Rocky Brands Inc (RCKY) 2015 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 2015 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 Mr. Brendon Frey of ICR.

Thank you and thanks to 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 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 31, 2014. I will now turn the call over to David Sharp, President and Chief Executive Officer of Rocky Brands.

Thank you, Brendon. Joining me on the call today is Jim McDonald, our Chief Financial Officer. Our most recent results represent the third consecutive quarter of double-digit earnings growth on a year-over-year basis. The adjustments we've made to our operating structure over the past several years allowed us to achieve a 30% increase in earnings on a slight, less than 1%, decrease in sales for the second quarter.

As we expected, top-line growth for the first half of the year was challenging due to tough comparisons created by some large, one-time sell-in events in the quarter last year. These were principally a seeding program with Tractor Supply, which expanded our assortment at this important account, and our large, one-time shipment to a foreign country for military boots. Compounding the issue of these tough comparisons, and as we've reported for several quarters, changes in the US Army authorized footwear regulations pressured growth of our commercial military business.

These headwinds were offset by strong double-digit growth of our hunting boot category, a more than doubling of contract military sales, and the relatively continued strong performance of our Durango brand. I'm going to walk through each of our brands and channels and outline why we are confident that, despite the flatter sales trends during the first six months of 2015, we are poised for accelerated growth over the remainder of the year.

Starting with wholesale, sales of work footwear, our largest category, were flat with a year ago. Led by Georgia Boot, we experienced solid sell through at many of our core independent accounts, which led to fill in orders during the quarter. Unfortunately, this was offset by softer than expected sales with several larger national accounts, where traffic during the quarter appears to have been challenging, consistent with overall retail industry trends. The good news is that inventories in the channel are very clean, especially our insulated work boots, following a cold winter throughout the eastern half of the United States.

Moving on to Western, Durango brand sales increased high single digits, which comes on top of a mid-20% gain in the year ago quarter. In general, the brand continues to experience healthy gains across its retail distribution network, as Western fashion trends remain very relevant with today's consumer. Our Rebel, Lady Rebel, and Little Durango collections are resonating with a broad audience, driving solid sell through at key retailers like Boot Barn, Academy Sports, and Cabela's. Western sales were partially offset by the product seeding program we ran with Tractor Supply during the first half of last year and a slight decline in Rocky\ branded Western footwear, which was also up against a tough comparison due to a sizable closeout order a year ago.

We're pleased to report that we'll begin shipping Bealls Department Stores, a Florida-based retailer, in Q3. We are online with them, have displays with inventory in six stores as an opening test, and a visual presence in all stores with display materials for direct to purchase via Bealls' in-store online kiosks. And regarding Rocky-branded Western boots, retailer response to Rocky's new fall holiday 2015 collection has been very positive, the majority of which will ship in Q4.

Now to hunting, which delivered our strongest performance in the quarter, with sales growth of 19%. It's great to head into the key hunting season with such strong momentum. As we said last quarter, the cold weather early in the year helped drive sell through of insulated, waterproof boots, setting us up for a solid restocking situation ahead of the fall season. That is what we experienced during the second quarter and we are now well-positioned with new product and traditional bestsellers to meet demand and chase reorders in season at key accounts such as Bass Pro, Cabela's, Dunham's, and Boot Box.

Turning to commercial military, sales were almost $3 million less compared with a year ago, with the decline due primarily to the impact on demand for our popular C4 and C5 lightweight boots. These styles were deemed unserviceable in the middle of last year due to changes in the Army's wear and appearance regulations. This affected all manufacturers, not just us. During the past several months we've been working hard to overcome this obstacle through the development of our new Rocky lightweight boot, which boasts a rugged yet lightweight platform, and is fully compliant with all Army uniform requirements.

The RLW launches next quarter and we believe it will eventually more than fill the void created by the discontinuation of the C4 and C5 boots. Also boosting our outlook for this category was the recent transition to a new operational camouflage pattern that aligns with the new military uniform introduced on July 1, which will benefit sales of our flagship S2V boot and new RLW in Q3.

With regard to Creative Recreation, we continue to make steady progress building a business for the long term that is rooted in great products and quality distribution. The impact of the brand's new sales force has been very positive in terms of expanding relationships with existing partners such as Nordstrom and Journeys, and testing new accounts, including Express and DSW this fall, and opening up new international markets via new distributors.

