Rocky Brands, Inc.
Q2 2019 Earnings Call Transcript

Published: 25 Jul 2019

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter Fiscal 2019 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. 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.I will now turn the conference over to Brendon Frey of ICR.

[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 statement.For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2018.And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

[Jason Brooks:]

Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. As you saw from our earnings release issued earlier today, we delivered another quarter of solid results. Our performance was highlighted by growth in each of our three segments

[Thomas Robertson:]

Thanks, Jason. Net sales for the second quarter were $62 million compared to $58.2 million in the corresponding period a year ago, an increase of 6.4%.By segment, wholesale sales for the second quarter increased 2.1% to $40.6 million, retail sales increased 20.2% to $14.1 million and military sales increased 8.4% to $7.2 million.Gross profit in the second quarter increased to $21.4 million or 34.6% of sales compared to $19.5 million or 33.6% of sales in the same period last year. The 100 basis point increase was driven by a higher percentage of retail sales, which carry higher gross margins than wholesale and military sales combined with higher wholesale and military margins. Gross margins by segment were as follows

[Operator:]

Thank you. [Operator Instructions] And we will take our first question today from Jonathan Komp with Baird.

[Jonathan Komp:]

Yeah. Thanks, guys. Wanted to first ask maybe when you look at the wholesale business, it sounded like you had a mix, stronger performance domestically versus international from the shipment differences year-over-year.But domestically, what are you seeing in terms of growth rates across the key end markets, and any color on how some of your key work in western partners are holding up, any more color there?

[Jason Brooks:]

Sure. Jon, thanks for being on. I think, for us, we are feeling pretty confident in our core businesses, our core, Work Western. The outdoor business is holding on really well where we're seeing some nice things happening there for the fall in Q3 and Q4.And then Work and Western are just pretty steady and -- but still doing well. So we're pretty comfortable with where we're at there and we think those look pretty good for the rest of this year.We're still hearing reasonably good stuff in the marketplace from our competition. The work boot business is still doing well. Western boots seem to be regionally doing well and hunting boots, we really won't see a big indication on that here for about another month or so.

[Jonathan Komp:]

Okay. Great. Then - and maybe on Durango. I think last quarter it was up just a little bit and now, it's up high single digits in the second quarter. Can you just remind us kind of - I know you had some constraints in the first quarter, like what do you think kind of the normalized growth rate for that brand is?

[Jason Brooks:]

So I think what happened for us was really a timing issue when you look at Q1 and Q2. So a blended rate there might be a good indicator of what's going on with Durango. We anticipated some things to happen in Q1 and they got kind of pushed into Q2.

[Jonathan Komp:]

Okay. Great. And then the retail business, helpful color on how you're thinking about the second half. Is there a potential that you continue to get some more wins that as you cycle higher growth for the Lehigh business last year that you keep the momentum going?

[Jason Brooks:]

So I think we're really excited about what's happening with Lehigh. We are really pretty comfortable with Q3 and the momentum that we have. Q4 is going to just be a little tougher one for us.We had some pretty good wins last year and so that one to anniversary I think is going to be a little more difficult, but we're working hard right now to find those wins and make those happen and hopefully be able to pull off the mid- to high double digits in Lehigh.

[Jonathan Komp:]

Okay. Great. And then just the kind of drilling down to the earnings in the back half. I know the first half had a pretty good flow-through close to 7% top line growth and about double that on the EPS growth.How are you thinking about that relationship in the second half just given some of the commentary, Tom, that you provided around some of the reinvestment opportunities in the brands?

[Thomas Robertson:]

Yes. So I think that we kind of gave fairly clear guidance from a top line perspective. I think our gross margins will hold pretty steady. One of the things to keep in mind on the retail side of -- or by category, it should hold pretty steady. One of the things to keep in mind on the retail segment is that as Lehigh continues to grow, it becomes a bigger proportion of our total retail bucket of sales.And our Lehigh CustomFit business carries a lower gross margin than our e-commerce business, and so we might see a little bit of decline in our retail business. And our military margins, we're very happy with where the margins were at -- were in Q2. I would expect that those would probably come down a little bit for the last half of the year, particularly because of the production -- for sales being down in military in the third quarter.But overall, I think the margins, because we're expecting retail to -- growth to outpace our wholesale segment. Overall, I think the margins will creep up. From the SG&A standpoint, we talked about a lot of the investments. If you think about -- our peak seasons are Q3 and Q4, so a lot of our advertising and marketing investments, they happen in those quarters.So we're going to see an uptick in our SG&A spend there as well as particularly in the fourth quarter as we are on the holiday season, we're doing a lot more drop shipments and a lot more e-commerce business. And so the variable costs associated with those shipping one pair versus shipping a 6-pack, it becomes a much higher percentage of sales. So I think we're going to see an increase in SG&A both in dollars and as a percent of sales for the remainder of the year, but particularly in the fourth quarter.

[Jonathan Komp:]

Okay. Very helpful. And then just last one. The balance sheet, the cash balance is up quite a bit comparing to last year. Any updated thoughts - any thoughts on the plans there in terms of the cash balance and any uses you might have?

[Thomas Robertson:]

So we don't disclose a whole lot on our future plans with our cash. I think you did probably see our increase in our dividend. We're always weighing our options with share repurchase. And if we see some opportunities to buy the stock that we'll perceive to be undervalued, we would.And then also we're going to be making those investments in our marketing, and we're also making some more investments and we're using some cash for our distribution and for our manufacturing facility, specifically in the Dominican Republic as we continue to try to eliminate some of our risk from sourcing from China and drive more payers and more volume efficiencies to the Dominican Republic. So we'll see some investments there as well.

[Jonathan Komp:]

Okay. Got it. Thanks for taking all my questions.

[Jason Brooks:]

Thank you, Jon.

[Thomas Robertson:]

Thanks, Jon.

[Operator:]

[Operator Instructions] And that will conclude today's question-and-answer session. I'd now like to turn the conference over to Mr. Brooks for any additional or closing remarks.

[Jason Brooks:]

Thank you very much, operator. Just want to say thanks to the Rocky team for a great quarter, and look forward to finishing out a great year. Thank you very much.

[Operator:]

That does conclude today's conference call. Thank you for your participation. You may now disconnect.