Q2 2022 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by.
Welcome to the Rocky brands second 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.
<unk> will be provided at the time for you to queue up for questions.
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I would like to remind everyone that this conference call is being recorded.
And now I will turn the conference over to Mr. Brendon Frey of ICR.
Please go ahead 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.
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.
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.
And 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.
We are very encouraged with the continued strong demand we experienced for our portfolio of leading brands during the second quarter <unk>.
Especially in light of the growing pressure on consumer spending from inflation and the other macro economic headwinds our topline performance year to date underscores the desirability of our innovative functional footwear the strong connections we forged.
With our core customers in multiple categories led by work western and outdoor and commercial military.
Over the past 15 months, we have integrated our acquisition of Honeywell's performance and lifestyle footwear business, which includes the mark and extra top brands and made important infrastructure investments to support growth.
Most notably the opening of a new distribution and fulfillment center in Reno, Nevada.
At the same time, we have faced certain internal and external challenges that have hampered our ability to fully capitalize on our progress and deliver the profitability of this company is capable of generating.
Most recently it has been higher than expected costs throughout our supply chain from first cost with our suppliers to inbound freight and port related logistic expenses.
We raised our prices at the start of the year. However, it hasn't been enough to fully offset the continued increases we've experienced which resulted in second quarter earnings coming in below our expectations.
In response, we will be taking our pricing up again on September one.
Which along with improved supply chain conditions, and the express expense synergy savings, we announced in early June we'll put rocky brands and a much stronger position to deliver sustained profitable growth.
Tom will go through the numbers in more detail, but I wanted to spend a few minutes reviewing the highlights for each of our brands from the second quarter beginning with Durango.
The brand continued to experience experienced robust demand and finished up double digits for the eighth quarter in a row.
We saw strength in both key and field accounts, driven by strong sell through and better on hand inventory levels with particular outperformance in our farm and ranch channels.
While we saw broad based strength across our core Durango styles. We also shipped new styles are very popular Maverick XP westward series and rebel pro adding to the tremendous strength with our field accounts.
In summary, the Durango brand continues to have major momentum and is poised for further gains as we continue to capture new shelf space with new and existing customers.
Turning to Georgia.
The brand continued its strong performance with strong double digit gains this quarter fueled primarily by growth in the field accounts.
We are particularly pleased with the headway, we've made diversifying the Georgia business.
While the original wedge, Georgia giant romeos and mud dog all represent major volume for the brand. We are also having success with newer items with more features and comfort in.
In response to certain competitor supply chain constraints, both large and small farm and ranch accounts increasingly stock, Georgia loggers in work western styles to to fill vacant shelf space. Additionally.
Additionally, we saw the new Amp LT wedge a more modern take on our classic wedge grow almost 50% and our work hikers grow 74% fueled by strength in our Pacific Northwest accounts and area, usually dominated by our lager and classic Romeo.
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The diversifying of originality, and new styles bodes well for the success of Georgia, even as market forces way on the industry.
The Rocky brand, which brands work outdoor western commercial military and public service footwear also had another solid quarter outdoor.
Outdoor and western in particular or areas of strength, while in work the timing of key orders in the year ago period that we didnt anniversary was nearly offset by new distribution. We've added this year.
Importantly, the hunting season got off to a strong start, especially our outdoor apparel as many retailers were under inventory this time last year.
Overall, the outlook for Rocky work outdoor and western for the balance of 2022 remains solid.
With respect to Rocky commercial military and public service Division the categories registered high teens year over year growth one of the best quarters on record as the teams capitalize on growing market momentum.
Better product availability, coupled with increased deployments and training helped commercial military sales continue the positive trend established in the last quarter at.
At the same time, our public service business had a terrific quarter.
As a team are definitely executed its comprehensive sales strategy that focuses on proper forecast and on time delivery for factory direct orders as well as increased customer contact informing them of our in stock position for key Alpha four styles.
With both groups the growing demand and improved inventory positions.
Along with the closing of the U S government fiscal year in September bodes well for a continuation of our strong momentum.
Our muck in extra tough brands, both posted solid gains in the second quarter for months, the logistics and distribution challenges experienced in Q4 and Q1 dramatically improved this quarter as a result total shipments were up 41% year over a year.
Looking at the competitive landscape for muck. The category is currently overstocked, but the brand continues to perform very strongly with double digit sell through at some of our key farm and ranch accounts with the rising cost of energy in key markets. The natural resources industries are booming.
<unk>, which is driving opportunity for our work in industrial products.
Extra tough also continues to see positive momentum, especially with the brand's key outdoor and fishing retail partners.
