight combat boot that offers more functionality, durability, and comfort than the C4T. We believe the RLW will quickly take over as the lightweight boot of choice amongst service people. As mentioned on our last conference call, we have high expectations for our new S2V jungle boot, which is currently in testing with the US Army.

With regard to the newest addition to our wholesale department, Creative Recreation, we made additional progress during the fourth quarter preparing this business for sustained growth and improved margins. First and foremost, Rich Cofinco, Co-Founder of Creative Recreation, returns as Creative Director. We are confident he's going to have a profound impact on the future direction of the brand and product line.

We also expanded the sales team in order to brought broaden our coverage of the US, especially the East Coast, which is underpenetrated and a high priority for us in 2015. On the operational front, many of the supply chain kinks that have hampered past results have been worked out. Inventory is now flowing into market on time in a more cost-efficient manner.

Turning to our retail segment, sales increased 6.6% from a year ago, driven by continued gains in our direct-to-consumer e-commerce channel. Ramping up our online DTC operations was a key priority in 2014. Many of the major initiatives weren't implemented until the second half of the year, such as transitioning our mono and omni branded sites to Demandware and launching more advanced email marketing and lead-nurturing capabilities. Therefore, we are well-positioned to increase the penetration of this business in 2015 and longer term, as consumers continue to shift more of their brand interaction and purchasing through the Internet and mobile.

On the B2B side, 2014 was also about investing for the future. Most notably, we added 500 more CustomFit kiosks this past year and now have over 750 installed at our customers' worksites. This Web-based program provides workers an easier way to purchase their required safety footwear while allowing us a more cost-efficient way to execute these transactions compared to our legacy mobile store operations.

In summary, we are very pleased with the accelerated momentum in the fourth quarter exhibited by our legacy brands; and our positions in work, Western, and outdoor have never been stronger. We are also pleased with the developmental progress of our newer growth initiatives, which we are confident will evolve into larger contributors to our future top- and bottom-line results.

After Jim reviews the numbers, I'll outline our strategies for building on our recent success in 2015. Jim?

Thanks, David. Net sales for the fourth quarter increased 28.2% to a fourth-quarter record of $78.9 million compared to $61.6 million in the corresponding period a year ago. Wholesale sales for the fourth quarter increased 30% to $62 million, which included $3.3 million of Creative Recreation sales compared to $47.7 million last year. Retail sales for the fourth quarter increased 6.6% to $13.7 million compared to $12.9 million a year ago, while military segment sales increased to $3.2 million versus $1 million for the same period in 2013.

Gross profit in the fourth quarter increased 26.6% to $27.6 million or 35% of sales compared to $21.8 million or 35.4% of sales for the same period last year. The 40-point basis decrease was driven by higher military sales, which carry lower gross margins than our wholesale and retail operations.

Before I discuss expense and then the bottom line, I would like to remind everyone that 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. The totals are excluded from the following year-over-year comparisons.

Selling, general, and administrative expenses were $20.7 million for the fourth quarter of 2014 compared to $18.5 million in the year-ago period. The $2.2 million increase in SG&A was due to higher compensation expense, higher [variable] expense associated with the increase in sales, and additional expenses associated with the Creative Recreation brand. As a percentage of sales, SG&A improved 330 basis points to 26.2% compared to 29.9% last year. Income from our operations was $7 million or 8.8% of net sales compared to $3.4 million or 5.6% of net sales in the prior-year period.

For the fourth quarter, interest expense was $246,000 compared to $211,000 last year. Net income for the quarter increased $2.3 million or 107% to $4.5 million or $0.59 per diluted share compared to $2.2 million or $0.29 per diluted share last year.

I'll just quickly touch on a few highlights from the full year. Net revenue for 2014 increased 16.9% to $286.2 million and included a 21.3% gain on our wholesale footwear business. For the year, work increased 10.1%, Western and hunting both grew 23.2%, and commercial military sales were up 12.1%. Full-year net income rose by 25.3% to $9.8 million or $1.30 per share compared to $7.9 million or $1.04 per share.

