Rocky Brands Inc (RCKY) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands' third-quarter fiscal 2015 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 provided at that time for you to queue up for questions. (Operator Instructions).

I would like to remind everyone this conference is being recorded, and will now turn the conference over to 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 and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2014.

I'll now turn the conference 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.

While there were a number of positive takeaways, our overall results in Q3 fell short of our internal expectations, driven primarily by a soft topline. I'm going to walk through each of our brands and channels, starting with an explanation of where we came up short. And then I'll review the areas of our business that helped to partially offset the miss. Jim will then review the financials, and then we'll open up the call to your questions.

Before I go into the details of the quarter, I think it's important to remind everyone that the vast majority of our business is derived from orders generated for at once-delivery. In fact, in our wholesale business, year-to-date, 79% of our business was derived from customers requesting delivery within 10 days of the order date.

Said another way, we don't receive advance orders for most of our products like many of the athletic and fashion footwear companies. We rely on replenishment or fill-in orders to drive our business. At any time of the year, we have very little visibility into our future business. And in the third quarter, we did not receive the level of replenishment orders we forecasted, which is the reason for the shortfall, versus a year ago and compared with expectations.

The decline in sales came primarily from two of our three largest categories, work and hunting. Starting with sales of work footwear, which were down mid-teens, there is no one specific thing to point to that would explain the slowdown. Rather, it appears to be a combination of factors that led to weaker sellthrough at many of our retail accounts.

I believe we are still feeling the effects of a weak consumer environment for nonathletic footwear and apparel in the US. Consumers were not shopping for workboots like they were a year ago. This was true at several of our larger national accounts, where store traffic during the quarter appears to have been challenging. We believe this was also the case at our network of independent retailers, the mom-and-pop accounts, most of which don't have eCommerce platforms to help offset the headwinds facing bricks and mortar.

On top of this, we are starting to feel the indirect effects of the slowdown in domestic oil and gas production in certain regions. While we market only a few products specifically intended for that industry, the loss of jobs from the decrease in oil prices is having a ripple effect across many local economies throughout the Midwest, from Texas up to North Dakota, where a large number of our consumers live and shop.

Finally, the unseasonably warm temperatures in September across much of the country were not conducive to sales of cold weather insulated workboots. This is consistent with what we've heard from many of our competitors, some of which have already spoken publicly about the sluggish sales environment. This reinforces our belief that the headwinds are industry-wide and not specific to the health of our Rocky and Georgia boot brands.

Turning to hunting, the story is very much the same. Our business, like the broader outdoor sportsman category, experienced soft sellthrough at retail in Q3, driven by warm dry weather and weak store traffic. Sales were down in the mid-20% range, as we didn't receive the level of replenishment orders from our wholesale partners that we expected. There were some bright spots from the quarter, such as the positive reaction to our new Retraction line of value-rich hunting boots, which is now the number one selling boot in Rocky's hunting portfolio.

As we've discussed in the past, hunting is our most weather-sensitive category. We benefited earlier in the year from the cold snowy weather, which helped drive first-half sales up 14%. Now we are seeing the opposite effect here in the back half. The good news is we are well-positioned with key styles to chase business in season, when the temperatures drop and sellthroughs re-accelerate.

Moving on to Western, Durango brand sales increased mid-single digits, which comes on top of a high-teens percentage 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 in demand and resonate with today's consumer.

Our Rebel, Lady Rebel and Little Durango collections are clicking with a broader audience, driving solid sellthrough at key retailers like Boot Barn, Shoe Show, DSW, and Rec Room. Western sales, especially for the Rocky brand, which is less fashion-driven and more work-oriented than Durango, experienced declines in territories where oil and gas is the primary industry, which is parts of Texas and Oklahoma. We hope to offset this headwind in Q4 when we start shipping Rocky's new holiday and spring 2016 collections, which have been well-received by retailers.

Turning to commercial military, as we expected, growth resumed in Q3, with sales up mid-teens over the last-year period. This was driven by demand for new versions of our flagship S2V boot, which we introduced in response to the Army's issuance of a new operational camouflage uniform. Soldiers are in the process of transitioning from their desert tan S2V boot to our new coyote brown -- a tailwind we expect to benefit from more, as soldiers across numerous installations receive their new uniforms between now and the end of the year.

