Q4 2020 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to the Rocky brands fourth quarter of 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 and instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties here.
The conference. Please press Star zero for operator assistance at any time I would like to remind everyone that this conference call is being recorded and I will now turn the conference over today two of Mr. Brendon Frey of ICR. Please proceed sir.
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 sub.
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.
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.
I'll now 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 Robertson, our Chief Financial Officer.
Our fourth quarter was outstanding on every level.
The strong demand for our brands and products fueled record sales and profitability Rep.
Representing a great finish to.
Two a year.
From a high level, our fourth quarter results were driven by 20 plus percent 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 include net sales increased 16%.
To $87 6 million.
Gross margins expanded 370 basis points and adjusted diluted earnings per share increase of 107% to a record.
One dollar and 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.
And 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 we're 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 <unk>.
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% par.
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 the restrictions on many businesses started to ease and consumers began returning to brick and mortar retail or 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. The benefited our business in the third and fourth quarters the.
This was true for wholesale as well as our digital channel, which didnt, let up even as physical retail resumed more normalized operations.
For the back half of 2020 revenue increased 16% with wholesale up 21% retail up 12% and contract military down 12%.
Many of the brand and category highlights I've discussed on our Q3 call repeated themselves in the fourth but let me spend a few minutes reviewing them again.
Starting with work our largest category sales were up 18% led by Georgia boot as the brands New collections performed well at key retailers like tractor supply boot barn coastal farm and ranch along with many.
One of our smaller independent of accounts.
We've also seen interest spike in several of the Georgia core items, such as the Romeo and giant driven by more casual work from home policies that are still in effect in many parts of the country.
Our western category continued its strong second half turnaround with fourth quarter sales, increasing 43% year over year, following a 27% increase in third quarter.
Durango had a fantastic finish to the year driven by strong demand for perennial top sellers like our flag boots and other patriotic products as well as new offerings in core western and western work too.
Two areas, we've been focused on growing the last couple of years.
In terms of retail performance. It was strong across the board with majors, such as boot barn Rural King calendars and Academy sports all up strong double digits, while our smaller farm and ranch field accounts grew at an even faster pace.
Yeah.
Sales of the Rocky brands also accelerated in the fourth quarter led by Western as are functionally focused product offering continue to enjoy strong demand from a customer base that has experience little to no downtime during the pandemic.
Meanwhile, our outdoor business increased 20 plus percent despite less than optimal whether for hunting across much of the country.
The lack of cold Snowy weather in Q4 was more than offset by the higher participation in hunting and overall enthusiasm for the outdoor lifestyle and our ability to serve consumers with compelling compelling market appropriate product.
Finally, Rocky work grew high single digits is it continued to supply essential workers with their safety footwear needs combined with a new program for a key E tailor partner.
With respect to Rockies commercial military division the fourth quarter was marked by sizeable purchases from the army and Marine Corps.
As the military continues to transition to tactical uniforms, requiring coyote Brown boots.
As a result, our popular S. Two V collection once again posted a nice gain.
This was offset by some softness in the consumer direct transactions as foot traffic at the on base exchanges like a fees was down due to temporary travel restrictions related to COVID-19.
Turning to our retail segment strong growth in our E Commerce channel, which consists of both our own branded websites and online marketplaces.
Another double digit gain in the quarter.
Total web sales were up 33% with Georgia, Rocky and Durango, all increasing double digits.
Even as consumers resume shopping at brick and mortar retail in greater numbers, we continue to see increase engagement on line with both existing and new customers.
The work, we've done enhancing the functionality of our branded desktop and mobile sites and expanding our direct to consumer efforts of marketplaces, particularly Amazon, where we enjoy seller fulfilled prime status has provided us the opportunity to capitalize.
On this change in the buying behavior.
Meanwhile, our Lehigh safety shoe business remained active signing of new accounts, which we which will provide a nice tailwind in 2021 and beyond.
In terms of current business trends have continued to improve since late spring when many of the highest customers, we're operating with reduced workforces in order to maintain social distancing.
