Q3 2020 Rocky Brands Inc Earnings Call

Welcome to the Rocky brands third quarter fiscal 2020 earnings conference call. At this time, all participants are listen only mode. Following the presentation. We will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties hearing the conference call.

Chris.

Star Zero for operator assistance at any time I would like to remind everyone that this conference call is being recorded I would now turn the conference over to Brendon Frey of I see our please go ahead.

Thank you and thanks to everyone joining us today.

We begin please note that today's session, including the Q and 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 Exchange Commission, including our 10-K for the year ended December 31st 2019.

I'll turn the conference over to Jason Brooks, Chief Executive Officer of Rocky brands Jason.

Thank you Brendan.

With me on today's call is Tom Roberts, our Chief Financial Officer.

We hope everyone on the call and listening via the webcast is staying safe and healthy.

As you saw from our earnings release, it was an outstanding quarter from both a top and bottom line perspective.

Our results were fueled by the resurgence of our wholesale business combined with the continued strength of our direct to consumer channels.

Following a challenging second quarter when many of our retail partner stores were either closed or experiencing reduced tropic levels due to cope with 19 restriction.

Wholesale trends bounced back nicely in Q3.

Like we discussed on our last earnings call.

Through started to pick up in June is the number of new cases started to slow and stores reopened.

This momentum accelerated as we moved into the third quarter driven by strong full price selling.

Tom will go through the financials in more detail, but here are just a few of the highlights net sales increased 15.8% to $77.8 million.

Gross margin improved 120 basis points in earnings per share grew 38.7% to us dollar four cents.

Our recent performance admit the ongoing health pandemic underscores the strong consumer connections, we forge in the desirability of our product lines.

Importance of our brands, our wholesale partners and the work we've done creating a more nimble and efficient organization.

Has been able to quickly adapt to the changing market conditions.

Looking at our third quarter results in more detail starting with our wholesale segment.

With all of our wholesale doors open and many were assuming normalized hours and operations and the U.S. consumer and a much stronger position.

The selling environment at the start of the third quarter was dramatically better than just three months earlier.

With many of our retailers reducing inventory levels in canceling reseach early in the pandemic. There was definitely pent up demand for product as consumers started to return to stores in greater numbers.

This is reflected in our strong sell in results as wholesale revenues increased 19.3% for the quarter Mike.

More importantly sell through was also strong compared with a year ago period per the data we receive from several of our large retailers.

In terms of category and brand performance work, our largest category was up 20% led by Georgia boot as the brand's new collections performed very well at key retailers like tractor supply boot barn coastal farm and ranch.

Along with many of our smaller independent accounts.

We've also seen interest spike in several of Georgia core items, such as the Romeo and the giant driven by more casual work from home policies that are still in effect in many parts of the country.

Our western category experienced a dramatic turnaround from the second quarter, increasing <unk> percent year over year.

As consumer shopping in stores and online responded very favorably to our Durango brand New series like the rebel pro and the Maverick.

Kids product has also been a huge hit recently as have our U.S.A. and Texas flag boots.

The Rocky brand had another solid quarter, our outdoor business has held up well during this pandemic as travel restrictions have kept people closer to home and social distancing requirements have benefited outdoor activities.

Sales were also helped by several compelling new products introduced this year.

Particularly with our rubber boot category.

Which have resonated strongly with our core consumer.

Rocky Western experienced strength across its entire customer base things to keep product introductions like our new legacy 32 bit that brings a unique look and improved level of fit and comfort to the western market and expanded programs with many of our major independent account.

Yes.

Finally, rocky work grew at its fastest pace in some tough.

As it continued to supply essential workers that have remained on the job throughout the pandemic safety footwear.

With respect to Rocky commercial military division the business posted a substantial year over year increase things to enlarge part to our work with Atlantic diving supply or adss.

On supplying military footwear forces of 70 basis around the world with one of our insulated waterproof S to be boots.

This great partnership also yielded a large order what the U.S. Marine Corps for our popular Tropic weather boot.

Turning to our retail segment strong growth in our E Commerce channel, which consist of both our branded websites and online marketplaces fueled another double digit gain in the quarter Tony.

Total web sales were up 50% with Georgia, Rocky and Durango, all increasing strong double digits.

Even as consumers regimes shot resume shopping at brick and mortar retail in greater numbers, we continue to see increasing engagement online with both existing and new customers.

The work Weve done enhancing the functionality of our brand the desktop and mobile sites and expanding our direct to consumer efforts, our market places, particularly Amazon, where you will recall, we gained seller fulfill prime status last year has proved us the opportunity to.

Capitalized on this change in buying behavior.

Meanwhile, our Lehigh safety business remained active signing up new accounts, which will provide a nice tailwind 2021 and beyond.

