Rocky Brands, Inc.
Q3 2019 Earnings Call Transcript

Published: 24 Oct 2019

[Operator:]

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands Third Quarter Fiscal 2019 Earnings Conference Call. [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. Please go ahead, sir.

[Brendon Frey:]

Thanks, Hector and thank you 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 statements. 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 will now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

[Jason Brooks:]

Thank you, Brandon. With me on today’s call is Tom Robertson, our Chief Financial Officer.Our third quarter and year-to-date results have been driven by our ability to capitalize on the key growth opportunities we’ve identified for the company. With three distinct business segments

[Tom Robertson:]

Thanks, Jason. Net sales for the third quarter were $67.2 million compared to $65.9 million in the corresponding period a year ago, an increase of 1.9%. By segment, wholesale sales for the third quarter increased 0.5% to $47.2 million, retail sales increased 21.6% to $14.5 million, and military sales decreased $1.6 million to $5.4 million. Gross profit in the third quarter increased to $25 million or 37.2% of sales compared to $22.4 million or 34% of sales in the same period last year. The 320 basis point increase was driven by higher percentage of retail sales, which carry higher gross margins than our wholesale and military sales combined with higher wholesale, retail and military margins.The third quarter of 2019 also benefited from a $725,000 hurricane-related expense reimbursement. Excluding net gain, gross margins were up 220 basis points year-over-year. Adjusted gross margins by segment were as follows

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

[Unidentified Analyst:]

Yes. Hi, thanks. This is Steve on for John. I was just wondering maybe if you could start off giving us a little more insight on some of the wholesale shifts. I know you called out Georgia and what gives you confidence that it’s just timing related. If you can isolate it to a particular region or customer and maybe anything else really impacting that part of the business right now?

[Jason Brooks:]

So yes, Steve, this is Jason. I think if you dig back through, you’ll see Georgia was really the brand in Q3 that didn’t perform up to the level that we were expecting. And one customer in particular, which is Tractor Supply really had a timing difference in regards to when they wanted some business – when they wanted some orders delivered. So we’re pretty comfortable that those orders just fell to Q4, and we believe that that’s going to come back there a little bit in Q4 from a top line side of it.

[Unidentified Analyst:]

Great. That makes a lot of sense. So maybe just as a follow-up, a little – if you can share a little more color on, I guess, how to think about total wholesale growth going forward, if that low single digit is what should we still be expecting here?

[Tom Robertson:]

Yes, Steve, this is Tom. When we looked at the whole year, we realized that Q3 came in a little lighter than we anticipated. And to Jason’s point, we think some of that has shifted into early Q4. But I think we are still comfortable on – in kind of giving guidance to wholesale and we think that it’ll be in that low to low mid-single-digit range for the year. And so that’s kind of our plan as we move into Q4, and we expect that to continue.

[Jason Brooks:]

I think Steve, we said that year-to-date, we’re still at a 2.4%, 2.5% sales increase. And that’s just for Q4, which we think we missed – I’m sorry, Q3, which we believe we missed Q3 a little bit. So I think if you think of it in that way, Q4 comes in – I think those low single digits are still pretty strong.

[Unidentified Analyst:]

That makes sense. And then maybe if you could talk a little bit about some of the tariff impacts, I guess what level of unmitigated impact you expect this year and then to the extent you’re willing to look forward to 2020 a little bit. And maybe just any leverage you think you have in the model whether that’s pricing that you think retailers would accept or ability to flex production? If you could just give a little more color on some of those.

[Tom Robertson:]

Yes. So Steve, I hate to give you kind of a firm number on the impact for Q4, the reason being as that as Jason said, it’s a really fluid percentage changing on a daily basis. And we’re negotiating with our partners in China about – just over about half of boots are brought from China. So, we are working to get that number down and anybody who follows the forward markets should know that your orders are out anywhere from 90 or 120 even 180 days in some cases. So some of that we are not going to be able to mitigate until the – till the beginning of 2020. With that being said, we feel – we’re very confident that we’re going to increase our capacity in the Dominican Republic. We think that’s a huge advantage that Rocky has over some of our peer group. And we’re going to be able to increase the capacity there, move higher volume styles as needed and where it makes sense from China to the DR. We’re also exploring other countries outside of China. But we’re not in a – we don’t want to jeopardize the quality of the footwear. There’s a lot of challenges that come with moving footwear from one factory to another. So we’re very – we’re going to do it very cautiously and we’re going to do it as quickly as possible. But we don’t want to jeopardize the brands we’re trying to transition something too fast. And then also, as we’ve talked about earlier in this call, we think a small or modest price increase will help with the margin impact as we move into 2020. And we expect our Chinese partners to continue to give us discounts as we move forward.

