Rocky Brands' (RCKY) CEO David Sharp on Q2 2014 Results - Earnings Call Transcript

| About: Rocky Brands, (RCKY)

Rocky Brands, Inc. (NASDAQ:RCKY)

Q2 2014 Results Earnings Conference Call

July 23, 2014 4:30 PM ET


David Sharp - President and CEO

Jim McDonald - Chief Financial Officer


Mitch Kummetz - Robert W. Baird


Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands Second Quarter Fiscal 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I would like to remind everyone that this conference call is being recorded.

And I'll now turn the conference over to Mr. David Sharp, President and Chief Executive Officer. Thank you Mr. Sharp. You may begin.

David Sharp

Thanks Manny and welcome everyone. On the call with me this afternoon is Jim McDonald, our Chief Financial Officer who will read our Safe Harbor Statement.

Jim McDonald

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 any such statements.

For a complete discussion of the risks and uncertainties, please refer to today's press release and reports filed with the Securities and Exchange Commission including our 10-K for the year ended December 31st, 2013.

I'll now turn the call over to David.

David Sharp

Thanks Jim. We are delighted to deliver second consecutive quarter of strong double-digit growth. Revenue increased 16% to a record $68 million. Our wholesale business grew 24%. This is the second consecutive quarter above 20% and the growth included 17% gain for our legacy brands.

We believe our momentum is being fueled by positive internal response to our broader, more compelling, more innovative footwear that we’ve introduced over the past several seasons, expanding our sharp space with existing accounts and opening up new distribution.

This is evident in our three major categories, work, western and hunting, each of which increased double digits over a year ago. At the same time, sales trends in our commercial military and duty businesses accelerated over the fourth quarter. There is pent-up demand in channels following the government headwinds in 2013, which is driving strong replenishment order and expanded distribution for our products.

Many of our major retail partner entered the second quarter with much clean inventory level compared with year ago (indiscernible) that fuels strong sales of the boots in late 2013 and early 2014. This was especially true in our largest category, work, which posted sales being 20% and 18% in the last quarter of 2013 and the first quarter of this year respectively.

Well, temperatures were warmer and dry in the second quarter, we continue to experience positive response with several of our new work (indiscernible) Georgia and Rocky Brands, helping drive 6% gain for the category over last year. Georgia’s performance was highlighted by our new Homeland series that we introduced late last year ahead of schedule based on retail requests.

Selling and sell-through of this product line features an extremely flexible but normal (indiscernible) that exceeded projections. And with a solid inventory position heading into the back half of the year, we expect the current growth trajectory to continue. Overall, Georgia is receiving great support from the (indiscernible) industrial safety distributors and in key account such as Tractor Supply which is on pace of a solid growth with the brand as well as new distribution at Academy Sports and Fred Myer to name a few.

Regarding Rocky branded work boots, sales were driven by the highly anticipated delivery of our new elements collection. This is a trade-specific footwear designed for the different trades and the elements they encounter in the specialty. We have four differentiated products, one each for those who work with wood, with brick and block, with (indiscernible). This (indiscernible) products (indiscernible) great support reflecting great solid results.

Our new big subsidiaries of work boots made an extra large size of (indiscernible) also contributed to the categories overall performance. In addition, the business is being supported by the ongoing expansion of our everyday best selling (indiscernible) collections throughout the industrial work channel.

Turning to western, where our sales momentum accelerated in the second quarter as demand for the Durango brands drove a 26% gain for the category over last year. This was one of the best quarters for Durango since we had (indiscernible) brand as part of the EJ Footwear acquisition in 2005.

Shipments were up meaningfully at all major accounts including Amazon, (indiscernible) new account for the brand and Tractor Supply whereas you’ll recall from the last earnings call, we were in the process of expanding our shell space to a new seeding program that will see our (indiscernible) more than double from 2 to 5 in the quarter this year.

We also saw nice increases with several of our partner range accounts. What’s especially encouraging about Durango performance is the fact that it’s coming on top (indiscernible) year ago and the year before that demonstrating the growing strength of the brand and the growing popularity of the western lifestyle market.

Now to Rocky Hunting which had one of its strongest quarters in sometime, the sales increased approximately 55% from a year ago. The response to several of our new products has been fantastic which had us excited as we get set for the start of hunting season in September.

In 2014, we introduced updated styles from our heritage rich (indiscernible) stock collection that includes our traditional installation, waterproof and protected toe features along with great comfort that are compelling value proposition.

The other standout collection before 4/14 is our (indiscernible) innovative, lightweight rubber and laceup boot that are being carried (indiscernible) national accounts such as (indiscernible) along with several (indiscernible) across the (indiscernible).

