Q1 2022 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Rocky brands first quarter 2022 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 <unk>.
If anyone has any difficulties hearing the conference. Please press star zero for operator assistance at that time I would like to remind everyone that this conference call is being recorded I will now turn the conference over to Mr. Brendon Frey of ICR.
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 1095.
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.
Complete discussion of the risks and uncertainties. Please refer to today's press release, and our reports filed with Securities and Exchange Commission, including our 10-K for the year ended December 31 2021.
Now I'll turn the conference over to Jason Brooks, Chief Executive Officer of Rocky brands Jason.
Thank you Brendon.
With me on today's call is Tom Robertson, our Chief Financial Officer.
Following a successful 2021, the new year has gotten off to a good start as demand for our process for our portfolio of leading brands continues to be strong we experienced solid growth across our wholesale and retail segments and drought archives.
<unk> mix of distribution channels, including Western work farm and ranch outdoor and family retail the <unk>.
Combination of healthy inventory positions and additional fulfillment capacity allowed us to better capitalize on the market opportunities, we are creating through our product and marketing strategies and focus on operational excellence.
Unfortunately, the current cost environment and tight labor market has required us to spend more temporarily to bring our new distribution facility in Reno up to speed.
While this limited our ability to flow more of our revenue outperformance to the bottom line, we are making good progress gaining greater efficiencies and expect we'll be able to translate more of our topline growth into enhanced profitability as the year proceeds.
Tom will go through the numbers in more details, but the quarter was highlighted by net sales of $167 million, representing an increase of 91% over the same period last year and a gain of 32% on a pro forma basis.
Underlying these results were very strong performance for each of our brands starting with Durango. The brand continued to experience robust demand, finishing the quarter with mid double digit growth in both key and field accounts driven by strong sell through.
<unk> strategy of diversifying the line into new offerings, particularly in work and core Western has been very beneficial as our farm and ranch and true Western retailer partners have posted large year over year increases.
Not only has demand remained incredibly strong, but we've been able to capture the demand was strong inventory and improving logistics capabilities, leading the increased shelf space again this quarter.
Turning to Georgia brand generated solid gains over 2021 as demand was once again strong.
New opportunities and expansion of current programs continue to drive business as the market looks for answers to the limited supply at retail.
Especially in key categories that Georgia is an established leader.
For example, Georgia experienced tremendous growth of its popular logger collection growing strong double digits in part because we were able to fill in inventory void created by peers.
Reliant on Asian production.
We produce this line of boots in our own factory in the Dominican Republic, and therefore are able to control inventory flow much more precisely and capitalize on the opportunities.
The Rocky brand, which spans work outdoor western commercial military and duty footwear also had a very solid quarter strong growth in rocky outdoor and western was coupled with flat sales in work due to the timing of key orders in the year ago period that we do.
Didn't anniversary.
Whether it be hunting product or rugged outdoor footwear for general outdoor activities. We saw ongoing strength as consumers continued the trend of getting outdoors and being active.
We're encouraged by the resiliency of the demand we saw this quarter.
Unlike previous years, where Q1 outdoor sales are boosted by off price sales of discontinued or overstocked product from the past fall hunting season. This was not the case in Q1 of 2022.
The overall outlook for Rocky work outdoor and western for the balance of 2022 remains solid.
With respect to Rocky commercial military and duty divisions continued efforts over the past few quarters materialized in first quarter results exceeding expectations.
The arrival of much needed inventory help commercial military sales continue the positive trend established in the fourth quarter.
While our public service business had one of the best quarters as we've increased production of our duty footwear in our Puerto Rican facility.
Although there were a multitude of variable contributions to the growth in both categories. The drawdown of the pandemic restrictions in the military and numerous municipalities allowed our military members and public servants to train and work more often than.
And then in the last 12 months.
Our muck and extra tough brands, both posted sizable gains in the first quarter for muck core styles remain in high demand and sold through very well in farm and ranch and outdoor channels. While most new spring 2022 product is just now arriving create.
