Rocky Brands Inc (RCKY) 2015 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 2015 earnings conference call. (Operator Instructions) I would like to remind everyone this conference is being recorded.

I will now turn the conference over to Brendon Frey of ICR. Go ahead, Brendon.

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 they're 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'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. As you saw from our earnings release, it was a challenging fourth quarter. We were up against a tough comparison, as 2014's Q4 was a record sales quarter for the Company helped by cold, wet weather which drove strong demand for our work and hunting categories.

Unfortunately, this year we experienced the opposite conditions, as temperatures were at or near record highs in many areas of the country. We're obviously disappointed in our top-line performance and the impact it had on fourth-quarter profitability.

I want to spend the majority of the call talking about the growth initiatives we're focused on in 2016, but I'll first begin with a brief review of the fourth quarter. Not surprisingly, the shortfall came from the two most weather sensitive areas of our business: from softer sales of our work and hunting boots. Both categories were down double digits on a percentage basis year-over-year, as sellthrough at retail was more modest than planned and impacted our replenishment business during the quarter.

In addition to the impact warm weather had on the boot category in general, we continue 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.

Unfortunately, our Western category, which was up through the first nine months of the year, was not immune to the same challenges that affected work and hunting sales in the fourth quarter. As a reminder, most of the distribution of the Durango brand is limited to the core Western market.

The combination of warm weather, soft local economies where many of our Durango dealers do business, and a very tough comparison contributed to the category's first quarterly decline in 21 quarters of consecutive year-over-year increases. For the year, Durango brand sales increased very modestly.

Weather has always played a role in shaping our results. We benefited from favorable weather in 2014, when sales increased 17% and net income nearly doubled. And recognizing how dependent our core categories were on weather as well as other factors that were limiting growth, such as segment size, workplace changes and retail consolidation, for the past few years we've been developing new growth vehicles.

They include extending our reach into new, larger segments of the market, namely casual lifestyle footwear; leveraging our domestic manufacturing facility to grow both our contracted and commercial military businesses; and increasing the penetration of our direct-to-consumer channel. Based on the work we've done to date, combined with our key areas of focus for 2016, we are cautiously optimistic we can reaccelerate sales and earnings growth starting this year.

Let me walk you through our strategies for achieving these financial objectives, beginning with the casual lifestyle opportunity. With respect to Creative Recreation, on the two past quarterly investor conference calls we've talked about the importance of spring 2016: the spring 2016 was the season where the creative direction of the brand was fully influenced by Rich Cofinco, the original Creative founder, who we tapped to rejoin the Company in late 2014.

However, ahead of this spring, we have good news on the sellthrough at several important accounts during Q4, most of which involve the sales of fall 2015 and holiday merchandise. Perhaps our best story is at Express.com, where we are their only branded footwear vendor. In October and November, sellthroughs pushed 10% per week; in the December, sellthroughs were 12% per week. Based on these results, we have a 20-store test planned for fall 2016.

We saw similar sellthroughs at DSW.com, and they have committed to distributing us in 40 doors in spring 2016 and 100 doors for fall 2016. At Nordstrom we actually pushed 12% per week in December, and we have expanding door counts and style counts promised for fall 2016 also.

Some new Creative Rec customers we are shipping soon are Footaction * in 20 doors and Von Maur's online and in seven doors.

Importantly, through leveraging the relationship we enjoy through our Rocky commercial military business at AAFES and NEXCOM, we will soon be in those outlets also, where there is a concentration of Millennial consumers, our consumer target.

And imminently, Creative Recreation will launch a multi-tier celebrity ambassador program, kicking off with a successful internationally recognized recording star. The partnership will activate throughout the year with a number of public appearances, social media mentions, red carpet events, on tour events, and more.

The celebrity will also develop a Unisex Capsule Collection inspired by the entertainer's lifestyle. This will be available at select retailers by holiday of 2016. This major investment is indicative of our confidence that the Creative Recreation product is on trend, and we are positioned to grow sales in 2016.

Now to Rocky 4EurSole. As the name suggests, this product line is euro-comfort inspired and it gives us assurance that we're relevant because our largest target -- our largest customer today is actually a 28-store chain retailer in Germany.

Here in the US, we had the primary goal to be at retail where active women consumers shop, which means having a strong online presence. Just a few weeks ago we were able to go live on Kohls.com; and by this quarter end, we'll be live on Footsmart.com.

For the past five months we've also enjoyed a presence and growing business on BonTon.com. They have indicated an interest in an in-store test for fall.