Turning to the balance sheet: our funded debt at December 31, 2014, was $36.3 million compared with $38.4 million at December 31, 2013. During the year we paid out $3 million to shareholders in quarterly dividends. Inventory increased 9% or $7.1 million to $85.2 million at December 31, 2014 compared, with $78.2 million in the same date a year ago. We feel comfortable with our current inventory position as we start the new year.

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

Thanks, Jim. Even with the tough comparisons we were up against in our core work, Western, and hunting businesses from the outsized growth these categories posted in 2014, we believe there is room for further expansion. The performance of our new product collections has led to additional shelf space with our key retail partners and new distribution that is helping us reach a wider consumer audience.

As we've discussed, at Creative Recreation our focus has been on shoring up the supply chain. The majority of the heavy lifting on the infrastructure has been completed, so we can now focus our time and resources towards driving the top line through evolution of the product line and an increased emphasis on sales and marketing. With Cofinco back on board, there is a clear line of sight on where we want to take the product line within existing categories as well as extending the brand into new markets like boots, which we will enter this coming winter.

Finally, we have done more work and made other investments in exploiting the opportunity for our legacy brands in the casual lifestyle market. Late last year we created a new lifestyle division that is tasked with leveraging the strength of our brands and product development capabilities to reach a wider consumer audience. The team spent the last few months researching macro, fashion, and lifestyle trends to identify new opportunities for existing products as well as for building new lines in Durango, Durango Leather Company, and Rocky 4EurSole that are relevant, on-trend, and excite today's lifestyle and fashion consumers.

Their work also identified several thousand doors where we have little or no distribution, including department stores, better shoe stores, and specialty boutiques. In response we have assembled a team of independent sales reps with proven success selling into these distribution prospects.

In closing, we are confident that the investments we've made in our brands and organization have us set up to deliver another year of solid growth in 2015. With our outlook for gross margins to remain stable and SG&A dollars to grow only modestly, we would again expect earnings to increase at a much faster pace than sales.

Before we open the call up to questions, I want to acknowledge the recent passing of Pat Campbell, a member of Rocky's Board of Directors for over 12 years. In addition to his valuable leadership and insight, Pat was a great friend to the Company on many levels. Personally, he's been a mentor to me, especially as I made the transition into the CEO role. I will miss his guidance; but more than that, more than anything, his friendship. Our thoughts and prayers continue to be with Pat's family.

Operator, we are now ready to take questions.

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

Thank you, and congratulations, guys, on a great quarter. I've got a few questions. David, let me start with the strength of your wholesale growth in the quarter. You mentioned up 30%, and you highlighted work, Western, and hunting.

And I guess I'm trying to get at is: if you think about the drivers of that growth in order of magnitude, maybe -- can you kind of lay those out for me? How much of it was just growth of the segments, versus taking market share, versus expanded distribution or penetration of new products? Again, I'm sure it varies across the different segments; if there's any way to kind of -- just, again, sort of an order of magnitude as to what were the drivers of that wholesale growth?

Yes. So as you'll recall, on the third quarter we disappointed a little. And we talked about already knowing when we had the Q3 call that we had shifted some dollars into fourth quarter. So there was about $3 million, $3.5 million that shifted out of third into fourth.

And we think that the -- our brands are largely around the needs of the blue-collar guy. And we think his lot has been a little better of late, with the relief that he's getting when he goes to the gas pump and when he's paying for fuel oil. And the weather sort of aligns pretty nicely with the season and drove some of that increase.

But I think in all of the categories, we delivered a lot of new product in the quarter. And it performed extremely well at retail, particularly at some of the larger accounts, who reordered very strongly through the quarter. So for once we fired on all cylinders.

