Q1 2020 Earnings Call
Good afternoon, ladies and gentlemen, and thank you for tending bar.
Welcome to the Rocky brands first quarter fiscal 2020, earning conference call. At this time all participants are in their listen only mode. Following the presentation. We will conduct a question answer session and instructions will decide at that time to queue up a question maybe one has any difficulty during the conference.
Please press star deal for operators, but any time I wouldn't like to remind everyone that this conference call is being recorded and then we'll now turn the call bundle, but you burden, but as I see our please go ahead.
Thank you thanks to everyone joining.
Before we begin.
No that today's session, including that you would a pure may contain forward looking statements.
Doubling but the private Securities litigation reform.
Such statements are based on information.
I'll be able at this time and are subject to changes risks and uncertainties, which may cause actual results could differ materially.
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For complete discussion.
Oh Geez choose look for today's press release, I know reports, all the Securities and Exchange Commission, including our country.
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Philadelphia the culture.
Chief Executive Officer, Lucky brand's Jurgen.
Thank you Brendan with me on today's call is Tom Roberts, our Chief Financial Officer.
That's our 2009 key performance indicators, we came into 2020, good momentum in our business and while we were facing a few sales and margin headwinds early in the year. We were on track for another year of solid growth and improved profitability.
Like many companies are near term plans in projections have been significantly interrupted due to the covert 19 pandemic.
First and foremost or thoughts or what ever you want affected by this virus. It we so all those in the fourth launch battling this global health emergency.
We also want to acknowledge the dedicated employees or the central businesses continued to show up to work every day, including our great teams in our distribution center facility.
Rich the shift since the start if this unprecedented situation.
During our quarterly earnings calls I typically review, our sales results by brand and segment.
In light of the current circumstances, I don't think don't make sense.
<unk> does it provides a framework for our current environment I'm going to spend a few moments on our Q on Q1 results and then Tom and I will spend the rest of our time, providing an update on the state of our business and are really actions, we've taken to protect our employees in strengthening our.
Financial liquidity and flexibility.
The first quarter total net sales were approximately 56 million compared with approximately 66 million a year ago.
We initially anticipated sales to be down slightly due primarily to plan reductions in our military business plus some early softness in the wholesale segment from a pull forward on certain deliveries at a price increases that went into effect on January 1st.
We were also forecasting.
We also for cashing pressure in Q1 gross margins as we work through inventory that was brought him with the 15% additional terror prior to the robots are stepping a half person.
Went into effect February 14th.
Following the signing of the phase one deal between the U.S. in China.
Q1 was tracking close to plan prior to the outbreak of until the night gene driven by low double digit increase in retail segment sales through mid March.
Several stage announced the closure of all non essential businesses and implemented stay at home direct is we saw an immediate impact on demand, particularly in our wholesale channel as many accounts speaking cutting back airplane deliveries and replenishment orders.
Today, we estimate approximately a third of our wholesale partners doors are currently close.
Fortunately roughly two thirds were designated essential businesses by their respective state governments and they serve consumers who must remain on jobs either fight the buyers protect our citizens or actually Q functions that needs to be may change during this crisis.
Importantly, as we announced on March 23rd or distribution Center in Logan, Ohio was deemed an essential infrastructure business operation.
No decision has allowed us to continue supporting our retail customers that remain open as well as service customers directly through our branded website and a Wi high shaky shoot program.
For the retail doors that are open there, obviously dealing with decrease traffic levels and you're seeing that in our Q choosing to date results. However, our wholesale accounts with E Commerce operations, where we drop ship customer orders from RBC.
He we've experienced a strong spikes in demand.
Particularly for our work in western footwear as consumers purchasing behavior further shifts towards online during this period of cell isolation.
With respect to our retail segment, starting with Lehigh, we believe more than half of our shaky shoe customers are currently functioning as many operating critical industries, such as food and agriculture infrastructure.
Pharmaceutical and waste coal.
Those businesses that are temporarily close feelings are being read schedule and we expect there to be pent up demand. Once these facilities come back a lot.
Finally, we actually signed up hundreds of new smaller accounts over the past month as this current circumstances have driven and increased need for safety shoes.
Several professions and our online business model provides an easy and safe way for employees outfit their workforces, what's the required footwear.
Meanwhile, our branded ecommerce websites have experience a strong start to the second quarter.
