Rocky Brands Inc (RCKY) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Rocky Brands' first-quarter fiscal 2016 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 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, they 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, 2015.

And I will 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.

2016 has gotten off to a challenging start due to a combination of factors that negatively impacted our wholesale segment. While we are disappointed with our first-quarter results, we continue to make progress executing on strategies aimed at further diversifying our business. We believe by shifting more time and resources to support our growth opportunities in the casual and fashion segments of the footwear market, we will reduce the impact of weather on our topline and drive more consistent growth in the years ahead.

I will share more about these exciting initiatives later in the call. But I first want to address our recent performance.

With the exception of our commercial military business, our wholesale business continued to be adversely impacted by the lingering effects of the unseasonable weather experienced by the majority of our markets during the fourth quarter of 2015. On a comparative basis last year, we carried the great momentum we had in late 2014 into the first quarter of 2015, thanks to frigid temperatures in January and February a year ago.

The dramatic swing in weather year over year, when we went from record cold to record warm temperatures, has created a larger material overhang in the channel as retailers initially purchased inventory to anniversary their prior year's sales performance. With demand not materializing as expected, accounts came into 2016 with excess product and have essentially suspended fill-in business during the first quarter to bring inventories in line.

These actions have a pronounced effect on our core Rocky, Durango and Georgia Boot brands, which rely heavily on at-once business during Q1. Indeed, our first quarter is the period we enter with the smallest future book and therefore the least visibility into our sales prospects.

On top of weather, we continued to experience weakness in areas of the country that earlier had benefited from the oil and gas boom. We've heard from many retailers that their overall Q1 business was [off] between 30% and 60% compared with a year ago.

Compounding all of this, our business was impacted by internal changes in certain accounts. For example, one retailer recently implemented an initiative to increase inventory turns and also reduced its open to buys by 10%. Another is shifting its mix more towards private label, which is negatively impacting our Georgia brand, while others are trying to reduce inventories by returning goods. We have only accommodated one account with such a return.

I should note that we believe the aforementioned issues, weather-related inventory, the impact of oil and gas in changes of key accounts, are systemic in our channels of distribution and are not at all unique to our portfolio of brands. Because of our reliance on fill-ins, particularly during Q1, we make it a priority to know the inventory position of our customers. Inventories have been incredibly high and consequently harmful to us for the past two quarters.

So, although we are disappointed with our recent results, we are optimistic that our core work, Western and hunting business will improve once our customers' inventories are back in balance.

Meanwhile, our commercial military business, which is part of our wholesale operations, grew nicely in Q1. Sales increased 30% to $5.2 million compared with the same period last year. Much of this demand is being fueled by the new regulations for uniform camouflage and the introduction of our new Coyote brand footwear. We expect the commercial and military business to remain healthy for the balance of this year.

Regarding our contracted business with the US military, sales increased 122% to $5.8 million versus $2.6 million a year ago. For the remainder of the year we've received orders for a delivery of another $31.4 million worth of combat boots. So in total, our sales of contract military boots should be at least $37.2 million in 2016, up 114% from $17.4 million for all of 2015.

Additionally, we are bidding on other contracts which will maximize our production capabilities until late this year and hopefully into 2017. Accordingly, our manufacturing folks are working creatively to improve our output so that we may fully benefit from the US military's current healthy appetite for boots.

Shifting to the diversification efforts I spoke to earlier, as you know, we have been focused on extending our business into larger segments of the footwear market. The goals of this initiative are, first and foremost, to grow our top and bottom lines. But they will also help us to reduce our reliance on cold, wet weather, while at the same time they will develop a more robust futures business to mitigate our reliance on at-once business.

To this end we are making headway broadening our lifestyle footprint with our Creative Recreation and 4EurSole brands. Beginning with Creative Rec, the response to the latest product introductions has been very positive. Looking at sales for the spring 2016 season, they were up marginally. However, our gross margin on the sales increased 1,400 basis points, a strong indicator that we are on track in terms of product design and relevance.

More recently, we announced an exciting new partnership with actor and musician Nick Jonas. He is collaborating with us in the development of a signature line of unisex shoes to be launched in January of 2017. In addition, he will make personal appearances at key retailer locations and will be featured in Creative Recreation's fall 2016 advertising campaign.