[Jason Brooks:]

I think the other area that you probably aren’t hearing a lot about is our vendor partners, right? Our suppliers of leather, our suppliers of waterproof, the raw material side of it. Everybody is aware of the tariffs. So when you walk up and say, guys, I need an additional percent discount, people are least willing to talk to you about it, where before if you couldn’t explain it, then they didn’t won’t even discuss it. I think our retail partners are also going to be good partners and say, okay, some of it is going to have to move on to the consumer. And then some of it, they’re going to eat it as well. So I think it’s really important how we look at every style and how it is affected by the price increase that we are going to apply to it in the marketplace. But we are beating this one to death.

[Tom Robertson:]

Yes. Steve, another point to kind of get across too is that with our Lehigh business with us selling to other third parties, we get kind of a sneak peek into what other brands are doing from a price increase standpoint. So we’re trying to leverage that information that we know to make sure that we position brands as good as possible in the market.

[Unidentified Analyst:]

That all makes sense. And then maybe just switching over to the retailer side of the business here, obviously, it seems like really, really good momentum there. So I know you’re just cycling kind of a tough comparison in Q4 and there was some favorable weather last year. And just kind of piecing all that together, I was wondering how you’re thinking about your ability to kind of keep the momentum up here into the fourth quarter?

[Tom Robertson:]

Yes. So I think when we look at the retail space, I think, we internally and I think probably almost everybody has high expectations for our retail category, just given its growth over the last couple of years. But as you hit the nail on the head there, we’re starting to come up to some tougher comps. And so we’re kind of cautious to throw out growth rates that we’ve been hitting over the last few quarters. But I still think that a low double-digit increase is definitely doable in the fourth quarter. And so I think that’s kind of where – I guess we’re kind of expecting it to come in.

[Unidentified Analyst:]

Great. Maybe just a couple more for me really quick, so could you maybe just give a little bit of color on – how you’re feeling about inventory. I know it’s been coming down a little bit here over the last few quarters, but still maybe slightly elevated. So just trying to get a better sense of your comfort with that?

[Tom Robertson:]

Yes. Steve, to be honest with you, I feel probably more comfortable about our inventory today than I did when I joined the team three years ago. I know the dollar amounts are up, but our discontinued inventory is at a lower level, both dollar and percentages than what it was certainly last year. And I think with our new Amazon seller fill Prime warehouse that it gives us a whole another channel to sell a product that’s coming to the end of its life. And so hopefully, that’ll drive up the margins of our discontinued boots when we do sell them. However, I am not sure we’ll get the same margins that we currently get in retail. But I still think that it will be a net margin gain.

[Unidentified Analyst:]

Great. And then maybe just one last one for me, you made some comments about maybe some of your retail partners being a little more tepid here, just given maybe the warmer start to fall here. And I know there’s been some macro noise. I just wonder if you could talk through some of that. And if that’s something you think starts to flip once the weather gets a little colder here? And maybe just on an unrelated note, I know you talked about some better efforts here with some of your e-commerce players, like Amazon and others. So just how you’re thinking about the contribution from that looking ahead into the fourth quarter?

[Jason Brooks:]

Yes. Sure. So the weather is a crazy piece of our puzzle that affects really every category, except for our retail side. So if you think about a guy who works in the outdoors, if it’s nice and sunny and kind of cool out, he is going, I can get another three months out of my boots. And – so if that turn isn’t happening in the retail floor, then the retailer pushes back on us to say, I’ll take it in another 30 days. And same thing with hunting boots, if it’s not wet and nasty out, they’ll push that purchase out a little bit longer. So we definitely think it had somewhat of a – an issue with it. I’m not concerned at all. Our retail partners are sharing with us. A lot of very good positive things going on in the marketplace. So I think the Q4 is going to come together pretty good under that circumstance. And obviously, if we can get some cold, rainy, snowy weather, it will also clean up some inventory and may accelerate some sales if we could get that here pretty quick though. And then, you had asked – the other question was about Amazon and e-commerce. I think that is a ever-evolving learning process for us, and we are finding new things, new nuggets every day that are allowing us to see increases there. And not just on Amazon but a lot of the other marketplaces and really being able to partner with some of the other companies out there to help us position ourselves in the right places to get those sales. So we’re pretty excited about that area as well.

[Unidentified Analyst:]

Great. Thanks for all the time and best of luck.

[Jason Brooks:]

Absolutely. Thank you.

[Operator:]

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for any closing remarks.

[Jason Brooks:]

Great. Thank you very much. Appreciate everybody’s support and questions about the direction of the company. We are looking forward to Q4 and wrapping up ‘19 and heading into a great 2020. Thank you, guys. Talk to you next quarter.

[Operator:]

This concludes today’s conference. You may disconnect your lines. Thank you for your participation.