Rocky Brands Inc (RCKY) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Rocky Brands First Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded.

And we will now turn the conference over to Brendon Frey of ICR.

Thank you, and thank you for 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, 2017.

I'll now turn the conference over to Mr. Jason Brooks, President and Chief Executive Officer of Rocky Brands.

Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer.

As I approach my 1 year anniversary as CEO, I would like to take a moment to express my gratitude toward our Board of Directors, our partners and especially our employees for helping put Rocky Brands on the path towards long-term success. Over the past 12 months, I've experienced exceptional support from all our stakeholders and witnessed first-hand our teams working long hard hours to strengthen our consumer connections and deliver improved financial results.

Our entire organization is committed to building on our recent accomplishments by continuing to execute the growth and profit improvement strategies currently in place. At the same time, we are implementing new growth initiatives to fuel our top line while continuing to strive for operational excellence across each of our 3 major segments, wholesale, retail and military, in order to further enhance profitability.

Now to our Q1 results, which represents a very good start to the year. Our performance was highlighted by solid wholesale and retail growth, our 2 highest margin segments, which along with expense leverage led to a 79% increase in operating income year-over-year and earnings that exceeded our expectations. I'll review the drivers of each segment top line. Then I will turn it over to Tom who will go through the numbers in more detail.

Starting with wholesale. Our heightened focus on our core brands in work, western and outdoor categories, along with our commercial military business continues to lead to positive gains across the board. There are several drivers of our recent success. First is the product. We have invested additional time and resources in bringing great product to the market that further advanced the company's long history of providing consumers with unbelievable quality, comfort and great value. Examples of recent product introductions that have sold in well include Rocky XO-Toe, Durango Mustang and the Georgia Carbo-Tec LT to name a few.

Second is retail support. We are working very closely with our bricks and mortar and e-tailer accounts to ensure that their assortments resonate with consumers and that they are in stock on key styles.

Finally, marketing. We've redirected funds to programs, primarily digital, that drive consumer engagement and generate greater awareness of our brands in the marketplace.

By brand, our Durango business was particularly strong. Increased velocity of the brand's collection led by the Rebel series for both men and women, along with additional shelf and screen space led to meaningful growth with our largest accounts such as Boot Barn, Cavender's, Academy and Rural King. Georgia Boot sales were up in first quarter with solid demand for new spring styles, partially offset by the shift in some deliveries out of January into December. We had a few key retailers pull forward shipments of core product to replenish their inventory position ahead of the new year following strong sell in the fourth quarter.

For the Rocky brand, the first quarter marked the beginning stages of our strategy to create a more holistic approach to managing the brand's work, western and outdoor footwear and apparel offerings. By establishing 1 Rocky brand advocate per account, we can provide retailers with better service and allow our teams an easier time cross-selling our categories, especially in the independent channel. While this process is just getting underway, early results are encouraging with solid gains for the brand across many of our brick-and-mortar partners. The reshaping of our sales force configuration continues to proceed smoothly, and we expect it will be fully implemented by the end of the year.

Staying with the Rocky brand, our commercial military division had an outstanding quarter. Things came together nicely for the businesses as U.S. government passed a 2-year defense spending bill in February, while at the same time our program aimed at expanding our domestic retail sales to the Army and Air Force exchange service channel and accelerating our international operations are gaining traction. With our recent investment in additional S2V boot inventory, we were able -- we were positioned to capitalize on the global opportunities, we believe, exist for this business.

Shifting to our retail segments, beginning with our Lehigh business, which continues to generate strong growth through expansion of its CustomFit model. Sales were up high single digits driven by key account growth and increased sales to existing accounts. We're very pleased with the business' current momentum, and we are investing in more sales people to go after more accounts and additional territories as we believe our differentiated service offering provides companies a better option for managing their safety shoe programs. We need to get in front of more buyers to highlight the advantages of Lehigh and adding staff will allow us to increase the number of calls and visits we can make on a daily basis.

I do want to point out that on March 31, Lehigh concluded a multiyear agreement with the New York Transit Authority. While this will be a headwind to sales until we anniversary the termination a year from now, it does allow us to take our remaining 5 mobile shoe centers off the road, which will lower operating expenses and benefit operating margins going forward.

Turning to our direct-to-consumer business. Our branded e-commerce websites collectively posted a double-digit sales gain in Q1. As this channel capitalizes on our recent investments aimed at increasing traffic and conversion while enhancing the consumer experience. This is included shifting dollars from our traditional advertising format to more digital programs, broadening the product offering and introducing web-only styles in order to entice consumers to shop directly with our brands. We've also provided guests with additional payment options such as PayPal, and we are exploring other ways to further improve both the checkout and return process as we look to build more loyal, repeat customers. To that end, we recently upgraded our warehouse management system and can now pick and ship all e-commerce orders placed by 2:00 p.m. Eastern that same day. In addition, we are investing in software that will allow customers to see exactly when their orders will arrive, which should further bolster online conversion rates.