The brand has maintained a great following among fashionable males, and Nick is one of those rare celebrities who crosses over and appeals to both young men and women. His collection will be a focal point as we seek to build our women's business and continue to expand our brand into new retail channels.

As part of the partnership, Nick has identified his favorites or Nick's Picks from Creative Recreation's spring and summer 2016 line. These reflect his favorites silhouettes of the season and are highlighted on the Creative Recreation website.

Having Nick on board is already resonating with the Creative Recreation target consumer. And importantly, the trade is validating this initiative with increased commitment to the brand. His collaboration with our brand will also help distribution in Europe, where his cachet is equally strong and where the brand has a large following. One third of Creative Rec's total business is in the UK.

Looking ahead, we are in the final phases of development of our spring 2017 line. We are expanding the Creative Recreation offering to include women's fashion sneakers and men's and women's casual sandals as well as a broader range of children's footwear due to demand from our dealer and distributor network.

Now turning to 4EurSole line extension of the Rocky brand, we continue to have good success at building distribution. True to our strategy of having a brand presence wherever active women shop, our online partners now include BonTon.com, ShoeBuy.com, Kohls.com and FootSmart.com. And QVC just informed us they will be testing the brand this fall.

Since the start of the year, we have opened 20-plus new 4EurSole brick-and-mortar dealers and we are seeing reorders already with many of those customers on both our InspireMe clogs as well as our new sandal line that just launched in March.

In marketing the brand, we are focused on establishing awareness and engaging target consumers with meaningful content through social, digital and traditional media in supporting our dealer network. In Q1, we grew our social media engagement close to 40%. And to help launch our new sandal line we have engaged influential bloggers and started a multi-week campaign on Oprah.com and Oprah Winfrey Network television.

If you are interested in learning more about the brand, please visit 4EurSole.com. It's a very interactive site with great content and information that we continually update.

Just a few notes regarding our retail segment. As Jim will report, sales were down just slightly for the period year-over-year. However, we experienced a major timing issue with our largest customer, the New York City Transit Authority, where we benefit from a multiyear contract.

Last year, they outfitted their employees substantially in the first half of the year. This year the sales will be primarily in the second half of the year. Overall, we expect the sales to increase with the customer approximately 70% to $3 million this year.

We also shut down our operations in Hawaii and Augusta, Georgia, where we had stores and mobile operations. In Q1 last year, those operations accounted for approximately $300,000 of sales, which we were unable to anniversary. The only trucks we operate today are located in New York City to service the aforementioned contract.

Our emphasis on direct-to-consumer sales continue to bear fruit. In the quarter, sales increased 17% to $2.4 million. Given the headwinds overall, we are pleased with our retail results. We are able to maintain profit contribution even with the decrease in sales.

In summary, we are 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 start to 2016. While economic issues persist in certain markets and inventory levels in the channel is still above normal, we believe sales trends in our work, hunting and Western categories should improve as the year progresses, a trend we have typically experienced following a warm winter.

I will now turn the call over to Jim.

Thanks, David. Net sales in the first quarter were $57.5 million compared to $65.5 million in the corresponding quarter a year ago. By segment, wholesale sales for the first quarter decreased 21% to $40.2 million compared to $51 million last year. Retail sales for the first quarter decreased slightly to $11.5 million compared to $11.9 million a year ago. And military sales increased 122% to $5.8 million versus $2.6 million for the same period in 2015.

Gross profit in the first quarter was $18.9 million or 32.9% of sales compared to $22 million or 33.6% of sales for the same period last year. The 70 basis point decrease was driven primarily by the higher penetration of military sales, which carry lower gross margins than our wholesale and retail segments.

Gross margins by segment were as follows. Wholesale, 32.2%; retail, 46.6%; and military, 13.7%. Selling, general and administrative expenses were $19.1 million or 33.3% of sales for the first quarter of 2016 compared to $19.6 million or 29.9% in the year-ago period. The $500,000 decrease in SG&A was primarily related to lower variable expenses associated with the decrease in wholesale sales.

Loss from operations was $221,000 compared to income from operations of $2.4 million or 3.7% of net sales in the prior-year period. For the first quarter interest expense was $135,000 compared to $165,000 last year. Net loss for the quarter was $191,000 or $0.03 per diluted share compared to net profit of $1.4 million or $0.19 per diluted share last year.