The spring 2015 product line is performing well, led by the Santos, a new style that is selling through on a weekly basis in excess of 50% at several key retailers. Looking ahead, the early reaction to the spring 2016 line, which will begin shipping in Q4, is providing us with increased optimism about the top-line opportunities we believe exist for this business.

Turning to our retail segment, we saw a nice improvement in our B2B channel during the quarter as we reestablished an important customer we had previously serviced under our old mobile store upgrading model. At the same time, we continue to make important enhancements to our Internet-based direct ship platform to drive higher sales to existing customers. These included, one, upgrading our CustomFit sites to be mobile responsive, allowing for a seamless ordering experience, regardless of the device consumers use to interact with our brand; two, implementing a series of how-to videos on our CustomFit websites; and three, publishing a series of white papers focused on occupational safety. We ended the second quarter with 760 installed CustomFit kiosks and remain on schedule to end the year with 1,000 installations.

With respect to our direct to consumer operation, as you'll recall, the first quarter got off to a slow start due in part to some ineffective paid advertising programs. The team reacted quickly and was able to rectify the situation, and I'm pleased to report that organic sales trends across our branded e-commerce websites are again heading in the right direction, with increases year-over-year. We remain very confident that our enhanced e-commerce websites, supported by more robust software platforms, provide us with meaningful, high-margin growth opportunities in the coming years.

In summary, the first half of the year played out much like we expected it to. While our top line was a bit softer than we planned due to some missed sales opportunities created by the West Coast port congestion, we delivered strong earnings growth in the face of challenging comparisons, highlighting the power of our business model. The good news is that the temporary headwinds we recently faced are now behind us and our top-line comparisons get easier as we head into the second half of the year. Therefore, we are confident that we can increase sales mid-single-digits during the back half of 2015.

Jim will now review the financials. Jim?

Thanks, David. Net sales for the second quarter were $68.6 million compared to $68.8 million for the corresponding period a year ago. Wholesale sales for the second quarter decreased 4.9% to $53.9 million compared to $56.7 million last year. Retail sales for the second quarter increased 1.2% to $10.2 million compared to $10.1 million a year ago. While military segment sales increased to $4.5 million versus $2 million for the same period in 2014.

Gross profit in the second quarter increased to $22.6 million or 33% of sales compared to $22.6 million or 32.8% of sales for the same period last year. The 20 basis point increase was driven by higher wholesale and retail gross margins, partially offset by the increase in military segment sales, which carry lower gross margins than both wholesale and retail.

Selling, general, and administrative expenses were $19.4 million for the second quarter of 2015 compared to $20 million in the year ago period. The $0.6 million decrease in SG&A expenses was primarily attributable to lower incentive compensation expense. As a percentage of sales, SG&A improved 80 basis points to 28.3% compared to 29.1% last year.

Income from operations was $3.3 million or 4.7% of net sales compared to $2.5 million or 3.7% of sales in the prior year period. In the second quarter, interest expense was $176,000 compared to $225,000 last year. Net income for the quarter increased $0.5 million or 33% to $2 million or $0.26 per diluted share compared to $1.5 million or $0.20 per diluted share last year.

Turning to the balance sheet, our funded debt at June 30, 2015, decreased $7.8 million or 17.9% to $35.6 million compared with $43.4 million at June 30, 2014. Inventories were $86.5 million at June 30, 2015, compared to $86.4 million on the same date a year ago.

Operator, we are now ready to take questions.

(Operator Instructions). Mitch Kummetz, B. Riley.

I got about a handful of questions, so let me -- Jim, first of all, can you just give me the segment margins on the quarter?

Sure. Wholesale, 32.5%; retail, 44.6%; and military, 13.3%.

Got it, thank you. And then obviously some moving parts in the quarter in terms of sales. Is there any way you can give us an aggregate number when you -- seeding programs, military shipment to the foreign country, and then the C4/C5. I know you mentioned that was $3 million, but is there any way you can add those up and tell us what the impact was on the quarter?

So, Mitch, in total it was around $3 million.

Okay, in total. Okay, I thought the C4/C5 was by itself $3 million.

No. That was around $2 million.

Got it. Okay.

Yes, I think the commercial military, which included the shipment to a foreign country was the other (multiple speakers).

Oh, okay, got you. So all in it was about $3 million, okay. In terms of your back half outlook, I know you are saying mid-single-digit sales growth. I thought you were previously expecting mid-single-digit growth for the full year, recognizing that the first half would be a little bit depressed based on some of these moving parts. So I'm trying to understand if you're not as optimistic about the back half as you previously were, or how should I think about that?