Creating a nice tailwind for Q2.
<unk> certainly has a good backlog and we are working to return to normal retail inventory positions. Additionally, we are beginning to see orders increase with most of our retail partners as they look at the fall and winter, which are the key seasons for the brand.
At the same time extra tough continues to gain momentum, especially with the brand's key outdoor and fishing retail partners we have.
We are experiencing growth on two fronts.
Both on a door productivity basis as accounts expand into new styles as well as expansion of doors from our existing accounts.
This expansion position uses for a strong 2022 as our current backlog will only strengthen as we continue to launch new extra tough products. This year.
Turning now to our retail segment first quarter traffic and conversion of our own E. Commerce site was up nicely year over year, even as we pulled back on expensive performance marketing.
In addition to double digit e-commerce growth for both Rocky in Georgia. The first quarter was highlighted by the launch of a new I am extra tough campaign on March one.
The campaign has been a fantastic success for the brand thus far.
Generating a ground swell of demand and positive sentiment across both core and new consumer segments with more than 500000 video views to date.
While we are pleased with our first quarter E Commerce results, our fulfillment expansion activities did hinder our ability to ship all DTC orders in a timely manner.
This was most pronounced with our market and extra tough brands.
As most of this inventory is processed in our new Reno, DC, which wasn't fully operational until early April we are excited to have all inventory now in our distribution and fulfillment system and look forward to taking advantage of our enhanced capabilities to better capture the direct demand.
For all our brands.
Meanwhile, our Lehigh <unk> retail business has has had a very strong start to 2022, driven by significant growth in both new and existing accounts.
This cumulative in March representing the highest single revenue month for custom fit and Lehigh history history.
With prices going up across the footwear industry. Many of our customers have increased the subsidy amounts for their employees, helping fuel our top line performance.
Additionally, many accounts are beginning to view, providing safety PPE, such as footwear orthotics and compression Sox as a tool to drive employee retention.
With its wide offering of safety products.
<unk> been able to organically drive additional revenue with existing accounts.
And as Covid concerns have continued to beat our.
Number of onsite I fits events is gaining pace, which combined with our E mail and SMS strategy is driving higher account participation rates, increasing our account revenue and penetration rate.
Overall I am very pleased with our start to 2022, our continued focus on operational excellence combined with our comprehensive portfolio of brands have put us in a great position for upside in a challenging environment as we've seen over the past few years.
Our strategies people and ability to satisfy every niche of the boot markets are what will drive our success this year and into the future.
Now I'll turn the call over to Tom Tom.
Thanks, Jason as Jason outlined growing demand strong inventory to meet that demand drove another solid quarter for Rocky reported net sales for the first quarter increased 19, 5% year over year or 32, 2% on a pro forma basis to $167 million.
By segment on a reported basis wholesale sales increased.
126, 2% to 134 million retail sales increased 19, 3% to $28 6 million and contract manufacturing sales were $4 4 million.
Turning to gross profit for the first quarter gross profit increased 78, 8% to $62 8 million or <unk> 37, 6% of sales compared to $35 1 million or 41% of sales in the same period last year.
The decrease in gross margin was mainly attributable to the increase in inbound freight cost coupled with the delayed impact of our price increases and a lower mix.
Retail segment sales compared to a year ago period, which carry higher gross margins in our wholesale and contract manufacturing segments.
Gross margin by segment, whereas follows wholesale down 160 basis points to 36%.
Retail up 30 basis points to 48, 4% and contract manufacturing down to 16, 2% from 29, 9% a year ago due to labor cost and constraints and Puerto Rico.
Operating expenses were $49 6 million or 29, 7% of net sales in the first quarter of 2022 compared to $28 6 million or 32, 6% of net sales last year, excluding $1 million in acquisition related amortization and integration expenses for this quarter.