Turning to the balance sheet, our funded debt at March 31, 2016 was $21.6 million, a decrease of $15 million or 41% from $36.7 million at March 31, 2015. Inventory at March 31, 2016 was $84.5 million compared to $83.1 million on the same data year ago. The slight increase in inventory year-over-year was driven by the buildup of raw materials ahead of the ramp-up in military footwear production.

Operator, we are now ready to take questions.

(Operator Instructions) Mitch Kummetz, B. Riley.

Thanks for taking my questions. I've got a handful. So let me start with backlog.

I would imagine that you have a fair amount of your fall 2016 orders in hand right now. Can you speak to that all, in terms of what that looks like?

It's looking fairly good in our work category, in particular. Western is a little soft. Hunting is also soft. The other categories are pretty flat with where we were last year.

And I think, Mitch, what we are seeing -- really, I think we should consider the part that's emotions and psychology is playing to what's going on right now. And particularly with our smaller customers, of which we have thousands, that play in the cold weather market, they expected to have this banner year during fall/winter 2015 and they didn't even really come close.

So, many of them are not only dealing with excess inventory, they have significantly reduced cash flow. And so, in many cases this is not just an open-to-buy problem for that, it's an open-to-flow problem. But knowing that a lot of it is emotional, we've seen this before, when their business improves we will see our fill-in business improve and also see future orders improve.

But we have seen some improvements in the business in April, although three weeks isn't a trend. But we feel better about anniversarying April and May. We really see that as a possibility.

But as we approach fall, we see order dates being pushed much later than they have been in the past. So orders that we usually have for June and July have moved into August and September. We think that the -- and we are seeing this with larger accounts also, that customers are hedging, playing defense just in case they are surprised by another record long winter.

But I think we are seeing the business improve right now compared to what it was like, particularly in February and March.

Okay. And your business obviously skews more towards fill-in orders and pre-books, anyways. But you mentioned the large overhang, inventory overhang on the channel and how that impacted your business this quarter. Is there much opportunity this late in the season for retailers to continue to clear inventory? Or do you think that there has been a lot of product that has been packed away? And if there has been a lot of packaways, does that then encumber your opportunity to capture some fill-ins as you move into the back half of the year? Or how do you view all that?

Well, like I said, yes, you are right. We know, particularly in the -- we know that larger accounts can't pack away like they used to. So they've cleared a lot of the goods. We know a large part of our business is done with smaller accounts, and they do pack away and they have packed away. And we are seeing, as I said, in our hunting business a reduced order book.

But we do believe there's opportunity, once our retailers experience better sales and better cash flow and they are feeling a lot better about everything.

And so I know -- I think, on the last earnings call, you provided preliminary topline guidance for the year. And granted you have limited visibility, but I think, at the time you are seeing high single-digit revenue growth. It sounds like your projection on the contract and military business has gone up, I don't know, maybe like $6 million.

So when you roll everything up where your crystal ball stands today, what are you looking in terms of your topline expectations on the year?

So Jim and I have done a lot of work on that, particularly the last three days. Jim, why don't you go ahead and comment on that?

Yes; I think that with the new increase in military sales, and this is total sales, not by segment, we feel like we will be more up in the mid-single-digit range then higher-single-digit range, more around the 5%, as we see it right now.

Okay. And then --

For the year.

Right.

And I think that on the wholesale, particularly, side we will continue to be a little bit challenged here in the second order until we move into third quarter and fourth quarter.

Okay.

But overall.

And it sounds like relative to what you're thinking was a few months ago that you now expect more military sales, maybe less wholesale. From an earnings contribution standpoint, did that mix shift -- is that a favorable mix shift? Is military -- I know military carries a lower gross margin but there's not a lot of SG&A tied to it. If all of a sudden now you are expecting to do more military sales versus wholesale sales, does that actually help from a profitability standpoint? Or does it hurt you?

No; I think it's probably a little bit -- hurt us a little bit in the fact that it does have a big profit contribution because it doesn't have any SG&A expense. But when you look at the gross margin that we earn on wholesale and retail, less the variable SG&A that we have, that's a little bit higher than our 13% plus that we get on our wholesale -- on our military products.

So if we didn't have any fixed SG&A, yes, it would be a positive. But unfortunately, the fixed SG&A that we have in our wholesale and retail businesses doesn't go away with a decrease in sales. So it will hurt us some.

