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Rocky Brands, Inc. (NASDAQ:RCKY)

Q2 2009 Earnings Call

July 27, 2009 4:30 pm ET


Brendon Frey - IR, ICR

Mike Brooks - Chairman and Chief Executive Officer

David Sharp - President and Chief Operating Officer

Jim McDonald – Chief Financial Officer and Treasurer


Analyst for Mitch Kummetz - Robert W. Baird & Co., Inc.


Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands fiscal 2009 second quarter earnings conference call. At this time all participants are in listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time.

(Operator Instructions) I’d like to remind everyone that this conference call is being recorded.

I will now turn the conference over to Mr. Brendon Frey of ICR.

Brendon Frey

Thank you. Before we begin, please note that today’s discussion 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 change, 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 the reports filed with the Securities and Exchange Commission including Rocky’s Form 10-K for the year ended December 31, 2008

I will now turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.

Mike Brooks

Thank you and thanks to everyone for joining us this afternoon to review our second quarter results. With me on today’s call are David Sharp, President and Chief Operating Officer and Jim McDonald, Chief Financial Officer and Treasurer.

Our second quarter sales results reflected the same challenges we, along with many of our peers, have been facing since the second quarter of last year. The difficult economic conditions continue to impact consumer demand and therefore our wholesale accounts are still being very cautious with their purchasing, choosing to place orders much closer to season until visibility improves.

In an effort to limit our potential risk, we too are being cautious with the level of product we are shipping several retailers which along with the lost sales from some bankruptcies in the first quarter negatively affected our second quarter performance of our wholesale business.

The environment is also impacting our retail division as accounts have been reducing their workforce and cutting their budgets in response to the economic slowdown. We knew starting the year that the first two quarters would be tough given the comparisons were up against.

From a sales and earnings perspective, the first quarter was in line with our internal projections. In the second quarter, sales were again generally on plan and we continue to do a very good job controlling expenses. However, to help drive some incremental purchases we incentivized many of our retail partners with reduced pricing on several styles during the quarter along with higher closeout sales of some obsolete product and higher manufacturing costs both at our company-owned facilities and third party manufacturers. This contributed to a 570 basis point decline in our gross margins and resulted in a slightly wider loss than planned.

While we have seen some signs of stabilization, we expected to begin benefiting from the stimulus spending earmarked for infrastructure projects by now, but that has not happened yet. The good news is we move into our peak selling season with operating expenses down nearly $6 million to date and better visibility and a greater percentage of our businesses in the second half of the year are pre-booked.

Based on our current shipping schedule, we are optimistic we can deliver improved profitability year-over-year in the second half of the year.

I will now turn the call over to David who will review each of our operating segments in more detail.

David Sharp

Thanks, Mike. Let me begin with our wholesale division where sales were $37.9 million compared to $42.5 million in the corresponding period a year ago. Within our work category which includes footwear under our own brands, Georgia and Rocky, and our licensed brands, Dickie’s and Michelin, sales were $22.5 million in the second quarter compared with $25.2 million in the prior year period.

As you can imagine, ever since the economy went into recession, the work footwear category has been a challenge for all retailers, both big and small. Our 10.7% decrease in the category appears to be in line with our customers and wholesale competitors’ experience and is in line with our expectations. This category heavily on [app once] orders.

While the majority of our retailers continue to carry the breadth in assortments of our brands, most of our retailers have cut back the depth of their model stocks of our products. They are choosing to rely on our inventory to replenish their needs on a just-in-time bases. Now that our retailers’ inventories are in line we expect that our sales will improve quickly when the economy recovers.

Turning now to the Western category, second quarter sales were down $0.5 million to $6.7 million versus $7.2 million a year ago. With respect to credit risk, Mike commented that we were being extra cautious with respect to our shipments to retailers with weak balance sheets. The Western channel is particularly challenging for us where most of our customers are very small and where we have just a handful of large customers. We are assessing risk daily with these customers to maximize business with them and lately we have been taken a very conservative approach, foregoing some potential business.

