Q2 2020 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by welcome.
Welcome to the Rocky brands second quarter fiscal 2020 earnings conference call.
This time, all participants are only listen only mode.
Following the presentation, we will conduct a question answer session instructions will be provided at that time Buda queue up for questions.
No one has any difficulty sharing the conference. Please press star zero for operator assistance anytime.
I would like to remind everyone that this conference call is being recorded and we'll now turn the conference call over to Brendon Frey of I see our.
Thank you thanks to everyone joining us today.
Before we begin.
Please note that todays session, including the cure in 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 risk 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 todays press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31st 2019.
In addition, the company may refer to certain adjusted non-GAAP metrics on this call.
Explanation of these metrics can be found in the earnings release filed earlier today.
I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky brands Jason.
Thank you Brenda.
With me on today's call is Tom Robertson, our Chief Financial Officer.
I hope everyone on the call in listening via the webcast is staying safe and healthy.
Our thoughts continues to be with every one affected by this devastating pandemic.
Like it has for so many kobin 19 has created new challenges in our organization.
Despite being up against the most difficult operating conditions, we have ever experienced our business exhibited increasing strength as the quarter progressed.
Thanks to the work we've done over the past few years, improving the desirability of our brands through impactful marketing programs and enhancing our product lines through innovation in building out our direct to consumer channels, we were able to capitalize.
On the acceleration in online spending that occurred as a result of the stay at home orders.
[noise] under the circumstances, our business performed relatively well in our wholesale channel well sell through on our partners' websites Oh over last year early in the corridor and then picking up at brick and mortar later in the quarter as more stores reopened for resumed.
More normalized hours and operations.
Overall sales declined approximately 9% with wholesale our largest segment.
Down, 16% somewhat offset by 16% increase in retail sales.
Retail responded a proper retail represented approximately 29% of our Q2 sales up from 23% a year ago.
The increase in retail sales helped fuel 180 basis point improvement in adjusted gross margins.
This allowed us to deliver a slight year over year improvement in adjusted E. P. S. Despite the overall sales decline.
With our better than expected performance, we made the decision to repay the $20 million, we drew down on our credit facility in March.
So precautionary measure in response to the covert 19.
After the repayment, we still ended the quarter with nearly 26 million in cash and cash equivalents, a 64% increase over a year ago in zero debt on our balance sheets.
Looking at our second quarter results in more detail starting with our wholesale segment.
As we outlined on our Q1 call in late April we estimated that approximately a third of our wholesale partner doors were temporarily closed while the other two thirds for designated essential businesses by their respective state governments as they serve consumers who mustard.
And on the job either fight the virus protect our citizens or execute functions that need to be maintained during this crisis.
Beginning in May many of the locations that were close began to reopen and by mid June close to 95% of all wholesale doors were open.
This trend along with the strengthening of the U.S. consumer, which we believe has been driven impart by federal stimulus actions fueled a meaningful month to month improvement in sell through of our products for the data we receive from several of our large retailers.
Following a difficult start to the quarter with April down almost 30% sell through was down only 10% in may and turned positive in June increasing mid single digits.
In terms of categories and brand performance work led by Georgia Boot was in demand as many consumers, who where our work boots remains on the job during the pandemic in fact demands for certain key styles started to outpace supply.
Fly late in the quarter and we've been chasing some inventory.
Rocky outdoor enjoyed a strong second quarter also with people not traveling as much and staying closer to home due to covert 19 combined with the social distancing measures in place more people, it's turned to outdoor activities for entertainment and our hunting boot business.
Was a beneficiary of this dynamic.
Sales were also helped by several compelling new products introduced this year that it strongly resonated with our core consumer.
Our western category led by Durango, what's under the most pressure at wholesale early in the quarter as many of our key account adjusted their assortments to serve the essential workers on the job during the early days of the pandemic.
Sales trends did improve as we move through the quarter and more consumer started returning to stores.
While western revenue was down I do want to call out the gross margin was up several hundred basis points.