During Q3, we also launched a new Rocky lightweight boot, which, as you will recall, replaces our popular C4 and C5 lightweight boots. The RLW boot boasts a rugged yet lightweight platform and is fully compliant with all current Army uniform requirements. It started shipping late in the quarter, but early reads have been positive and we continue to be confident that the RLW will eventually more than fill the void created by discontinuation of the C4 and C5 boots.

Now to Creative Recreation, which continues to regain the momentum that initially put the brand on the map through the introduction of great-looking casual lifestyle shoes. There were a number of highlights from the quarter, led by the Adonis Red Ripple, a red leather hightop that sold incredibly well at several leading and influential retailers, such as Lord and Taylor, Jimmy Jazz, Shoe Palace, along with Amazon, to name just a few. It's also been the best-selling shoe on CreativeRec.com for the past two months.

The Santos and Vito new styles introduced earlier in the year, remain top sellers, and along with the Adonis, are propelling the brand forward with exciting accounts like Nordstrom and Journeys, despite the broader market challenges, while also opening up new distribution opportunities with retailers like Express and DSW. Looking ahead, the spring 2016 line -- the first under the creative control of brand co-founder Rich Cofinco since his return to the Company -- has received extremely positive feedback. The sell-in has produced a significant increase in orders for the spring season versus the prior-year, and these orders will be fulfilled starting in November for the important holiday season and on into January of 2016.

We are eager to gauge the retail sellthrough of these new products. Our intuition tells us they will be favorable and we'll be able to leverage them to more doors with broader and deeper commitments. With the enhancements we've made to the product sales and marketing teams, combined with an improved supply chain, our optimism around the long-term prospects for Creative Recreation continues to grow.

To close out the discussion of our wholesale segment, I'm pleased to announce that the selling efforts behind our recently launched 4EurSole line of clogs continues to result in new distribution. This includes key independents who took delivery of the product in Q3 as well as national accounts we are working towards opening in Q4, including Bon-Ton, DSW, and Kohl's.

Turning to our retail segment, sales increased 8% for the quarter -- the strongest percentage gain we've experienced since we transitioned the business to our new digital platform. B2B sales continue to be driven by the acquisition of new accounts, along with specific initiatives aimed at fueling higher productivity at existing customers.

With respect to our direct-to-consumer operation, as you will recall, the year 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 issue. And I'm pleased to report that organic sales trends across our branded eCommerce websites are again heading in the right direction with increases year-over-year. We remain very confident that our enhanced eCommerce websites, supported by more robust software platforms, provide us with meaningful high-margin growth opportunities in the coming years.

Finally, our military segments posted a significant increase over last year with sales of $5.1 million compared to $1.1 million in Q3 2014. We've received orders under our current contract through June of 2016, and we are currently in the bidding process of three more potential contracts, any of which could totally consume our capacity available for contract military boot production next year and into 2017.

As you've heard, elements of our wholesale business suffered largely from external factors beyond our control that impacted the work and hunting categories. That isn't to say we are sitting back waiting for selling conditions to improve. Our teams are working hard to capitalize on all opportunities to drive our topline, and we believe that the strength of our brands and commitment to innovation will continue to differentiate our product offering from the competition.

At the same time, there is a lot of excitement across the other areas of our business from the Durango brand, and commercial and military business to CreativeRec, and our direct-to-consumer operations. Therefore, while we are disappointed in our overall performance in Q3 and are taking a more cautious stance on Q4 given current trends, we continue to be very confident that our business model will generate earnings growth in excess of sales growth over the long-term, which, combined with our quarterly dividend policy, will return exceptional value to our shareholders.

Jim will now review the financials.

Thanks, David. Net sales for the third quarter were $70 million compared to $72.7 million for the corresponding period a year ago. Wholesale sales for the third quarter decreased 12% to $54.7 million compared to $62.1 million last year. Retail sales for the third quarter increased 8.4% to $10.3 million compared to $9.5 million a year ago, while military segment sales increased to $5.1 million versus $1.1 million for the same period in 2014.

Gross profit in the third quarter was at $22.1 million or 31.6% of sales compared to $24.3 million or 33.4% of sales in the same period last year. 180 basis point decrease was primarily due to the decline in wholesale sales and the increase in military segment sales, which carry lower gross margins than wholesale and retail. By segment, wholesale gross margin was 30.8%; retail was 44.6%; and military was 13.9%.

