Q1 2021 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to the Rocky brands first quarter fiscal 2021 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 hearing the conference. Please press star zero for operator assistance at any time I would like.
To remind everyone of is this conference is being recorded I will now turn the call over to Brendon Frey. Please go ahead.
Thank you and thanks to everyone joining us today.
We begin please note that today's session, including the Q&A period may contain forward looking statements as defined by the private Securities Litigation Reform Act of 1995, such.
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 complete discussion of the risks and uncertainties. Please refer to today's press release, and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31 2020.
I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky brands.
Thank you Brendon with me on today's call is Tom Robertson, our Chief Financial Officer.
2021 is off to a great start as the strong momentum our business experienced in the second half of last year continued during first quarter. The combination of robust demand for our Rocky, Georgia, and Durango brands in stock inventory positions.
Then easier comparisons due to the impact of COVID-19 led to our strongest growth rate in years.
On the top of our excellent results. We have also completed a highly transformative acquisition with the addition of the original Mark Boot company extra tough service Nios and range. Your brands, we have meaningfully enhanced our powerful.
The portfolio of footwear brands and nearly doubled our sales space.
At the same time, the acquired brands bring exciting growth opportunities with our existing categories as well as an entre into new market segments.
Let's start with the review of our first quarter performance and then I'll share some thoughts on our initial plans for the acquired brands.
Tom will go through the numbers in more detail, but here are just a few of the financial highlights.
Net sales increased 57% the 87.7 million of.
Adjusted gross margin improved 410 basis points and the adjusted earnings per share grew 341% to a dollar of 19.
To better understand the underlying strength of the Rocky business I think it is important to look at our results against first quarter of 2019.
Which elements of the benefit from the easy comparison due to COVID-19.
Compared to two years ago, we grew first quarter sales, 33% and increased adjusted earnings per share of 148%. Our performance has been driven by strong growth in both of our wholesale and retail segments beginning with wholesale.
And starting with work our largest category sales were up 53% over Q1 last year and up 26 per cent compared to the same period in 2019.
The growth in our work business has been led by Georgia boot as the brands core items, such as the Romeo and Giants have been in high demand throughout the country.
Meanwhile, newer collections continue to gain gained great traction with consumers fueling strong sell through and leading to incremental shelf space. Georgia's performance was broad based with strong double digit percentage gains across key retail partners like tractor supply.
Calendars coastal farm and ranch and bass pro shops to name a few as well as our robust network of smaller independent accounts.
Our western business was on fire during first quarter. Following a very strong finish in 2020 demand for the Durango brand accelerated early in 2021, helping to drive a 110% growth in the category over last year and 82.
Per cent growth when compared to the first quarter of 2019.
Fresh assortments continue to be well received in the marketplace, while legacy styles, such as the rebel and rebel flag series outpaced prior year sales levels.
Major accounts, such as tractor supply and Academy, along with farm and ranch retailers like Baumgart orphans, and runnings posted high double digits, and some cases triple digit gains year over year.
Durango strong performance at retail has boosted by much healthier stock positions relative to many of its industrial peers.
Who have struggled with the inventory issues since the outbreak of the pandemic.
This has been a key competitive advantage not only for Durango, but across our business over the past year.
The Rocky brand, which spans work outdoor western and commercial military had a fantastic start to the new year driven by a mix of increased participation in the outdoor activities pent up demand government stimulus and competitive supply issues.
What has been particularly encouraging is the performance of several new products introductions in outdoor this included the highly successful dry strike line, which March Rockies. The initial foray into the popular marine fishing water sports market.
In Western it has been the new work smart online the Wellington boots that has driven excitement and volume while in work we introduced a new dual work hike boot and a new made in the USA ironclad safety chose you.
Both of which are selling very well and have helped to create the most complete package of work boots from rocky in many years.
With respect to Rockies commercial military division business in the direct to consumer channels have accelerated as more members of the U S military become fully vaccinated and resume operational status with military training and developments on the rise we are seeing any.
