Rocky Brands: EPS +131%, At 10x P/E, Stock Is Still Attractive With Significant Upside Potential

Aug. 04, 2021 2:00 PM ETRocky Brands, Inc. (RCKY)7 Comments

2.26K Followers

Summary

2Q21 net sales up 134.2% YoY and adjusted net income up 131.2% YoY.
Demand for their brands has remained robust.
Adjusted gross margins improved 270bps YoY.
Accretive Honeywell footwear brands acquisition aided growth in financials.
Stock up 150% since our initial recommendation in August 2020 and we still expect significant upside.

Sunny day at hiking adventures — hobo_018/E+ via Getty Images

Acquisition Drives 2Q21 Earnings

Rocky Brands (NASDAQ:RCKY) reported 2Q21 financials with revenues up 134.2% YoY driven by strong demand, and the Honeywell footwear acquisition. Both wholesale and retail channels demonstrated good traction in net sales, up 195.0% YoY and 36.8% YoY respectively. Acquired brands too demonstrated good demand. While adjusted gross margins improved across each segment, the marked 450bps improvement for the wholesale business drove an overall 270bps improvement in adjusted gross margins for Rocky Brands. Adjusted net income grew 131.2% on account of the higher revenues and margin improvement but offset by the larger interest cost burden. Adjusted EPS for the quarter was $0.99 against $0.45 in the same quarter last year. On their results conference call, management highlighted that high demand late in the quarter resulted in some orders being shifted from 2Q21 to 3Q21. Additionally, 2Q21 adjusted EPS at $0.99 was lower 16.8% QoQ as some product distribution and inventory inefficiencies existed. Management hopes to have these ironed out through the rest of the year.

Commenting on the results Jason Brooks, President and CEO of Rocky Brands said "Our business exhibited tremendous strength in the second quarter. Demand for our Rocky, Georgia and Durango brands has been building over the past year and recent trends have been particularly strong. The combination of innovative product introductions, enhanced consumer engagement, and effective inventory management are fueling market share gains in our work, western and outdoor markets. At the same time, the newest additions to our brand portfolio, in particular The Original Muck Boot Company and XTRATUF are performing very well, contributing to our exceptional growth. I am confident that we are well positioned to continue capitalizing on our current momentum and successfully integrating our recent acquisition to unlock even greater earnings power from our operating model in the years ahead."

Rocky Brands’ stock has done very well over the last few months and is up 150% since our initiation. Our target price for Rocky Brands stands at $100.00 which represents an upside potential of more than 90% from current levels. Our target price is derived through a 18x P/E multiple on our 2022 EPS estimate.

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 1H21 despite the impact of COVID-19, we believe it is well placed to show strong growth in the long-run. In addition, the recently completed 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 12.8x and 10.4x 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 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.

View as PDF

Income Statement ($ thousand) FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E FY 2023E FY 2024E

This article was written by

Value Investment Principals

2.26K Followers

Value Investment Principals [VIP] has a 12-year track record, starting in 2009, focusing on unique under-covered stocks. Our typical ideas have zero/limited research coverage, “deep-value”, growth, high cash and FCF [Free Cash Flow]. We search for High Dividend Yields to appeal to retail clients, creating a steady source of income. We have a strong track record of performance for both large institutional and High Net-Worth Individuals [HNIs].Approximately 2/3 of our ideas have been in growth industries (with earnings growth of more than 2x the GDP growth rate). Our deep-value ideas all have multiple catalysts that are likely to unfold over the next 6-12 months to unlock value. We offer 10+ page research reports with detailed IS/BS/CF forecasts, rigorous ratio analysis and Discounted Cash Flow valuations alongside price targets on all recommendations. Our team consists of 3 highly skilled analysts with Masters degrees and extensive industry experience. Bottom-line, all of our ideas have been ignored by Wall Street analysts, and this creates opportunity in undervalued, under followed stocks with high dividend yields and growth.Sandy Mehta, CFA, our founder and Director, has over 30-years’ experience as a PM of a 5-Star award-winning small-cap fund as well as a flagship $15 billion Global Equity Fund. Sandy also founded Acumen Capital Management in 2004, and incubated a global long-short $200 million Hedge Fund. In 2015, he founded equity research firm Evaluate Research, his third entrepreneurial venture in global financial services, focusing on unfollowed equities. He has an MBA degree [Director’s List Honors] from the Wharton School, and a Master of International Management [with Honors] from the American Graduate School of International Management. He attained his CFA at the age of 25.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (7)

rjm22

19 Oct. 2021

Comments (5.06K)

(From merion road investor letter)

While not core to the thesis, management believes that they have a tremendous opportunity to build
out the XTRATUF brand that came over with the acquisition. XTRATUF is a waterproof shoe brand that
dates its origins to the Alaskan fishing industry. Even though consumers may not demand the
performance characteristics of such a technical shoe, they do want authenticity. And XTRATUF screams
authenticity. RCKY management has been pleasantly surprised to see just how much demand there is
for this line. In fact, they have been refusing to open new accounts to protect the brand and manage
supply. A quick search for top men’s rain boots of 2021 yields the following results:
 GQ: XTRATUF Legacy Chelsea Boot
 NY Times: XTRATUF Ankle Deck Boot
 NYMag: Timberland White Ledge Mid Waterproof Ankle Boot
 Business Insider: XTRATUF Rubber Deck Boot
A search of ecommerce sites yields similar results. XTRATUF has strong ratings and is consistently
sought out by consumers. While all of this bodes well for the core business, it does pose the question of
how else to capitalize on this opportunity. Right now the company does very little outside of shoes and I
would not be surprised to see them start testing the waters in ancillary products.
In any case the company is trading at about 7x EBITDA and 9x FCF once integration is complete. At 9x
EBITDA (which accounts for the higher quality “distribution” business hidden within their retail
segment), the company would be worth about $70. If you are willing to look out a few years, I think
there should be a pretty clear path to over $100, or roughly a double from current prices.

Senopta

04 Oct. 2021

Comments (913)

China, shipment issues, rising interest with debt... i see problems

srduke13

04 Aug. 2021

Comments (148)

My choices today are cash in RCKY and switch to BOOT or hold on.
Read the call transcript and read the article.
I am going to hold on.

Duke

Wellington999

04 Aug. 2021

Comments (4.63K)