<unk> and $5 2 million in acquisition related expenses for the first quarter of 2021 operating expenses were $48 $6 million or 29, 1% of sales in the current year and $23 4 million or 26, 7% of net sales in a year ago period.
240 basis point increase in operating expenses as a percentage of net revenue was driven primarily by higher logistics and fulfillment costs, including including temporary spending associated with the opening of the new Reno distribution facility.
Income from operations was $13 2 million or seven 9% of net sales compared to $6 6 million or seven 5% of net sales in the year ago period.
Adjusted operating income, which excludes the expenses related to the acquisition in both periods was $14 2 million or eight 5% of net sales compared to adjusted operating income of $12 1 million or 13, 8% of net sales a year ago.
For the first quarter of this year interest expense was $3 9 million compared to 747000 in a year ago period. The increase reflects interest payments on our senior term loan loan and credit facility, we used to fund the Honeywell footwear acquisition.
On a GAAP basis, we reported net income of $7 4 million or <unk> 99 per diluted share.
<unk> to net income of $4 5 million or <unk> 61 per diluted share in the first quarter of 2021.
Adjusted net income for the first quarter of 2022 was $8 2 million or $1 10 per share per diluted share compared to adjusted net income of $8 7 million or one $1 19 per diluted share.
Turning to our balance sheet at the end of the first quarter cash and cash equivalents stood at $15 million and our.
Our debt totaled $267 7 million, consisting of $126 8 million term loan facility and borrowings under our asset backed credit facility.
As of March 31, 2022, we had $36 million of borrowing available under our credit facility.
We are currently working with our lenders to temporarily increase the size of our credit facility by $25 million to provide working capital flexibility over the next couple of months.
Inventory at the end of the first quarter was $289 $2 million compared to $125 1 million a year ago. The increase in inventory was driven by overall cost increases and strong sales growth combined with additional inventory as a result of the increased transit times and the distribution and fulfillment.
Challenges experienced in the second half of 2021, while inventory at the end of March It was higher than we would have liked it has come down over the past month, the company plans to realign inventory levels.
The sales growth and inventory purchasing strategies by the end of 2022.
With respect to our outlook based on the first quarter sales results, we're raising our full year projections. We are now expecting sales for 2022 to increase between 21% and 24% over 2021 up from our prior outlook of 16% to 19%.
In terms of gross margin, we still expect wholesale margins to remain under pressure in the first half of the year with second quarter gross margins down slightly compared to the first quarter before improving starting in the third quarter as our price increases go into effect and start flowing through the income statement.
Based on the outlook for wholesale margins and our projected sales mix by segment, we still expect we'll move towards overall gross margins of approximately 40% by the fourth quarter of this year.
As stated earlier, we expect to gain efficiencies in our distribution and fulfillment capabilities as the year progresses, while also working to identify synergies and other cost saving opportunities now that the integration of our two organizations is complete.
We did spend more than we planned during the first quarter and temporary help at our Reno distribution center, but expect to start to boot.
Mute.
But expect to start phasing this extra expense out during the second quarter. Our current view is that we will generate slightly better expense leverage in Q2 versus Q1, and an adjusted basis, and then start driving down SG&A as a percent of sales into the 26% to 27% range in the second half of the year.
For the full year, we are now targeting achieving approximately 60 basis points of expense leverage over 2021 adjusted levels and are making further progress next year. This will help to transform our top line success into stronger earnings, which along with the cash generated by reducing inventories put us in a good position to begin.
Paying down our debt.
That concludes our prepared remarks, operator, we are now ready for questions.
At this time, we'll 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 tone will indicate your line is in the question queue. You May press star two 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.
One moment, while we poll for questions. Our first question comes from the line of Susan Anderson with B. Riley you May proceed with your question.
Hi, it's Alex leg on versus and thanks for taking our question first off nice job on the quarter.
And then my question was on yes, Youre welcome just on the Nevada distribution center it sounds like it's mostly done but.