In terms of current business trends have improved since the second quarter. When many Lehigh customers were operating with reduced work forces in order to maintain social distancing.

Many companies have resumed more normalized operations and have allowed us back on site to execute our I fit events we.

We are also deploying new did you don't tactics to drive demand when our teams are on site such as enhanced contact techniques in a virtual fitting program that is currently in beta testing and expected to roll out before the end of the year.

Lastly in terms of our manufacturing facilities, both Puerto Rico, and the Dominican Republic are running at a 100% weve.

We've recently had to adjust productivity to keep up with demand for some key styles and the.

Compensate for some of our suppliers, who have been shifting constraint do the Cobra related restrictions.

This ability to dial up and dial down our production schedules in response to the market volatility and speed to market underscore the benefits of our vertically integrated manufacturing structure, which we believe is a key competitive advantage.

I'm very pleased with how our organization has performed under the circumstances, we've emerged from a challenging second quarter and quickly capitalize on the wholesale opportunities created by the improving store environment, while continuing to deliver great service to consumers.

Sure our direct to consumer channel.

Our teams are doing a great job executing our growth strategies, while continuing to provide and prioritize the health and safety of our employees, our consumers and the communities we operate in.

While it is still unclear what impact COVID-19 will have on our industry and the overall economy over the near and long term, we are feeling better about our outlook for the remainder of this year based on our recent performance and current momentum we.

We do expect trends to moderate from third quarter levels as the pent up demand we experienced early in the store reopening process continues to fade.

That said, our brands and products remain in high demand.

With consumers, which should drive solid gains in both our wholesale and retail segments during the fourth quarter.

Looking beyond this year I'm confident.

The combination of our people business model and balance sheet has rocky well positioned to emerge from this period of uncertainty poised for sustained success.

I will now turn the call over to Tom to <unk> to review the financials in more detail Tom.

Thanks, Jason we're.

We're pleased with our third quarter performance, which was highlighted by most.

All key metrics coming in well above last year and ahead of our expectations.

Net sales for the third quarter increased 15.8% to 77.8 million compared with 67.2 million a year ago.

By segment wholesale sales increased 19.3% to 56.3 million.

Retail sales increased 11.4% to 16.1 million.

And military sales were 5.3 million compared to 5.4 million last year.

Gross profit in the third quarter was 29.8 million or 38.4% of sales compared to 25 million or 37.2% of sales for the same period last year.

The 120 basis point increase in gross margin was primarily attributed to higher wholesale margins, which were driven by increased full price selling and less discounting along with higher retail margins.

Gross margins by segment were as follows.

Wholesale 37.1%.

Retail 46.7%.

And military 26.6%.

Selling general and administrative expenses were 20.2 million or.

Were 25.9% of net sales.

Compared to 18 million or 26.8% of net sales last year.

We were able to leverage operating expenses by 90 basis points on higher sales despite higher variable expenses from the increase in sales. Thanks to steps, we've taken to create a leaner and more efficient operating structure.

Income from operations increased.

38.2% to 9.7 million.

Or 12.4% of net sales compared.

Compared to 7 million or 10.4% of net sales in a year ago period, driven by healthy gross margin expansion and expense leverage.

Net income for the quarter was $7.6 million or one dollar and four cents per diluted share compared to net income of $5.6 million or 75 cents per diluted share in the year ago period.

Turning to our balance sheet, which at the end of the quarter continued to be in a very strong position cash and cash equivalents at September Thirtyth 2020 totaled $19.9 million.

Compared to cash cash equivalents.

6.4 million at the end of Q3 2018, an increase of 210%.

During the quarter, we did resume our share repurchase activity buying back approximately 41000 shares.

We ended Q3, this year with no debt and 71 million and available borrowing.

Capacity on our credit facility.

Inventories at September Thirtyth were 80.7 million down 2.7% from 82.9 million.

At the end of the third quarter last year, our inventories in very good shape with the majority being core product that is in line from year to year and as Jason said, we've had to adjust their manufacturing to build up stock on some key in demand products.

While we are not reinstating our outlook, we provided at the start of 2020 visibility into near term trends have continued to improve.

This is a volatile environment and things are changing quickly assuming there isn't another wide scale locked down we do expect our business to be up in the fourth quarter led by continued resurgence in our wholesale business. However, the rate of growth on a year over year basis will be below Q3, as we won't benefit from the initial pent up demand.

And we experienced and the start of the third quarter when stores were just starting to reopen.

We're looking forward to a solid finish to this year and moving into 2021 with good momentum.

That concludes our prepared remarks, operator, we're now ready for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation Todd will indicate your line is in the question queue.

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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from Jonathan Komp with Baird. Please go ahead.

Yeah, Hi, Thanks. This is Steve on for John <unk>. Our first question is really just around inventory and it looks looks pretty clean. So I guess, just just trying to dig a little bit deeper there on how you feel about that I'm headed into holiday here and.

