Rock Brands, Inc (NASDAQ:RCKY)
Q2 2012 Earnings Call
July 24, 2012, 01:30 pm ET
Brendon Frey – IR
David Sharp – President, CEO
Jim McDonald - CFO
Mitch Kummetz – Robert W. Baird
John Sullivan – Olstein Capital Management
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rock Brands second quarter fiscal 2012 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 and 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 will now turn the conference over to Brendon Frey of ICR.
Thanks. 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 reports filed with Securities and Exchange Commission, including Rocky's Form 10-K for the year ended December 31, 2011.
I will now turn the conference over to Mr. David Sharp, President and Chief Executive Officer of Ricky Brands.
Thanks, Brendon. Good afternoon and thanks for joining us. With me on the call is Jim McDonald, our Chief Financial Officer. At the end of the second quarter, we faced a significant challenge as severe storms moved through Ohio and knocked out power to much of the state including our distribution center in (Logan).
As a result, we were unable to ship product for several days in late June and early July, which had a material impact on our second quarter results.
Approximately $2.5 million of wholesale and retail orders moved into the third quarter costing the second quarter approximately $0.06 in diluted earnings per share. Our team did a great job of getting those orders shipped once power was restored to make sure we didn't lose any sales.
Outside of this disruption, our second quarter performance was generally in line with our expectations, consistent with recent quarters in terms of what's driving our business.
We continued to experience gains in our wholesale business driven by demand for new western and commercial military products, which were more than offset by softness in our hunting segment.
With regard to our hunting category, as we said on the last call, we were pleased with the level of (pre book) coming off of a very mild winter. We've seen good response to new product introductions, most notably our new Rocky Athletic Mobility, or RAM, product line that targets a younger, more athletic demographic.
What we are finding out, though, is that many of our key outdoor retailers are taking product close to the start of the hunting season which shifted some sales out of the second quarter and into the third quarter compared with past years.
As the hunting retail landscape continues to consolidate and we have fewer small and medium-sized hunting boot customers, we believe our ability to enjoy meaningful sales in the category during the second quarter will continue to diminish.
With that emphasis on capabilities around inventory management, big box retailers do not have the appetite to take hunting products in advance of the season.
Having said that, should we experience a more normalized winter, that is if it is colder and wetter than last year, we think there is additional upside to the category later in the year.
Now to other categories where we are enjoying the success; as we detailed on last quarter's call, we recently began a new program with Tractor Supply, one of our largest national accounts, that included expanding to roughly 1100 doors with four styles, each of which is on a weekly auto replenishment program.
After the initial set, their footwear sales suffered from the drought conditions in the United States. But since the start of the recent rain storm patterns that have been sweeping across the Midwest, we have seen our sell through improve.
Over the past two weeks, our comp store unit sales have increased 17.3% versus the same period last year. We expect momentum to build in the second half of this year. The product mix is skewed to wet, muddy conditions and the all-store distribution will improve our brand awareness.
An area of our business that continues to see considerable improvement in demand is (Western). This is being driven by our Durango brand. And, in particular, in new products under our more fashion forward city collection, which is creating new distribution opportunities and lead to more shelf space with existing accounts where we already are experiencing results at retail.
Based on extremely strong bookings ahead of the fall season, we project ourselves in the brand to grow approximately 30% this year. Therefore, we expect the brands for management retail to build over the back half of the year and continue into 2013 when we introduce broader fashion (alliance) for Durango.
Another fast-growing area for us is our commercial military business. Building on the strength and popularity of our (F2V) product series, we are developing a larger sales base through product light extensions such as steel toe versions and wider distribution within the armed forces retail network of exchanged base stores with 151 locations globally.
The (F2V) was also recently adopted by the Naval expeditionary comeback command providing us with another growth vehicle for this relatively new venture. We have also bee experiencing increased demand for our C4Trainer, an ultra lightweight boot, which soldiers prefer to wear while on base and for travel.
And the armed forces (auto) base doors just expanded their assortment to include a test of the C4 Trainer in 15 stores.
We have the capabilities to meet the demand should the test go well and ultimately expand to all stores.
Further, in an attempt to improve product brands and product visibility in this after market military channel, we recently launched a new website, rockmilitary.com. We expect our sales for commercial military boots to improve some 40% this year.
Turning to our retail business where for the past two quarters we have been reporting improving profit contributions, even on lowest sales volumes as more and more transactions are executed by the web and we are able to take additional expenses (over) the business model.
As a percent of total retail sales, the (Western) direct business increased to 68% in the second quarter of 2012 compared to 48% a year ago. We currently operate 23 trucks. A year ago we were operating 49.
