Rocky Brands' (RCKY) CEO David Sharp on Q4 2015 Results - Earnings Call Transcript

| About: Rocky Brands, (RCKY)

Rocky Brands, Inc. (NASDAQ:RCKY)

Q4 2015 Results Earnings Conference Call

February 11, 2016 04:30 PM ET

Executives

David Sharp - President and CEO

Jim McDonald - CFO

Brendon Frey - ICR

Analysts

Jonathan Komp - Robert W. Baird

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Fourth Quarter Fiscal 2015 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. [Operator Instructions]. I would like to remind everyone this conference is being recorded.

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

Brendon Frey

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, our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2014.

And I'll now turn the conference over to David Sharp, President and Chief Executive Officer of Rocky Brands.

David Sharp

Thank you, Brendon. Joining me on the call today is Jim McDonald, our Chief Financial Officer. As you saw from our earnings release, it was a challenging fourth quarter. We were up against a tough comparison as 2014's Q4 was a record sales quarter for the company helped by cold weather which drove strong demand for our work and hunting categories. Unfortunately this year we experienced the opposite conditions as temperatures were at or near record highs in many areas of the country. We are obviously disappointed in our top line performance and the impact it had on fourth quarter profitability.

I'd like to spend the majority of the call talking about the growth initiatives we are focused on in 2016. But I'll first begin with a brief review of the fourth quarter. Not surprisingly, the shortfall came from the two most weather sensitive areas of our business, from softer sales of our work and hunting boots. Both categories were down double digits on a percentage basis year-over-year as sell-through at retail was more modest than planned and impacted our replenishment business during the quarter. In addition to the impact warm weather had on the boot category in general we continue to feel the indirect effects of the slowdown in domestic oil and gas production in certain regions.

While we market only a few products specifically intended for that industry, the loss of jobs from the decrease in oil prices is having a ripple effect across many local economies throughout the Midwest, from Texas up to North Dakota, where a large number of our consumers live and shop. Unfortunately our western category, which was up through the first nine months of the year was not immune to the same challenges that affected work and hunting sales in the fourth quarter.

As a reminder most of the distribution of the Durango brand is limited to the core western market. The combination of warm weather, soft local economies where many of our Durango dealers do business and a very tough comparison contributed for the category's first quarterly decline in 21 quarters, after consecutive year-on-year increases. For the year Durango brand sales increased very modestly.

Weather has always played a role in shaping our results. We benefitted from favorable weather in 2014 when sales increased 17% and net income nearly doubled. And recognizing how dependant our core categories were on weather as well as other factors for the limited growth such as segment size, workplace changes and retail consolidation, for the past few years we've been developing new growth vehicles. They include extending our reach into new larger segments of the market namely casual lifestyle footwear, leveraging our domestic manufacturing facility to grow both our contracted and commercial military businesses and increasing the penetration of our direct consumer channel.

Based on the work we've done to-date, combined with our two areas of focus for 2016, we are cautiously optimistic, we can re-accelerate sales and earnings growth starting this year. Let me walk you through our strategies for achieving these financial objectives, beginning with the casual lifestyle opportunity. With respect to Creative Recreation on the two past quarterly investor conference calls, we’ve talked about the importance of spring '16. The spring '16 was the season where the creative direction of the brand was fully influenced by Rich Cofinco the original creative founder who we kept to rejoin the company in late 2014.

However, ahead of this spring, we have good news on the sell-through of several important accounts during Q4, most of which involves the sales of perfecting in holiday merchandise. Perhaps our best story is express.com where we are the other any branded footwear vendor. In October, November sell-throughs pushed 10% per week. In the December sell-throughs were 12% per week. Based on these results, we had a 20 store test time for fall '16. We saw similar sell-throughs at dsw.com and they have committed to distributing us on 40-doors in spring 2016 and 100-doors for fall '16. At Nordstrom we actually pushed 12% per week in December and we have expanding door counts and start counts promised for fall '16 also.

Some new Creative Rec customers we are shipping to [soon] are Foot Action in 20-doors and [indiscernible] online annually 7 doors. Internally to leveraging the relationship we enjoy to our Rocky commercial military business at [indiscernible] we will soon be in those outlets also where there is a concentration of millenial consumers are our consumer target. And imminently Creative Recreation will launch multi-tier celebrity ambassador program kicking off with a successful internationally recognized recording star. The partnership will activate throughout the year with a number of public appearances, social media mentions, red carpet events, encore events and more. The celebrity will also develop a unisex Capsule production inspired by the entertainer's lifestyle, which will be available at select retailers by holiday '16. This major investment is indicative of our confidence that the Creative Recreation project is on trend and we’re positioned to grow sales in 2016.

