Rocky Brands Inc (RCKY) 2019 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 2019 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Brendon Frey of ICR. Thank you. You may begin.

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, 2018.

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

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

Fiscal year 2019 was a tremendous year for our company on many levels. We successfully executed our core strategies, fueling strong momentum in our Rocky, Georgia and Durango brands as well as a robust growth in our retail channel. We invested in our brands and people and continued to drive operational excellence throughout our organization, and we strengthened a key competitive advantage by increasing our manufacturing capacity and capabilities.

A few of the financial highlights from the past year include: total net sale increased 7% to $270 million; retail sales grew 22% to $65 million; gross margins expanded 170 basis points; net income per diluted share improved 21% to a record $2.35; and our year-end cash position increased 53% to $15.5 million. Our strong finish to the year was a big contributor to these fantastic results. Our Q4 performance was highlighted by a 12% increase in net sales, our highest growth rate in some time, including robust gains in both our retail and wholesale segments.

The improvements in our top line, combined with meaningful gross margin expansion, drove a 41% increase in net income compared with the fourth quarter last year. I'll go into more detail about our sales results by segment, and then Tom will review the financials in more detail, after which we'll be happy to answer any questions.

Starting with wholesale. Sales were up 7% compared with a year ago, which marked a nice acceleration for the growth rate in our third quarter. We experienced nice gains with each of our brands. Georgia grew high single digits, thanks to continued success in key retailers like Tractor Supply, Boot Barn, Amazon and field accounts such as Coastal and buying groups such as Mid-States. A portion of the Georgia growth was driven by the shift in orders out of Q3 into Q4 that we talked about on the last call. Absent this shift, Georgia was mid-single digits for the quarter.

In terms of product, the introduction of the AMP LT Wedge and the made-in-the-U. S.A. wedge contributed nicely to the brand's performance and will continue to be a tailwind in 2020, along with the upcoming launch of the new Carbo-Tec LTX and our lightweight work hikers, Eagle Trail.

Moving to Durango. Sales up mid-teens versus last year, which follows a low double-digit gain in Q3 and a high single-digit gain in Q2. Durango's performance during the fourth quarter and the full year was fueled by the continued growth of legacy items, including the brand's popular flag boots combined with the successful new product introductions with our PX premium boots, collection and Maverick XP work segment. These products sold through very well across all account-based, led by Cavender's, Boot Barn, Tractor Supply, Academy Sports, Horsetown and Shoe Sensation, to name a few.

Specific to Q4, we saw a nice uptick at Cavender's through additional shelf space gains and new special makeup product that arrived in-store during December. At the same time, our focus on several Mid-States field accounts during 2019 is paying dividends. As a group, they were up 20% in Q4 versus the same period last year. Looking ahead, Durango is poised for another strong year in 2020.

Turning to the Rocky brand. On a combined basis, sales were up low mid-single digits, which included a strong increase in our commercial military bases, partially offset primarily by some softness in outdoor. While our one Rocky sales rep strategy, which allows us to better serve accounts with one point of contact for all categories, continues to get great support from our key retail partners, the warm fall and winter impacted demand for our legacy cold weather waterproof boots.

Despite the Q4 softness, Rocky Outdoor had a solid 2019, finishing up 7% over 2018. In 2020, we are focused on maintaining our momentum in outdoor and stimulating Rocky Work and Western business through a number of initiatives, including additional brand-building investments, launching enhanced in-store displays and working closely with our retail partners to execute improved sell-through strategies. It is essential that we drive consumers to look for the Rocky brand at retail through more effective point of purchase materials and digital and social media campaigns. For the Work category, these efforts will focus heavily on promoting our XO-Toe and Worksmart collections as well as the light industrial applications of our popular WorkKnit LX. At the same time, attention will be concentrated on our popular Ride FLX and Iron Skull boots as well as our new RIDE square-toe rubber boot in the Work-inspired western line.

With respect to our commercial military business, it was a great quarter as sales far exceeded expectations, driven by strong gains across all U.S. military exchanges: AAFES, NEX and MCX. MCX, which is the United States Marine Corps Exchange and our newest partner among the 3, grew at an outstanding rate as they began selling the recently certified Marine Corps tropical weather boot. We also continue to experience robust demand for our incredibly popular S2V boot throughout our military channels.

Now to retail, which delivered its third consecutive quarter of 20-plus percent growth. As a reminder, our retail segment has 2 components: our Lehigh Safety Shoe business, which is a B2B; and our B2C channel, which includes both our branded websites as well as sales through our online marketplaces.

Starting with Lehigh. Our CustomFit safety shoe model continues to demonstrate strong, sustainable growth, driven by new account acquisition, continued improvements in account retention as well as new operational process introduced to enhance our on-site iFit ordering events. On top of this, the addition of new styles from Rocky, Georgia, New Balance and Skechers as well as the implementation of new social marketing initiatives and promotional placements helped improve engagement and sell-through.