As we reported on the last call, with the transformation of this business substantially complete (technical difficulty).
Thanks, David. Net sells for the second quarter were $44.4 million compared to $52.3 million for the corresponding period a year ago. As David mentioned, approximately $2.5 million of sales shifted out of the second quarter into the third quarter as a result of the temporary shutdown of our distribution center in late June.
Wholesale sales for the second quarter were $34.7 million compared to $40.8 million last year with the decline driven primarily by the delayed shipment and softness in our hunting category.
Retail sales for the second quarter were $9.1 million compared to $10.9 million a year ago. Military segment sales were $0.6 million in both periods.
Gross profit in the second quarter was $15.4 million or 34.6% of sales compared to $20.6 million or 39.4% of sales for the same period last year. The 480 basis point decrease in our gross margin was primarily driven by increased product cost, resulting from the manufacturing variances in our company's production facilities a year ago (inaudible).
All right, so what happens when we're cut off?
I don't know. We'll have to call Brendon on his cell.
Operator? (Technical difficulty)
… resulting from manufacturing variances in our company's projection facility versus a year ago.
This year's gross margins were in line with our expectations. Selling, general and administrative expenses climbed 11.6% to $14.9 million or 33.5% of net sales for the second quarter 2012 compared to $16.9 million or 32.2% of net sales a year ago.
The $2 million decline was primarily due to lower compensation expense, lower operating cost of our retail business and lower advertising expenditures.
Interest expense for the second quarter decreased to $0.1 million from $0.3 million in the same quarter of 2011 due to lower borrowing during the period versus the same period last year.
Our effective tax rate for the second quarter of 2012 was 35.8% compared to 35% in the second quarter of 2011.
Net income was $0.2 million or $0.03 per diluted share compared to net income of $2.3 million or $0.30 per diluted share. As outlined in our release, the shift in sales out of the second quarter related to the power outage equated to approximately $0.06 in diluted earnings per share.
Turning to the balance sheet, our funded debt of June 30, 2012 was down $9.6 million or 24.3% to $29.9 million from $39.5 million at June 30, 2011.
Inventory at the end of the second quarter 2012 was $74 million compared to inventory of $74.4 million at the end of last year's second quarter. Compared with a year ago, inventory units were down 13.5% offset by an increase in cost per unit.
I'll turn it back to David for his closing comments.
Thanks, Jim. At the start of 2012, we viewed the third quarter as the key growth driver to the year based on several new programs and initiatives. With the shift in sales from Q2 to Q3, our annual mix of sales and profits will now be even more heavily weighted to the third quarter. In fact, in Q3, we expect sales to increase in the mid teens percentage-wise.
We also expect our retail sales to improve versus the decline we reported in the second quarter with sales projected to be flat during the remaining six months of the year. We do not expect any military segment sales for the remainder of 2012.
With regard to gross margin percentage on a segment basis, they should be similar to last year's levels while total SG&A expenses on a dollar basis will increase approximately $3 million on the improved sales and investments in new product lines.
So with respect to earnings per share, in the second half of this year, we anticipate a 20% plus increase versus the same period a year ago. To be clear, we will make up the first half of earnings shortfall and exceed last year's annual earnings of $1.60 per share.
And longer term, we are even more excited about what we believe lies ahead for our brands and our business. On top of the growing momentum in the (Western) fashion channel and expected increases in commercial military and work boot business, we believe our efforts to penetrate both the healthcare industry and broader outdoor footwear markets will begin to yield positive results beginning in 2013 and, finally, can help mitigate some of the vulnerability from our changing hunting business in the first half of the year.
We look forward to updating you on our progress when we report third quarter results in October. Operator, we're now ready to take questions.
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Your first question comes from the line of Mitch Kummetz – Robert W. Baird.
Mitch Kummetz – Robert W. Baird
Guys, let me start with the power outage. I mean, you talked about losing sales, $2.5 million of sales in Q2 and I guess I just want to be clear. So is that truly just a shift of those revenues into the third quarter? Do you lose any sales because of the issue and the retailers cancelled because the shipments were delayed?
And again, it sounded like it was a $0.06 hit to Q2 and, again, I just want to be clear. Does that mean that you basically pick up the $0.06 in Q3 or is there some sort of SG&A impact in the third quarter as you are kind of catching up there, maybe running extra shifts, things like that, to get that product out the door?
No, I think we were pretty clear, Mitch, that we expect to – that we will ship those – that we did ship those sales as soon as the power came online and that we – we did incur some additional over time to accomplish that, to ship the product as soon as possible, when it came back online. So those $0.06 we will pick up in the back half of this year.