In all, this spring we'll be distributed by 60 retailers here in the US. This season, marketing efforts have begun in earnest. Our sandal launch includes a blogger initiative and other strong public relations campaigns.

Additionally, we've launched a consumer grassroots loyalty program. While this is still a fledgling business without meaningful sales, we remain committed to investing in this category with this initiative for the long term.

Now to Durango. We're stepping up our marketing efforts with the brand because we believe it has the potential for more growth. As our retailers work through their inventory issues created by the oil and gas dilemma, because of the way our brand resonates with the consumer and because of the on-trend relevance of our product offerings we should survive any paring of brand and style counts. And because of our focus on the $150 to $200 price tier, we believe we may come through this temporary slowdown with more shelf space.

Turning to our military footwear operations, as we announced last month, we received a new order from the US military to produce temperate weather combat boots. The terms of the agreement include a minimum purchase amount of $13 million, with the entire initial order projected to ship this year.

When combined with our existing military contract, which we were awarded in 2012, we now have approximately $31 million in contract military sales scheduled for delivery in 2016, which represents a 78% increase over 2015 levels. While gross margins on contract military sales are lower than our wholesale and retail channels, there is very little SG&A associated with this business, so operating margins are respectable.

Further, when we do meaningful volume like we did in 2015, and now even more so in 2016, military sales provide the Company with solid cash flow that we're investing in other, higher-margin areas of the business. There are other nuanced benefits for us with the contract military business. It helps offset overhead costs through better utilization of our Company-operated facility in Puerto Rico; and perhaps more importantly, it is a great avenue to create strong brand loyalty with the young soldiers who often purchase additional combat footwear at their own expense through commercial military channels and potentially transition into our work, Western, and hunting categories during or post their military careers.

In a few short years our commercial military category has grown into a meaningful business, similar in size to our hunting category. While there have been some recent headwinds to sales from changes in the Army's wear and appearance regulations, our team responded quickly and launched our new Rocky lightweight boot during the back half of the year which, as you will recall, replaces our popular C4 and C5 lightweight boots. Along with the introduction of new versions of our flagship S2V boot, which we recently introduced in response to the Army's issuance of a new operational camouflage uniform, we have solid momentum to start 2016.

Shifting now to our direct-to-consumer strategy, we continue to make inroads leveraging the investments we've made in digital infrastructure over the past three years. We're learning that consumers who come to us to purchase Rocky, Georgia Boot, Durango, and Creative Rec brands are extremely loyal and return time and time again and purchase again.

For example, in Q4 53.9% of consumers coming to our Rocky branded site had purchased previously from us. One of the customers purchasing made his first online purchase with us in October of 2007. Of those returning customers, on average they have purchased from us 15 times with an average order value exceeding $130.

Because of its appeal to the male Millennial, these statistics are even more impressive with our Creative Recreation consumer. So we remain committed to driving direct sales as much as possible.

Knowing that today many consumers research brands and their products online we are making further investments in our online capabilities. For example, we've just grown the team of focus people who will focus on our wholesale dealers with websites. This new group will work to ensure that our new online minimum advertised pricing policy is adhered to, and that all of the copy, brand logo, and product imagery and video we have on our sites is on our dealers' sites as well, so that consumers have a properly curated and consistent experience with our brands.

In summary, we're confident that our strategies to expand our casual lifestyle business, grow contract and commercial military sales, and increase the size and penetration of our direct-to-consumer channel will allow us to rebound from the challenging finish to 2015. While economic and weather issues persist in certain markets, we believe sales trends in our work, hunting, and Western categories should improve as the year progresses, a trend we typically experience following a warm winter.

I'll now turn the call over to Jim.

Thanks, David. Net sales for the fourth quarter decreased 17.3% to $65.3 million compared to $78.9 million for the corresponding period a year ago. Wholesale sales for the fourth quarter decreased 25% to $46.5 million, compared to $62 million last year.

Retail sales for the fourth quarter decreased slightly to $13.5 million, compared to $13.7 million a year ago. Military segment sales increased 64% to $5.3 million, versus $3.2 million for the same period in 2014.

Gross profit in the fourth quarter was $22.2 million or 33.9% of sales, compared to $27.6 million or 35% of sales for the same period last year. The 110 point basis decrease was driven primarily by the higher percentage of military sales, which, as David mentioned earlier, carried lower gross margins than our wholesale and retail segments.

Selling, general, and administrative expenses were $20.2 million for the fourth quarter of 2015, compared to $20.7 million in the year-ago period. The $0.5 million decrease in SG&A was due to lower incentive compensation compared to a year ago. As a percentage of sales, SG&A increased 480 basis points to 31% compared to 26.2% last year, primarily due to lower sales compared to a year ago.