<unk> demand across the globe for our popular SUV and Tropic weather boots.
Turning to our retail segment strong growth in our E Commerce channel, which consists of both our own branded websites and online marketplaces.
Helped fueled another double digit gain in the quarter.
Total web sales were up 88% with Georgia, Rocky and Durango, all increasing strong double digits.
Even as consumers resume shopping at brick and mortar retail in greater numbers, we continue to see increased engagement on line with both existing and new customers.
The work we've done enhancing the functionality of our brand of desktop and mobile sites and expanding our direct to consumer efforts on marketplaces, particularly Amazon and more recently target plus and ebay has provided us the opportunity to further capitalize on this.
Change in buying behavior.
Meanwhile, our Lehigh safety shoe business also enjoyed a strong first quarter with sales up 18% year over year.
As more and more companies have resumed normalized operations our activity with existing and new accounts has continued to pick up leading to a record level of on site I fits events in the month of March.
We expect this trend to continue based on our pipeline of new accounts and the further loosening of the on site restrictions in the coming quarters.
Finally, our contract military segment increased 16% to four point for me and in the first quarter driven by increased the orders under an existing contract combined with the start of a recently awarded Navy contract. We are pleased with the positive start in 2020.
One for this segment. However, we do anticipate full year sales to be down slightly versus 2020 due to a contract expiring in the third quarter and the continued challenges. We face is the only non small business competing for U S military footwear com.
Tracks.
Shifting to our manufacturing facilities, we continue to run both Puerto Rico, and the Dominican Republic at 100% capacity during.
During the first quarter, we had to adjust productivity to keep up with demand for certain key styles and are evaluating additional shifts if necessary to maintain in stock positions.
Our adaptability and speed to market underscores the benefits of our vertically integrated manufacturing structure, a key competitive advantage that has become increasingly important given the recent disruptions in some of the major global supply chain routes.
We are very pleased with the profitable growth we've delivered over the last several quarters, the multiyear initiatives, we'd been ex executing and product innovation fulfillment consumer engagement and inventory management enhanced our ability to capture market.
Share during the pandemic, while creating a strong foundation to supporting the long term growth.
The recent addition of the original book Boot company extra tough service Nios and range of brands has further bolstered our powerful brand portfolio and provided our business model with compelling new opportunities to drive profitability top line.
Expansion.
Our primary focus for the acquired business over the remainder of 2021 is on a three main areas people systems and inventory.
Starting with people our people are the foundation of Rocky brands and they are the reason for the success we've achieved over the years.
Based on interactions and discussions with the Honeywell throughout the process. The same is true for the people coming over to Rocky as part of the acquisition.
Integrating our two great organizations and harnessing the power of the combined teams will be key to our future success.
In terms of systems migrating the acquired business of Honeywell's ERP system on the Rockies is underway. This step, which we expect to be completed during the fourth quarter is critical to providing our newest brands customers and consumers with the world class.
The service, we've been executing at Rocky for years.
Finally inventory.
We have started moving the acquired inventory to our state of the art distribution facility in Ohio.
We expect to have everything under one roof by late Q2 or early Q3 with the investments we've made in technology and people. We are extremely confident we'll be able to realize important savings over time by meaningfully lowering fulfillment cost for the new brands.
And this is just the beginning after we execute these critical first steps, we'll shift our focus to leveraging our collective strengths across this powerful brand portfolio to create new growth opportunities for all our businesses.
I'll now turn the call over to Tom Tom.
Thanks, Jason.
Recent airline it has been a great start to 2021 highlighted by strong demand for our brands and products during the first quarter.
Partially aided our year over year performance was an easier comparison due to the impact of COVID-19 had on our business in the first quarter for 2020, and the contribution from the acquisition of Honeywell's performance and lifestyle footwear business.
Now for the results net sales for the force for the first quarter increased 57, 3% to 87.7 million driven by strong gains in our two largest segments wholesale and retail.
The segment wholesale sales increased 69, 1% to $59 2 million.