Mitch Kummetz – Robert W. Baird
And then, David, I just want to be clear. You provided some guidance on the third quarter in the back half. I think for Q3 you said sales up mid teens. Were you specifically referring to the wholesale business on that?
I was talking about the wholesale business.
Mitch Kummetz – Robert W. Baird
Then speaking of the wholesale performance, I don't know if you can tell us, but can you maybe run us through how those kind of individual businesses perform by category? I mean, you mentioned the hunting and the shift in sales there as retailers are looking to take product closer to the hunting season?
I mean, could you say how much hunting was down on the quarter and then maybe talk about (Western) and work as well for the second quarter?
Yes, sure. The hunting business was down versus last year $3 million off the base of $5.6 million. So that was a big hit. And if we look at our business with three customers in particular, our three largest customers, our business in total with those customers really hasn't dropped. It shifted.
And we had a – year-on-year for the past probably seven or eight years, we have had a declining customer base here in this consolidating of retail environment. So as Cabellas and Bass Pro shops and Dick's Sporting Goods and (inaudible), particularly those four are a much larger part of our business.
They, of course, have the systems and the fiscal responsibility to manage their inventories much tighter and playing deliveries much closer to their needs.
So but in total, we're pretty pleased with where we are. We're still off the pace of total orders for the year. We're still off the pace of last year at this time which we believe that's all related to the (inaudible) after the very warm conditions last year and the pitiful season that a lot of retailers had.
We know from prior seasons that that's short lived. Once the weather conditions are more seasonal and they (pull through weather) than the year before and so with – and that's why we noted in the comments, in the prepared comments, that there is upside to our business for outdoor.
(Western) continues to be – outpace our expectations. We talked about a 30% sales increase for this year. We're certainly on pace to do that. The new product lines are really looking at retail both in our existing customers and in some of these new doors that we've managed to open. We're very optimistic about (Western).
Our work business in the quarter, frankly, was a little disappointing. In total we were down a base of $18 million. We were down about $1.5 million. We – a lot of that is around – although when you read retail reports, they talk about the warmer weather being favorable for retailers but when it comes to (six and eight), it's (inaudible), particularly in these very, very hot conditions. It can slow down the pace of the work boots.
And we've heard a lot about in the Farmer Ranch channel where Georgia is so strong that retail business has been a little soft as some of these farmers struggle with the drought.
And then I spoke pretty – at length pretty much on commercial military. It's still a stubborn (inaudible). We ended last year – we talked about this on calls before – we ended last year about $20 million, up $10 million the year before and we project around $28 million right now so it's another kind of 40% trajectory there.
So in apparel, we – the largest part of our apparel business today is hunting apparel. And we suffer there just like we suffered, I think, a little bit with outdoor footwear. So we were down about $600,000 off a base of last year of $1.8 million.
Some of that is going to shift and close up. But some of the (inaudible) that we expected didn't stack up the way we thought it would. So we'll be a little soft there by year-end.
Mitch Kummetz – Robert W. Baird
Just as a final question, Jim, could you just run us through the segment margins on the quarter, just in a wholesale, retail, military?
Yes, wholesale margin was 31.9%. Retail was 46.7% and military was 4.7%.
(Operator Instructions) Your next question comes form the line of John Sullivan – Olstein Capital Management.
John Sullivan – Olstein Capital Management
Just trying to drill down a little bit more into the sales; it seemed like they were obviously fairly weak in the quarter and you guys are giving pretty decent forward look for the third quarter. Now is this just expectations that you guys have or is this something where you’ve got some of your bigger accounts with firm orders in place where you know it's really coming through versus kind of just hoping?
John, a large portion of our business is at once. Over the years, 70%; however, the quarter where we have the best vision is in Q3 where we pre-booked a lot of the insulated products early in the year and then we ship them in Q2 and Q3.
So we have – this is not just us sitting around and rubbing our stomachs and feeling good about the business. I think we have a very high level of confidence about our ability to deliver what we just talked about in Q3 and Q4.
Thank you. Mr. Sharp, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.
Well, thank you. First, let us apologize for the little hiccup mid call there. We did have – we do – we talk to you from a conference room that has a window in it and somebody came to that window and said there's nobody can hear us on the call. So we thought the call had dropped.
But fortunately, it hadn't and we enjoyed sharing with your our prospects for the back half. We're obviously disappointed with our results in Q2 but feel fairly good about Q3 and Q4. So we look forward to speaking to you 90 days from now. We'll work hard to make it a much better quarter. Thank you very much.
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