In addition to demand for extra tough score offering new styles, such as the army sandal and the kids ankle that boots, which provided brand entry into two new product categories have performed well since arriving at retail stores in the second quarter.
Turning now to our retail segment there were some very positive developments in the second quarter. Most significant was the implementation of our Reno, Nevada distribution Center singles processing function.
This allowed us to bring alive much needed inventory for both Mark and the extra tough U S sites as well as enable our ability to fulfill those orders with one to two business days.
We went live with this new processing function at the end of April and since then we have seen average daily sales for those two e-commerce sites double compared to last quarter.
Unfortunately at the same time, we were continuing experienced extended courier delivery times.
Mitigate this we expanded our expedient shipping options at checkout on some of our sites and continue to send tracking information. So the customers can be more closely monitored shipping process.
We will also soon begin going live with alternative payment methods, such as Paypal on our Canadian marketing extra tough sites, which should lead to increased conversion and overall revenue capture.
Equally important we saw double digit increases in our Rocky, Georgia, and Durango brands on their respective ecommerce sites average order volume on full priced items increased mid teens year over year due to strong full price selling and new price increases that went into effect.
Looking at digital first marketing programs enhanced online user experience and compelling new product launches have us optimistic optimistic about the growth prospect for this channel.
Meanwhile, our Lehigh beta be retail business had another strong quarter, driven again by significant growth in both new and existing accounts with prices going up across the footwear industry. Many of our customers have increased 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 Lehigh has been able to organically drive additional revenue with existing accounts and as Covid concerns have continued to be our number of onsite I fit events is gaining pace, which combined with our email and SMS strategy.
It's driving higher account participation rates and increasing our account revenue and penetration rate.
Overall, I'm very pleased with our topline results and momentum in the midway point of 2022.
While we are cognizant of the impact of certain micro economic factors could have on our overall industry demand in the near term, we believe our comprehensive portfolio of leading brands and continued focus on operational improvements puts us in a great position to can you.
To continue capturing market share and to start driving enhanced profitability.
We're excited for what the future holds for Rocky brands, and we look toward to a solid finish to the year.
I'll now turn the call over to Tom Tom.
Thanks, Jason as Jason outlined growing demand strong inventory to meet that demand through another solid quarter for rocky.
So operational challenges did hinder our ability to convert that demand into bottom line results.
Ported net sales for the first quarter increased 23, 1% year over year to $162 million.
By segment on a reported basis wholesale sales increased 29, 7% to $131 2 million retail sales increased 16, 4% to $26 million in contract manufacturing sales were $4 $9 million.
Turning to gross profit for the second quarter gross profit increased nine 4% to $53 8 million or 33, 2% of sales compared to $49 2 million or 37, 4% of sales. The same period last year. The decrease in gross margin was primarily attributable to <unk>.
Fire than expected increases in product costs, inbound freight and other shipping and logistics cost.
Gross margin by segment were as follows wholesale down 500 basis points to 39% retail down 80 basis points to 48, 9% and contract manufacturing down to 10, 5% from 21, 8% a year ago.
As Jason noted, we're raising prices on September one and with this action along with improving supply chain conditions, we expect gross margins in the second half of the year to improve compared to the second quarter.
Operating expenses were $48 $2 million or 29, 7% of net sales in the second quarter of 2022 compared to $47 million or 39% of net sales last year.
Excluding $2 $1 million in acquisition related amortization integration expenses and restructuring costs this quarter and $2 $3 million in acquisition related expenses in the second quarter of 2021, adjusted operating expenses were $46 million in the current period and $38 five.
A million in the year ago period.
The increase in operating expenses was driven primarily by higher outbound freight expenses and higher variable expenses associated with the increase in sales as a percentage of net sales adjusted operating expenses improved 80 basis points to 28, 4%.
In the second quarter of 2022, compared with 29, 2% in the year ago period.
And improved 70 basis points compared to 29, 1% in Q1 of this year.
Income from operations was $5 $6 million or three 5% of net sales compared to $8 4 million or six 4% of net sales in a year ago period.
Adjusted operating income, which excludes the expenses related to the acquisition and restructuring charge in both periods was $7 7 million or four 8% of sales.
Compared to adjusted operating income of $13 million or nine 9% of net sales a year ago.
For the second quarter interest expense was $4 $3 million compared with $3 $4 million in the year ago period.
On a GAAP basis, we reported net income of.
0.9 million or <unk> 12 per diluted share compared to net income of $3 9 million or <unk> <unk> per diluted share in the second quarter of 2021 <unk>.
Adjusted net income for the second quarter four of two.