Finally, as we expected, military segment sales were down in the first quarter as a couple contracts expired in late 2017. However, gross profit dollars were up as margins increased significantly driven by improved efficiencies in our Puerto Rican factory. Like we discussed on our year-end call, this segment faces some headwinds in 2018 in addition to expiring contracts. We plan to utilize the excess capacity to expand our commercial military business in the U.S. and overseas, while continually aggressively bidding on all available contracts that make financial sense for the company.

I'll now turn the call over to Tom.

Thanks, Jason. Net sales for the first quarter were $61.4 million compared to $63.1 million in the corresponding period a year ago, which included approximately $1.9 million of sales from the Creative Recreation brand, which we sold in the fourth quarter of 2017. Excluding Creative Recreation, sales were essentially flat year-over-year.

By segment, wholesale sales for the first quarter increased 3.2% to $40.4 million compared to $39.2 million last year. Retail sales for the first quarter increased 10% to $13.1 million compared to the $11.9 million a year ago. And military sales decreased to $7.9 million versus $12 million for the same period in 2017. Excluding Creative Recreation, wholesale sales were up 7.8% and retail was up 12.2%.

Gross profit in the first quarter increased to $21 million or 34.2% of sales compared to $19.7 million or 31.3% of sales in the same period last year. The 290 basis point increase was driven primarily by the higher wholesale and military margins, along with a lower percentage of military sales, which carry lower gross margins than wholesale and retail segments.

Gross margins by segment were as follows: wholesale, 34.7%; retail, 42.4%; and military, 17.9%.

Selling, general and administrative expenses decreased to $16.7 million or 27.3% of sales for the first quarter of 2018 compared to $17.4 million or 27.6% in the period a year ago. The decrease in SG&A expenses was primarily related to the reduction in expenses for the Creative Recreation brand, which, as I mentioned earlier, was sold during the fourth quarter of 2017.

Income from operations was $4.2 million or 6.9% of sales, an increase of 78.7%, compared to income from operations of $2.4 million in the prior year period.

For the first quarter, interest expense decreased to $47,000 compared to $90,000 last year as a result of the significant reduction in our debt year-over-year.

Net income increased 120% to $3.3 million or a $0.44 per diluted share compared to net income of $1.5 million or a $0.20 per diluted share.

Turning to the balance sheet. As of March 31, 2018, we had no funded debt compared to $5.2 million at March 31, 2017. Inventory at the end of Q1 2018 was $65.2 million, down 5.3% compared with $68.8 million on the same date a year ago.

I'll now turn it back to Jason for his closing comments.

Thanks, Tom. While we're very pleased with our recent performance and the company's current financial position, our sights are firmly on the future and focused on continuing to deliver enhanced profitability and greater value for our shareholders.

Looking ahead, we believe we can continue to post improved bottom line results on a quarterly basis, although not necessarily to the magnitude we experienced in the first quarter. This is because elements of the business such as international commercial military shipments can be lumpy and therefore, can have a greater impact in certain quarters. Over the remainder of the year, we expect our gross margin rate to be in the low-30% range and operating expenses on a dollar basis to be approximately in line with Q1 levels.

In closing, I want to, again, thank our employees for their great work in getting Rocky to where it is today. While the company recently celebrated 85th year in operation, I feel like we are just getting started and that the future has never been brighter.

Operator, we're now ready for questions.

(Operator Instructions) Our first question is from Jonathan Komp with Robert W. Baird & Co.

Jason, I want to first follow up on the comments you just had about timing shifts. And I just wanted to clarify where there any timing shifts into Q1 that benefited? Or are you more talking about potential lumpiness in the quarters ahead?

So I would say that there is more lumpiness coming forward -- going forward. In the quarters coming ahead, we may not see the same international military comes in -- add us to the really different rate than wholesale. Sometimes it's here, and then sometimes it's gone. And so it's just not going to be as smooth over Q2, 3 and 4.

Okay. And then maybe a few questions about the wholesale business. The first question, I know last quarter you quantified by segment the growth rates, and I'm wondering if you -- unless I missed it, if you could do it again across the western and work and the major segments for wholesale?

You got that, Tom?

Yes. Thanks, Jon. For our work category, we are pretty much flat to last year from a work standpoint. From an outdoor segment, we are actually up approximately 20%. And then western, where Jason had mentioned, we are really strong in the Durango brand, we are up 34%. Our duty segment -- our duty was around -- was actually flat with last year. And then commercial military, as Jason alluded to, was up -- significantly up 32% for the quarter.