Turning to e-commerce, which had a fantastic holiday quarter. Our website continued to experience increased traffic and conversion as a result of the work we've done driving brand awareness and improving the shopping experience through investments in technology. We are also seeing great success expanding our direct-to-consumer efforts, our marketplaces, particularly Amazon. As you will recall, earlier this year, we gained Seller Fulfilled Prime status, which allowed us to make our entire catalog Prime-eligible and capture those consumers that not only shop Prime-eligible products on Amazon. This has been a huge win for us, and we are looking to take further advantage of this designation by implementing a strategy around selling third-party brands on Amazon.

Finally, military segment sales increased just over 10% in the fourth quarter compared with last year, and we finished 2019 on plan at $26 million. As we've previously discussed, this business has faced headwinds due in part to the recent expiration of some military contracts combined with the fact that Rocky is the only non-small business competing for U.S. military footwear contracts. On a positive note, we recently started delivering our general safety boots under the United States Navy contract that we received from Defense Logistics Agency in May, which will provide some relief in 2020. Based on the terms of the purchase agreement, the DLA has the right to purchase approximately $27 million of these boots through 2022.

In closing, I'm extremely pleased with how 2019 unfolded from a financial, strategic and operational perspective. I want to thank the entire Rocky organization for their commitment to executing our core strategies, pursuing operational excellence day in and day out. We wouldn't be where we are today without our all collective efforts.

Looking ahead to 2020. With a strong balance sheet, we are well positioned to invest in our brands and channels, pursue new growth opportunities and return cash to shareholders through our quarterly dividend and share repurchases. Our go-forward plan also includes further strengthening our manufacturing facilities in Puerto Rico and the Dominican Republic, which we view as important strategic assets. Both facilities are running more efficiently, thanks to the implementation of new technology and heightened focus on operational excellence. While in the Dominican, we have increased production levels to accommodate moving some production from our Far East partners to help mitigate the pressure on gross margins from the increased tariffs that went into effect late last year. Despite this temporary headwind, I continue to be confident that our ability to drive profitable growth and generate increased value for our shareholders over the long term.

I'll now turn the call over to Tom.

Thanks, Jason. Net sales for the fourth quarter increased 12.1% to $75.3 million, driven from healthy gains in each of our 3 segments. By segment, wholesale sales increased 7.3% to $49.3 million; retail sales increased 26% to $20.8 million; and military sales increased 10.4% to $5.3 million.

Gross profit in the fourth quarter increased 17.1% to $28.3 million or 37.5% of sales compared to $24.1 million or 35.9% of sales in the same period last year. The 160 basis point increase was driven by a higher percentage of retail sales, which carry higher gross margins than wholesale and military as well as higher wholesale, retail and military segment margins versus the same period last year. Gross margins by segment were as follows: wholesale, 34.5%; retail, 46%; and military, 32.2%.

Selling, general and administrative expenses were $21.6 million or 28.7% of sales in the fourth quarter of 2019 compared to $19.3 million or 28.7% of net sales last year. Income from operations increased 37.2% to $6.7 million or 8.8% of net sales compared to $4.9 million or 7.2% of net sales in the same year-ago period. Net income for the quarter was $5.1 million or $0.68 per diluted share, an increase of 41% compared to net income of $3.6 million or $0.48 per diluted share in the year-ago period.

Turning to the full year. Let me quickly summarize the highlights for 2019. Wholesale sales increased 3.7%, in line with our long-term growth rate for this segment. Retail sales increased 21.8%. Gross margin increased 170 basis points to 36.1%. Operating margin increased 110 basis points to 8.2% and EPS improved 20.5% to $2.35.

Turning to our balance sheet, which at the end of the year was in a very strong position, highlighted by cash and cash equivalents of $15.5 million compared to cash and cash equivalents of $10.2 million at the end of 2018. We were able to increase our cash position by $5.3 million, even as we paid out approximately $4 million in quarterly dividends and spent $1.5 million repurchasing approximately 54,000 shares of our common stock.

With respect to 2020, we are planning for another year of growth. We anticipate revenue increasing in the low single-digit range over 2019 levels led by our retail division, followed by wholesale. Following the industry challenges our military segment faced this past year, combined with the expiration of a multi-year contract midway through last year, we expect military sales to be down approximately $4 million. This guidance assumes our sales are impacted due to some inventory constraints beginning at the end of the first quarter as a result of delays at our Chinese manufacturing partners from the coronavirus outbreak. Without this impact, we anticipate revenue to grow in the mid-single-digit range.