Now to our hunting category. Second quarter sales were $6.3 million, down 20% from sales of $7.9 million last year. We have some timing issues to report this quarter in this category. Over the past few years we have seen these retailers buy close to the hunting seasons. Their response to the economic conditions this year, we see an amplification of this trend plus last year in June we made a one-time off price shipment to a large customer which is impossible to anniversary.

For the year though, we are cautiously optimistic about making our internal sales plan for this category. At this point this year, we have a larger percentage of our planned sales shipped and booked then we did at the same time last year.

Now to international sales. As you know, as part of our longer term growth strategy. We are focused on the development of a network of European distributors for our brands. Despite the severity of the economic downturn in Europe and the challenges for our Baltic state partners with their embattled currencies, we remain vigilant in our commitment to the region.

Last month we announced that we had signed a multi-year deal with premier UK distributor of shooting sports equipment, Garlands. On August 15 we will commence shipping Garlands their apparel orders which will represent the large increase in business in the UK versus prior years. This past weekend Garlands showcased our products at CLA, the consumer show attended by 110,000 hunting enthusiasts in Warwickshire, England.

In mid-September we will be previewing our Durango and new Giant by Georgia lines at the [Mekamp] show in Milan, Italy with a view to further penetrate in Europe with lifestyle products.

Turning now to our retail division. As we discussed in detail on our last earnings call, we are in the process of restructuring our retail business model. This has involved developing a web-based platform that will allow us to conduct a much larger percentage of our transactions via the internet versus our fleet of mobile trucks. Due to this ongoing transformation which has included reducing the number of vehicles in our fleet and the number of storage facilities from which they operate, we have reduced our spread structure significantly.

We planned sales to be down year-over-year as our e-commerce initiative is still in its early stages of growth. That said, since January of this year, we’ve seen our sales from our website almost double, and they are now over 9% of our total retail sales versus 4.3% last year. Our strategy seems to be working. Our industrial and hospitality customers have positively responded to both the cost savings and the convenience of purchasing their safety footwear via the web. Second quarter sales were $12.3 million, down slightly from the first quarter and just below planned versus $16.2 million the year before.

I’ll now turn the call over to Jim who will review the financials.

Jim McDonald

Thanks, David. Net sales for the second quarter decreased 15.4% to $51.2 million compared to $60.5 million for the corresponding period a year ago. Gross profit in the second quarter was $17.7 million or 34.6% of sales compared to $24.4 million or 40.3% of sales for the same period last year. The decrease in gross margin was primarily attributable to higher closeout sales, lower retail sales which carry a higher gross margin, and increased manufacturing costs versus a year ago.

Selling, general, and administrative expenses decreased 13.4% or $2.8 million to $18.1 million or 35.4% of sales for the second quarter of 2009 compared to $20.9 million or 34.5% of sales a year ago. The decrease in SG&A expenses is primarily the result of reductions in salaries and benefits, freight, sales commissions, and Lehigh and mobile store expenses, partially offset by a $400,000 increase in the bad debt expense versus a year ago.

Loss from operations was $0.4 million for the second quarter of 2009 compared to income from operations of $3.5 million for the second quarter of 2008. Interest expense for the second quarter decreased 20.8% to $1.9 million from $2.4 million in the second quarter of 2008 as a result of lower borrowing under our credit facility combined with lower interest rates compared to the same period last year. For the quarter, we reported a net loss of $1.4 million or $0.25 per diluted share compared to net income of $0.7 million or $0.13 per diluted share in the second quarter of 2008.

Now turning to the balance sheet. Funded debt as of June 30, 2009 decreased 13.7% or $13.9 million to $87.5 million compared to $101.4 million at June 30, 2008. Inventory decreased $6.2 million or 7.3% to $79.3 million at June 30, 2009 compared with $85.5 million on the same date a year ago.

I will now turn the call back to Mike for some closing comments.

Mike Brooks

Thanks, Jim. As I stated earlier, we are in a good position to report improved profitability during the second half of the year driven primarily by the reduction of our operating budget and the expected leverage from higher sales volumes compared to the first six months of 2009. Gross margin should also rebound from second quarter levels as our Caribbean factory is now running at full capacity in advance of our peak selling period and the cost increase we received from some of our suppliers late last year have now modified.