Okay. And maybe my last question -- just on Rocky 4EurSole, can you just remind us how big that business is maybe as of last year, where does it stand from a profitability standpoint and any growth targets you might have for that business for this year or beyond?

Yes. So our plan is -- in our current plan it's at $1 million in sales, which is obviously de minimis. However, you are familiar with this market and how dynamic it can be if we have the right dog food. So we think we've got a great story here. It's resonating exceptionally well, and we think that we can do that $1 million. And if we can do $1 million, there's no reason why it won't be $3 million to $5 million the following year.

Got it. All right. Thanks, guys. Good luck.

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

If I could first just ask a question about the wholesale business, I know when you are talking about the order patterns you used words like emotions in terms of how retailers plan the business in the back half.

I'm just wondering how you plan your business in terms of the level of fill-in inventory and reduction that you might have ready if you do get more normalized weather patterns and just how you view that dynamic overall.

Yes. So what we have done in the past, Jonathan, is not -- is depending on the insulation factor. So heavily insulated boots, 200-400 grams and above, we only buy what we book, what we sell. Or we only make what we sell. And on those that have a longer season on either end of the really cold weather, the 200 and 400 grams boots, we will sometimes by 105% or 110%. So the bottom line is there isn't a lot of upside, once we get into the season, to capture something that's moving extremely well.

Okay, got it. That's helpful. And then just a bigger-picture question -- I know you have talked several times about the shifting of resources in the casual and fashion side of the business.

Can you maybe just help conceptualize internally what that means in terms of resources and what you are applying to casual and fashion versus what you previously were, and maybe how you think about how fast that business could start to ramp? I know you've got a lot of initiatives going on there, but any help there would be definitely helpful from our perspective.

So, obviously in birthing something or rebirthing something like we are doing with Creative Recreation, there's a lot of work and investment in product developments and (inaudible) patterns, those kinds of capital investments along with the advertising expense, obviously, that we incur once we get the stuff to market, to help it sell through.

But in terms of a return on those expenses and investments, the plan is for it to be very minimal for Creative Recreation this year but for it to be marginally profitable. We are spending aggressively now; with a guy like Nick Jonas, you know, is a very popular guy and his services don't come cheap.

And with respect to 4EurSole, as you probably heard earlier when we were answering Mitch, we plan sales there to be $1 million. Obviously, with everything that we are putting behind that, that will be a loss of profit, be a negative traffic contribution. But we believe that it's a category of footwear that is growing and can be -- and we have a future there.

And it looks like we've got some product that's performing at retail. We've gotten it placed with some great retailers and it's selling through pretty well.

So we are excited about both of these brands and the line extension and that Rocky 4EurSole is, we believe, a good platform to grow in the future.

Great. And then, David, as you continue to get some wins on the contract military side, any updated thoughts to your thinking, you know, the sustainability of some of those contracts, if they could become annual type contracts or if what you are seeing now is more of a one-time bump up and then back to a normalized level for that business, or just any perspective on the sustainability there.

From what we are hearing -- there seems to be a great need here. And when we bump that need up against what we know about people who play here in terms of manufacturing these kinds of boots, we think there isn't really enough capacity to meet the military's needs in the short term.

Many of these contracts are multiyear contract; they are usually four- or five-year contracts that renew annually. So we're hopeful. We think that we can get a little bit more this year, maybe; and as we swing into 2017 we are feeling really pretty good about 2017 also.

Okay, great. And then maybe two last ones from me for David or for Jim -- just, first, any thoughts on the timing and the rationale for the buyback authorization? And then, secondly, I noticed in the 10-K I think there was a decline in the total headcount for the Company. And I'm wondering if you could just provide any color with (technical difficulty).

With regard to the buyback, we are actively seeking stock out at this point; we have that in place. To date, we haven't bought any back. We had a program in place that we could buy in the closed period. Unfortunately, we weren't able to buy any of that back (technical difficulty). So we will continue on with that program, provided we can buy it back at a value that we feel is appropriate.

With regard to the headcount reduction, most of that headcount reduction came in our facility in the Dominican Republic, where our production was down some from where it was the year before. So that's where most of the reduction in headcount came from.

Okay, great. Very helpful. Thank you, guys.

(Operator Instructions) There appear to be no further questions at this time. I'd now like to hand the call back over to management for closing remarks.

Okay. Well, we thank you for your time. We'll be working hard here over the next quarter to increase sales and meet targets. Thank you for joining us today.

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