In terms of margin, we are facing a pretty significant cost pressure early in the year as we work through inventory that was imported with the 15% additional tariff prior to the rollback to 7.5% that went into place February, 14% following the signing of the Phase 1 deal between U.S. and China. While we expect to be through this inventory in the second quarter, this temporary headwind will make it difficult to grow earnings in the current year. Once we're beyond this cost increase, we are confident we can resume our track record of delivering profitable growth on an annual basis.

That concludes our prepared remarks. Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from Jonathan Komp with Baird.

This is [Steve] on for Jonathan. I just wanted to maybe dig in a little bit more on the category performance and just ask if there was anything that really stood out in the fourth quarter. I know some others have talked about maybe work particularly being a little more choppy, whether that's weather being uncooperative or end markets like oil maybe being a little more volatile. So I just wanted some of your thoughts on the category performance in the quarter.

Yes. Thanks for the question. I would tell you, the only category for us that we had a small issue with was outdoor. We really had nice things happening in the work category. The western category was really strong for us. Again, our commercial military category was well. And then obviously, retail was really great. So outdoor was probably our only issue in Q4.

Yes. And to add on to that, Steve, we did have, we talked about in the last earnings call, a little bit of shift from sales from one of our key accounts into the quarter. So that helps us out in the fourth quarter, we talked about -- we expected that particularly after the third quarter. But I agree with Jason on this. We -- I think really, outdoor was the only piece that was impacted by weather.

And that shift was a work product.

Yes. It was a work product. Correct.

Great. And then I know you touched on it just a little bit, but I was wondering if you could dig in any more on kind of the expected impact from coronavirus on your supply chain. And what you're seeing and hearing and what potential offsets there are? How you're thinking about the impact as of right now?

Yes. So good question. It's something we're kind of evaluating on a day-to-day basis. I think that there's still a lot of unknown for us when it comes to that. If you think about our business, a lot of our business is at-once, right? And so we have a pretty good idea on where we stand with most of our Chinese factories now and where we're -- what delays we expect. But the other part of the puzzle here is figuring out what sales we'll have from at-once business. So I think we gave some guidance in my prepared remarks about the change from mid-single-digit to low single-digit overall growth for the company impacted by the coronavirus. So I think that's where we stand right now.

Yes. I think just to add to Tom's, it's definitely, at the end of Q1, going to be an issue and into Q2. I think the other part that people aren't talking about enough is the actual transportation. And the lanes coming from the Far East over here are going to get crowded in a big, big way. And so how are you going to fight to get your product from there to here? So I think there's another issue, right? It's getting the product and then getting it to the United States. So I think that's something that we're also focused on and trying to make sure that we have a good relationship working with our transportation company to make sure that we're getting that product.

Great. Maybe just one more for me. I was just wondering if you could talk a little bit more about some of the successes you're seeing in Amazon. And you mentioned looking at implementing some third-party brands. Just what that might look like? And how to think about the impact or the timing or anything you could share there would be really helpful.

Yes. So as Jason alluded to in the prepared remarks as well, we got that Seller Fulfilled Prime status middle of the year -- a little after the middle of the year. We didn't really start doing in any kind of meaningful way probably till the end of the third quarter, at the beginning of the fourth quarter. And so we really saw the benefit from that in the fourth quarter. As we talk about third-party brands, I want to kind of frame this a little bit in that our Lehigh business already sells a significant amount of third-party brands. And so we think that there's an opportunity for us to leverage our distribution center to benefit selling third-party brands on Amazon as well.

And so we've been pushing this with our third-party partners to get the right to do it on Amazon because there's really -- there's benefit to us from the Lehigh business as well. If we take a bigger commitment, we take some inventory risk on some third-party styles, ideally, we'll get better pricing there. We'll be able to control the experience on Lehigh. We'll control the dropship experience, and we'll have margin expansion with the more inventory that we have as well as pick up incremental sales on Amazon that we didn't have before. So we think it's kind of a win-win for us. It's a focus of ours. We have a great asset in our distribution center here in Ohio, and we want to continue to leverage it as much as possible.

And I'll just add on. I think from an expectation standpoint, it's going to be a slow burn. We are obviously a retailer from the Lehigh side, but we're a wholesaler. And so when we start asking people to let us have that product to sell on Amazon, they're kind of like, "What's going on there?" So we have to slow play it with them and tell them, "Look, we understand the difficulty of Amazon. We understand wanting to protect your brands, and we're not going to mess with that." So we're taking our time with it, but we think there's some opportunity, probably more in Q3 and Q4 by the time we get it kind of rolling. But I think from an expectation standpoint, it's going to be a slow burn for us.

(Operator Instructions) There are no further questions at this time. At this point, I'd like to turn the call back to Jason Brooks for closing comments.

Great. Thank you. Again, I'd just like to thank the Rocky team for a phenomenal 2019, and we look forward to a 2020 successful year, and let's go get them. Thanks.

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