The current challenges are related to labor is there anything else that needs to happen.
And then Nevada distribution center or.
Essentially just labor there.
Yes.
This is Tom.
I'll take I'll start with this one so yes. The good news is the Reno distribution center as we sit here today has full capabilities to process all.
All of the different types of orders.
That is needed to process, whether it be a case of garden or sort of product or E Commerce DTC type orders.
We did have to use a significant amount of temporary labor in the first quarter and as we as we outlined a.
A few minutes ago, we plan to phase out a lot of that temp labor, we had ramped up.
The temp labor in Reno, as we tried to dig out of the backlog once the capabilities became live which which was in March and in April .
From a DTC standpoint, so we'll phase out temp labor.
As we go through the second quarter, but we are making good progress on hiring people every week.
I will I will just add there are.
Small <unk>.
Issues around getting equipment and things in that area, but not nearly as bad as it was six eight months ago. So to Tom's point. The labor is the biggest issue, but there are still.
Issues around getting equipment and other things the other the other thing to call out with the Reno facility is that not only will we see temporary labor come down over Q2, and three but I believe that the teams to become more efficient new processes and so there is still efficiency improvements to be made.
In 2022 at the Reno facility.
Got it and then a follow up just on how we should think about wholesale and retail sales throughout the rest of the year before I remember you were focusing on wholesale just to kind of gain shelf space.
Should we think about the sales growth between wholesale and retail.
Just the cadence wise going through the rest of the year.
Yeah I'll start this one off I think I think you are right. The strategy was in Q1 do we wanted to defend ourselves space with our retailers.
And so we focused and prioritized.
We focus and prioritize those type of shipments now that we have the ability to ship market extra top but really the entire catalog that's in Reno.
I think we will see the e-commerce business recovered nicely.
It was down slightly in the first quarter for those brands.
Housing arena.
I do think that the.
The bulk of the growth will still happen in wholesale that's where we're seeing the strongest demand.
However, our retail category, both Lehigh and our ecommerce business is growing nicely.
But I would probably say that the stronger growth will be will be in wholesale for the year.
Thank you.
Our next question comes from the line of.
Miller Lyon with <unk> you May proceed with your question.
Oh, great. Thanks, Mckenzie points in on for Camilo, Thanks for taking our questions.
My first question is just about.
The price increase that I believe you took January 1st.
Can you just kind of help us understand was that an across the board.
Kind of price increase and how are you kind of.
We looked at that from like an Ohio group versus Boston Group perspective.
And then also did you see any price resistance from the consumers.
With that price increase and then do you have any price increases that youre planning for the rest of this year.
Yes, thanks for the question Ken.
Kinsey so.
We did we didn't see much price resistance in the marketplace.
Everybody was taking price increases they are still competitors in the marketplace, taking price increases so I think the markets okay with the.
The market is never okay with price increases, but under this circumstances seem to go better than normal we did take a price increase on all brands and when we went across so all the Rocky, Georgia, Durango, Mark extra tough.
Service Neostem range of brands, we did take a price increase on all of those.
And there was one more part of that question I forgot it.
We do not.
The increase in plan yeah.
Yes.
Just remember so we do not have any planned at this time, we are evaluating that.
Really as we speak we are coming into our sales meeting timeframe here and the end of May.
But we do not have anything planned for a price increase at this time this year.
Got it thank you.
And then just on your supply chain.
And your exposure to Asia I believe the Boston group is a little bit more expensive.
Then your.
Your legacy brands. So can you just talk about any impact that you're seeing from the manufacturing side.
From the Lockdowns in Asia.
Have you been able to shift maybe any additional manufacturing tier.
U S facility is just understand like your exposure in your impact.
From the Lockdowns there.
Yes, sure so actually the muck and extra tough brand.
Excluding our own factory in choose Ow.
Do not produce any other products in mainland China those products are all made in Indonesia.