Really how clean the channels are I mean, I know you said sell throughs have been good.

So just trying to get a sense of some of those moving parts and how you feel about your ability to maybe chase demand if that's an opportunity here during holiday.

Yeah, Hey, Steve Thanks for calling in a yeah I mean, it's as it relates to I'll speak to the to the inventory specifically, maybe Jason get a little bit into the channels, but you know our inventories down a rail why we as you know the the business snapped back a little bit faster than we anticipated and we were going to.

Servant Avanir ordering.

You know as the pandemic started so.

We are we are chasing some inventory and some key styles that being said, we feel really good about the inventory that we have on the balance sheet and we are lot inventory in transit to try to meet expectations for the fourth quarter.

From a channel channel specific I'll, let Jason kind of touch on.

Yeah, I think you know as Tom indicated, we really slowed down orders, we didnt cancel anything so we feel pretty good even though we are chasing it.

We feel pretty good about where the year's going to and we have seen probably a bigger issue in the western channel than any other channel, but but we still feel pretty good about that channel as well and obviously the western channel in Q.

Three at a pretty nice quarter so.

We'll see where it kind of falls out but.

There's there's we're chasing some stuff, but I don't think its going to affect us.

Too terribly bad in the fourth quarter, Yeah, just a touch of that to Jason Jason spoke to it. It has prepared remarks, but the fact that we have our own manufacturing facility, both Puerto Rico and the Dominican now we have much shorter transit times, and we've got greater flexibility sense. It's a company owned manufacturing for so.

So we were able to adjust.

Our scheduling for what what shoes, what boots were going to make a minute.

I think that's going to give us a better ability to react and maybe some of our peers and then in and that will even go into we don't do a lot of western boots and those factors Sir.

Yeah, Great and maybe that's that's maybe a good transition to my next question, which is more just you know anything more you can share on digging into some of those categories. I mean, I think it's pretty good to see it seems like that the strength, it's pretty broad based right now across a number of categories, but maybe just where you feel the most.

Confidence maybe heading into next year across yeah at work in western and outdoor and some of your different categories.

Yeah. So I think work is absolutely one of the strongest right. We build tools, we build essential items and those people didnt stop working fortunately or unfortunately.

We the people who did stop working don't really buy our product right. They work in restaurants, and and casinos and we don't do a lot of business. There that construction workers didn't stop working so we continue to see pretty positive things in the work category as we just reported.

The hunting category continues to be a real positive for us because I think people are able to travel and go on vacations and do the things they want to do.

But they can do it locally and so I think hunting is taking on a new.

Life of its own for a family and maybe their sons or daughters, and taking them hunting hunting is a seasonal program. So I think it will not be in my opinion, a strong going into next year, but we see no reason that it won't continue to be a strong.

In 2021 in total and then the western market probably took the biggest hit from the pandemic.

In regards to stores that maybe were closed store closed a little bit longer or had to reduce hours.

But we've seen it come back really nice in Q3, I think that one probably was the biggest pent up demand issue and so that one may be.

Level off a little bit more here and our expectation is it will it will do that again in 2021, Tom I don't know if you want to add anything no. I mean, I think we saw a really good step back and our commercial military business too.

Theres a lot of oil Lockdowns Yep Yep.

With the armed forces, moving and transition and different bases and trainings and that such so we saw a strong resurgence in that in the third quarter I anticipate that that will that will continue to fade into our fourth quarter here and I think the outdoor spaces. The ones I've got my biggest question Mark around I think that as Jason alluded to more people are out there and.

Because there is less others lets things to do and hunting is the perfect socially descent activity to do so.

We will see how that continues in the fourth quarter, but I have high expectations for that as well.

Yes, great and maybe just on the on the E. Commerce, obviously really strong results here in the quarter.

How do you see kind of your your mix playing out over time do you think that's something that's going to continue to come down there.

Do you think that's going to stay elevated and what do you think could be a good a good target for the company over time.

Oh, the target is a great question I'm not sure that we have a a definitive answer on that one.

I think the way we are looking at E Commerce right now.

Is that its flight so quickly and so that's.

The increase was huge and it happened in such a short period of time I.

I think we believe it has to continue to come down a little but but we do believe that this consumer has turned the corner and and so I'm not sure where the floor is.

What I do believe it's got to come down a little bit, but it's still going to be strong we're still going to see nice increases there, we're still going to see nice business there.

But that it spikes, so hard and so fast I just don't know that we can maintain that yeah. I think what I think about our E com business, which would include our own branded websites you know the rocky boots Dotcom and also our marketplaces you know I think that we had a lot of consumers the transition into to shop.

Being online and went directly to to our websites or two of marketplaces and so are your biggest challenge. We have is how do we keep some of those consumers right and how do we keep them coming back to rocky good subcom to purchase their their their product.