Income from operations was $1.9 million or 3% of net sales, compared to $7 million or 8.8% of net sales in the prior-year period. For the fourth quarter, interest expense was $167,000 compared to $246,000 last year. Net income for the quarter was $1.4 million or $0.18 per diluted share, compared to $4.5 million or $0.59 per diluted share last year.

I will just quickly touch on the full-year results. Net revenue for 2015 decreased 5.9% to $269.3 million, which comes on top of the 17% increase we experienced in 2014. Full-year net income was $6.6 million or $0.87 per share, compared to net income of $9.8 million or $1.30 per share for fiscal 2014.

Turning to the balance sheet, our funded debt decreased 34.7% or $12.6 million, to $23.7 million at December 31, 2015, compared to $36.3 million at December 31, 2014. During the year, we paid out $3.3 million to shareholders in quarterly dividends.

Inventory decreased 9.7% or $8.2 million, to $77 million at December 31, 2015, compared with $85.2 million at December 31, 2014. I'll turn the call back to David for his closing comments.

Thank you, Jim. Before we open the call to questions I want to thank our group of dedicated employees. You addressed our recent challenges head on and are working diligently to improve on our recent performance.

There's a lot of positive energy running through our organization, which adds to my confidence level about what is in store for our Company in 2016 and the years ahead. Operator, we're now ready for questions.

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

Yes, hi; thanks, guys. David or Jim, whoever wants to take it, maybe the first question I have -- just looking at the quarter itself, I think a few months ago you signaled that the wholesale revenue decline might be similar to the third quarter, which was down 12% in terms of the top line. I'm just wondering, when you look at the shortfall versus that type of level, maybe if you could parse out how much you thought was purely related to weather. And then separately, maybe how much was related to other factors, like Durango being a little softer?

Yes, so I think that the weather definitely affected our work and the shortfall in our work and hunting business. That was around $9 million -- $9.5 million versus the year before. Then the Western was more related to the oil patch dilemma.

But I think that weather also has an impact of -- Western boots are boots, after all, and we do see it spike usually in December as the weather gets colder. And that was -- Western was about $4 million, $4.5 million of the shortfall.

Okay, great. On that piece, just looking at Durango specifically, you sounded a little surprised by the shortfall. But is there anything you can point to more broadly with the Western category from a fashion perspective or any other broader trends that are a headwind right now? Or do you expect that business to come back pretty quickly?

We do expect the business to come back quickly. What we're hearing from our core market retailers is that there seems to be price resistance at $200 and above.

That's why in my prepared remarks I said that I think that, if anything, if there is a paring of brands or styles, I think that we'll weather that pretty well because our sweet spot really is $150 to $180 to $200. So I think we're positioned well there.

There has been some talk about the bloom is off the rose as far as Western is considered in fashion. But we really don't play there in terms of our distribution. We are widely distributed -- or mostly distributed in the core markets, where folks wear Western whether it's on-trend or not.

So I think that we expect this to bounce back pretty nicely, particularly as we move through the year. We're going to be anniversarying, frankly, smaller comparisons.

Okay, got it. Then maybe just thinking more broadly about the wholesale business, you sound pretty optimistic about some of the initiatives at Creative Recreation. I'm just wondering, when you add all the pieces between the growth for Creative Recreation and then maybe some bounceback in the weather-impacted categories, do you think the wholesale business can trend back towards the 2014 levels that you had in terms of the top line for that?

Or -- I'm just trying to gauge maybe what type of growth you might be anticipating for the wholesale business given all the moving parts for 2016.

Yes. What we're hopeful for, and internally, we're focused on growing the business in the high single digits.

Great; that's helpful. Then maybe one more if I could, just on the military business. Any thoughts on how to think about the new contract that you have for 2016? I'm just wondering how much of that $31 million that is contracted for should be viewed as nonrecurring, if any; or if that's a new baseline as you think beyond 2016.

No. This is what I know about -- that most of the vendors to the US military are pretty much full. There seems to be some demand beyond the vendors' capacities for this year. But they haven't indicated as to yet whether those orders will fall and roll over into 2017.

We won't know more for several months how 2017 is going to look. So, most of these contracts that we have do end at the end of this year.

Got it. Okay; that's helpful. That's it for me. Thanks, guys.

Okay, gentlemen, there are no further questions at this time. I'd now like to turn it back over to management for any closing remarks.

Okay, well thank you very much, ladies and gentlemen, for joining us on the call. We're going to work hard to have a better report for you in Q1. Thank you again.

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