Many companies have resumed more normalized operations and of allowed us back on site to execute our I fit events. We are also deploying new digital digital tactics to drive demand, where our teams aren't on site such as the enhanced content.
Techniques and a virtual fitting program that is currently in beta testing and expected to roll out soon.
Finally, our contract military segment was down 21% or a little over a million dollars in the fourth quarter.
As we previously discussed this business has faced headwinds due in part to the recent exploration of some multi year contracts combined with the fact that rocky is the only non small business competing in the U S military footwear contracts.
On a positive note we recently.
We're awarded a $3 $5 million contract.
To produce a new safety boots for the U S. Navy that we expect to start delivering in the third quarter of 2021. It is a one year contract with an option to extend for an additional two years.
Shifting to our manufacturing facilities, both Puerto Rico, and the Dominican Republic are running at 100%.
During the back half of the year, we had to adjust productivity to keep up with demand for some key styles and compensate for some of our suppliers who have been shifting constrained due to COVID-19 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 for.
For 2020, we manufactured approximately 40% of what we sold.
Before I turn the call over to Tom to review the financials I wanted to discuss our proposed acquisition of Honeywell's lifestyle footwear business that we announced last month.
We are very excited about this transformation transaction for many reasons.
First we are acquiring great brands led by the original Buck Boot company and the extra tough.
The combination of our two powerful portfolios will create meaningful growth opportunities with our existing categories, particularly work and provide an entry into new market segments, such as commercial fishing outdoor camping and recreational.
Total fishing.
Second with innovative and authentic product collections that complement our existing offering with minimal overlap we will be in a position to strengthen our wholesale relationships and survey wider consumer audience.
Third we believe there is tremendous upside for leveraging our advanced fulfillment capabilities to improve.
Distribution of the new brands to wholesale customers and accelerate direct to consumer penetration today.
Today. These brands are fulfilled from a distribution center that includes numerous other product categories, such as hard hats, and PPE items. We believe we can meaningfully reduce their from fulfillment cost and we've integrated our business and begin shipping product out of <unk>.
Our D C in Ohio.
Lastly, and perhaps mostly important it is a very well run profitable business that nearly doubles, our sales and is immediately accretive to gross margins and EPS for 2020 sales of the acquired brands were approximately.
205 million wasn't the adjusted EBITDA of $24 5 million.
We expect the acquisition the close next month after which we look forward to sharing more details about the growth perspective for our combined brand portfolios.
I want to close by expressing my thanks, and gratitude to the entire Rocky organization for its hard work and perseverance during what has been a very challenging year for everyone.
You all have adapted to significant changes in how we work and do business without missing a beat it's because of your efforts that we will emerge from this pandemic, even stronger and on course to deliver even greater value to shareholders in the years to come.
I'll now turn the call over to Tom Tom.
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.
Gross profit in the fourth quarter increased 27, 8% to $36 1 million.
Or 41, two percentage of sales compared to $28 3 million or 37, five percentage of sales the same period last year the.
The 370 basis point increase was primarily attributable to higher wholesale margins driven by increased full price selling along with higher retail margins.
Gross margins by segment were as follows.
Wholesale 39, 1%.
Retail 48, 7%.
And military.
$30 zero percent.
Selling general and administrative expenses were $23 2 million or 26, 5% of net sales in the fourth quarter of 2020 compared to $21 6 million or 28, 7% of net sales last year.
Included in this years fourth quarter were approximately $700000 of acquisition related expenses.
Income from operations increased 93, 8% to $12 $9 million.
Or 14, 7% of net sales compared to $6 7 million or eight 8% of net sales in the year ago period.
Net income for the fourth quarter increased 91, 1% to $9 7 million or $1 33 per diluted share compared to net income of $5 1 million or <unk> 68 per diluted share and a year ago period.
Adjusted net income for the fourth quarter of this year, which excludes acquisition related expenses.
Was $10 3 million or one point of $1 41 per diluted share.
As Jason said 2020 was the year of two halves.
