Q3 2023 Rocky Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to the Rocky brands third 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. If anyone has any.
Speaker 1: Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brand's third quarter 2023 earnings conference call. At this time all participants are in a listen only.
Speaker 1: Following the presentation, we will conduct a question and answer session. Instruction 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 that this conference call is being recorded and will now turn the conference over to President Frey.
The difficulties hearing the conference. Please press star zero for operator assistance at any time.
To remind everyone that this conference call is being recorded I will now turn the conference over to Pat.
Yeah.
Speaker 2: 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 1990.
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.
Speaker 2: 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 obligat-
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.
Speaker 2: For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports follow the Securities and Exchange Commission, including our 10K for the year-end of December 31st, 2020.
For a 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, 2022, I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky brands Jason.
Speaker 2: I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?
Speaker 3: Thank you, Brandon. With me on today's call is Tom Robertson. After Tom's and my prepared remarks, we will be happy to take questions.
Thank you Brendon with me on today's call is Tom Robertson.
After Tom and my prepared remarks, we'll be happy to take questions.
Speaker 3: We are pleased with our third quarter results, which were highlighted by a meaningful top-line improvement compared with the second quarter and a significant increase in profitability on both a sequential and year-over-year basis.
We are pleased with our third quarter results, which were highlighted by a meaningful top line improvement compared with the second quarter and a significant increase in profitability on both a sequential and year over year basis.
Speaker 3: As we outline on our Q2 call, we anticipated that our performance would start to rebound beginning in the second half, thanks to the sustained consumer demand we've seen all year for our product offering.
As we outlined on our Q2 call we anticipated that our performance would start to rebound beginning in the second half thanks to the sustained consumer demand, we've seen all year for our product offering.
Speaker 3: It's important to remember that while 2023 got off to a difficult start...
It's important to remember that while 2023 got off to a difficult start.
Speaker 3: Much of the top line pressure was experienced, was related more to macroeconomic headwinds and industry dynamics.
Much of the topline pressure was it scary was related more to macroeconomic headwinds and industry dynamics, notably excess channel inventory, along with tough comparisons versus the strength and desirability of our brands.
Speaker 3: notably excess channel inventory along with tough comparisons versus the strength and desirability of our brand.
Speaker 3: In fact, our cell through has held up relatively well despite persistent inflation that has impacted consumer discretionary spending.
In fact, our sell through has held up relatively well despite persistent inflation.
This impacted consumer discretionary spending.
Speaker 3: This performance combined with early actions by retailers to better align overall inventory levels with the current demand environment.
This performance combined with early actions by retailers to better align overall inventory levels with the current demand environment.
Speaker 3: Drone acceleration in at once orders for many of our key wholesale partners as a third quarter progress.
Drove an acceleration in at once orders for many of our key wholesale partners as the third quarter progressed.
Speaker 3: While third quarter sales did not reach our year-go levels, the work we've done enhancing our distribution and fulfillment capabilities along with lower expense levels, including reduced rate rates, allowed us to translate a 13% decrease in revenue into a 40% increase in operating income on an adjusted basis.
While third quarter sales did not reach our year ago levels. The work, we've done enhancing our distribution and fulfillment capabilities, along with lower expense levels, including reduced freight rates allowed us to translate a 13% decrease in revenue.
New into a 40% increase in operating income on an adjusted basis.
Speaker 3: Tom will cover the numbers in more detail shortly. But before that, I would like to spend a few minutes reviewing the drivers of our recent top line performance.
Tom will cover the numbers in more detail shortly but before that I would like to spend a few minutes reviewing the drivers of our recent topline performance.
Speaker 3: Starting with work, our four brands that make up this category, Georgia, Rocky, Muck, and ExtraTub, collectively delivered a sequential sales increase in the third quarter after selling in was severely impacted by high retail inventories in the first half of 2023.
Starting with work our four brands that make up this category, Georgia Rocky marked an extra top collectively delivered a sequential sales increase in the third quarter. After selling was severely impacted by high retail inventories in the first half of <unk>.
2023.
Speaker 3: And on a year-over-year basis, the decline moderated significantly from what we experienced in the first and second quarter.
