Strong 1Q21 Earnings
Stock up 16.5% on intra-day trading because of strong earnings.
Rocky Brands (NASDAQ:RCKY) reported an excellent set of first quarter 2021 financials with revenues up 57.3% YoY driven by strong demand, easier comparisons against last year and $6.5mn in revenues from the Honeywell footwear acquisition. Both wholesale and retail channels demonstrated good traction in net sales. Adjusted gross margins increased a significant 410bps YoY with all three channels contributing to the improvement. Adjusted net income grew 344.1% on account of the higher revenues and margin improvement. Adjusted EPS for the quarter was $1.19 against $0.27 in the same quarter last year. Cash on the balance sheet declined to $8.9mn in 1Q21 as opposed to $44.2mn in 1Q20 as cash was used to fund the acquisition of Honeywell’s footwear brands.
Source: Bloomberg Terminal Data
Given this strong performance, management now expects to increase standalone sales of Rocky Brands by 20% in 2021 against the earlier guidance of mid-single digits growth. For the Honeywell footwear brands too, management expects to see 20% growth in net sales. Gross margins for the combined business are expected to clock in at about 40%.
Commenting on the results Jason Brooks, President and CEO of Rocky Brands said:
It has been an excellent start to the year for Rocky Brands as we delivered a strong first quarter performance and completed a highly transformative acquisition. We experienced robust demand for our Rocky, Georgia and Durango brands across our wholesale and direct to consumer channels, which when combined with an easier comparison due to the impact on our business from COVID-19 in the year ago period, resulted in a dramatic improvement in revenue and earnings per share. The recent addition of The Original Muck Boot Company, XTRATUF, Servus, NEOS, and Ranger brands has further bolstered our powerful portfolio and provided our business model with compelling new opportunities to drive profitable, top-line expansion and increased shareholder value for years to come.
Price Target Upgraded to $100
Source: Bloomberg Terminal [1-year chart for RCKY]
Rocky Brands’ stock has done very well over the last few months and is up 169% since our initiation. With the first quarter results, we have updated our model to reflect the stellar revenue and margin performance for the company. Our new 2021 and 2022 adjusted EPS estimates are $4.56 and $5.62 compared to $3.51 and $4.19 respectively earlier. We have also revised upwards our target price to $100.00 [$60 earlier] which represents an upside potential of 86%. Our target price is derived through an 18x P/E multiple on our 2022 EPS estimate. See our attached model in this article for further reference towards our financials.
Conclusion and Valuations
Rocky Brands is a leading designer, manufacturer and marketer of footwear and apparel across a range of well-known brands. With the company growing well in 2020 and 1Q21 despite the impact of COVID-19, we believe it is well placed to show strong growth in the long run. Growth in the higher margin retail channel and production efficiencies have resulted in improved gross margins. In addition, the recently announced large acquisition that is significantly accretive to EPS makes the stock attractive, in our view. Rocky Brands is trading at inexpensive P/E valuations of 11.8x and 9.6x for 2021 and 2022 respectively and offered investors a 1% dividend yield in 2020.
Catalysts
Acquisition of Honeywell’s footwear brands
Rocky Brands recently completed the acquisition of Honeywell’s footwear brands and it is significantly EPS accretive for the company and adds scale to Rocky Brands. Once the portfolio is integrated within the company, the chance to generate economies of scale and improve margins too exists.
Growth in the retail and digital business
The retail business, driven by the digital side, has seen significant growth in the last quarter. With this segment carrying better margins, sales growth in retail will result in better profitability for the company.
Medium-term growth
With well-recognized brands in its target markets, investments in marketing, digital and customer relationships, introduction of innovative product offerings and execution of laid out strategy over the last couple of years, we expect Rocky Brands to sustain good medium-term growth in sales and profitability.
Risks
Slowdown in the US economy
An economic slowdown or prolonged lockdowns due to COVID-19 would negatively impact sales and profitability for Rocky Brands.
International manufacturing facilities
The company products are largely manufactured in the Dominican Republic and China. Changes in foreign exchange, imposition of US regulations on imports, etc. can impact costs for Rocky Brands.
Issues with acquisition integration
Any issues with integrating the recent acquisition into Rocky Brands’ current business can negatively impact financials.
Competition
While Rocky Brands’ products are well-recognized, the company faces competition. An increase in competition can affect sales and profitability.