Selling general and administrative expenses were $19.2 million for the third quarter of 2015 compared to $19.4 million in the year-ago period. As a percentage of sales, SG&A was 27.5% compared to 26.6% last year. Income from operations was $2.9 million or 4.1% of net sales compared to $4.9 million or 6.8% of sales in the prior-year period.

For the third quarter, interest expense was $188,000 compared to $253,000 last year. Net income for the quarter decreased $1.3 million to $1.8 million or $0.24 per diluted share compared to $3.1 million or $0.42 per diluted share last year.

Turning to the balance sheet, our funded debt at September 30, 2015 decreased $5.7 million or 11.2% to $45 million compared with $50.7 million at September 30, 2014. And inventories were down $2.1 million or 2.4% to $88 million at September 30, 2015 compared with $90.1 million on the same date a year ago.

As David mentioned, we are taking a more cautious outlook on Q4, given current trends combined with the tough year-over-year comparisons for our wholesale business. Therefore, given our current visibility, we expect wholesale sales to be down on a percentage basis similar to the decline we experienced in the third quarter. Retail sales are forecasted to be up on a percentage basis similar to the Q3, and military segment sales in dollars should be equal to Q3 levels. With respect to margins and expenses, gross margins on a segment basis will be similar to Q4 a year ago, and total SG&A dollars should be down slightly.

Operator, we are now ready to take questions.

(Operator Instructions) Mitch Kummetz, B. Riley.

Thanks for taking my questions. I've got a handful of questions. I was hoping we could start just drilling down a little bit more on the work business. I was hoping you could reconcile something for me. So, on the wholesale side, work was down mid-teens, but your retail business was up 8%. And correct me if I'm wrong, but the majority of what you are doing at retail was work as well, right? So help me understand the difference between those two numbers, why it's so much worse at the wholesale end versus the retail end, if I'm even thinking about that the right way?

Well, I think, Mitch, that we control the retail environment as our retailers control their retail environments, and perhaps with respect to how we position our brands on our websites, we certainly position them as the -- you know, competitively against our other brands that we show on the B2B sides, as the primary brands. So, I just think we are doing a very good job in social and in pay-per-click, and encouraging business through our websites, both on the B2C and our B2B business.

I think the other thing, Mitch, is you are right, I think that our business is still more work, but it's less work as a percentage than it used to be, as our other websites have started to expand. And the difference on the retail side with the Lehigh business, we are -- you know that business is subsidized business with employees, and they are getting no shoes no matter what the retail environment is at this point too.

Got it. And then on the hunt business, David, I know you mentioned that you are positioned to chase if and when the weather turns. But remind me of kind of the cadence on the hunt business. I mean, it's -- at some point, even if the weather turns, do retailers look at their inventories and just say, hey, we'll sell through what we have and will be glad to try to get through the season as clean as possible? Or are they kind of restocking through the end of the hunting season? How do retailers sort of play that?

Well, I think they play -- and certainly have over the past few years really close to the vest, particularly for those boots with a design specifically with hunting in mind. But there are other boots that -- with more of a sort of multipurpose outsole, that they can get, or maybe in brown versus camo, that they can get a much longer season out of with the insulated products.

So we found last year, as we swung into January and February, with the weather we had, that we were able to liquidate anything that was remnant inventory extremely well. And I think that our retailers did so also. So, I think the retail community has a -- an interest in getting out of boots that are specifically for hunting in late October/November, but they have an interest in those boots that have a longer life on the shelf through January and February, as these seasons seem to extend now into early spring.

Got it. No, that makes a lot of sense. And then also in the work business, you know you mentioned oil and gas and the trickle-down effect there. Are you seeing any pressure in ag-related markets? Again, if I'm not mistaken, you guys -- the Georgia boot brand resonates pretty well kind of in the Northeast with kind of the farm community there. Is there any softness in ag? And is that also a factor, do you know?

We talked about softness in ag on our Q2 conference call, I think, in questions. And you know certainly, the Georgia boot brand, after having such a big increase in sales last year, we are disappointed with its performance through three quarters this year. I think some of that is related to that softness. And then I know that TSC reported earlier, and they were talking about sales trends -- the store traffic was off in September probably due to weather.