Retail sales increased 42% to $24 million.
And military sales increased 15, 7% two for $4 million.
The first quarter of this year includes approximately $6 $5 million in sales from the acquired brands with approximately $5 5 million falling in our wholesale segment and $1 million in retail.
Gross profit in the first quarter increased 81, 9% to $35 1 million or 41% of sales compared to $19 3 million for 34, 7% of sales in the same period last year. This.
Of this year's gross margin includes a $300000 inventory purchase of purchase accounting adjustments, while last year's gross margin includes approximately $1 million in expenses related.
Related to the temporary closure of our manufacturing facilities due to COVID-19.
Excluding these items gross margin for the first quarter of this year and last year were 45% and 36, 4% respectively.
The the 410 basis point increase was primarily attributable to higher margins in all three segments with the biggest gain in wholesale as we benefited from increased manufacturing synergies on higher volumes experienced less promotional selling and were up against an easier comparison due to higher tariffs in the year ago quarter.
Yeah.
Gross margins by segment were as follows.
Sale 37, 6%.
Retail of 48, 1% and military 29, 9%.
Operating expenses were $28 6 million or <unk> 32, 6% of net sales in the first quarter of 2021 compared to $17 8 million or 32% of net sales last year.
Included in this year's first quarter were approximately $5 2 million of acquisition related expenses.
Excluding these expenses operating expenses as a percentage of net sales improved 530 basis points to 26, 7% driven by leverage on higher sales.
Income from operations increased 335% to $6 6 million for seven 5% of net sales compared to $1 5 million or two seven per cent of net sales in the year ago period.
Adjusted operating income, which excludes the inventory purchase accounting adjustment and acquisition related expenses in Q1 of 2021 and the expenses from the manufacturing facility shutdowns in Q1 of last year.
The $12 1 million or 13, 8% of net sales versus $2 5 million or for 5% of net sales respectively.
Net income for the quarter increased 278, 1% to $4 5 million or <unk> 61 per diluted share compared to net income of $1 2 million for <unk> 16 per diluted share in the year ago period.
The adjusted net income for the first quarter of the year was $8 7 million or $1 19 per diluted share an increase of 344% compared to adjusted net income of 2 million for 2007 cents per diluted share last year.
Turning to our balance sheet, we ended 2020, and a very strong position highlighted by cash and cash equivalents of $28 $4 million and no debt. During the first quarter, we borrowed approximately of $190 million and utilized $20 million of cash to fund the acquisition.
As of March 31, 2021, cash and cash equivalents stood at $8 9 million.
Our debt totaled $186 3 million consisting of $130 million senior secured term loan facility and borrowings under our $150 million senior secured asset backed credit facility.
With regard to our outlook, we want to provide some updates.
Updated thoughts on 2021.
As a reminder, we said in the Q4 call in February that we expected full year revenue for Rocky brands on a standalone basis to increase in the mid single digit range.
However, based on the strong first quarter was the performance combined with the very good start to the second quarter. We are now expecting rocky Standalone revenue for the full year two.
To increase approximately 20% over 2020.
With respect to the acquired business as we previously disclosed collectively the new brands generated annual revenue of approximately 200 of $5 million in 2020 for 2021. We're also forecasting growth of approximately 20% of which we'll recognize roughly 80% based on when the transaction close.
In terms of margins, we're expecting consolidated gross margins for 2021 to be approximately 40% as the combined businesses benefit from increased economies of scale and higher gross margins for the acquired brands to help offset headwinds from increased shipping costs.
That concludes our prepared remarks, operator, we are now ready for questions.
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Our first question comes from Jonathan Komp with Baird. Please go ahead.
Yeah, great. Thank you.
Maybe if I could start.
Looking at the base business on the acceleration you've seen in the first quarter.
Could you maybe the share more.
You're aware of where you've been surprised in terms of the sources of the upside and I know Tom It sounds like maybe that's continuing into the second quarter, but any thoughts on how you expect.