Following a challenging first six months due to the impacts from Covid, our business rebounded strongly over the third and fourth quarters for the full year net sales increased two 6%.
Wholesale of three 4%.
Retail sales of 12, 4%.
The military sales down 27, 6%.
Adjusted gross margins increased 260 basis points to 38, 5%.
Adjusted operating margin increased 290 basis points to 10, 8%.
And adjusted EPS improved 38, 3% to $3 14.
Turning to our balance sheet, which at the end of the year was in the very strong position highlighted by cash and cash equivalents of.
Of $28 4 million compared.
Compared to cash and cash equivalents of $15 5 million at the end of 2019.
We were able to increase our cash position by $12 9 million, even as we paid out $4 $1 million in quarterly dividends and spent $2 $9 million repurchasing approximately 130000 shares of our common stock.
As we previously disclosed we are funding a portion of the proposed $230 million acquisition of Honeywell's performance and lifestyle footwear business with cash on hand, the remainder of the financing is coming from a $80 million senior secured asset backed credit facility with bank of America and of 130.
The million dollar <unk>.
<unk> secured term loan facility with the direct lending group of TCW asset management company.
With respect to 2021 my comments are for the Rocky brands on a standalone basis as the transaction has yet to close we are.
We're currently planning for a solid year of growth with revenue is projected to increase in the mid single digit range led by our retail division followed by the wholesale.
With the recent Navy contract that we were awarded were expecting the military segment sales to be flat this year.
In terms of margins, we were facing some tough comparisons in the second half of the year from strong full price selling we experienced in 2020 as well as from the mix of sales in our retail division.
That said, we believe we can maintain overall gross margins at or slightly above 2020 levels as we leverage cost on higher volumes and gain efficiencies in our factories from increased production.
Following the close of the acquisition, which is scheduled for next month.
We will share our view on 2021 from a combined business.
That concludes our prepared remarks, operator, we are now ready for questions.
Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad income.
Information tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys once again Thats star one at this time, one moment, while we pull for first question.
Our first question comes from Jonathan Komp with Baird. Please proceed sir.
Yeah, Hi, thanks, everyone.
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 brands within the portfolio and then I understand you don't want to give projections at this stage, but could you share more backward looking out from what you've seen that for growth across the various brands.
Yeah, I think hi, John Thanks for the question could the here from you you know I think in.
In the press release that came out.
Their annual sales for 2020 was $205 million.
I think I could tell you mark is the.
The largest portion of that.
<unk> represents about two thirds of the total yeah.
And and extra tough in extra inside of a service make up most of the of the remaining third and then the Ranger in AR and the newest brands are smaller pretty small.
But they they bought.
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 and so as we stated we're really excited to have them of part of our family in and think the.
<unk> fit our business model and our distribution model really well.
Okay, and maybe a follow up there I want to ask.
Maybe stepping back kind of the motivation to do the deal.
Sounds like there while we're on brands so it looks like fairly profitable already so the when you step back and think about you know really the the reasons listen the good fit.
How do you rank order the.
Sales growth opportunity the.
Opportunity to leverage your <unk>.
Your own sales force and distribution and then.
The supply chain opportunity you mentioned, just curious kind of how the frame that up.
Yeah, I think right now until we get the close John we probably need to move to.
To more of a rocky question right now I think.
We're intending on closing here in in March and I think we will 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 it a little later day, Yeah, I think I think Jason hit some of the highlights in his prepared remarks to address.
Okay that.
It makes sense understood maybe one for a weighted but I'm extra rocky just how do you view that the.
The post the acquisition state of the balance sheet just curious.
Tom how are you thinking about the financing and the Oh really.
Your degree of comfort with the leverage on the balance sheet of steel.
And it'll be the first time in three years we of that.
Yeah, and so I think look we we've kind of given we've given some guidance on the financing with the.
With the ABL and the term note on the call.
