Rocky Brands, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Rocky Brands Fourth Quarter Fiscal 2020 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 . I would like to remind everyone that this conference call is being recorded. And I would now turn the conference over today, to Mr. Brendon Frey of ICR. Please proceed, sir.

[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 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, 2019.

[Jason Brooks:]

Thank you, Brendon. With me on Today's call is Tom Robertson, our Chief Financial Officer. Our fourth quarter was outstanding on every level. Strong demand for our brands and products fueled record sales and profitability, representing a great finish to a year. From a high level, our fourth quarter results were driven by 20% plus growth in our wholesale channel with particular strength in Work and Western, combined with ongoing strength in our direct-to-consumer business. Across both channels we experienced strong full price selling and very little discounting, underscoring the strong appeal of our brands and products. A few of the financial highlights included net sales increased 16% to $87.6 million. Gross margins expanded 370 basis points, and adjusted diluted earnings per share increased 107% to a record $1.41. 2020 was certainly a year of two halves. We had outlined on our Q4 call last February that we expected the year to start slowly due to an expiring contract for our military business and some inventory constraints from our third-party Chinese suppliers due to the early impact from the outbreak of COVID-19 in that country. We obviously weren’t anticipating what happened in late March when the outbreak of COVID-19 in the U.S. resulted in wide scale shutdowns across the country forcing many of our retail partners to temporarily close their doors. And for the locations that were able to remain open, they faced significantly reduced foot traffic as the majority of Americans remained at home and shifted their spending to online. This had a significant impact on our wholesale segment, which makes up approximately two thirds of our overall revenue. As challenging as the initial months of the pandemic were, our people stepped up and executed tremendously, especially our distribution center teams who worked tirelessly to fulfill the surge in digital demand we experienced starting in April. For the first six months of 2020 revenue declined 13% with wholesale down 17% and contract military down 39%, partially offset by a 12% increase in retail sales led by the strong gains in our branded e-commerce sites and online marketplace business. As restrictions on many businesses started to ease and consumers began returning to brick-and-mortar retail, our wholesale business rebounded strongly in the third quarter. We attributed this both to the desirability of our products and our ability to replenish channel inventories quickly. We made some inventory investments in key styles towards the end of second quarter that benefited our business in the third and fourth quarters. This was true for wholesale as well as our digital channel, which didn't let up even as physical retail resumed more normalized operations.

[Thomas Robertson:]

Thanks, Jason. Net sales for the fourth quarter increased 16.3% to $87.6 million, driven by strong gains in our two largest segments, Wholesale and Retail. By segment, Wholesale sales increased 21.7% to $59.9 million. Retail sales increased 13.1% to $23.5 million and Military sales decreased 21.4% to $4.2 million.

[Operator:]

Thank you. Our first question comes from Jonathan Komp with Baird. Please proceed sir.

[Jonathan Komp:]

Yes hi. Thanks, everyone. I wanted to start with a couple of questions on the business you're planning to acquire. Maybe first, could you just give us a better sense of the relative size of the brand within the portfolio? And then, understand you don't want to give projections at this stage, but can you share more backward looking on what you've seen that for growth across the various brands?

[Jason Brooks:]

Yes, I think, hi Jon, thanks for the question. Good to hear from you. I think in the press release that came out their annual sales for 2020 was $205 million. I think I could tell you Muck is the largest portion of that.

[Thomas Robertson:]

Yes, Muck represents about two thirds of the total.

[Jason Brooks:]

Yes, and XTRATUF.

[Thomas Robertson:]

XTRATUF and Servus make up most of the remaining third and Ranger and the NEOS brands are smaller, pretty small.

[Jason Brooks:]

But they, what I can tell you is, they've seen a, they've seen some nice sales increases over the last three years. They've done a really great job with those brands, and the distribution of those brands and the marketing of those brands. And so, as we stated, we're really excited to have them a part of our family and think they fit our business model and our distribution model really well.

[Jonathan Komp:]

Okay, and maybe a follow up there, I want to ask you, maybe stepping back, kind of the motivation to do the deal, it sounds like their brand. So it looks like fairly profitable already. So when you step back and think about, really the reason this is a good fit, how do you rank order, the sales growth opportunity, the opportunity to leverage your own sales force and distribution, and then the supply chain opportunity you mentioned, just curious how to frame that up?

[Jason Brooks:]

Yes, I think right now until we get to close Jon, we probably need to move to more of a Rocky question right now. I think, we're intending on closing here in March and I think we'll be able to answer more of those questions as we are able to get more information and dig in more and bring those together. But those are all very relevant questions that I think we just need to answer at a little later date.

[Thomas Robertson:]

Yes and I think Jason hit some of the highlights in his prepared remarks too Jon.

[Jonathan Komp:]

Okay, that makes sense, understood. Maybe one related, but tied back to Rocky, just how do you view the post acquisition state of the balance sheet, just curious Tom, how you are thinking about the financing and the really, your degree of comfort with the leverage on the balance sheet of this deal?

[Jason Brooks:]

It will be the first time in three years we have debt.

