Q2 2023 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to the Rocky brands second quarter 2023 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.
Anyone has any difficulties hearing the conference. Please press star zero for Ya for operator assistance at any time.
I'd like to remind everyone that this conference is being recorded and will and now I will turn the conference over to Brendon Frey of ICR.
Yeah.
Thank you and thanks to everyone joining us today.
Before we begin please.
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 refer to today's press release, and our reports filed with Securities and Exchange Commission, including our 10-K for the year ended December 31st 2022.
And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky brands.
Thank you Brendan.
With me on todays call is Chief operating Officer, Tom Robertson, and Chief Financial Officer, Sarah O'connor.
After Sarah's and my prepared remarks, we will be happy to take some questions.
Now to our second quarter results the challenging marketing conditions, we experienced during the first quarter continued to pressure our topline, particularly within our wholesale segment the difficult macroeconomic backdrop, coupled with the overall elevated inventory.
Level is for many of our retail partners.
Led to lower than expected sell in during the quarter. Despite the fact that our sell through for our brands remains solid notwithstanding the slow start at once orders improved month over month as the quarter progressed and this trend continued in <unk>.
July .
Providing a good start to Q3, and leaving US cautiously optimistic that channel inventories are getting properly aligned with demand.
While the retail inventory situation weighed on our reported results consumer demand for brand portfolio has provided resilience contributing to the progress many of our key partners have made working down their total on hand inventory.
Importantly, the combination of strong full price selling and the price actions. We took in the second half of 2022 helped drive a 440 basis point increase in gross margin year over a year.
While the first half of 2023 was more challenging than we expected. We believe the business is positioned for sequential improvements in both the third and fourth quarter based on sustained consumer demand, we continue to experience for our products.
Combined with the recent conversations with key wholesale partners.
Before I hand, it over to Sarah to cover the numbers in more details I wanted to spend a few minutes reviewing some of the drivers of our recent topline performance starting with our work category portfolio of brands.
The the four brands that represent our work segment.
Georgia, Rocky Muck and extra tough, we're collectively impacted by slower reorder frequency as retailers work to correct their inventory levels. While the group was down during the period, we saw the situation improve as the quarter progressed and also.
Observed areas of strength beneath the challenging operating environment.
The Georgia brand exited the quarter in a much better position than it started June was much improved from April and May as we saw mid single digit growth with our field accounts along with the best month of the year with some of our key account base.
The majority of the upside in June came from new product orders as the new season of product was well received by retailers with some of our legacy product. The price decreases we were able to pass through from our efforts to lowering manufacturing costs with.
Our factory partners has driven an immediate uptick in sales for the selected amount of styles included in this program.
With our Rocky work segment, we saw a similar story playing out as excess inventory levels continued to stall replenishment orders overall.
Overall, the second quarter didn't unfold as we had hoped.
We are optimistic about the remainder of the year as our retail partners continue to work through their inventory and consumer demand remains strong for our Georgia and Rocky work France.
Shifting to extra tough in luck.
Which make up our rubber based work product both bad.
Both brands had very challenging quarters, particularly extra tough due to the order irregularities in the year ago period.
As you recall distribution challenges in 2020. One resulted in late delivery of fall 2021 inventory into Q1, and Q2 of 2022 causing a spike in orders in the first half of the year. Additionally.
Additionally, record warm weather and elevated retail inventory levels slowed reordering levels from our partners this quarter.
Although inventory positions remain high the muck brand continues to provide steady sales for most retailers.
In June we saw significant upticks in our southeast southwest and Rocky Mountain territories, and early indications point to success with new products in our spring 2023 collections.
In the second quarter, we also made significant headway with securing shelf space for Mark and one of the largest co op hardware store retailers with an opportunity to open 500, new your new doors by the end of the year.
With extra tough we have seen improvements in partner inventory levels and some regular orders starting to flow.
The positive brand sales, we are seeing from partners are coming from their on hand inventory.
While the second quarter was difficult we ended with our best months of the year in June and are focused on maintaining our positive brand momentum into Q3 and Q4 as sales continue to improve.
Turning now to our western business the inventory situation that impacted our work business was also a factor for our western segment.