We're planning on using our cash the fund part of the that the transaction as well and so given our EBIT results for 2020, and we've shared the EBIT results of the the transaction. We don't think that the we think we're still in a very good balance sheet position. We don't think we are over levered.
By any by any stretch.
And then obviously as we have planned growth for both ourselves and for the acquired brands in 2021 and would there be an accretive we feel very comfortable with where rocky will be from a balance sheet perspective.
Okay, great. Thank you.
Any change in plans short term of the dividend.
Should we kind of expect any other cash to go towards deleveraging in the short term or just any thoughts there.
We haven't we haven't really made any of those decisions yet we're still talking through all of the different scenarios. So I think I think we will.
Those conversations will evolve over time and as the results of the company continue.
But I do want to say, though I don't I don't see any changes today to our dividend.
I you know 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.
Okay. It makes it makes sense.
Just a couple of them on the Rocky business maybe on the.
The wholesale side first.
Just given how strong the second half of the bins curious.
If you of any insights on the on the sell through or kind of the state of inventory Mckee retailers the Madden yeah.
How that might translate into certainly the start of 2021 of them pretty easy compare I don't know if youre still benefiting from.
Better inventory.
The ability of concern given the unique sourcing versus competitors, just any any more thoughts from.
The state of inventory and how that all of that plays out.
Yeah. So so I would tell you, yes, we went into Q4.
After seeing Q3 being pretty strong in 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 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 in allowing us to have the the kind of increases we're seeing and.
We have been able to.
Keep up with the demand we 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 to to stay with it and the only be short in a couple of areas.
But we're excited about where we are where we ended and kind of where things are headed in Q1.
And are you facing in the disruption are you hearing disruption for others from some of the west coast ports or the issues I assume maybe you have lots of exposure there but I.
I don't know if there's any short term impact for you or maybe for your competitors.
Yeah, I think John 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 through Seattle, but we are we're very focused on it and we are prioritizing containers and product as we see necessary but.
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 but it's definitely there I I would I would be lying to you if we werent feeling it at some level, yes, John to add on there a little bit also keep in mind you of about 40% of our product comes from from the from Puerto Rico or from the Dominican which which isn't coming through the west coast ports went through the east coast. So we benefited.
From from a large portion of our product come in.
Through the through the East coast.
Yeah, great great. The here and then and then Tom Your commentary was helpful on the margin it sounds like.
We are expecting to hold the double digit operating margin for 'twenty, one from the Rocky business.
Any broader context, I know looking back in our model.
Higher than you've ever had so maybe just any thoughts on what's the what's changed if anything are kind of structurally why.
Yes.
Now it looks like that.
Double digit margin opportunity.
Yes.
There's a couple of dynamics leading to the that.
Clearly, we plan with our sales growth to leverage a lot of our operating expenses. So 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 of standpoint, because of the 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've got a little upside there.
Particularly in the first half of the year so.
It's really growth.
<unk> gross margins.
Vs and additionally, sorry of the leveraged.
Operating expenses from our sales growth.
Okay, Great and maybe the last one if I could I know first quarter of 2020 was sort of unique.
Second quarter, so just frame it up any any perspective, you might add on the first quarter.
I know the few years prior to 2020.
You typically earned at least as much in the first quarter of you did in the fourth quarter, maybe more of a good assumption this time around but just.
Any way to frame up.
You know your expectations for from the first quarter.
Yes, I think I don't think using the seasonality of our business in 2020 with.
It would be a good representation because as we kind of coined the term 2020 was pretty wonky.
If we go back to.
The 2019 and 2018 as a percentage.
It should be more of the seasonality should be similar I should say from an earnings perspective.
As it was historically.
Okay, Great. That's very helpful. I appreciate you taking all of the questions. Thanks guys.
Yeah. Thanks I appreciate it.
Once again, ladies and gentleman, who asked the question at this time. Please press star one on your telephone keypad.
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.
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 a 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 are finding way.
Just to make it happen so thank you again.
Have a great one.
Thank you ladies and gentlemen. This does concludes today's teleconference. You may disconnect. Your lines at this time and have a great day.