And Vietnam. So so we saw actually less issues with the moc and extra tough from the shutdown standpoint.
Our factory was shut down for like five days, so not terrible we did have one other factory that we do business with.
And some of the other brands Rocky Durango that we did have a shutdown again about a week I think six days.
And so that wasn't too awful from a COVID-19 standpoint, where we saw any major delays.
What we are still seeing our long lead times.
All around the world really so.
We used to be able to get.
<unk> products placed and shipped and delivered to US maybe within 90 days and we're seeing stuff in 120, 130, 140 days and so the lead times it just become much longer.
In regards to that so yes, I think I think these longer transit times.
It has impacted a couple of ways.
When we're chasing inventory on a particular style or or for a particular brand it is causing a little bit of issue and trying to get the rest of those orders out the door.
But it's also it's also put a strain on working capital as we have almost four times the amount of inventory in transit today.
We did a year ago.
And so those long transit times.
It's putting a lot of inventory on our balance sheet.
We haven't had a chance to even distribute and turned into cash yet so.
I think the transit times out of Asia Im optimistic that we will start to see a little bit of relief there and we'll just have to take that into account as we're doing our future.
Purchasing out of Asia.
That's very helpful. Thanks, and then just last one for me.
I think on the.
Last earnings call you mentioned that your wholesale partners are being a little bit more aggressive with their orders.
Make sure they had enough product this year and are you seeing any kind of caution from your wholesale partners today for.
Paul just given an increased macro uncertainty.
<unk> theory, Warren, Ukraine, et cetera, just any any incremental caution from them or is it pretty much the same as it was last quarter.
So I don't know if its caution based on on on the things going on in the world or if they've just gotten back to a more normal inventory position in there and their floors right. So we have definitely seen.
The books.
Bookings.
Become more normalized we are still.
I have a tremendous.
Backlog is not a tremendous backlog, but we have some backlogs.
We have some bookings and so we feel pretty good about where we're at from that standpoint, and obviously theres a lot of conversation going on.
Around the economy and is there going to be a recession.
So we're being very cautious around that and watching it.
But we still think that our brands.
<unk>.
A little safer when it comes to that rate people are still working people are still out people are still active.
And so we feel pretty good about where we're at there and haven't seen anything too crazy from our retail partners in regards to it.
Perfect. Thank you so much best of luck for the austere.
Thank you.
Our next question comes from the line of Jonathan Komp with Baird. You May proceed with your question.
Yes, hi, Thank you maybe a broader question.
Sort of a base business, if you want to call it that but if you exclude.
Excluding the Boston brands, the Rockies business generated more than $100 million of revenue in the quarter that looks like a new high watermark in certainly a step up from the last few quarters. So just any more color on.
What you've seen for that business and kind of broader context.
That step up in the sales levels.
Yes, Hi, John .
I'll start with this one and Jason.
We'll add on you know I think we continue to see strong demand for the for the <unk>.
Rocky, Georgia, and Durango brands.
In the first quarter I would say it was a high mark for them.
These.
These brands benefited from being in our Ohio distribution Center, and then I think as Mckinsey pointed out we source more of that product out of our Dominican Republic facility.
Then mark an extra tough.
And so we benefited from shorter lead times not to mention.
When coming out of Asia, they're shorter lead times on the.
On these three on our legacy brands here as they generally come through Seattle versus versus long beach. So.
<unk> chain was working in the favor of those brands I do not think that I think the demand.
It's still very strong for the extra top of muck brands as can be seen in the results, but we were able to execute on the demand.
Wei for the Rocky, Georgia, and Durango brands.
Yes, that's helpful. And then maybe thinking about the full year guidance and the update how much of the update and the increase.
As it relates to the first quarter versus any changes for the balance of the year and it looks like the midpoint youre assuming.
Close to 10% growth for the balance of the year or is that still.
Concentrated in third quarter, with Q2, and Q4 flattish or how are you thinking about the year.