Looking at our commercial military business, that posted the second largest (indiscernible) for the second quarter. Sales of flagship boot the S2V along with growing contributions from our C4T garrison boot and our most recent product introduction to C5 Combat Boot helped drive a 30% increase over the year ago period. We continue to experience solid sell through in the Army and Air Force exchange channel and we’re pleased to announce we recently reached an agreement to supply next comp.

U.S. Navy’s (indiscernible) presents us with a large (indiscernible) opportunities with the back half of this year (indiscernible) a challenging 18 months due to sequestration efforts and troop draw downs. The military market has stabilized and the outlook for the next few quarters appears positive. Adding to our optimism is the developments of our S2V jungle boot (indiscernible). Based on the successful outcome, the boot has the potential to be selected as the premier jungle boot due to jungle operations.

Our international division also posted solid gains during the second quarter. A good portion of the increase came from Canada as we continue to make inroads building distribution and awareness for our brands. We are also having success outside North America, primarily through new distributor agreements covering the U.K., Europe and the Middle East.

Finally with regard to the newest wholesale brand in our portfolio, Creative Recreation, we are still working through some of the supply chain changes that impacted the business prior to the acquisition. That said, we feel confident we are on top of the operational issues and the brands remain on track to hit the sales and profit contribution we budgeted for the back half of 2014.

Turning to our retail segment, sales were up slightly as our initiative to drive more volume to our direct to consumer e-commerce channel continues to take hold. As you recall, we’ve recently transitioned several of our branded websites to Demandware, a leading e-commerce web-based software that has increased the speed of functionality of our sites. In the next few weeks we will be ready to implement responsive designs, which will optimize the viewing experience of our sites across the wide range of devices from mobile phones to desktop computers.

These enhanced features will improve the overall consumer experience and improve conversion rates and result in higher product. Our growing web direct business has helped us to offset the plan decline of our legacy Lehigh business, which in the second quarter was down due to the fact we had 10 less mobiles stores in operation. We know only operate three mobile stores.

In the meantime we continue to make good progress recapturing these sales through our Custom Fit kiosks branded websites, which provide us and our customers an easier, more efficient way to transact with business. Year to date we placed over 400 kiosks in the field and we remain ahead of schedule to have 750 deploy by the end of the week.

To summarize the quarter, it was characterized by strong sales trends in our wholesale business across every category. We believe our performance year-to-date is the result of the investments we made in our sales and marketing and product development platforms, and we are confident that they should continue to yield positive returns over the near and long term.

I will now turn the call over to Jim.

Jim McDonald

Thanks, David. Net sales for the second quarter increased 15.8% to $68.8 million, compared to $59.4 million for the corresponding period a year ago. Wholesale sales for the second quarter increased 23.7% to $56.7 million, compared to $45.8 million last year. The $10.9 million increase was driven by a 16.8% increase in our legacy brands and the contribution from Creative Recreation, which we acquired in December 2013.

Retail sales for the second quarter increased to $10.1 million, compared to $9.8 million a year ago while military segment sales decreased to $2 million versus $3.8 million for the same period in 2013.

Gross profit in the second quarter was $22.6 million or 32.8% of sales compared to $20.3 million or 34.2% of sales for the same period last year. The 140 basis points decrease was driven by a combination of factors. They included lower wholesale margins due primarily to the seeding program attractive (indiscernible) in the first quarter. As a reminder, we expect this tailwind to ease as we get into the back half of the year.

Second quarter gross margin were also down due to our shift to the web-based retail platform, which carries lower gross margins than our previous mobile store structure and lower operating expenses as well.

Selling, general and administrative expenses were $20 million for the second quarter of 2014, compared to $17.4 million a year ago. The $2.6 million increase in SG&A was driven primarily by additional expenses associated with the Creative Recreation brand which we acquired in December 2013 and higher compensation expenses related to a midyear -- a new midyear bonus program that we implemented this year for the first time.

Potential annual bonuses under this new management incentive program as similar to the potential payment under the previous annual program. As a percentage of net sales, SG&A improved 30 basis points to 21% from 29.4% a year driven by leveraging expenses over higher sales. Income from operations was $2.5 million or 3.7% of net sales compared to $2.9 million or 4.8% of net sales in the prior year period.

In the second quarter interest expense was $225,000, up from $147,000 last year due to higher volumes related to the acquisition of Creative Recreation. Net income was $1.5 million or $0.20 per diluted, compared to $1.8 million or $0.24 per diluted share last year.