So, yes, I think there is some softness in the farm and ranch channel right now. It's certainly reflected in the sales numbers of the Georgia brand, which is primarily a farm and ranch product line. We do very few sort of steel toe industrial products in that brand.

Got it. And then Western, you guys continue to show strength in Western, particularly on the Durango side. Is that incremental accounts or anything? Or how should I think about Western anyways? I mean I would guess it's maybe a less weather-dependent category than some of the other boots that you are selling, but I would also think that cold weather could help that business as well.

Is there anything specific as to why Durango Western continues to trend so well for you guys? Are you guys taking share? Or is the Western business maybe just not as impacted by the weather as some of the other pieces that we've been talking about?

I think it's not impacted by the weather. Women are wearing Western-influenced products all year-round now. They're -- women are even seen wearing Western boots with shorts in spring and summer. So, I think the trend is still strong.

I think we've done a particularly good job in our niche with the Durango brand, and we are benefiting from -- we've done exceptionally well with staying close with Boot Barn as they have expanded, and we've gained a lot of sales increases there. So I think a combination of really great styling and good relationships at retail has driven the sales increases that we are seeing.

Got it. All right. Thank you so much. I appreciate it.

Thank you, Mitch.

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

A couple of questions. David, maybe first, if I could start really on the workwear business or on the work side of the business. I know you called out several factors that led to the shortfall versus your expectations. And I'm hoping you might be able to quantify some of those pieces, just so we get a sense of the magnitude of each of those.

Yes, sure. Underlying -- and I think it's really important to understand the impact that weather has on our business. Weather is perhaps the -- when we anniversary weather events or we have weather events that are when seasons are colder than they were the year before, that certainly helps drive increased sales in a quarter.

I think that the -- so, that's number one. I really feel that that underlying both of our hunting and work business, that is something that is always the number one factor.

Number two is perhaps this weaker consumer environment, and particularly in the oil and gas regions. And we've heard a lot of folks talking about that in the last couple of weeks as they are talking about their business. We certainly have seen it.

Not that we really engaged in the oil and gas business. We have a few products in the Rocky line made specifically for oil and gas workers. But in those communities where businesses were really experiencing a lot of increased sales from the boom in oil and gas, that's where we are seeing things fall off a little bit. So, the tangent to that. I think those -- so it's weather first and then the economy next, I think.

Got it. And maybe a couple of follow-ups to that. On the oil and gas business first, as you look at the business, I'm wondering if you could help provide a little more color just on the magnitude or the steepness, or kind of just helping to conceptualize how much of a fall-off you've seen there? Anything you can provide would be helpful.

Yes. I mean, well, we also see that in -- with our -- in our other business too, with Durango and Rocky West and the other categories of footwear in and around the Texas, Oklahoma out in the sort of Upper Midwest in pockets of Ohio and Pennsylvania, we are seeing some weakness there.

And if you are asking me to sort of pin a number on that, I would think that that would account for a couple of million dollars of sales that we could have had in the three months in Q3, as things continued as they had last year there. And everybody was feeling good about oil and gas exploration. You know I think that the rest of it really is -- we can sort of hang on a more sort of general weaker consumer confidence, and the weather particularly in September was particularly difficult for us.

Got it, okay. And sorry to keep asking about the same topic here, but just trying to drill down on the major category here, but --

No problem.

Maybe one more related question. Just curious to hear, as you look at the competitive environment -- obviously, we heard from Wolverine recently publicly. But I'm curious, related to the competitive dynamic, and just curious to hear your perspective maybe what type of data points or conversations or areas, industry indicators you look at to really get comfortable that this is a broader industry factor and nothing specific to your brand?

You know, as we talked to our key retailers, key buyers and merchandisers and executives with where we have relationships, we are hearing that store traffic is down, particularly in September. We are hearing that it was very challenging and that a lot of promotion -- there was a lot of promotional activity that really didn't reap the sorts of results that retailers expected.

You know, I think as we look at -- we are a retailer, and we do have sort of insights into the top work brands and how they perform versus Georgia boots and Rocky in our B2B business, the Lehigh business. And I can tell you that -- so we look at this monthly, and look at the percentage of sales that are being derived from each brand and items that are performing and not performing. And we see, across the range of products and brands, that there is similar sort of activity and sales, as there was in the same period last year.