Yes, I think that the mid-single-digit -- we talk in terms of 5% to 7% is the outlook for the rest of the year. A lot of what we experienced in the first half and with the challenged top-line were we just were not seeing the fill-ins from some of our larger accounts, as we noted in the prepared statements. We did not see the sort of reorders that we expected, because their business didn't come in on plan. So it's difficult to replace that business, Mitch, unless things happen at retail.

Got it.

Based on our visibility today, we're comfortable with this mid-single-digit outlook.

And I think, Mitch, us being a little bit a little our expectations in Q2, that puts us more towards the lower end of that range, or maybe just slightly below it.

Sure (multiple speakers). Okay. Got it. A couple last items. On the retail, is there any way you could break out the growth, B2B versus B2C? I know that B2C has been growing faster. Just trying to get a better sense of that in the quarter.

As we worked through the quarter and we tweaked the B2C advertising and pay-per-click, we saw it coming back to in the midteens. And the B2B business is growing at a little higher rate than that.

Okay. And then the last one on Bealls. You mentioned that you're going to open up some doors there. I'm curious, is that all Western product, or is some of that lifestyle product? And maybe you could just comment on the progress that you're making with the Durango lifestyle more broadly.

Yes, sure. It's actually Durango lifestyle product.

That's what I meant to say, sorry.

Yes, it's a Durango lifestyle product. We are in a six store test with inventory in store, we're on their website, and we're also -- they have a kiosk program also, we're on that in all stores. So we're very hopeful with that placement and excited to see how we perform at retail. Later, they also have custom -- I'm sorry, comfort locations. A business that they've developed a large comfort business around, so we're also placing 4EurSole there.

Okay. Can I ask one last one? How much was Creative Rec in the quarter? Do you know offhand?

Yes. It was about $2.3 million.

Okay. All right. Thanks, guys.

(Operator Instructions). Jonathan Komp, Robert W. Baird.

Just wanted to get on the revenue performance a little more in the quarter. Maybe if you could just clarify: it sounds like, based on the prepared remarks, if you look at maybe what factors surprised you to the downside on the wholesale business. Was it entirely in the workwear category, or where there other categories that you'd say negatively surprised versus what you were expecting coming into the quarter?

Definitely workwear was the largest surprise, yes, Jonathan. We also expected to do a little better in commercial military than we did. And we were disappointed with the performance of Creative Recreation in the quarter. However, we're very optimistic there with the visibility we have into the spring 2016 product line that will be shipping in Q4. So we think that we're going to actually see a bounce in that business in Q4 and as we roll into 2016.

And I think as we entered the quarter we also thought there was a potential opportunity to replicate the order we had for the commercial military to the foreign country, but that didn't materialize. And we were still working on that as we entered the quarter, and thought that was a possibility.

Got it. And on the workwear side specifically, I know you mentioned a larger, national account there, maybe several. I don't know if there's any additional context that you can give or any -- just more color on what you're seeing there. And I don't know if there's any call-out regionally or weather-driven or any more context there. And really maybe more on what you expect of that piece of the business, the workwear, to look like as you get into the second half.

Yes. And I hate to give a weather report, but I will. Our largest work customer is Tractor Supply, and our business there is largely around farm and ranch product in the Georgia brand, some Western product in the Durango brand, and a private label program which we manage for them. And I know that it's been a lot wetter than usual and their business has been off in farm boots, which we certainly saw in the reorder situation with them.

Got it, that's helpful. And then just framing up the second half of the year -- and I know you pointed to easier comparisons, and I know you are not going to be cycling to the same extent against the seeding program that you faced in the first half -- but when I look at the second half comparison, it's not entirely obvious to me that it's a lot easier. Just looking at the growth rate specifically that you saw in the fourth quarter last year. So, what are you looking at it when you look to the second half and point to easier comparisons as one of the factors that should help the growth rate?

Yes, so, we're comfortable. We think that the Q3 comp is an easier comp for us. I think we'll be a little bit more challenged as we swing into Q4, but we think over the back half of this year we can deliver that mid-single-digits increase.

Got it. Maybe (multiple speakers).

But, Jonathan, at this point in time we have the best visibility. The third quarter is the quarter where we have the largest pre-book as a percentage to sales. So, it's always the easier quarter for us to forecast.