And then when you think about 2015, and maybe you could speak a little bit to the visibility that you have there. I don't know kind of where you are in terms of billing order books for the back half, or at least if you could kind of talk about the conversations you're having with retailers. And I don't know -- maybe you could talk about any sort of big new programs that you might have going on or any big new product extensions that you really feel like could be beneficial to you guys.

Well, I think that no one knows better than you, Mitch, that sales at Rocky Brands have traditionally been very difficult to predict. And that's because, as a reminder over 70% of our sales are at once. And in fact, in the first quarter over 90% of our sales are at once. We don't book a lot of future shipments for first quarter.

And at this point in the year, we are out there gathering orders. Retailers seem to be very optimistic. They are very pleased with our brands' performance this last quarter. They don't seem to have any inventory situations as they have in prior years.

But because of these factors that sort of make the predictability of our business really tough, like weather. If the weather and the seasons don't align properly, we can have these shifts from quarter to quarter and these microeconomic factors that -- knowing that we've largely catered to this blue-collar guy. You know, if you're looking for some sort of picture of this year, you know, I think we're comfortable in that 5% to 7% range.

But I think the significant thing here is that because of all the work that we've done on leaning out the operating platform over the past five years, six years, that we should be able to leverage -- even on a meager 5% sales growth -- leverage a 20% earnings growth. So that's how we're really thinking about the business. And if you will recall, at ICR we began talking about that sort of leverage on a 5% sales growth.

Got it. And then on Creative Rec, I know at least from a sales standpoint the business fell a little short of what your plans were at the beginning of the year. But, you know, you talked about some of the improvements you made on the supply chain. I know you -- I think you were air freighting stuff last year to try to hit delivery schedules.

There's new product coming out with the boots and stuff. So how should we be thinking about that business in 2015? Is there any way you can kind of speak to how the business ended up for the full year of 2014 on kind of an EBIT basis? And with the supply chain improvements, how much can you kind of get back there in terms of profitability? And again, maybe kind of what your sales outlook is there.

Well, let me talk about it prospectively, and then I'll let Jim give you some numbers from last year. But on the top line, we ended with about $16 million in sales, which was -- the year prior had been $20 million. And then in prior years this brand had done as much as $40 million to $45 million in sales.

Even through these very difficult times, with the supply chain issues we had, we are still in the key retailers. For example, we are still in about 50 to 80 doors at Journeys, who have 850 doors.

So now with Cofinco on board and a clearer direction about where to take the brand from a styling standpoint, once we are able to prove ourselves at retail -- again, I think we can grow this business very quickly and work towards getting back to that $40 million mark. But I think, again, we want to approach this very conservatively for 2015 and we are looking for 5% to 10% growth on that brand next year.

Okay.

And I think that brand will also accelerate as we move to the back half of the year, because some of the -- we'll still have some drag from the distribution -- the logistic problems that we had in 2014 and their effect on sales as we move into 2015, and particularly in the first half of the year. So I think that that acceleration will pick up as we move to the back half of the year.

With regards to the profit of Creative Rec in 2014, it was not profitable in 2014, particularly in the first half of the year. And then the second half of the year, we actually broke even with the brand and made a profit for the first time in the fourth quarter with the brand. So overall, about $0.5 million negative to earnings for the full year, and all of that coming in the first half of the year.

Okay. And then, I guess, just a last question for you, Jim.

I think, Mitch, one of the things, it took us -- we finally got that operation leaned out in the fourth quarter. And that's made it possible for us to be profitable at lower levels of sales, just as our other operations are. So we're in good shape there. And that was one of the reasons we were able to make a profit in the fourth quarter.

Got it. And then lastly, gross margin by segment for Q4?

Sure. Wholesale is 34%, retail is 44.8%, and military was 13.6%.

Great. All right, thanks, guys. Good luck.

Okay, thanks.

Thank you, and ladies and gentlemen, I would now like to turn the floor back over to management for closing comments.

Okay. Well, thanks again for joining us on the call today. We look forward to speaking to you again in 90 days with improved earnings again. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.