Turning to the balance sheet, our funded debt at June 30, 2014 increased to $43.4 million compared to $31.4 million at June 30, 2013, primarily due to acquisition of Creative Recreation. During the quarter we paid out $750,000 to shareholders (indiscernible). Inventory increased 6.5%, or $5.3 million to $86.4 million at June 39, 2014, which included approximately $2.8 million in Creative Recreation inventory, compared to $81.2 million on the same date a year ago. Based on our current sales momentum and fall order book, we feel comfortable with our inventory position as we head towards our busiest second half selling season.

Now I’ll turn the call back to David for some closing comments.

David Sharp

Thanks, Jim. It’s been an encouraging start to 2014. For several years we struggled to growth, but we’re able to improve profitability with cost cutting measures and debt reduction actions. The several trends now head in the right direction. We need to find the balance between driving the sustainable top and bottom line growth simultaneously. As we told you on our last conference call, we are convinced we have the right strategy in place to better leverage the investments we’ve made in the business to achieve this objective starting in the second half of the year and beyond.

Now, with another quarter under our belt, we reiterate that we will improve earnings year-on-year in the second half.

Operator, we’re now ready to take questions.

Question-and-Answer Session


(Operator Instructions) Our first question is from Mitch Kummetz of Robert W. Baird. Please go ahead.

Mitch Kummetz - Robert W. Baird

Yeah. Thanks and good quarter. I've got handful of questions guys. Now I want to start with speak about the year. I think coming after last earnings call, you’re talking sales guidance sort of in the 10% to 12% organic growth range and also like you're ahead of that pace to the first half. I’m just kind of wondering if there is any updates on that.

David Sharp

I think at this point Mitch, we want to -- we’ll stay in the 10% to 12%.

Mitch Kummetz - Robert W. Baird

Okay. And then how about the seeding program? Again, I think you’ve said that that should be incremental to revenues by about $5 million for the year, is that still kind of what you’re for out of that?

David Sharp

Yes, it is.

Mitch Kummetz - Robert W. Baird

And are there any other -- I mean, that’s probably the biggest piece in terms of incremental revenues hitting the P&L this year. Is there other staff as well in addition to that seeding program that we should be thinking about?

David Sharp

There are the key accounts, Mitch, that we’re experiencing pretty dramatic growth with, amongst those are Amazon and Groupon and Sporting Goods.

Mitch Kummetz - Robert W. Baird

Okay. And then on Creative Rec, again I think coming after last call, you’re talking about $18 million to $20 million in revenues from that business this year. Is that still kind of the plan or is that changed at all?

David Sharp

Yeah. I think based on our experience in the first half, what’s going on there is we’ve been very offended by late deliveries from our vendors. So in order to hold on for the sales, we had to in place of customers, we’ve really had to make concessions, fly a lot of product, decent pricing. So, based on all of this and based on what we know about delivering the (indiscernible) I think we’re looking more like 17 to 18.

Mitch Kummetz - Robert W. Baird

Okay. When should that improve? You talked about concessions and all that based on late deliveries from I guess, the manufacturers. When would you guys be able to kind of change that trend and really improve upon that?

David Sharp

Well, we’re out there right now selling (indiscernible) which we can deliver as early as September of this year.

Mitch Kummetz - Robert W. Baird


David Sharp

And we’re getting very favorably (indiscernible) on that. But I don’t think we’re far enough into the season to move off this $17 million to $18 million.

Mitch Kummetz - Robert W. Baird


David Sharp

(Indiscernible) 40 units a year. So we can turn to site quickly, once we have the right kind of structure.

Mitch Kummetz - Robert W. Baird

Okay. And then just a couple last questions. Jim, maybe on the gross margin size, could you just give us segment gross margins on the quarter?

Jim McDonald

Sure. Wholesale was 32%, retail was 41.3% and military is 15.3%.

Mitch Kummetz - Robert W. Baird

Okay. If I recall correctly, you were looking for or expecting some gross margin improvement in the back half and for gross margins to meet -- to maybe to be up modestly for the year, is that still kind of the plan at this point?

Jim McDonald

Yes. I think gross margin back half of the year will be up year-over-year particularly in wholesale. In detail, I won’t think they will be because we’re still anniversaring those mobile sale, mobile storage that had higher gross margin that (indiscernible). But I think that’s all we planned in the back half of the year (indiscernible) and military continue to be with military …

Mitch Kummetz - Robert W. Baird

All right. That’s all I have. Thanks guys. Good luck.

Jim McDonald



(Operator Instructions) We have no further questions in queue at this time. I’d like to turn the floor back over to management for any closing remarks.

David Sharp

Okay. Thanks Manny. We thank you for listening in this afternoon and your interest in Rocky Brands. Everyone here is focused on enhancing shareholder value and we look forward to reporting the improved results in 90 days from now. Thank you.


Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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