Sales on Rocky Beach, Georgia, Boot, and Durango boots Dot com, Oh strong double digits, driven by robust gains in new users and conversions.
I'm pleased to report that the following.
To Petrobras government mandate shutdowns or manufacturing facilities in Puerto Rico, and Dominican Republic have reopened.
Based on current demand both are operating at less than full capacity.
Reduce costs. However, they are preparing to ramp back up as needed.
Highlighting the benefits of our vertically integrated manufacturing structure.
For the period, we source from third party contract manufacturers, we have delayed or canceled approximately 15 million a purchase orders over the next couple of months due to slow down and overall demand.
The good news that is for our inventory on our balance sheet at the end of March over 70%. Its core styles that have been an online for more than a year. So there's very little risk for a write down.
These are unprecedented times and I certainly the most difficult operating conditions. Many as many of us have faced in our lifetime.
At Rocky the health of our employees is our number one priority and taking a number of steps to ensure their safety.
This includes a loud individuals to work from home if their job functional allows it.
So those in our distribution center, we have split them up to 33 person teams.
We are sanitizing, all equipment and work areas before beginning operations on top of this we're conducting temperature readings at the beginning of each shit, ensuring each workstation is being utilized in a way to keep employees six feet apart in structuring all staff to keep.
Appropriately decisions at all times, including during breaks.
Hi, I'm extremely proud of the way our organization has responded to the men recent new challenges and the docking to what we all hope is temporarily the new norm.
In addition to executing their jobs across our organization people work stepped up to support our communities healthcare workers first responders in the U.S. military and knows didn't need by preparing in delivering food.
Manufacturing and donating maps and providing discounts on the central products.
I'm confident the combined strengths of our people our brands in our balance sheet will allow us to whether this store and emerge well positioned to get back on track to deliver sustained growth and increased profitability and generate enhanced value for our share.
Yes.
I'll now turn I'll now turn the call over to Tom who will review the financials in more details.
Thanks, Jason.
Jason mentioned at the start of the call. We're finding our first quarter revenue to be down slightly year over year and earnings per share to be down even more due to the pressure on margins from higher tariffs.
The added impact of go the 19 Q1 revenue ultimately declined 15.5% to 55.7 billion compared with 65.9 billion a year ago by segment wholesale sales decreased 17.5% to 35 million.
Retail sales increased 9.4% to 16.9 million and military sales decreased 4.3% to 3.8 million.
Gross profit in the first quarter was 19.3 million for 34.7% of sales compared to 23 million or 34.9% of sales the same period last year.
This years gross margins.
Here's gross margins include approximately $1 million in expenses related to the temporary closure of our manufacturing facilities due to the code due to covert 19, excluding these expenses gross margin for the first quarter 2020 was three point or 36.4%.
The 150 basis point increase in adjusted gross margin over last year were driven primarily by a higher percentage of retail sales, which carry higher gross margins than wholesale and military sales.
Adjusted gross margins by segment were as follows wholesale 33.9%.
Retail, 44.1% and military 26.5%.
Selling general and administrative expenses were 17.8 million or 32% about sales in the first quarter of 2020 compared to 18.5 million or 28% that sales last year.
Since the outbreaks of covert 19, you taken steps to reduce our expense structure and to date have eliminated approximately 1.5 million from our 2020 budget.
There are additional potential savings of approximately $2 million, because if we could realize this year, including a reduction incentive compensation.
Income from operations decreased 1.5 million or 2.7% of net sales compared to 4.5 million or 6.8% of net sales in a year ago period.
Adjusted operating income, which excludes the expenses from our manufacturing facility shutdowns was 2.5 million or 4.5% about sales.
Net income for the quarter was 1.2 million or 16 cents per diluted share compared to net income of 3.6 million or 48 cents per diluted share a year ago period.
Adjusted net income.
For the year was $2 million or 27 cents per diluted share.
Turning to our balance sheet, which it today with the first quarter was in a very strong position cash and cash equivalents at March 31st 2020 totaled $44.2 million compared to cash and cash equivalents of 17.6 billion at the end of Q1 2019.
The bolster our cash position and increase our financial flexibility, we drew down $20 million on a credit facility in March.
Inventories at March 31st were 77.3 million compared to 76.7 million at December 31st and 69.9 million at the end of the first quarter last year.