[Thomas Robertson:]

Yes, and so I think, look we've kind of given, we’ve given some guidance on the financing with the ABL and the term notes on the call, we're planning on using our cash, the fun part of that transaction as well and so, given our EBIT results for 2020, and we've shared the EBIT results of the transaction. We don't think that, we think we're still in a very good balance sheet position. We don't think we're over levered by any stretch. And then obviously, as we have planned growth for both ourselves and for the acquired brands in 2021 and with it being accretive, we feel very comfortable with where Rocky will be from a balance sheet perspective.

[Jonathan Komp:]

Okay, and should we think, any change in plans short term debt and dividend and should we kind of expect any other cash to go towards deleveraging in the short term or just any, any thoughts there?

[Thomas Robertson:]

We haven't really made any of those decisions yet. We're still talking through all the different scenarios. So I think those conversations will evolve over time and as the results of the company continue.

[Jason Brooks:]

I do want to say though I don't see any changes today to our dividend. I think we want to continue with that and have every intention to continue with that. And we'll see what it looks like as we bring these two companies together.

[Jonathan Komp:]

Okay, it makes make sense. Just a couple of then on the Rocky business, maybe on the wholesale side first, just given how strong the second half, I've been curious. Do you have any insights on the sell through or kind of the state of inventory and the key retailers? And then how that might translate into certainly the start of 2021? You have pretty easy compares. I don't know if you're still benefiting from better inventory, ability to source given to your unique sourcing versus competitors. Just, any more thoughts on state of inventory and how that plays out?

[Jason Brooks:]

Yes, so I would tell you, we went into Q4, after seeing Q3 being pretty strong. And I think our anticipation was that it was probably going to slow and obviously, that's not what's happened, right. So what we are hearing and learning and have learned over the last, three, four months is that the shelf space that we have been able to pick up is checking at retail well, and then therefore is creating more demand and allowing us to have the kind of increases we're seeing. And we have been able to keep up with the demand. We've found a few little holes in our inventory. But I would say in general, because we made the decisions we did in Q2 we've been able to stay with it, and only be short in a couple areas. But we're excited about where we are, where we ended and kind of where things are headed in Q1.

[Jonathan Komp:]

And are you facing any disruptions or are you hearing disruptions for others from some of the West Coast port issues, I assume? Maybe you have less exposure there, but I don't know if there's any short term impact for you or maybe for your competitors?

[Jason Brooks:]

Yes, I think Jon, I think everybody is feeling this pain. We bring everything from a Rocky standpoint through Seattle. And for whatever reason, there seems to be less of a disruption through Seattle, but we are very focused on it and we are prioritizing containers and product as we see necessary. But it's definitely on our radar and would echo some of the other statements out there in the marketplace. I don't know that we are feeling it as badly as some other people are, but it's definitely there. I would be lying to you if we weren't feeling it at some level.

[Thomas Robertson:]

Yes, Jon to add on there a little bit, also keep in mind about 40% of our product comes from Puerto Rico or from the Dominican which isn't coming through any West Coast ports, it is coming through the East Coast. So we've benefited from a large portion of our product coming through to the East Coast.

[Jonathan Komp:]

Yes, great to hear. And then Tom, your commentary is helpful on margin, it sounds like you're expecting to hold a double-digit operating margin for ‘21 for the Rocky business, just any broader context, I know looking back in our model that's higher than you've ever had. So maybe, just any thoughts on what's changed if anything, or kind of structurally why, this style looks like, you know, double digit margin opportunity.

[Thomas Robertson:]

Yes, so I think there's a couple dynamics leading to that. Clearly, we plan with our sales growth to leverage a lot of our operating expenses, so we'll definitely get some economies there. We also had a little bit of headwind, particularly in the first couple of quarters, from a gross margin standpoint, because of the incremental Section 301 or Trump tariffs, that incremental 15%. So we've gotten that incremental 15% tariff inventory behind us at this point, so we have got a little upside there, particularly in the first half of the year. So it's really gross margins versus and additionally, sorry, the leveraged operating expenses from our sales growth.

[Jonathan Komp:]

Okay, great. And maybe last one if I could. I know first quarter 2020 was so unique, and it is all good, the second quarter is just framing it up, any perspective you might add on the first quarter? I know that the few years prior to 2020, you typically earned at least as much in the first quarter, as you did in the fourth quarter. Maybe that's not a good assumption this time around, but just any way to frame up your expectations for the first quarter?

[Thomas Robertson:]

Yes, I think, I don't think using the seasonality of our business in 2020 would do a good representation, because as we kind of point the term 2020 was pretty wonky. So if we go back to, 2019 and 2018, as a percent of, it should be more the seasonality is to be similar, I should say from an earnings perspective, as it was historically.

[Jonathan Komp:]

Okay, great. That's very helpful. I appreciate you taking all the questions. Thanks, guys.

[Jason Brooks:]

Yes, thanks Jon. I appreciate it.

[Thomas Robertson:]

Thanks, Jon.

[Operator:]

There are no further questions in queue. At this time, I would like to turn the call back over to Jason Brooks for closing comments.

[Jason Brooks:]

Great, thank you very much. I just want to say once again to the Rocky employees, thank you for an exceptional year. We have been able to pull together in an amazing, difficult climate and have a record year, and I continue to keep working with you and look forward to beating this year and finding ways to make it happen. So thank you again. Have a great one.

[Operator:]

Thank you, ladies and gentlemen. This does concludes today's teleconference. You may disconnect your lines at this time and have a great day.