And on a year over year basis, the decline moderated significantly from what we experienced in the first and second quarters.
Speaker 3: Momentum for the Georgia built throughout the quarter was sales turning positive in the month of September . As many key customers, key customer accounts began returning to more consistent ordering as their inventories further normalized.
Momentum for the Georgia built throughout the quarter with sales turning positive in the month of September.
Many key customer key customer accounts began returning to more consistent ordering as their inventories further normalize.
Speaker 3: At the same time, load pricing on a certain Georgia styles, which is the result of recently realized cost savings that we passed along to customers, has spurred a notable picture.
At the same time lower pricing on a certain Georgia styles, which is the result of recently realized cost savings that we passed along to customers has spurred a notable pickup in demand.
Speaker 3: Looking ahead, we are optimistic about the brand's growth prospects. Consumer response to the George's fall 2023 line has been very positive.
Looking ahead, we are optimistic about the brand's growth prospects consumer response, the Georgia is fall 2023 line has been very positive while our wholesale bookings for spring have been much stronger than we've seen in quite some time.
Speaker 3: while wholesale bookings for spring have been much stronger than we've seen in quite some time.
Speaker 3: Our Rocky work brand had had a bit more challenge than the Georgia this quarter. With excess inventory levels continuing to impact replenishment orders.
Our Rocky work brand has had a bit more challenged in the GA this quarter.
With excess inventory levels continued to impact replenishment orders.
Speaker 3: However, there were some bright spots, particularly with strength in our own e-commerce channel, along with solid success with new key independent retailers driven by new product introductions.
However, there were some bright spots, particularly with strength in our own E Commerce channel.
Along with solid success with new key independent retailers, driven by new product introductions.
Speaker 3: Shifting to our rubber-based work product, both the muck and extra tough brands delivered solid results.
Shifting to our rubber based work product, both mark and extra tough brands delivered solid results.
Speaker 3: While warm weather weighed on category demand and elevated inventories continue to impact cell-in, we saw steady improvement in Q3 compared to the first six months of this year.
The warm weather weighed on category demand and elevated inventories continued to impact sell in we saw steady improvement in Q3 compared to the first six months of this year.
Speaker 3: Upnote, much new fall collection featuring 12 new styles and supported by a new marketing campaign that targets the brand's core consumer is performing well at the gate.
Of note much new fall collection, featuring 12, new styles and supported by a new marketing campaign that targets. The brand's core consumer is performing well at the gate.
Speaker 3: setting the stage for continuing success in the month to come.
Setting the stage for continued success in the months to come.
Speaker 3: With X-RTough, shipments were up year over year for the first time in 2023, as we delivered the brand's highly anticipated new fall product.
With extra tough shipments were up year over year for the first time in 2023, as we delivered the brands highly anticipated new fall product.
Speaker 3: Inventory levels for our key partners have begun to write size, resulting in a return to steady and growing wholesale demand.
Inventory levels for our key partners have begun to rightsize, resulting in a return to steady and growing wholesale demand.
Speaker 3: As we finalize our spring 24 booking season, we are seeing continued success for the brand in both existing and new channels and expect this positive trajectory to continue into the fourth quarter and next year. Turning this...
As we finalize our spring 'twenty four booking season, we are seeing continued success for the brand in both existing and new channels and expect this positive trajectory to continue into the fourth quarter and next year.
Turning now to our western business, while inventory levels with some key account partners, where again a hurdle we saw steady sales improvements in the third quarter over the first half of the year.
Speaker 3: While inventory levels with some key account partners were again a hurdle, we saw steady sales improvements in the third quarter over the first half of the year. With Durango, strengthen our direct to consumer channel and increases in our special makeup business help offset a portion of the lower selling compared to a year ago.
With Durango strength in our direct to consumer channel.
Increases in our special makeup business helped offset a portion of the lower selling compared to a year ago.
Speaker 3: In terms of cell through, lower map pricing on certain key products, which is the result of the affirmation cost efficiencies that we were able to pass through to customers.
In terms of sell through lower map pricing on certain key products, which is the result of the affirmation cost efficiencies that we were able to pass through to customers.