We now anticipate that our top line prospects will remain challenging until early next year as any meaningful improvement in a retail environment appears a few months away. Therefore, in the near term, we will continue to focus on things we can control such as our expenses, inventory levels, the latter of which will help further reduce our debt levels and interest expense for the remainder of the year.

At the same time, we are developing new liens of innovative footwear for our traditional work, Western, and hunting categories that we believe will help drive future sales, particularly once economic conditions improve. Early response from accounts of several of our 2010 [thous] have been very encouraging.

We will also be introducing casual footwear under our established Rocky and Georgia brands beginning next year while at the same time targeting a more casual consumer with several of our Durango styles. This will allow us to go after new consumers and open new accounts including Big Box footwear chains and national department stores. The product will reflect our core message of durability and comfort and will be positioned with price points that offer the consumer a very compelling value perspective.

We thank you for your continuing interest and support and we now are ready to take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mitch Kummetz - Robert W. Baird & Co., Inc.

Analyst for Mitch Kummetz - Robert W. Baird & Co., Inc.

This is actually Kevin Kent calling in for Mitch. A couple questions here. First, you mentioned on the wholesale side that retailers are operating with leaner inventory levels. Do you guys expect that trend to continue into the second half here?

Mike Brooks

We think they will for the short term until their business improves, yes.

Analyst for Mitch Kummetz - Robert W. Baird & Co., Inc.

As far as backlog, I know you mentioned at the end of Q1 that it was up. Is that still up in the second half and how has that changed since you guys reported your Q1 earnings?

Mike Brooks

I believe the backlog to be… When we said that in Q1, we were focused on futures that had been booked for third quarter shipping and that was up against last year so historically over three quarters, we’re pretty much selling shoes every day and in our hunting category, those would be backlogged in futures and that’s really what we’re referring to. So to answer your question, backlog is no greater than it was the first three to six months of the year. They’re still playing it very tight to the vent, expecting us to have inventory upon their beck and call.

Analyst for Mitch Kummetz - Robert W. Baird & Co., Inc.

On the retail side, when do you expect to anniversary the transition from mobile stores to internet?

Mike Brooks

We really started the transition in October, November of last year in earnest.

Analyst for Mitch Kummetz - Robert W. Baird & Co., Inc.

As far as guidance, what’s expected in the second half sales trends to reach the improved profitability levels that you guys mentioned? How does that break down within the wholesale and the retail business? Also, should we be assuming a stronger SG&A decline in Q3 then in Q4 given the easier comparisons?

Jim McDonald

I think from the top line standpoint, we see sales being down in the back half of the year similar to where they were in the front half, maybe a little bit less only from the standpoint from the decline really started last year, particularly in fourth quarter in the sales. So both wholesale and retail, we look at those to be down year-over-year in the back half of the year. From a gross margin standpoint, we feel like we’ve got these increased costs behind us and we should be able to anniversary our gross margins in the back half of the year, both in third and fourth quarter and from SG&A we’ll see the declines we believe will still be relatively significant but you’re right, as we start to anniversary, they will not be as strong as they were in the first and second quarters.

Analyst for Mitch Kummetz - Robert W. Baird & Co., Inc.

While we’re on the subject, as far as manufacturing costs, are you guys expecting a decline in the second half?

Mike Brooks

Yes, especially in our Dominican plant. We started to gear that plant up with a lot of production later in the second quarter but it really wasn’t to the point that it could positively affect the second quarter. So we’re running at capacity currently.

Jim McDonald

Those expenses that we incurred that we recognized in the second quarter because of our FIFO accounting were actually generated late last year in the fourth quarter, particularly in December of last year, so our factories are running more efficient now than they were at this time last year and it also was not only our company-owned facilities, but also particularly as we resource a significant portion of our or all of our Western last year because of our problem with our vendor. We recognized some increased costs and those rolled out to the P&L in the second quarter and we weren’t able to take any price increases on those last year.


We have no further questions in the queue at this time.

Mike Brooks

If there’s no further questions, we thank you for listening in and we look forward to meeting with you after Q3. Thank you, operator.


Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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