Understood. Two last ones for me then. I know previously you've talked a broader framework on an annual basis, being able to grow earnings in the 20% range on a mid-single-digit revenue increase. And I'm just wondering as you look at the moving parts in the second half of this year, if that type of algorithm would hold for that mid-single-digit revenue increase you're looking at in the second half of the year.

Yes, I think that on a full year basis -- because also we grew earnings at 50% in the first half of the year, but we should be close to that 20% growth as we get to the back half of the year. I think last year we made about -- just over $1 in the back half of the year. So, we might be a little bit light of that, but still certainly coming in for the full year at -- still at 20% growth rate, it still seems achievable, if we achieve a 5% to 7% -- a mid-single-digit growth rate in the back half of the year, we should be able to do that.

Got it, that's helpful. And then last one for me, maybe just a bigger picture question. Maybe you have a little bit more capacity on the balance sheet as you get in a better position from that standpoint. And just wanted to hear the broader context, maybe strategically and from a capacity standpoint, how you are viewing acquisitions and the broader outlook on that side of the business.

Obviously, currently we are very focused on our core businesses and fully integrating Creative Recreation and ensuring that that acquisition is successful, and we get the growth that we expected when we acquired the company. But at the same time we are active, and we would still like to be in the women's casual business, have a brand in our portfolio around that sort of a market, because we see the opportunity there for growth and to complement these very mature brands and that we own in these mature market.

I think our position is the same as it's been for probably the last 6 to 9 months, as we've stated before, that we still are, as Dave said, focused on this, but we're still active in looking for when the right -- if there is a right opportunity, we would certainly look to take advantage of that.

All right. That's it for me. Thanks for taking all the questions.

Mark Cooper, Pacific Ridge.

Actually it was answered in the last commentary. Thank you.

Mitch Kummetz, B. Riley.

I just got a few follow-ups. One, David, you mentioned in response to one of Jon's questions that for Q3 that's the quarter where pre-book is the largest percent of sales of all your quarters. I know on the last earnings call you were alluding to double-digit pre-book when you were talking about strong fall orders for Georgia Boot and Rocky hunting. Can you just give us an update on the pre-book or the backlog as you are heading into the third quarter?

Yes, and many of the brands -- in the brands and segments that -- where we have the largest percentage of sales in the third quarter, we have the sort of backlog that gives us the confidence to talk about this 5% increase in sales. Would you like me to be more specific than that?

Well, I was hoping you would. I got the impression coming out of last quarter that your fall orders were up double digits. Maybe that was not the case. I think you were specifically talking about hunting boots up significantly, and I think you actually talked about Georgia Boot booking up like 40% for the back-half delivery. Maybe I misinterpreted that, but a little bit more color would be helpful.

(multiple speakers) and we talked along those lines, but the Georgia Boot business is still one which we rely heavily on fill-ins in the quarter.

Sure.

Which we didn't see in Q2. The hunting category was up substantially and we shipped a lot of those goods in Q2. We were up 19%. I think that because the -- our business -- fill-in business did not come in the way we wanted it to in Q2, we're reluctant to be more optimistic than forecasting more than this 5% number in the quarter.

Got it.

I think the other thing, Mitch, with the pre-books is not all of those will ship -- they are for multiple deliveries that happen in both Q3 and Q4, as well as, based on sell through, they are not noncancelable orders. So we're always less -- we're a little cautious at this point to make sure that those orders that we collected are actually going to ship. And we'll have a better read on that as we get into late third quarter, early fourth quarter.

Got it. On your contract military business, that was up a little more in the quarter than I was anticipating. Does that pull some sales out of the back half of the year? Or how should I think about that?

No, I think that we're still -- they are going to continue to perform at the levels that we had there in the back half of the year also. So, we've got some strong orders for that going forward. I think we did -- in the front half of the year, we did about $7 million. And I would anticipate the back half of the year to -- we got a few more months to get orders for, but we should be about the same range for the back half of the year.

Okay. All right, good. That's good to hear. And then lastly on commercial military, how should we be thinking about that going forward? You've got the RLW boot coming out. You've had some pressure from the C4/C5. Commercial military was down $3 million in the quarter. Does that normalize as we go into the back half of the year, or is that still a bit of a pressure point in Q3?

It's still going to be a little bit of a pressure point, but I think as we move into Q4 we'll be in good shape.

Okay. All right. Thanks again.

Thank you. I would now like to turn the conference back over to management for any additional or closing remarks.

Well, thank you for joining us on the call today. We will look forward to speaking to you again in approximately 90 days. Thank you, thank you.

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