Some of the strong performance of the category level, but the play out going forward here.
Yeah, Hey, John Thanks for being on the call.
I would tell you that all of the categories have have continued as we came out of Q4 and the Q1, I think our expectations where things would.
Maybe slowed down a little bit in the retailers.
Would come out of the holiday timeframe and there would be a little bit of a slowdown and Fortunately for us that has just not happened.
We also.
Can say that the stimulus monies that have been thrown around have definitely help that and I think that we because of the position. We took during the COVID-19 last year in an inventory position our inventory going into Q1 was in a really good place.
We were able to fill orders that I'm not sure all of our competitors were able to fill so we've really seen a nice steady increase through all of the categories and brands as I stated Durango and in the Western category really has caught on fire.
And I would say that's the biggest one but they're all doing pretty good right now.
And when you look forward just looking at the implied guidance.
In the first quarter.
Without the new business. It looked like sales are up kind of for.
40% versus Q1 of 'twenty.
It looks like for the balance of the year, you're embedding more of a mid teens growth rate versus 2020 for that.
The core business, excluding the acquisition.
Any thoughts on how you came up with those assumptions.
I know the comparison to book a lot different Q2 compared to the back half so.
Any more thoughts there, especially.
I assume maybe some of your competitors catch up on the inventory availability.
Got to have any impact as well.
Yes, John I'll take this one so obviously if we look at Q2, we're going to be running up against another pretty easy comparison, given the impact of COVID-19 in Q2 of 2020.
And the new kind of hit the nail on the head here. So Q3 and Q4, if you recall for us where we're very strong quarters.
Wood, which would obviously be harder comps.
But also to your point, we think that.
Some of our some of our peers will be caught up on inventory and we will be.
B back to fighting for some of the shelf space and that could have some implications to on gross margins. If we had to get promotional again book.
We haven't had the need to really get promotional over the last couple of quarters. So.
If you're if you're trying to model out for the rest of the year, obviously youre running a much tougher comparisons, particularly in Q4.
Of which was.
Very strong quarter for us.
Okay understood.
I think the base business can grow against those comparison there.
Not sure if you're willing to.
Looking at the fourth quarter.
Sorry.
Yeah.
Yes, we do.
Okay, Okay, Great and then just a few on the new business.
So.
Couple of questions just of course, the integration the biggest heavy lifting.
Curious, how you're viewing the the <unk>.
Work, that's needed to bring everything on board and.
How you're managing any execution risk there.
Yes. This I would tell you John is the biggest.
This is the biggest thing we've ever gone through of me personally and I think a lot of the people here would tell you we have a great team of people.
And as I stated the people that are coming with the new brands are really engaged as well.
And they're excited to be a part of this whole company and so I think we are of great plan in place.
We are meeting daily if not hourly to execute on the plan as I stated we started to lose some of the inventory.
In the RBC.
And we think once we get that in there we'll be able to to.
Do a little better job than.
Then maybe in the past and then the ERP system and getting off of that the Honeywell system is going to be really critical.
And we are on pace right now to hit somewhere in Q4, and more mindful of that timing because we also want to be careful of the holiday season, and what that would look like so I think we are of great plan in place.
We're going to hit some some roadblocks here and I'm sure make some mistakes along the way.
But as long as we can keep those limited I feel really good about where these first kind of 40.
45 days have have come in so.
Yeah, great on the sale.
Sales.
First of all if I could ask you about how the first quarter of look for for.
For the new brands and any color there on them, if we think about modeling out going forward.
Any color on the channel split of wholesale versus retail of Meg.
And the different things to think about in terms of the seasonality as we await the outcome of revenue projection.
Yes.
Great question, John So so as we look at the acquired business.
The first quarter results mine, you of which we've only closed on March 15th So we really only owned the brands for 15 days in and given the close.
Physical inventory counts and systems, which is the switch overs, we actually shipped for a 90.
Your line basics, yes, seven or eight days on me.
And so and so the.