Speaker 3: Help drive demand and further reduce on-hand inventory levels for several retails.
Drive demand and further reduce our on hand inventory levels for several retailers.
Speaker 3: We also saw notable improvement with our Rocky branded Western product driven by new distribution with Key Western retail.
We also saw a notable improvement with our rocky branded western product driven by new distribution with key western retailers.
Speaker 3: Along with these new partnerships, updates to longstanding Rocky Western bestsellers drove new interested in brand this quarter.
Along with these new partnerships updates to longstanding rocky Western best sellers drove new interested brand this quarter.
Speaker 3: Looking ahead, the Durango and Rocky Western teams are focused on launching.
Looking ahead, the Durango and Rocky Western teams are focused on launching.
Speaker 3: of existing new collections in Q4 and ensuring that the right wholesale partners have the right product to meet the needs of our consumers.
Existing new collections in Q4, and ensuring that the right wholesale partners have the right product to meet the needs of our consumers.
Outdoor which includes.
Speaker 3: which includes under Rocky, Muck, and Extra Tough brands, was again, the category most impacted by retailer inventory levels in the period.
Which includes under Rocky marked an extra tough brands was again the categories most impacted by retailer inventory levels in the period.
Speaker 3: A poor 2022 for industry created greater carryover than normal, which led to reduced bookings for new products ahead of this year's primary fall season.
A poor 2022 for industry created greater carryover than normal, which led to reduced bookings for new products ahead of this year's primary fall season.
Speaker 3: Hunting boots and a pair were most affected by carryover and this was compounded by one large sporting goods retailer exiting the category altogether.
Boots and apparel were most affected by carryover and this was compounded by one large sporting goods retailer exiting the category altogether.
Speaker 3: That said, as I mentioned, when discussing our work product, both the extra tough and muk brand delivered a notable improvement in this quarter, driven in part by new penetration of the outdoor product and more outdoor focus market.
That said as I mentioned when discussing our work product both the extra tough and muck brands delivered a notable improvement in this quarter driven in part by new penetration of the outdoor product and more outdoor focused market.
Last but not least within our wholesale segment commercial military was a bright spot in the third quarter as orders from several suppliers. So the U S Army and United States Marine Corps drove the strongest Q3 in recent memory for the business.
Speaker 3: Last but not least, within our wholesale segment, commercial military was a bright spot in the third quarter as orders from several suppliers to the U.S. Army and the United States Marine Corps drove the strongest Q3 in recent memory for the business.
Shifting to our retail segment, where sales were up 5% over last year. Thanks to a very solid quarter from our direct E Commerce channel.
Speaker 3: Shifting to our retail segment where sales were up 5% over last year thanks to a very solid quarter from our direct e-commerce channel. Each of our branded sites, Rocky, Georgia, Durango, Muck, and Extra Tough were up double digits.
Each of our branded sites, Rocky, Georgia, Durango, Mark and extra tough, we're up double digits, which more than offset expected declines in marketplace transactions through.
Speaker 3: which more than offset expected declines in marketplace transactions. Through enhanced.
Through enhanced digital marketing efforts, we've been successful fostering more direct engagement with consumers and we expect this trend to continue going forward, which should positively impact the segment's growth and margin profile Leo.
Speaker 3: We've been successful fostering more direct engagement with consumers and we expect this trend to continue going forward, which should positively impact the segments growth and margin portfolio. Shifting to our B2B Lehigh business. We've been successful fostering more direct engagement with consumers and we expect this trend to continue going forward.
Shifting to our B to B Lehigh business sale.
Sales were in line with a year ago levels, the temporary headwind from upgrades to our security protocols that we spoke about on our last earnings call. In August are now fully behind us and based on the recent event bookings we.
Speaker 3: The temporary headwind from upgrades to our security protocols that we spoke about on our last earnings call in August are now fully behind us and based on recent event bookings.
Speaker 3: We are optimistic about the return to growth in the fourth quarter. We are still very positive about our Lehigh business and the opportunity it provides in 2024 and beyond.
We are optimistic about the return to growth in the fourth quarter we.
We are still very positive about our Lehigh business and the opportunity. It provides in 2024 and beyond.