So, I don't think that we've done a poor job of the products that we've sort of delivered in the quarter that are new for the fall and winter season. I think that our brands -- you know there are also ways in which we can look at the traffic to our sites and sort of gauge consumer reactions. And we are not seeing a lot of consumers that, all of a sudden, are disenchanted with our brands.

So, I don't know what else I can say. I'm confident that the brand is still resonating well with consumers. And once this sort of melee clears, and I think what will really cause it to -- an inflection here is a good jag of cold weather around the United States.

Got it. That's helpful. Thanks for the color. Maybe two last ones for me, sticking on the wholesale side but more forward-looking. If I look at the business this year, it looks like it's shaping up to produce kind of a low to mid-$50 million run rate per quarter.

And understanding there's a lot of moving parts there, but do you think that's the type of level looking ahead that you can start to grow again into 2016 once weather cooperates more? Do you think there is further downside in 2016? Or how do you think about the trajectory going forward for the wholesale business?

So, were you talking $50 million run rate in US wholesale, right? Wholesale business.

Yes, it looks like each quarter, you'll probably be in the low to mid-$50 million range for the wholesale business this year?

Yes. Right. So, you know I think that by -- you ask me that question in 60 days from now, I think I've got a much better crystal ball, because we'll already be -- we have a wholesale sales meeting here this weekend. We primarily have one season per year that -- in terms of selling in, and that is fall/winter.

So we'll start to collect orders for next year, and start to get indications of interest from our retail folks of how we stack up and how we are going to stack up against our competitors. And I can give you a better feel then. But as we swung into this year off a 17% sales increase -- and I think 10% -- some of that was organic -- I'm sorry, some of that was acquisition, but 10% or 11% of it was organic.

We could not -- we didn't project certainly internally, we had much higher expectations of where this year would go. And as we swung into 2014, our expectations were not for a 17% sales increase. So I think that our business is difficult to project. And that is because of the sort of lack of -- as I talked earlier on the call, it's difficult to forecast because of this massive at-once business that we have.

But we think we are doing the right things. We think we have the right products in the pipeline. We think we have the right marketing behind it. We think we've got great folks here to get consumers excited about our proposition. So yes, I mean, we certainly hope that our business next year will rebound beyond levels -- the 2014 levels.

Got it. That's helpful. And then maybe one last one, more for Jim. Just on the G&A cost structure, as you look forward to the next couple of quarters. And understanding the low visibility on the topline, how do you think you'll manage the G&A? And do you think going forward, you could keep it closer to the recent run rate you've seen? Or is there anything that's going to cause it to grow more meaningfully?

Well, we certainly don't see anything that's going to cause it to grow more meaningfully. But I think that our SG&A tends to grow about by our sales increase. And our variable SG&A is about 12% of our -- 12% to 15% of our -- of sales. So that's how we usually project that.

And then normalized increase of 1% or 2% on ongoing SG&A. So, that's kind of how we project the SG&A. So, obviously, that's why we are saying SG&A will be down slightly in the fourth quarter as we look at this because of that variable piece of SG&A that we have with a down and -- a forecasted down in sales right now, so.

Jonathan, on that issue of sort of expense control, if you look back at this Company certainly over the last 10 years, you'll see that the one thing that we do pretty well is keeping a lid on SG&A when -- through tough sales periods. And we are focused on the other things that we think we can control like receivables and DSOs, and aging, and also inventory. So we are focused on those things as we go through this rough patch. And I think we'll swing into next year with a really good balance sheet, and with expenses under control and positioned for growth again.

Got it. All right. Well, thanks for taking all my questions.

Okay, Jon.

(Operator Instructions) Mitch Kummetz, B. Riley.

I've got a few follow-ups. So, David, how clean do you think inventory levels are at retail? And part of why I'm asking the question is, I'm guessing that as retailers are seeing their business slow down, they are not reordering in order to try to keep their inventories in line with the trends. And I'm just wondering if you think they've done a good job with that? Or do you think they are still a little bit heavy, given kind of what the trends are? Or what you think?

You know, with the visibility we have into inventories with big guys, we believe that those -- and we help manage those inventories. We think that those inventories are well-managed. Where there may be some issues is in the small mom-and-pop's, where through the competitive nature of the business, they've been encouraged to stockpile. But we see that the big guys are in pretty good shape.