Now to Rocky 4EurSole, as the name suggests this product line is your comfort inspired and it gives us assurance that we are relevant, because our largest customer today is actually a 28-store chain retailer in Germany. In U.S., we have the primary goal to be at retail, where active women can soon shop, which means having a strong online presence. Just a few weeks ago, we’re able to go live on Kohls.com and by this quarter end we’ll be live on [footsnow.com]. For the past five months, we’ve also enjoyed a presence in growing business on [indiscernible]. And they have initiated an interest in the new store test of fall. In all this spring we will be distributed by 60 retailers here in the U.S.

This season marketing efforts have begun in earnest, our sandal launch includes a blogger initiative and other strong public relations campaigns. Additionally we’ve launched a consumer grassroots royalty program. While this is still a fledgling business, without meaningful sales we may committed to investing in this category with this initiative for the long-term.

Now to Durango, we are stepping expecting up our marketing efforts with the brand because we believe it has the potential for more growth. As our retailers work through their inventory issues related by the oil and gas dilemma, because of the way our brand resonates with the consumer and because of the on-trend relevance of our product offerings, we should survive any pairing of brand and style pairing. And because of our focus on the $150 to $200 price here we believe we may come through this temporary slowdown with more shelf space.

Turning to our military footwear operations as we announced last month, we received a new order from the U.S. military to produce temperate weather combat boots. The terms of the agreement include a minimum purchase amount of $13 million with the entire initial order projected to ship this year. When combined with our existing military contract, which we were awarded in 2012 we now have approximately $31 million in contract military sales scheduled for delivery in 2016, which represents a 78% increase over 2015 levels.

While gross margins on contract military sales are lower than our wholesale and retail channels, there is very little SG&A associated with this business. So operating margins are respectable. Further when we do meaningful volume like we did in 2015 and now even more or so in 2016, military sales provide the company with solid cash flow that we’re investing in other higher margin areas of the business. There are other [nuance] benefits for us with the contract military business that helps us to offset overhead costs through a better utilization of our company upgraded facility in Puerto Rico and perhaps more importantly it is great avenue to create strong brand loyalty with the soldiers who often purchase additional comeback footwear at their own expense through commercial military channels and potentially transition into our work, western and hunting categories during or post their military careers.

In a few short years our commercial military category has grown into a meaningful business, similar in size to our hunting category. While there have been recent headwinds for sales in changes in the Army's wearing of [pants] regulations our team responded quickly and launched our new Rocky Lightweight Boot during the back half of the year, which as you'll recall replaces our popular C4 and C5 lightweight boots. Along with the introduction of new versions of our flagship S2V boot which we recently introduced in response to the Army's issuance of a new operational camouflage uniform, we have solid momentum to start 2016.

Shifting now to our direct consumer strategy. We continue to make inroads leveraging the investments we've made in digital infrastructure over the past three years and we're learning the consumers who come to us to purchase Rocky, Georgia Boot, Durango and Creative Rec brands are extremely royal and return time and time again and purchase again. For example, in Q4, 53.9% of consumers coming to our Rocky branded site had purchased previously from us. One of the customer's purchasing made his first online purchase with us in October of 2007. And those returning customers on average they have purchased from us 15 times with an average order value exceeding a $130. Because of its appeal to the male millenial these statistics are even more impressive with our Creative Recreation consumer.

So, we remain committed to driving direct sales as much as possible and knowing that today many consumers research brands and their products online we are making further investments in our online capabilities. For example, we've just [launched in] the people who will focus on our wholesale dealers with websites. This move will work to ensure that our new online minimum advertised pricing policy is adhered to and that all of the [copy] brand logo and product inventories and video we have on our sites is on our dealers' sites as well. So that consumers have a properly [correlated] and consistent experience with our brands.

In summary we're confident that our strategies to expand our casual lifestyle business, grow contract in commercial military sales, and increase the size and penetration of our direct consumer channel will allow us to rebound from the challenging finish to 2015. While economic and weather issues persist in certain markets we believe sales trends in our work, hunting and western categories should improve as the year progresses, a trend we typically experienced following a warm winter.

I'll now turn the call over to Jim.

Jim McDonald

Thanks, David. Net sales for the fourth quarter decreased 17.3%, $65.3 million compared to $78.9 million for the corresponding period a year ago. Wholesale sales for the fourth quarter decreased 25% to $46.5 million compared to $62 million last year. Retail sales for the fourth quarter decreased slightly to $13.5 million compared to $13.7 million a year ago. And military segment sales increased 64% to $5.3 million versus $3.2 million in the same period in 2014.

Gross profit in the fourth quarter was $22.2 million or 33.9% of sales, compared to $27.6 million or 35% of sales for the same period last year. The 110 point basis decrease was driven primarily by a higher percentage of military sales which as David mentioned earlier had lower gross margins than our wholesale and retail segments. Selling, general and administrative expenses were $20.2 million for the fourth quarter of 2015 compared to $20.7 million in the year ago period. The $0.5 million decrease in SG&A was due to lower incentive compensation compared to a year ago.

