- 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.
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.
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.
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.
While Rocky Brands’ products are well-recognized, the company faces competition. An increase in competition can affect sales and profitability.
This article was written by
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