And then how do you think about pent-up demand? I'm guessing with the work boot category in particular, if the weather isn't cold and wet and snowy, guys just go as long as they can without buying a new pair of boots. But once it turns, then they need a new pair of boots. And when you've seen these kinds of trends in the past where we've had a slow start to the season weatherwise, how does it tends to play out once the weather turns? Do you see this big uptick as guys are running out to buy new pairs of work boots? Or --?

Well, that's the way it works. There's no -- we sell the blue-collar guy and he doesn't lie in bed on a Saturday morning thinking about going on a shopping excursion just to look at boots. When his boots wear out or he has a lousy experience in hunting because his feet are wet and cold, he goes and buys another pair of boots. So -- and that's why weather is such a critical factor in driving demand for workboots and for hunting boots.

So, we always -- and what is sort of stares me in the face every day is, we manage a $4 million retail business across the street, which is visible from my office window. And when it is cold and wet outside, we get an awful lot of traffic. And when it's warm and dry outside, we have no traffic. It was 75 degrees here today in Nelsonville, Ohio. We had no traffic. I was there -- I was in the store for lunch. So, I think that there is going to be pent-up demand once the weather hits. Absolutely.

Is there a date on the calendar where if you get to a certain date, that guy is just like forget about it; I'm just going to wait until next year. Or does that really happen?

I think in hunting, you know -- and we've seen this over the past five or eight years as whatever we want to call it, as the planet has become warmer, we've seen this going on where hunting seasons can get stalled and never really break loose the way they should when it's warm. And then hunting season, depending on the region of the country, it's earlier south and then it gets later as you go north.

So if the weather doesn't align with the hunting season, the hunting season can be a little weak. But again, we are finding -- we are selling a lot more sort of non-camouflage, brown Cadora or all-leather boots today than we sold in the past. We used to do a huge business on a make-up with one of the large national sporting goods chains. And they always used to buy sort of 80% brown and 20% camo.

Because if the -- they wanted to be out of camo on the last day of the hunting season. And then if it was a little warmer, they knew they -- but colder in January, probably they knew they could liquidate that inventory because it was brown and people would wear it for casual wear. So -- and our lines over the past few years have sort of developed that way too, with more brown, more leather in the product line.

Got it. And I've got one last question. And bear with me as I'm not really sure how to ask the question, if I'm going to ask it the right way. But you mentioned to Jon that you are a retailer as well is a wholesaler. And when I think about the wholesale business -- or you tell me. As you think about your wholesale business, when you go through these periods like we're going through now, where the weather is not cooperating and the demand isn't there at retail right now, does that impact the wholesaler more than the retailer?

Because as a retailer, you might see your sellthroughs slow down a little bit. And then you look at your days of inventory, they are extending. And you start to panic and you are calling up all your vendors saying, I don't want any product. And so maybe it hits you harder as a wholesaler. But then once the weather turns and the sellthroughs start to pick up again, you are getting all the reorders then, and then it swings harder the other way. And again, I'm not sure if I'm asking that question the right way, but I'll let you try to answer it.

Well, no, I think conceptually, you are absolutely right. That's the way it works. And that's why this is sort of an inventory-intensive business. And -- but the flipside of this intensity of inventory is that it is not a perishable product line. It's not like lettuce. It's going to be good on the shelf for a long time.

So, all we have to do through these periods is perhaps not produce as much or slow some of our vendor factories down a little bit -- we turn the tap down a little bit to get the inventory back in line. And that's basically what we are -- we're in that process right now.

But yes, I think that it does obviously -- it's to do with the consumer first. So, the retailer will -- is closest to it, understands it before a wholesaler does, feels it before a wholesaler does. And that's how that relationship works.

Did that sort of answer your question or --?

Yes. No, I think so. It was an odd question anyway, so --

It's an interesting sort of thought and concept, and we are living with that every day. But I think being a -- just as being a manufacturer makes, I think, us a better sourcing, a more capable sourcer, being a retailer also helps us sort of understand -- gives us better insight into the wholesale, how we should react in the wholesale business.

Got it. All right. Thanks again for all your time, and good luck.

Okay, thanks, Mitch.

Thank you. At this time, we have no further questions. I'll turn the call back over to our speakers for closing comments.

Okay, well, thank you very much, everyone, for joining us on the call today. We are going to work hard in the next quarter to try and round out this year, and pull everything out that we can. Thank you.

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