As the amount of markdowns and discontinued product sales were far below last years levels.
Turning to our retail segment, which had a phenomenal quarter, increasing 16% year over year.
This result was driven by explosive growth in the E commerce sales, both through our own branded website and online marketplaces.
Total web sales were up 144% with Georgia, Rocky and Durango Dot Com, Oh, increasing strong triple digits.
As more consumer shifted their purchasing online during the second quarter, we saw a surge in a new customer acquisitions, along with strong demand for existing customers.
I believe the work we've done enhancing the functionality of our branded desktop and mobile sites and expanding our direct to consumer efforts, our market places, particularly Amazon, where you'll recall, we gain seller fulfill prime status last year has provided us.
The opportunity to capitalize on this change in buyer behavior.
Meanwhile, our Lehigh safety shoe business was active signing up new accounts and responding to a good deal of inbound interest during the quarter, However that pandemic forced us to adjust our normal operating procedures.
Requiring us to execute more remote fittings versus our usual onsite I fit events, which unfortunately doesn't drive as much volume.
On top of this many of Lee ice customers are operating with reduced workforces in order to maintain social distancing. Therefore demand is softer than usual at the moment.
We expect there to be pent up demand as conditions normalize and were able to reschedule in person fittings for existing accounts and scheduling initial events for newly signed customers.
Lastly in terms of our manufacturing facilities, both Puerto Rico, and the Dominican Republic are running at 100%.
Following temporary government mandated shut downs early in the pandemic they've reopened in April at reduced capacities in order to align costs with demand more recently, we've adjusted productivity in response to the recent increase in sales trends.
This ability to dial up and dial down our production schedules in response to the market ball volatility underscores the benefits of our vertically integrated manufacturing structure, which we believe is a key competitive advantage.
I'm very pleased with how our organization performed under such difficult conditions.
Especially want to thank our distribution center facility teams, who haven't missed a shift since the start of the pandemic.
While sales trends improved as the second quarter went on and this positive momentum carried into July our number one priority continues to be ensuring the health and safety of our employees our customers and the communities we operate in.
With that in mind, we are proceeding cautiously, but do expect our business during the second half of the year 10 through versus second quarter metrics more specifically, we are expecting overall sales to be roughly flat compared with second half of two.
2019.
As our wholesale channel continues to recover and E. Commerce trends remained strong we obviously have better visibility into the third quarter. At this point then the fourth quarter and what we can see in our order book indicates retailers are more bullish in immediate term.
And a bit more cautious about later in the year.
We are certainly expecting things to remain volatile and 2021 and why we don't know what the ultimate impact covert 19 will have on our industry and the overall economy I'm confident that the combination of our people business model and balance sheet have rocky.
Well positioned to navigate the current headwinds and emerge from this period poised for a long term success.
I will now turn the call over to Tom to review the financials in more detail Tom.
Thanks, Jason.
As Jason said under the circumstances, we are pleased with our second quarter performance, which included sales and earnings coming in ahead of our most recent expectations.
Net sales for the second quarter ended up declining 9.3% to $56.2 million with a difficult start to the quarter due to covert 19 somewhat offset by improving trends in may and even more so in June.
By segment wholesale sales decreased 15.6% to $34.3 million.
Retail sales increased 15.8% to 16 point Threemillion and military sales decreased.
To 5.6 million from 7.2 million.
Gross profit in the second quarter was 19.5 million were 34.6% of sales compared to 21.4 million or 34.6% of sales.
Period last year.
This quarter's gross margin includes approximately $1 million and expenses related to the temporary closure of our manufacturing facilities due to covert 19.
Including these expenses are excluding these expenses gross margin for the second quarter of 2020 was 36.4%.
The 180 basis point increase and adjusted gross margin over last year was driven primarily by a higher percentage of retail sales, which carry higher gross margins than our wholesale and military segments.
As well as higher retail margins year over year due to the higher proportion of ecommerce sales within our retail segment.
This was partially offset by lower wholesale and military margins year over year.