Okay. And on the work side, the flat, I think it was up 10%-or-so in the fourth quarter so. And I think you talked about some shifts pulled forward into December from January. Was there anything else going on for the work business?

No, I really think that was one of the big shifts that happened for us in Q1, particularly in the Georgia brands. There was just quite a few customers that wanted their product earlier and who are we to tell them no.

Yes, certainly. And then similar question on the western side. I don't think you quantified the growth in Q4. You just said double digits, but 34% seems quite strong. So do you have any more color on what's driving that and the sustainability?

So we're very excited about the western market. We are seeing some changing -- we are seeing some things change in the marketplace from more traditional western, right. So the fashion western business is still not good. But we're seeing some nice increases. And then we're also seeing it on our work western kind of stuff. So we've seen some key retailers engage us or us engage them in a very positive way. And so we're excited about what's happening there. That's a pretty strong quarter. So I don't know that we would see that kind of strength going forward. But we still think there is a lot of upside there.

Okay. And I guess, a bigger picture question on the sales. If I look at the last few quarters, kind of everything ex military had been pretty negative for a while leading up to most of 2017 but that inflected in the fourth quarter was up mid-single digits and that in the first quarter, it looks up pretty solid high single digits if you exclude Creative Recreation. So it's clearly an improving trend there. So I'm curious how you think about those businesses combined and the growth potential as you look forward?

So I just want to make sure I understand the question, Jon. So you are just asking from our wholesale business, we saw a little changing Q4. We're seeing a little better changing Q1. Do you think that we'll continue to see that, is that the basic question?

Yes. Same with your retail. I mean, I was thinking that those 2 combined so everything, excluding the contract military business is inflected?

Yes. I mean, I think we're continually want to be cautiously optimistic. We believe that our products is right. We believe that our relationships with our retailers and then from a retail standpoint is strong. And so we still think that we can continually increase. But we are still in a very functional business. It's not a fashion business. So I don't think you're ever going to see this thing take off in double-digit kind of increases. So I think this mid-single-digit increase we think we can maintain. Q1 was pretty strong though. Q1 was pretty strong.

Jon, I wanted to correct you on something real quick too. I got my lines crossed up here when I give you that western number. We were not up 34%. We're actually up 8% -- a little over 8%. So sorry if I misspoke there.

Okay. 34% (inaudible).

A big difference.

It seems like (inaudible) again, yes.

Yes. 8%, nothing to sneeze out though. And then just a couple of cost and margin-related questions. SG&A, I just wanted to clarify, so it was $16.7 million in terms of the dollars in Q1, and you said that would be a good run rate for the full year on average for the back three quarters. So on average, those should be about $16.7 million, is that right?

I would say, it'll probably come in a little higher than that. But yes, that's a good run rate.

Okay, great. And then on the gross margin, I know you are closer to the mid-30s in Q1 and there is obviously a lot of shifts with the segments that can happen. But any reason why you won't be able to sustain? I think you just called out low-30% range going forward, but what's the thought there?

Yes. Go ahead.

So I was going to say from our -- for the first quarter, we obviously -- we didn't -- came in really strong for Q1. And I think those higher margins were generated by some of our international commercial military sales. So given the lumpiness, as Jason alluded to, we're not expecting to see quite that rate in the quarters moving forward.

Okay. And maybe last one from me. Then just uses of cash. I know it's starting to build up on the balance sheet a bit. And you did authorize more of a repurchase program after the prior one expired. But do you think you'll get a chance to repurchase stock? Or kind of what's the thinking about best uses of the cash balance?

Well, I would hope we can't buy any stock back because it better go up. I think that's always an option, Jon. I think we do give -- we do have a nice dividend out there. And then I think we want always continually invest in the business. We want to find ways whether it's the Lehigh business or our core brands. And then if we were able to come across an acquisition that makes a lot of sense for us, then we would be in a position to hopefully be able to pull something off there. So I've always said it's never bad to have cash in the bank.

And I guess, to state my question a little differently, is there some sort of valuation sensitivity to your repurchase or your willingness to repurchase stock? Or how should we think about that potential?

I think from our standpoint, I mean, we're -- something we're constantly monitoring. I mean if you look back historically, we've kind of bought stock back in the mid-teen range. We're constantly evaluating it. So I wouldn't say there's a specific number that we're targeting.

(Operator Instructions) There are no more questions at this time. I would like to turn the conference back over to management for closing remarks.

Thank you, again, for the time. We're excited about where we're headed and look forward to 2018 and beyond. Thank you very much.

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