2022 was $2 5 million or <unk> 34 per diluted share compared to adjusted net income of $7 4 million or <unk> 99 cents per diluted share and a year ago period.
Turning to our balance sheet at the end of the second quarter cash and cash equivalents stood at $5 $8 million and our debt totaled $284 $6 million.
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$125 nine.
Our senior secured term loan facility and $158 $7 million borrowings under our senior secured asset backed credit facility.
As of June 32022, we had $38 $2 million of borrowings available on our credit facility.
Inventory at the end of the second quarter was $287 8 million compared to $143 5 million a year ago and $289 2 million at March 31 2022.
The increase in inventory was driven by overall cost increases and strong sales growth combined with additional inventory on hand, as a result of increased freight and transit times and distribution and fulfillment challenges experienced in the second half of 2021.
Inventory at the end of June was higher than we'd like.
Inventories are down from the end of last quarter slightly including a $45 million reduction in in transit inventory as we expect to realign inventory levels with sales growth and inventory purchasing strategies over the coming quarters.
With respect to our outlook based on a more challenging macro economic backdrop, we now expect full year net sales to be towards the low end of our previous range of 21, the 24% growth over 2021 and.
In terms of gross margin. The recent pressures we've discussed today will continue to weigh on wholesale margins in the second half of the year with some improvement compared to the second quarter as the price increases go into effect and start flowing through the income statement.
Just on the outlook for wholesale margins and our projected sales mix by segment. We now expect overall gross margins.
To be approximately.
Approximately 34% by the fourth quarter this year.
With the $3 million to $4 million annualized savings from our cost savings actions, we announced in June kicking in we will experience significant improvement in leverage compared with the first half of this year.
Yeah.
With third and fourth quarter SG&A as a percent of sales dropping down to the mid 20% range for full year. We are now targeting achievement, achieving approximately 100 basis points in expense leverage over 2021 adjusted levels and making further progress next year. This will help transform our topline success.
And a stronger earnings, which along with the cash generated by reducing inventories.
Put us in a good position to be in paying down our debt.
That concludes our prepared remarks, operator, we are now ready for questions.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on the telephone keypad.
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One moment, please while we poll for questions.
Our first question comes from the line of that Anderson from B Riley. Please go ahead.
Hi, good evening, Thanks for taking my question.
I was wondering Tom if you could talk maybe a little bit about just the drivers of the gross margin pressure or maybe if you could bucket it a little about a little bit just in terms of magnitude and when do you expect that to fall off and then in terms of the price increases and how much are you expecting them to be up in the back half and was there any in the first half.
We expect that to fully offset the inflationary pressures.
Yeah, Hey, Susan.
Yes, good question and so as we look at the rest of the year I guess, we're starting with the first part of your question. The second quarter, we really as inventory came in right and we've talked about in transit inventory at the end of last quarter as as the on hand inventory kind of swelled Wow, we had to throttle inventory into the distribution centers.
And and we ended up incurring more logistics costs than anticipated.
And so we've gotten a lot of that through the P&L at this point, but theres still more a flow through from the balance sheet and so we will see continued pressure really in the third quarter, and then mitigating a little bit in the fourth quarter are the other the other driver is as we noted earlier, we've seen price increases.
From third party sourcing factories in Asia, and so we are working to help mitigate those whether it be pushing back on those partners or even go up and the price increase that we've announced today.
And so you know it was.
In the prepared remarks, we stated we anticipate getting to that that you know that 34% Mark for the fourth quarter, which is down from what we previously guided.
The price increase more specifically are you know probably averages somewhere between five and $7.
Prepare and really the effects of that will lag and in Q4 and probably our larger accounts are you know you have to give them a little bit more notice so likely more see the benefit of that as we move into the first quarter of 2023.
I just want to add on there we did take a price increase at the beginning of the year. Obviously it was not enough of a price increase we do believe this one is a more appropriate.
We'll have to reevaluate that as we come into the end of the year and if there'll need to be any more price increases going into 2023.
Okay, Great and then maybe if you could just talk about the wholesale order book kind of what you are hearing there from your wholesale partners for the back half I mean, it looks like you are expecting sales to be at the low end now, but then also going into 2023.
Yeah, So I'll start off here I'm sure Tom will add some color, but we.
We are still going into you know the Q3 and Q4 pretty positive.
We saw a little.
Slow.
At once business in July , but nothing too awful scary I think we tend to look at our product in its more functional than fashionable end and people are still working people are still in need of the types of products. We have so we still feel pretty good.
About Q3, and Q4 and then you know to go.
Go out into 'twenty two 'twenty three.
To try to predict anything right now is it's really complicated I think and and are we going to get back to what is new normal in and how does that kind of flow through I I think I think it's got a level off I think we have to find a new normal here and and and hopefully we can get back to.