The results we had in the last 15 days were very comparison of kind of flat too.
On the Boston groups numbers in those last 15 days, but for the overall for the quarter.
Mind, you that that reflected our numbers the <unk>.
<unk> performed performed well.
As we as we move into <unk>.
The full year type of seasonality part first and so the seasonality of the acquired brands or Boston group as we call them.
Is.
Is is fairly similar to ours, it would probably weigh a little heavier in the fourth quarter than ours is I think just given the nature of the products.
Rubber.
Rubber boots.
And as we think through the mix between our segments keep in mind that the the acquired brands. The Boston Group does not does not do the military business. So obviously, there will be no incremental adds to the military business and in also.
On the they do not have the Lehigh business, which shows up in our retail segment, so theres going to be an increase in our wholesale segment.
As a percentage of the total bucket and <unk>.
The numbers I would probably peg wholesale on total somewhere between 75% to 80% of the total bucket as we move forward.
And we've kind of guided military to be.
The slightly down to flat for last year.
And so I think a little later in the season and a bigger portion going to wholesale just given the nature of the brands, but the Boston group does.
There is a strong e-commerce business and so we're anxious to see how we can kind of both of these brands onto the marketplace initiatives that we've done with our own brands or with our historic brands.
Over the past couple of years, and so that could that could shift some sales from wholesale to retail.
Understood and maybe the last one if I could just the 40% gross margin outlook for the consolidated basis.
Any way to further break past the.
Base business or organic expansion versus city and the mix impact from the new business.
Tom.
Unless I missed it I don't think I heard any comments on overall margin or earnings for the year. So I wanted to add any comments there.
Yes, so from from a gross margin standpoint, we're going to pick up given the demand for our traditional or Ohio group business has been we're going to pick up.
Volume efficiencies in our manufacturing facilities in Puerto Rico and the Dominican.
If you think about Q2, we were still working through in 2020, we are still working through some of the section 301 that 15% incremental tariff products, so sort of love a little bit easier comp in.
In the second quarter as well.
The Big question there for us for both for both groups, Ohio, and Boston is is going to be.
When do we have to start getting promotional again right.
Right now we've not seen that so some of our.
Hopefully we won't have to get.
The promotional as a lot of our peers get back in stock.
As it relates to operating margins were given the due of the 20% approximate 20% sales increase we've talked about for both groups.
Going to leverage.
Obviously, we're going to leverage our operating expenses, however for kind of refraining from giving clear guidance here as we're still trying to work through the integration and Theres. Some theres some significant expenses in there.
To be dealt with on the timing of those would really impact.
The operating margin and the earnings for for 2021 so.
We're not really prepared to give much for the guidance on that on that part.
Okay understood. Thanks for taking all the questions.
Thanks, Sean.
Your next question comes from Susan Anderson with B Riley. Please go ahead.
Hi, good evening nice job on the quarter.
I guess just to start out for the Honeywell business. I think you had said you did $6 5 million, maybe just didn't have the month of March.
Was that in line with your expectations and should we think about the cadence similar in second quarter and then also just from our tax we've known there's definitely a lot of the out of stocks and their brands, particularly the Mac. The so I'm just curious how much you think.
From the inventory perspective revenue is being left on the table and what's the opportunity from a revenue perspective, there going forward by having more of in stock inventory, but then also expanding into new wholesalers.
Yeah, Hey, Susan.
I'll take the first part of this won't give Jason.
The response to but I think I think our philosophy at Rocky brands has been to make investments in inventory that debt investments those investments have paid off for us over the last 12 months.
I think our plan is to make some investments in inventory.
So that we can we can catch demand.
And we can also meet at once business I think we have a good appreciation for how much of the business is at once versus bookings and so that.
Of that takes a little bit of investment in inventory to meet the the demand at some of these retailers require and so that debt investment in inventory I think is baked into the approximate 20% growth that we've kind of guided to for the the Boston group brands.
For 2021.
As it relates to timing, yet we own billing on them for 15 days as we said.