Across the quarters.
Yes go ahead.
Yes.
I think I think the messaging is still the same I mean Q3 for US last year was kind of the peak for the distribution challenges that we had and so that is going to be in a very easy comparison.
And we do have line of sight at our bookings.
And so we think that we will cover nicely.
Really draw for all brands, but particularly for market extra tough, which which were really hindered by the distribution challenges last year.
And so.
Our expectation is that most of that growth will come in the third quarter.
Just so we're aligned do you expect to still grow in Q2 and Q4 should we.
Are you expecting any.
Yeah that would impact those two quarters.
Yes, so we're expecting growth in the second quarter certainly.
It is up on a tougher comparison, because if you recall at that part of that part of the year we were processing.
The Rocky, Georgia, Durango brands out of Logan, we really haven't started to move.
Out of the Honeywell facility and so we were not as hindered who aren't hindered as much in Q2.
It is also the first full quarter of the combined organizations.
From a sales perspective in the fourth quarter I think growth will be we will be challenged a little bit, but certainly not speaking to the demand of the brands I think that it is speaking to we don't anticipate rolling into the fourth quarter of this year with a backlog in open orders.
That we did last year with the Miss in the third quarter.
Understood, maybe maybe last topic just on the balance sheet.
Any color on sort of your plans and your expectations from an inventory perspective.
You're targeting a certain.
I will have inventory turns our weeks on hand, and then maybe similar to just for the overall balance sheet leverage how quickly do you think you can start.
Converting working capital to cash in.
Any expectations for the debt leverage.
For this year or after that thanks.
Yes, so so as we as we alluded to on the call earlier.
We've already seen.
Decreases in inventory levels I think they hit their peak probably.
The middle of March and they've been working their way down nicely.
We will continue that trend.
If we had to set a target I think you'd be around a $40 million decrease in inventory by the end of the year. That's what we are internally working towards obviously theres a lot of factors that go into play there for us to achieve that goal but.
But we're going to manage inventory down and use that working capital too.
The change in working capital, obviously to pay down debt.
By the end of the year.
And Thats, Tom Thats against the Q1 balance of the fourth quarter pallets just.
For the base here that $40 million reference.
Correct Q1, sorry down from Q1.
Okay. So on the $250 million range is the goal.
Yes, yes correct.
Okay, great. Thanks again.
Alright, Thanks John .
Our next question comes from the line of Rob Shapiro with singular Research you May proceed with your question.
Hi.
Besides the increase in expenses in Reno have you seen any other impacts of the inflationary environment on other parts of the business.
Yes, yes.
Just to be clear there too.
Alright.
It might have got blended in and in our prepared remarks. So we saw it we saw significant increase in temp labor in Reno, but we also saw significant freight increases and that's what we meant by fulfillment costs freight increases, particularly outbound freight is referring to which shows up in operating expenses for us and so we.
With fuel prices we saw.
Increased rates from our from our freight from our freight partners and LPL carriers.
Other the other added costs, there that would certainly be.
The temporary and my mind was we made some freight concessions.
Some of our retail partners as we are shipping product to them late.
So that is something that we would not see.
On a go forward basis.
So that definitely added.
Costs to our operating expenses was the outbound freight cost.
Alright.
Can you comment on the the higher accounts payable this quarter.
Yes, so thats simply a reflection of inventory.
And reality is inventory in transit as I alluded to before is significant increase in in transit inventory.
And so.
While that inventories traveling to us it would sit in accounts payable.
Okay.
Okay. That's all for me thank you.
Great. Thank you.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jason Brooks for closing remarks.
Great. Thank you very much just wanted to say thanks to everybody on the call and our investors and really want to put out a thank you to all the rocky brands employees and the efforts that they've put into.
<unk> Q1 happened in 2022, and we look forward to finishing out the year end.
Another successful quarter for Rocky brands. Thank you so much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation under the rest of your day.
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