Gross margins by segment were as follows wholesale 31.4%.
Retail 48.1%.
And military 14.9%.
Adjusted gross margins were as follows wholesale 33.3% and military 20.9%.
Selling general and administrative expenses were $16.4 million or 21, 29.1% of sales.
In the second quarter compared to 17.5 million or 28.2% net sales last year.
Excluding the decrease we saw on variable expenses tied to sales in the second quarter, we've taken steps to reduce our expense structure and we have eliminated approximately $1.7 million from our 2020 budget.
Income from operations decreased to 3.1 million or 5.5, 0.5% of sales compared to 39 million or 6.4% of net sales and a year ago period.
Adjusted operating income, which excludes the expense from the manufacturing facility shutdowns was 4.1 billion or 7.3% of net sales.
Net income for the quarter 2.4 million or 33 cents per diluted share compared to net income of 3.2 million or 42 cents per diluted share.
Adjusted net income for the year was 3.2 million or I'm, sorry, adjusted net income for the year was 3.2 million.
For 44 cents per diluted share.
Turning to our balance sheet.
At the end of the second quarter continued to be in a very strong position cash and cash equivalents at June 32020.
5.8 million.
Compared to cash and cash equivalents of 15.7 million at the end of the Q2 2019 and increase 64.4%.
During the second quarter of 2020, we generated cash flow from operations of 4.7 million.
Based on this result, combined with our current outlook for the business. We made the decision to repay our $20 million draw on our credit facility at the end of the second quarter was zero debt on our balance sheet.
Inventories at June June Thirtyth were $774.5 million compared to $77.5 million at the end of the second quarter last year, our inventory isn't very good shape with the majority being core products that is in line year to year.
In fact, we are low and even out of stock on some styles.
We have wholesale orders in hand for.
Borrowing we are not reinstating the outlook, we provided at the start of 2020, we do feel like we have more visibility into the near term trends than we did in Q3 Q1 call.
This is a volatile environment and things are changing quickly assuming there isn't another's wide scale locked down we do expect our business performed better from both a top and bottom line perspective in the second half of the year compared with the first half of.
Curve of the first half with Q3 likely outperforming Q4 based on our current wholesale order patterns.
That concludes our prepared remarks, operator, we're now ready for questions.
Thank you.
We will not have our question and answer session if you'd like to ask a question on the phone line. Please press star one on your telephone keypad.
Confirmation Tom will indicate that your line is in the question Q.
Pretty when using speaker equipment, it may be necessary free to pick up your headset before pressing the star keys.
One moment, please what we now poll for questions.
Our first question comes from Jonathan Komp with Baird. Please proceed with your question.
Yes, thanks, guys.
I want to ask a couple of questions about the wholesale business I know you mentioned, yeah. The indications you get up sell through from some partners can you maybe just give a sense what portion of the wholesale business you see the sell through figures for maybe as a starting point just to get a sense of what you're seeing.
Hey, John Thanks for being on yes, so it's a pretty small group of accounts that we get that from but is it take a bigger.
Representative of the sales number right. So so our mom and pop customers don't have the ability to give us this kinda information.
But the larger accounts that are giving us do pretty good volume with us. So we feel pretty good about those numbers, but it it's not a huge representation from an account base yeah, John just add on their to it I think where we do have some visibility.
It certainly in the World category, we see we've seen those results are we can see those results in the where category.
And also in the in the outdoor spaces, where we saw some of the stronger trends from a sell through perspective.
Okay. That's helpful and maybe about my word categories, specifically I'm wondering if you have a view it sounds like the business, it's holding up better than you would normally expect given the employment situation I know you called out there.
Stimulus you have any any views on the sustainability of what you're seeing there.
So I think I think initially John our customer base.
It was really not affected terribly. So if you think about how the cove and kind of went across the country and restaurants were close down and bars were closed down that's really not our customer base.
Those are probably a different kind of footwear, but the construction guy the guy working on oil rigs the guy working in farm and ranch Yost he kept working and so we really didn't see any big decrease there.