So something in 2023.
Yeah, Susan just add on a little bit there.
We obviously follow our bookings really closely we've not seen any significant cancellations and so and so what we're trying to just retain really is <unk> who's a little bit of softness in our at once business, which is which is a large portion of our business.
But nothing too concerning and so I think we'll be okay.
Call it cautiously optimistic for the last half of the year. That's why we're not really taking down our guidance for just kind of go into the lower end of the range. We previously provided.
Great. Okay. Thanks, so much you guys. Good luck the rest of the year.
Thanks, Susie Thank you Susan.
Okay.
Thank you. Our next question comes from the line of Camilo Leon from V. P. I G. Please go ahead.
Hi, Greg This is Mckenzie whitestone on for Camilo, Thanks for taking our questions.
Hi, My first question is just on <unk>.
<unk> I know that you saw in Q2.
You saw some higher costs, but I'm just curious.
In terms of transit times and freight costs can you just kind of talk about what you're seeing now versus maybe what you saw.
You know earlier this year to try to understand like if you're seeing anything maybe come down from.
From Q2 into the back half way to understanding like when do you think transit times and costs might be for you.
Yeah, So I just wanted to be clear.
We are definitely seeing cost.
Come down it's not coming down as fast as it went up but we are seeing costs come down I think we're where we talked about the cost in in Q2 was we anticipated that maybe coming down a little quicker and so they they stay.
Good up there a little longer than we anticipated so.
So we are definitely seeing that a little bit and then in transit times are starting to get a little more normalized and and you know I would say 30 45 day in transit times or.
Or are more common today, and thats kind of what we used to see really before COVID-19 and in all of the mess, we still have some outliers occasionally.
Where you have a high expense and then maybe a 90 day transit time, but we definitely are seeing it come down a little bit more normal lives I guess from a transit time, yeah, I think an important call out here Mackenzie is it some of the some of the transportation costs that were incurred.
Third in the second quarter really relates to kind of our inventory position and us and us having to manage through all the logistics of getting the inventory into the D. C and so the takeaway from that is that some of these costs are really just temporary right and so as this inventory position works its way down as we're planning.
For for Q3, but really for Q4, we.
We will see those we call them extra type of logistics costs.
In pork costs, we should see those come down and so that's the that's the optimistic point of view on this is that some of these costs will go away as the inventory position gets better.
Okay.
Perfect that's really helpful.
And then.
Just your brands both your legacy and you acquired can you talk about I know you talked about your.
You're continuing to see demand be strong across your brands, but just any noticeable difference or call outs by income demographic customer product type just anything you could talk about from a demand perspective.
Your portfolio would be helpful.
I I think this is a great question, we because of the type of products.
The Democrat Democrats.
The graphics of it are pretty consistent right. These are blue collared workers are we might have some outliers occasionally here or there, but we sell all of the brands throughout all of the same kind of retail stores. When you look at farm and ranch you look at work boots stores, you look at outdoor hunting stores. So.
So we really don't see a lot of difference in that area and I would tell you that our work boot business is still very strong the western boot business is maintaining and doing very well in both Durango and rocky if their spin anywhere that we have.
<unk> seen a slight adjustment is is extra tough has a very functional side to it and then it also has a little bit more of a I hate to call fashion, but it has a little bit of a fashion side to it so.
We've seen a little bit there from a slowdown standpoint, but nothing nothing that's too awful. So the demand for our brands is still pretty strong right now.
Perfect. Thanks, so much best of luck in the bathroom and Nebraska.
Great. Thank you.
Thank you.
Our next question comes from the line of Jonathan Komp from Baird. Please go ahead.
Hi, Thank you.
Maybe just a follow up question.
Outlook for revenue growth at the low end of the prior range I think.
No I think you're implying something close to flat flattish in the second half to get to 21% growth for the year. So could you maybe just.
Confirm that's what you were thinking and any additional perspective, you get out in Florida.
<unk> versus the strong growth you just delivered in Q2.
Yeah, Yeah. So.
Going to the lower range you know I think we are we are relatively flat there might be some upside there for the second half I think just from a from a modeling perspective, John I think you've got to remember that last year.
Was it was a really tough comp that was kind of the or was a very easy comp I should say that was kind of the height of our distribution challenges. Following the integration. So you know I think you just need to massage the numbers from there as well, but we don't we don't plan to carry in as much back orders if you will into.
The fourth quarter, either so there's some noise between quarters, but I think I think you're correct in your assumptions there.
Okay, and maybe a broader question.
The revised margin commentary.
Hum.