This led to another sluggish quarter for Durango brand, but we saw steady improvement as the quarter progressed with that one sales trending above 2022 period for the last eight weeks of the quarter.
As we mentioned in Q1, the Durango team has been focused on cost efficiencies to help offset some of the intermediate demand pressure and these efficiencies helped us lower map prices on some products, resulting in a boost in sales late in the quarter.
The Durango team also continues to add new doors for the brand over 80, new doors through the first six months of 2023.
These new doors had been immediately impactful from the sales perspective.
And position us well for Reacceleration when market wide inventory positions moderate.
This ongoing door expansion, along with sharper pricing and fresh fall product hitting shelves in the coming months has us optimistic for our flagship western brand as the year progresses.
Our rocky branded western products saw similar wholesale pressures in the quarter the demand for some new product styles helped mitigate a portion of this headwind.
Turning to outdoor which includes styles under our rocky muck and extra top brands. This category was our most impacted segment again in this quarter.
Not unique to us, but a poor 2022 outdoor season for the industry has created greater carryover inventories and lower new product bookings as we headed into the more popular fall outdoor season.
On top of this mark and extra tough also faced difficult year over year comparisons from the shipping delays in late 2021, I mentioned a moment ago.
While overall it was a difficult quarter, we saw some positive results with select outlets along with a modest gain in the outdoor e-commerce sales.
Last but not least within our wholesale segment commercial military was a bright spot as orders from the U S Army and United States Marine Corps drove a strong double digit sales increase year over year.
Shifting to our retail segment Lehigh our beta V business continue to expand compared to 2022.
Those slowed its recent trajectory.
We saw some key account business push from Q2 to the second half of the year as several accounts adjusted eligibility of employees as they attempt to manage cash flow in the near term.
There is no indication these will be lost sales only that they will be delayed until later this year.
Additional factors that impacted the quarter stemmed from internal employee additions that resulted in adding training requirements along with upgrades to our security protocols that required training customers on additional credentials for login.
We believe this to be a short term impact as upgrades have been completed and sales aren't starting and sales are starting to return to more normalized patterns. We are still very positive about the lehigh business and the opportunities. It provides in 2023 and beyond.
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Overall, while the second quarter was challenging I'm encouraged by a stronger exit to the quarter and I'm very pleased to see resilient demand for our portfolio of brands at the consumer level.
Despite the pressure from the current retail environment landscape I am confident in our ability to manage through the current environment as retailers work through their inventory positions in the coming quarters, we expect to be in an excellent position to reaccelerate growth quarter over quarter. This.
This year and on a year over year basis, starting in 2024.
I will now turn the call over to Sarah.
Thanks, Jason.
Jason discussed the underlying strengths of our brands at the consumer level or overshadowed by inventory related selling pressure within our wholesale channel this quarter.
I did not say all the second quarter decreased 38, 4% year over year to $99 $8 million.
The year ago period included approximately $4 $3 million in service brand sales, which we divested in the first quarter of this year.
All $4.3 million at those sales occurred in our wholesale segment.
Alright, and adjusted basis, which includes retraining, it's related to a supplier dispute net sales were hungry and $1.4 million for the quarter.
By segment wholesale sales decreased to $71 5 million dollar retail sales decreased to $25 $1 million and contract manufacturing sales were $3 $3 million.
For the second quarter gross margin was $37 $6 million or 37, 6% of sales compared to $58 $3 million or 33, 2% of sales the same period last year.
The 440 basis point increase in gross margin as a percent of net sales was mainly attributable to increased wholesale segment gross margin as we realize the benefit of pricing actions taken in the second half of 2020 tail as long as the lower inbound logistics costs compared with the same period.
Last year.
A higher mix of retail segment sales, which carry higher gross margin than our wholesale and contract manufacturing segment also contributed to the expansion in overall gross margin.
Gross margins by segment for the quarter, whereas follows.
Gross margin was up 430 basis points to 35, 2%.
Retail gross margin was down 20 basis points to 48, 7% and contract manufacturing March Animas down to five 4% from 10, 5% prior year.
Operating expenses were $35 $4 million or 35, 5% of net sales in the second quarter of 2023 compared to $48 $2 million or 28, 7% of net sales last year.