So I I think that business will continue to see increases over ally, but to Jason's point will have to decelerate a little bit from a marketplace standpoint, you know we talked about initiative, we had and earnings two or one or two calls ago about increasing our third party brand presence on marketplaces and we.

Seen some some small victories there so as we continue to.

Leverage some of our relationships with other partners that we have from our Lehigh business and sell those and marketplace in the marketplaces I think that business will continue to grow pretty strongly one thing I guess, one one thing to think about from a comparison standpoint is that in the fourth quarter of last year is when we really saw.

Our to doing particularly the Amazon marketplace, So feel pride.

So we're comfortable running up into tougher comps really starting in a few weeks ago and so and so we know that will decelerate there, but we think overall will continue to grow that business, particularly if we're able to continue to add third party brands.

Yeah, Great couple of more from me.

Yes.

Are you seeing any impact even pretty recently here and you know in markets that have seen a recent uptick in virus case counts I know it's.

Starting to become more of a headline nationally. So just wondering if you see risk there you know those numbers keep going up here.

So I think if if you don't consider a risk then you're you're missing you're missing the boat, we monitor it and track it.

And and we are very concerned about it and how it's happening but.

But I will tell you we have not seen.

Those upticks.

Affect our business right, now and and and I think it's because we don't see we see a lot of conversations about it but I don't see or hear feel much about shutdowns and much about less hours and much about where where those policies might go.

So in the short term here, we have not seen any any real reduction in yes, Steve that the with the uptick in cases that we've seen recently the place. It gives me the most our burn is probably in our Lehigh business, we were starting to see some good momentum and when we do get some visibility.

Into our fittings from a scheduling perspective and so.

The if is companies start pulling back on our ability to do fittings, and and keeping workforces at reduced levels I think that will impact our lehigh business, but I do still believe there is a lot of pent up demand there and given.

As Jason noted given our increase in or new card New account acquisition, there I do think when things settle down.

We will we will have some significant pent up demand and hopefully we get there sooner rather than later.

Great and then just one one last one for me you know I I think my question is really looking into next year.

There's there's a lot of things, it's going to work themselves out around <unk> cobot and everything else, but in any event that it's a more normalized environment cycling some easier compares in the first half is there anything you think structurally that that has changed about your business because I know that you won't be able to recoup some of the you know the <unk>.

Cost of revenue and yes.

Some of the margin pressure you've seen over the last.

Call. It six to nine months I'm, just just in a in a vacuum that things were more normalized next year or even beyond next year.

[noise] or so so big question, there and so you know obviously, Jason and I have been talking a lot about this I think as we look into 2021 and think about how our business has changed there's a couple key things I think made a change and maybe structured differently and so one is our retail business right. We believe that the.

Hi model is still the best model, particularly opposed pandemic world for providing safety footwear to your employees. So I think we'll continue to see account growth there versus the.

The truck model, it's just less because you know its a touchless way of getting safety issues here employees.

The other area is in our own E commerce in our marketplace business I think you'll continue to see consumers go there as they look to purchase footwear in the in the future I think thats certainly accelerated consumers to purchase more digitally but is that also impacts our wholesale businesses. We've seen strong continued strong demand for our drew.

Rob shipments from a lot of our key retailer. So if they're not buying are the product on our company owned websites, they're buying more get it as getting bought on.

The websites of our retail partners, such as trashed flying Blue bar and so I think we'll continue to see an increase in drop shipments for those customers, which which in turn could could result in us having to invest a little bit more inventory.

But again, our for our inventories generally pretty core and carries over from year to year, Jason anything else would touch on when it comes to 2021.

Yeah, I think I think as everybody is trying to figure out 2021, and what's it going to look like and how it's going to kind to unfold.

I think again, we're fortunate that our products are.

Relatively essential our customer base is relatively essential.

And and I think as Tom hit we're going to continue to focus on.

The core aspects of digital and trying to increase our ability there, but I also think and I don't have any data around this but we think that this kind of increase we just saw in Q3 is really a shelf space stealing and so we're feeling pretty confident.

That the consumer bases liking our brands.

And more attracted to our brands and so.

Our goal is to continue rolling that into 2021 and getting a more normal stable.

Kind of year, but finding a way to having you know an increase throughout 2021 as well.

Great. Thanks for taking all the questions. That's that's all I have some good luck.

Yes, great. Thank you thanks Dude.

Once again, if you would like to ask a question. Please press star one on your telephone keypad.

There are no further questions I would like to turn the floor over to Jason for closing comments.

Great. Thank you very much I just want to say, thank you to all our employees they've done a great job through this crazy 2020, a thank you to all the supporters and stockholders, we look forward to finishing out a strong year and moving on to 2021. Thank you all.

Be safe.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.