It looks like Youre, pointing closer to 7% for the year in terms of.
The adjusted operating margin could you just.
Sure you know any perspective as we look forward to is that a new base to grow off of and what are the pieces that.
Or if you could quantify that and sort of look temporary that's here that maybe we shouldn't factor in going forward.
Yeah, No I think it's I think there's a lot of temporary factors going into this year as we worked through this this inventory issue, we're going to see efficiencies in several places one with them within the distribution centers himself is as Theyre jam pretty tight right now and so it will become more efficient as.
Those inventory levels come down, which again, we anticipate seeing inventory come down you know in the fourth and there's a little bit in the third but more in the fourth quarter.
I'm also a lot of there's a significant amount.
Of logistics costs around us.
I'm trying to get move the inventory around between distribution centers, which I don't anticipate having a next.
Next year and also port cost emerge drayage things like that that were incurred in the first and second quarters inventory swelled. There that we do not anticipate on a go forward basis as the inventories right sized.
So I'd say, there's a lot of this cost is is is temporary in nature and also the the price increases as we've alluded to or we've spoken to I should say will will will also drive higher margins. We just have to be patient for that price increase to take effect.
Taking the approach last year of trying to thinking that's afraid was probably going to be a little bit more of a temporary challenge, but when we got price increases from our from a preferred costs essentially from Asia.
We we have to take a more dramatic price increase and again as we said our plan is to try to mitigate those first cost as we as we move forward as well so.
So I would say, it's more temporary and for us to get back to a L Y numbers I would say, which would be a very logo for us in 2023 from an operating margin standpoint, and I think our expectation would be that we would see some improvements.
Okay. That's really helpful. Just last question for me sorry, if I missed this but.
Tom is there any way you could give a little more color into that that make up of the inventory or or just specifically where you see some of the excesses that you want to work through it and sort of our plans.
The updated plans to get through that.
Yeah, So it's really clear.
You look at you know inside of the makeup of the inventory the bulk of our inventory position our excess inventory position is really around the acquired brands, particularly marketing extra tough Fortunately for US you know those brands are performing very well.
Our plan is to do to move through that inventory and like I said in Q3, and Q4 and right size. It and we'll continue to rightsize that really optimize it and into Q1 and Q2 of next year, we are probably a little bit heavier on inventory are in the legacy brands.
It's really being driven by by trains at times, but also last year with everything going on in retail where we're up against really tough you know, our lean operating environment or lean inventory environment.
For for the legacy brands last year, but but it's very clear to US you know given the distribution challenges we had with with the acquired brands in Q3, and Q4 of last year that that's where the inventory position is.
<unk> is in New York to the largest import position I should say.
Appreciate all the color. Thank you.
Thanks, Sean.
[laughter].
Okay.
Ladies and gentlemen.
Last question comes from the line of Robert Toronto.
With singular research. Please go ahead.
Hi.
So is there any reason why you're waiting to raise prices until September 1st is there you need to have some lag time or.
Or why isn't a month away.
Yeah. So there's typically.
Timing around that to make sure that we get it communicated with the accounts, where we're able to take immediate price increases we will but typically you know the key accounts are looking for anywhere from 60 to 90 day notice is and then and then just trying to make sure that we can.
Get it in the systems and in the process itself they've been Robert just to be clear they've been announced.
As we got to give the customers so much notice and so we're giving we're giving our retail partners 30 day notice unless their contract or agreement specifies longer.
Okay makes sense.
Are there certain products that you can raise the prices up more than that.
Other ones are you or are you raising just a certain amount of across the board for.
So their shoes.
So we took the approach and looked at all the brands in all the products and I think Tom mentioned earlier, it's somewhere between like a five and $7 price increase.
There are definitely products.
They just cannot take those kinds of increases I would tell you service is one of the brands that you know when you were talking about a price point type shoot add $5. Two would just kill it. So there might be some style specific like that that we were only able to take a dollar price increase.
But the average for the core brands was five to seven.
Okay.
Okay, great. Thank you.
Yeah absolutely.
Ladies and gentlemen, we have reached the end of the question and answer session.
I would now like to turn the call back to Mr. Jason Brooks for closing remarks.
Thank you very much first I'd like to just say thanks to all of the Rocky brands employees and the efforts that they've been putting in in 2022 to <unk>.
Put together are a pretty good Q2, I also would like to thank our investors and our analysts we've we've got a lot of of.
Work to do here and we are focused on it and moving forward and we look forward to finishing out a good 2022, and and then moving on to an excellent 2023. So thank you for your time effort and supports I'm here today on the call.
Thank you the conference off Rocky brands has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
Okay.
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