Excluding $1 7 million of acquisition related amortization and restructuring costs in the second quarter, this year, and excluding $2 $1 million of acquisition related amortization and integration expenses and restructuring costs in the second quarter of 2020 sale adjusted operating expenses.
Says for were $33.6 million or 33, 2% in the current period and $46 million or 28, 7% of adjusted net sales and the year ago period.
The decrease in operating expenses must driven primarily by a decrease in variable expenses associated with lower sale, and then creative distribution efficiencies compared with a year ago period.
Income from operations was $2 $2 million or 2.2% of net sales compared to $5 million or 3.5 thousand net year ago period.
Adjusted operating income, which excludes expenses related to the acquisition and restructuring costs in both periods with $5 $7 million or five 6% of adjusted net sales compared to adjusted operating income of $7 $7 million by four 8% of net sales.
A year ago.
The second quarter. This year interest expense was $5 $6 million compared with $4 $3 million and a year ago period.
The increase reflects increased interest rates on the senior term loan and credit facility.
On a GAAP basis, we reported a net loss of $2 $7 million or a loss of 37 cents per diluted share compared to net income of zero point $9 million or 12 cents per diluted share in the second quarter of 2022.
Adjusted net income for the second quarter of 2023 was essentially breakeven.
Compared to adjusted net income of $2 $5 million or 34 cents per diluted share in the year ago period.
Turning to our balance sheet at the end of the second quarter cash and cash equivalents stood at $3 $1 million and our debt totaled $221 $7 million. This consisted of our 91 1 million dollar senior term loan and a one.
Hundred and $33 million of borrowings under our secured senior secured asset backed credit facility.
At the end of Q2 last year, our total debt was $284.6 million, including $125 $9 million on our senior term loan.
Underscoring the work that we've done paying down our most expensive borrowings.
Inventories at the end of the second quarter were $218 $3 million.
Down 24, 1% compared to $287.8 million a year ago.
And down seven 3% compared to the end of 2022.
As a reminder, the second quarter typically represents our highest mark for inventories for the year.
We still plan to exit 2020 three.
The previously guided $185 million level.
Now for our outlook.
Jason discussed inventories in the channel have continued to come down, which along with sustained consumer demand for our brands should lead to an improved sell in in the second half compared to the first half of the year.
That said the return to a more normalized wholesale order pattern will take longer to materialize than we expected on our last earnings call. We expect our third quarter top line will show a nice improvement over the second quarter with fourth quarter level, it's been even stronger and similar to the fourth quarter of last year.
Based on our updated view of 'twenty two 'twenty three we now expect full year net sales to be approximately $470 million.
With respect to gross margin, we still expect to achieve approximately 40% adjusted gross margin compared to adjusted gross margin of 36, 6% in 2022.
Our adjusted SG&A has come down further in step with the reduction in sales. So we don't anticipate any further deleveraging compared to our most recent forecast.
That concludes our prepared remarks, operator, we are now ready for questions.
Yeah.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Keith one moment, please while we poll for questions.
Thank you. Our first question comes from Jamie Stricture with BT IGN. Please proceed with your question.
Hey, you got eastern Saggy on Virginia can you hear me okay.
Yeah, Hi.
Hi, So first question I'd just be interested to know more about your conversations with key wholesale partners and what exactly is driving the expectation for improvement in the back half of the year.
Yes, no great question, So I think where the conversations that we've been able to have.
With many of our key retailers and field accounts is that the inventory levels are getting back into a better place where you can even go into some of these retailers and see that there's holes in different sizes.
And may be different styles, and so they're feeling a little more confident in that area and in some cases it may not even be our inventory that that they were high on and and we're seeing some of those inventories get right sized I do want to preface that every conversation.
And that we've had everybody is still being very cautious, though so we you know we believe that we're going to continue to see that get better, but not probably back to the same kind of business. It was in the past so so people.
More optimistic, but still being very cautious about the economy and what's happening in the marketplace. I think just to just to add on there we have visibility into a handful of 10 to 12 of our larger key accounts and so what we're able to see you go and sell through.
Retail its meeting our expectations the retailers seem happy.