As Jason said, we've already started adjusting future seats from a third party suppliers and our plan is to work down our inventory position over the next couple of months over the next couple of quarters to better align levels with our current demand.
To reiterate approximately 70% of our current inventories for product, but as I know theres been a line year to year.
On our fourth quarter call in February we outline how we thought.
2020 would unfold from a revenue perspective due to the uncertainty created by Cobot 19, you're drawing that view and not providing an update at this time.
That concludes our prepared remarks, operator, we're now ready for questions.
Certainly and ladies and gentlemen to ask your question. Please press Star then one on your telephone keypad.
Please note that if you're on it because it sounds like we said that they have Saturday petchem abortion pill that there's lots we talked about.
Yeah, that's star wanting to ask a question.
I will go first to Jonathan Komp a third.
Yeah, Hi, thank you.
Just first of stars that big gas versus a non-GAAP.
<unk> could you just share the rationale perks 30.
$90, there so that you called out.
Yeah. John So this is the same treatment that we did in 2017, when we had the hurricane hit Puerto Rico effectively. This is not before you would be counting but it's actually this is just overhead and labor cost that we were not allowed to capitalize into our inventory than we had to blow through the quarter. So it's not indicative of.
The operation moving forward, although I do anticipate because the shutdown leaked into the second quarter level have similar type of adjustment in the second quarter.
Okay do by chance that bad segment gross margin I'm exhausted.
If you're not excluded or not.
Yes, <unk> on adjusted.
Thanks.
Yeah on adjusted gross margins by by segment.
Wholesale would be 31.9%.
Retail, 44.1% that remained unchanged and military was at 18.1%.
Okay. Thank you Stacy could ask.
That's maybe a broader question.
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Certainty out there and <unk>.
Yeah, I think just given the wacko, maybe clarity around the relative size of a few of the businesses that you called out where you see constraints is there any way you can comment on feel like a total business or maybe even part of as there's a lot six weeks or so here in March and April.
Trend line usage.
Our revenue perspective.
Ah, yes, so just to make sure I understand the question just kind of trends in the last six weeks is that we're looking for.
Yeah, either either from a total revenue perspective, or if you could just share a little bit more I know you called out some of that is area.
Relative strike.
Joining me on either side of all those pieces I'm, just trying to get a better sense.
Where the business down over the last couple of months here.
Yeah without getting too specific your Johnny I think about do you think about our solar wholesale business you know Jason will too though.
A third of our wholesale customers are shut down there not a central businesses.
But when you think about that two of the two thirds that are still open.
They're seeing geeky decrease foot traffic.
And then also you know I'm not certain that the footwear purchases you had stopped buying goods or are the reason that store people are going into the stores are looking for what they do anymore central type of products. When we when we think about the retail business as Jason said in his prepared remarks as well you're just over half.
We believe just over half of our yeah customers are open.
And so if you look at that segment and total you know Lehigh is the biggest proportion of our retail segment.
That being said our retail business our E commerce retail business in our marketplace business has seen significant increase in sales over the last six weeks ended, particularly if you look at the last week or so we've seen get an even stronger growth there and then from a military segment you know we were kind of.
Guiding to that $20 million number for the year and that was going to be relatively even but given the shut down for you over the last 30 days or so we haven't been able to ship French military. So so we know we anticipate getting that business kind of back up to our run rate, but I'm not sure.
He gets the 20 million for the year.
Okay understood it and maybe just following up on inventory could you just.
Comment that I know you highlighted the reduction and plan to orders, but how do you expect inventory.
Play out here.
And when you think about wholesale business Howard how are you planning the balance of here in terms of.
The receipts and you still plan on receiving.
Yes. So so we're obviously as we talked about leave you either delayed or.
Canceled approximately $50 million orders right now.
We're continuing to monitor that situation, where having weekly updates I mean, I think as everybody knows everybody right now is having trouble forecasting what does the next.
Three quarters looked like what kind of playing it by year, we think that the given our own manufacturing facilities that gives us some more flexibility we have shorter lead times are the Dominican in Puerto Rico than that and then.
Out of Asia, and so we're in a play that to our advantage and as Jason talked about as well you know 70% of our products are core product. So even if we get a little over inventory will be able to work through that inventory and adjust our purchases as we move forward, but yes. If you know we're having to guess on demand and if we if we're to a graph.
Some I guess, we'll we'll see inventory levels creep up but it doesn't have a server concern.