As a percentage of sales, SG&A increased 480 basis points to 31% compared to 26.2% last year, primarily due to lower sales compared to a year ago. Income from operations was $1.9 million or 3% of net sales compared to $7 million or 8.8% of net sales in the prior year period. For the fourth quarter, interest expense was $167,000 compared to $246,000 last year. Net income for the quarter was $1.4 million or $0.18 per diluted share compared to $4.5 million or $0.59 per diluted share last year.

I will just quickly touch on the full year results. Net revenue for 2015 decreased 5.9% to $269.3 million which comes on top of the 17% increase we experienced in 2014. Full year net income was $6.6 million or $0.87 per share compared to net income of $9.8 million or $1.30 per share for fiscal 2014.

Turning to the balance sheet, our funded debt decreased 34.7% or $12.6 million to $23.7 million at December 31, 2015 compared to $36.3 million at December 31, 2014. During the year, we paid out $3.3 million to shareholders in quarterly dividends. Inventory decreased 9.7%, or $8.2 million, to $77 million at December 31, 2015 compared with $85.2 million at December 31, 2014.

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

David Sharp

Thank you, Jim. Before we open the call to questions. I want to thank our group of dedicated employees. You addressed our recent challenges head on and are working diligently to improve on our recent performance. There's a lot of positive energy running through our organization, which adds to my confidence level about what is in store for our company in 2016 and the years ahead.

Operator, we’re now ready for questions.

Question-and-Answer Session

Operator

Thank you very much David. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jonathan Komp from Robert W. Baird. Please proceed with your question.

Jonathan Komp

Hi, thanks guys. David or Jim whoever wants to take it. Maybe the first question I have just looking at the quarter itself. I think a few months ago you signaled that the wholesale revenue decline might be similar to the third quarter, which was down 12% in terms of the top line. And I’m just wondering, when you look at the shortfall versus that type of level maybe if could parse out how much you thought was purely related to weather? And then separately maybe how much is related to other factors like Durango being a little softer?

David Sharp

Yes. So I think that the weather definitely affected our work and the shortfall in our work and hunting business and that was around $9.5 million versus the year before. And then the western was more related to sort of the oil catch dilemma. But I think that weather also has an impact, the western boots are for all and we do see a spiked user in December when the -- as the weather gets colder. And that was -- western was about $4.5 million of the shortfall.

Jonathan Komp

Okay, great. And on that piece of just looking at Durango specifically. You sound maybe a little surprised by the shortfall. But is there anything you can point to more broadly with the western category from a passion perspective or any other broader trends that are a headwind right now or do you expect that business to come back pretty quickly?

David Sharp

We do expect the business to come back quickly. What we’re hearing from our core market retailers is that there soon is to be price resistance at $200 of a pair and that’s why in my prepared remarks I said I think that, if anything if there is a pairing of brands or styles, I think that we will weather that pretty well, because as we start to raise 150 to 180 to 200. So I think we are positioned well there. And there has been some talk about doing the job for us as far as western's considered in fashion. But we really don’t play there in terms of our distribution. We are widely distributed or mostly distributed in the core markets where folks -- where western is rather based on trends now. So I think that, we expect this to bounce back pretty nicely, particularly as we move through the year we’re going to be -- then we are showing frankly small comparisons.

Jonathan Komp

Okay, got it. And then maybe just thinking more broadly about the wholesale business. You sound pretty optimistic about some of the initiatives of Creative Recreation and I’m just wondering when you add all the pieces between the growth for Creative Recreation and then maybe some bounce back in the weather impacted categories. Do you think the wholesale business can trend back towards the 2014 levels that you had in terms of the top line for that or I’m just trying to gauge maybe what type of growth you might be anticipating for the wholesale business given all the moving parts for 2016?

David Sharp

What we’re looking at really [is grow wholesale for all] and internally, we’re focused on growing the business in the high-single-digits.

Jonathan Komp

Great, that’s helpful. And then maybe one more if I could just on the military business. Any thoughts on how to think about the new contracts that you have for 2016? I am just wondering, how much of that $31 million that’s contracted forward should be viewed as non-recurring if any or if that's kind of a new base line maybe beyond 2016?

David Sharp

No. This is what I know about that most of the vendors to U.S. military, are pretty much full. There soon is to be some demand beyond the vendors' capacities for this year, but we -- they haven't indicated us to yet whether those orders will fall, I know will go into '17. And we won't know more for several months, that's how 2017 is going to look. So most of these contracts that we have, do end at the end of this year.

Operator

Okay. Gentlemen, we have no further questions at this time. I'd now like to turn it back over to management for any closing remarks.

David Sharp

Okay. Well thank you very much ladies and gentlemen for joining us on this call this evening. We're poised to have a better report for you in Q1. Thank you again.

Operator

Ladies and gentlemen that does conclude today's teleconference. Thank you for your time and participation. You may disconnect your lines at this time and have a wonderful rest of your day.

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