With the sell through of our products and so and so we know this is a matter of time until the retailers move through that inventory and we get to see some of the inventory levels at those retailers and we're seeing them go to the right direction and just to add on as well you know some of the conversations we've had with these retail partners as well.
Just elaborate on Jason's point is that they are going to be buying more at once in Q3 and Q4 given their you know their cautious approach to the last half of this year.
So the inventories we'll normalize I believe is in the second half of this year.
Got it that's really helpful. And then my last question I think earlier in your prepared remarks, you talked about the progress you've made with some of your manufacturing partners, but I missed exactly what you said can you just give a quick update on that.
Yeah. So what we were referencing is we've been able to work with our manufacturing partners and even some of our suppliers that we have our own manufacturing facilities in the Dominican in Puerto Rico and in mainland, China, and we've been able to work with them.
On negotiating better raw material prices or better finished good prices and so as we took price increases back in 2022, we're now going back and saying Hey.
Our our our sales have slowed on this one style, we really need to get back to this kind of price point on it can you guys help us out from a manufacturing standpoint, and they've been able to find some some savings there for us and we've been able to pass that through to try to get the retail price point at.
The sweet spot somewhere it's turning at a faster rate.
Got it Super helpful. I appreciate you guys, taking my questions. Thanks.
Yeah, absolutely. Thank you.
Thank you. Our next question comes from Jeff Week with B Riley Financial. Please proceed with your question.
Good afternoon, everyone. Thanks for taking the question.
Jason I was curious obviously the quarter was a little more challenging than you thought going into it.
Just love to get your perspective.
Yes.
What were the things that.
To be most challenged again as you sit here today.
What are the things that you're a little more maybe even more optimistic than you were a month or two ago.
Yeah, Hey, Jeff Good to talk to you happy to take your questions.
I would say the thing that.
Really surprise.
Surprised me in Q2 more than I didn't think it was going to be this I thought the retailers would get through the inventory much quicker than we are and so I think that's been one that has really surprised me we knew they were you know.
Over inventory I think we have taken this approach of not being terribly promotional because our products are more of a need based than a want base right, they're more of a tool.
And and I think the retailers well I don't think I know, they've even said that on some of their earnings calls that they're not being promotion. So I do think that you know.
Although our products are selling at retail.
Nobody's discounting it so nobody's buying two pair right, they're going in and buying the one pair they need and then they'll come back in six months eight months a year and by another pair. So I just think it took a lot longer than than it was than I anticipated our thought it was going to take.
And in turn their mobiles.
As you sit here today.
Is there anything that kind of stands out as.
Youre more optimistic about.
And so you work.
Yeah, I think what I'm.
Man I am really being cautious about the rest of the year, but the thing that I'm really confident in is our brands are still meaningful in the categories. We're in.
People are still buying them the retailers are selling our product it's checking at retail.
So I am still confident that our brands are meaningful to the consumers in the marketplace.
We just have to navigate this crazy.
Predictable time, right now and you know I'm listening to these retailers and they're they're talking about being cautious right I think Tom just mentioned that they're they're not pre booking anything for now.
Not anything, but theyre pre booking less and they're just like look we're going to buy from you when we need it at once and you guys better out of the inventory in.
I guess the good news is we have the inventory right now so.
We're gonna be ready to ship them, when they're ready to place the orders.
I think Jeff just add on for optimism. Besides the fact that what we see at retail as promising I think we see a very clear path to driving that inventory down and as we look to the last half of this year, we're being very cautious with our inventory buys as well and so.
I see a clear path to getting the inventory down, which ultimately leads to to pay down of debt. So so that's another bright spot for the second half of this year.
Okay.
Great. Thank you very much I'll take the rest offline.
Thanks, Jeff.
Thank you there are no further questions at this time I would like to turn the floor back over to Jason Brooks for closing comments.
Great. Thank you very much thank you everybody.
That was on the call today, and all of our investors and I also want to send out a really special things to the rocky brands team members.
We have worked hard the first half of this year through really difficult.
Six months.
And I can't Thank you all enough for four.
Sticking in there and working so hard to make it the best possible company, we can and are excited to navigate the rest of this year with you guys in the years to come so thank you all very much.
Okay.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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