Okay. That's that's very helpful. And then maybe last one for me just.
More thinking about the cost side of that business I know you've mentioned some additional flexibility needed to take out operating cost but.
Anyway to frame up higher how you're planning the business or even.
It's a range of scenarios that you might be considering.
From a sales perspective on how that informs or what you're doing about operating cost side.
Yeah. So that's that's pretty complicated question, John but I'll give you my two cents down because we're all kind of you understand go trying to figure out what's going to happen over the next three quarters, but you know do you think about when we think we'll see our biggest sales decline in our wholesale business right. This is the current environment that retails and.
That we talked about our retail business you know, we weren't doing any kind of a meaningful Amazon business, you know really until the third quarter of last year. So we were continuing to see increases there as Jason talked about our E. Commerce business is growing and we hope that that momentum continues and then with our lead high space.
Which is our biggest category again in our retail segment, we believe that they're going to be more pent up demand, we can kind of feel that a little bit better and get a little bit more clarity on that because because of the the fitting schedules that are happening. So as we enter then it gets in the last one with military with those sales being down as the way that flows through the income saying.
And obviously you know from a gross margin standpoint, most retail sales me out those are going to your highest gross margin area and but with the wholesale business. We think we'll see a little bit we talked about in the last call how the incremental 15% tariff was gonna bleed through Q1, if you choose it.
The inventory that made lead through a little longer now because we've seen the sales decline, but we're going to work through that inventory to the first three quarters of this year.
From an operating expense standpoint, you know I don't think we'll see significant changes from a dollar standpoint that being said, even the savings that we're making up and we talked about earlier on the call those will be offset by increases in our retail segment and so you know we've talked about the significant increase in operating.
That's associated with selling 'em on different marketplaces, and the freight costs associated with it the selling boots and shipping goods. One one in two pairs at a time I'm. So so while I don't think we'll see increases interest expense from a dollar standpoint, we certainly see us de leverage a little bit as wholesale sales continued to.
I have struggled a little bit hopefully, we'll see those recover quite nicely here towards the second quarter and in the third and fourth quarter.
Yeah, and John I think also as ne is gone through this experience you know our Salesforce is really focused on staying communicated with the field accounts and what's kind of going on there and then from a Lehigh standpoint, when can we expect accounts to open back up is the states are opening up.
And we actually had I believe this week, we had two I fittings in Texas, where they are ever next week.
Where they're going to allow us stock in to hopefully get some things rolling there. So I think just the fact that the sales forces have been able to communicate with them and make those things happen that'll be kind of interestingly see out changes and then there's still shows that have not been canceled.
We are anticipating that will be cancelled so there could be some additional SNA savings there, but we have not made that decision to cancel we're still waiting for them to to roll those out and let US know so we do we think there might be some savings there as well and then.
Kind of walk through the rest of the year, Yeah, I think I think John just to.
Kind of put on deposit has been on some of the stuff. That's happening here you know we think we're trying to figure out how this is going to change our consumers moving forward and so the more consumers, we get going to two our ecommerce websites right. The the better and then also with our Lehigh business. It is particularly set up to two.
I'm, having a hands off or no contact safety shoes shoes solution and so we're excited about what we're seeing from an account growth standpoint at least high and we hope that we can continue to catch this momentum I keep this momentum going.
As consumers may change, you're buying habits as they move forward.
Okay and just this last follow up I'm, just thinking about the modeling Joe and I think a second quarter.
'cause there maybe they'll feel more revenue impact from what's going on and I just want to make sure. It's not that I'd refer all things that you might have a negative operating corridor.
I'm not really ready to talk through that at this point I mean, I think that the second quarter, certainly going to be our toughest quarter right and so.
There's a lot of variables in that about manufacturing and shut downs.
And we're working through that you know today so.
Rather not comment.
Okay understood. Thanks for taking all the question.
Yeah, Thanks, John inch up.
And with that when you come down and that does conclude today's question and answer session I would like to turn things back there, but any additional I couldn't comment.
Great. Thank you very much a everybody I want to again, thank the rocky team they've done an exceptional job through this entire.
Situation and I want to thank.
The people in the field that have worked tirelessly to help.
Keep in the United States are safe place and we look forward to moving past this and getting on thank you very much.
And with that ladies and gentlemen that does conclude todays call me. Thank you for your participation you may now disconnect.
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