I think we are concerned if you look at something like I think it was United Airlines has announced they're going to lay off some people in October.
That is more concerning for me and I think when when we talked about look Q3 looks the way. It does and we are not as comfortable maybe with Q4 I think that's probably why.
Until we have more visibility on what's happening there and we see what the book looks like it. It's just kind of it's kind of a big question Mark.
Okay, Great and then an unrelated to that commentary on the second half.
Any other specific to call out either the magnitude of outperformance you could see third quarter versus fourth quarter or any other color you're willing to provide and the order book and what you're seeing.
Yeah, John so from from a from a second half of the year perspective, we're seeing we're continuing to see a you know the Georgia bookings looking well.
We are we are also.
Rocky work is doing about rocky work and and as well as Durango for the second half of the year from Western perspective, it's come in.
[noise], it's stronger than than they did in the second quarter second first half of the or I'm sorry.
Yeah, what are the areas that that's got me a little bits or I guess complex isn't the outdoor space, we're not seeing a ton of bookings from the outdoor space, but.
We did see our outdoor business do very well and the for in the second quarter of.
Just to.
In the mid teens and so I asked the question. We're having is if the social distancing continues and depending how the pandemic unfolds for fall during Oh, you know during hunting season deer season, particularly.
We're curious to see how outdoor does and so I.
I think that we've got some potential upside there yeah I think the other thing John as we and I don't have.
And data around this but I believe it shut down so quick right at the end of Q1 in the beginning of Q2 and I think retailers made decisions that were all the right decisions at the time and I think things have come back a little quicker than we all expected.
So I think Q3 is some pent up demand and then I think you're going to see that kind of level off. So I think there there could be a pretty good you know bump in Q3, and then maybe a little smoothes out in Q4, but if you know if things continue the way they are who knows what could happen.
In Q4, but if we get another big shutdown, if if different states shut down that could change the end of Q3 and then into Q4, two so it's a lot of variables right now Unfortunately.
Oh, that's that's very helpful perspective, maybe just last one for me on inventory.
Like you're in Chase mode in a few areas could you maybe is there more on.
Kind of with state of things, maybe warrior and wider than you'd hope to be and are you seeing any.
Production or supply chain bottleneck that that would prevent you from catching up here.
So I think for US again, you know when when the retailers really slammed on the brakes, we took some steps backwards and said, okay, let's be a little careful here and we've been able to.
Turn that back on a little bit quicker I think that most people again as I talked in my.
And my.
Report.
We're able to affect our factories, a little bit quicker than we can our other partner factories, maybe in the far east.
We have not seen any real issues with any of our partners, we've been able to get the product we've been able to place the orders we've been able to get the raw material.
The biggest issue we're having right now is in both the really more in the Dominican them, Puerto Rico is as things change with Covance and the spikes come back up they made put in a new regulation that says well you're curfew now back to seven PM and so we have to go to the governor.
Matt and say, Hey, can we keep working until nine PM and in most cases, they've given us the okay to do that but we feel pretty good about that and we hope that here in Q3 going into Q4, we're gonna be in a better place for inventory, but.
And the way the orders are coming in it's a it's hard to keep up with it.
Great that's encouraging to hear thanks for taking all the questions.
Yes, absolutely Brandon, Thank you or I'm sorry, John.
Thank you.
As a reminder to our audience if you'd like to ask a question. Please press star one on your telephone keypad.
Yeah.
It looks like there are no further questions at this time I'd like to turn the floor over to Jason Brooks for any closing remarks, you may have.
Great. Thank you very much.
I just want to reiterate one more time to our team here at Rocky how much I appreciate their efforts and commitment.
We have had to go through it Mazin time, and everybody is really stepped up and done a wonderful job and I appreciate everybody's efforts and I appreciate the support from our.
Customers consumers and shareholders and I wish everyone, well and stay healthy.
Ladies and gentlemen, this concludes todays web conference you may now disconnect your lines.
Thank you for your participation have a great day.