We were down for a little over a week with the transition and so there was certainly some pent up demand.
The <unk> started shipping in April when things got back up on going.
Great that's helpful.
And then just on the retail business I'm curious.
Just the trends that you've seen in the Lehigh business.
It looks like it rebounded and then also if you could talk about the E Commerce contribution.
Yeah, I'll start off with the Lehigh So as you indicated we've really.
<unk> focused on the Lehigh business and we've seen it start to come back pretty nice and we we think that that will continue.
The COVID-19 really impacted that a lot.
Because of the company's closing themselves and now that they are opening back up letting us communicate with them, it's really driven that business and I think COVID-19 itself has made our business model, even more prevalent right now.
So these companies are like I don't know how.
How many trucks, we want coming here I don't know how many times, we want them coming here. So we're getting a lot more communication from new customers that we think will continue to drive that that opportunity for us for the rest of the year and so we're pretty optimistic about the the Lehigh retail.
Side, and then just to touch on our E com side of it we still seeing nice increases there I think we are anticipating that to slow a little compared to the triple digit increases we saw.
But we're still investing there and doing a lot of the right things to drive our E Commerce business and we think it's important.
To continue that in the future. So I think I think we'll still see some of that happen I think the the consumer's changed and a lot of ways.
And they'll continue to buy online as well and then one quick thing to add there too we still we're still focused on adding third party brands to our marketplace sales so continuing to leverage our state of the our distribution center in Logan.
So other third party brands.
Through Amazon marketplace for ebay marketplaces.
As another growth area for us in this space and so we're hopeful that we will we continue to we will be able to continue to grow that piece of the business.
Great. That's helpful. And then just really quick on the work the business I'm curious it looks like you are pretty much seeing strength across all of your brands and I'm. Just curious how that business is performing and what are the expectations. I guess, if we do get an infrastructure Bill passed do you think thats going to be on longer term tailwind for the business.
Yes, so so the first part of that Youre right the work boot business.
Youll really was deemed essential through the whole COVID-19 time here and so our customer base was really fortunate and so therefore, we have been and <unk> been able to capitalize on that by keeping the shelves full of our work type product and that really falls under all of the brands in.
Rocky, Georgia and Durango.
And so we think that's going to continue we don't see why that's going to slow down anytime soon there.
There is this question about our competitors getting back in stock and what that would look like but we still think there's a good opportunity for there for us.
As for the infrastructure Bill.
If that happens there has to be additional upside there for us.
And I would say that there's no reason why that wouldn't be a nice tailwind for depending.
Depending on when it goes into effect.
Could be 2022 into 2023 really depends on when the infrastructure Bill happens, but it would definitely.
<unk> be a positive tailwind for us.
Great.
Then last one.
You can maybe just touch on.
On the orders that Youre seeing in the back half of the year I guess with the tougher comparable it looks like wholesale did rebound quite a bit in the back half of them just curious what your wholesale partners are.
Talking about or how they're thinking about orders for the back half.
If youre expecting that strength to continue.
So I think Tom kind of touched on a little bit earlier.
Q1, and a little bit of COVID-19 to help their Q2, maybe even a little more.
We still had a pretty strong Q3 in 2020.
But we feel we feel like the bookings we are seeing are good and we feel pretty good there Q4 was a really strong.
On time for our core Rocky, Georgia Durango business.
But.
As we said this 20% increase.
For the year seems to be of a pretty good target for us and so we still think that.
The wholesalers and our brands are resonating and we feel pretty good about the rest of the year.
Great that sounds good. Thanks, so much good luck the rest of the year.
Great. Thank you Susan.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
I would like to turn the floor over to Jason for closing remarks.
Great. Thank you very much and thank.
Thank you, Susan and John and anybody else that was on the call. Today I also want to give a shout out to the rocky employees, the <unk> group and the BG group.
These guys in are really doing a great job and let's stay focused and continue 2021 positive and we look forward to next quarter. Thank you much.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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