Speaker 3: While overall market conditions remain challenging, we are confident that our top line is positioned for further improvement on a sequential basis in the fourth quarter, with channel inventories continuing to come down and the demand for our durable, innovative, and accessibility-priced work, western, and outdoor footwear pick up.
While overall market conditions remain challenging we are confident that our top line is positioned for further improvement on a sequential basis in the fourth quarter.
With channel inventories continuing to come down and the demand for our durable innovative and accessibility priced work western and outdoor footwear pick up the.
Speaker 3: The difference between our cell-through and cell-in is nearly parallel.
The difference between our sell through and sell in is nearly parity.
Speaker 3: This dynamic, along with an improved balance sheet, sets us up for a good finish to 2023 and a strong start to next year. I'll now turn the call over to Tom.
This dynamic along with an improved balance sheet sets us up for a good finish to 2023 and a strong start to next year.
I'll now turn the call over to talk.
Speaker 4: Thanks, Jason. As Jason shared, an improving wholesale inventory landscape, along with our greater ability to convert sales into year-over-year earnings growth, allowed us to deliver better-than-expected results in the third quarter.
Thanks, Jason.
As Jason shared and improving wholesale inventory landscape, along with our greater ability to convert sales into year over year earnings growth allowed us to deliver better than expected results in the third quarter.
Speaker 4: Net sales for the third quarter decrease 14.8% year-over-year for 12.7% on an adjusted basis to 125.6 million dollars. Fiescagment on a reported basis, wholesale sales decrease 17.4% or 14.9% on an adjusted basis to 99.7 million.
Net sales for the third quarter decreased 14, 8% year over year or 12, 7% on an adjusted basis to $125 $6 million.
Segment on a reported basis wholesale sales decreased 17, 4% or 14, 9% on an adjusted basis to $99 7 million.
Speaker 4: Retail sales increased 4.7% to $24.5 million and contract manufacturing sales were $1.4 million.
Retail sales increased four 7% to $24 5 million in contract manufacturing sales were $1 $4 million.
Speaker 4: Turning to gross profit for the third quarter, gross profit was $46.5 million or 37%.
Turning to gross profit for the third quarter gross profit was $46 $5 million or 37%.
Speaker 4: of sales compared to adjusted gross margin of $50.8 million or 35.3% of sales the same period last year. The 170 basis point increase in adjusted gross margin as a percentage of adjusted net sales was mainly attributable to increased wholesale segment gross margins as we realized the benefit of pricing actions taken in 2022, as well as lower inbound logistics costs compared with the same period last year.
Of sales compared to adjusted gross margin of $58 million or <unk> 35, 3% of sales the same period last year.
The 170 basis point increase in adjusted gross margin as a percentage of adjusted net sales was mainly attributable to increased wholesale segment gross margins as we realize the benefit of pricing actions taken in 2022, as well as lower inbound logistics costs compared with the same period last year.
Speaker 4: A higher mix of retail segment sales, which carry a higher gross margin than wholesale and contract manufacturing segments, also contributed to the expansion in overall gross margin.
Higher mix of retail segment sales, which carry a higher gross margin than wholesale and contract manufacturing segments also contributed to the expansion in overall gross margins.
Speaker 4: During Q3 this year, we capitalized on some strategic opportunities to move certain discontinued products in our inventory. While these sales were dilutive to gross margins versus our plan, this decision puts us on track to come in below our initial year-end inventory target and sets us up to begin 2024 in a much cleaner position. Gross margins by sale.
During Q3 this year, we capitalized on some strategic opportunities to move certain discontinued products in our inventory. While these sales were dilutive to gross margins versus our plan. This decision puts us on track to come in below our initial yearend inventory target and sets us up to begin 2024, and a much cleaner position.
Gross.
By segment were as follows Bolsa.
Speaker 4: Wholesale, up 160 basis points to 34.7%, retail down 70 basis points to 48.0%, and contract manufacturing down 390 basis points to 11.5%.
Wholesale.
160 basis points to 34, 7% retail down 70 basis points to 48.0.
Zero percent and contract manufacturing down 390 basis points to 11, 5%.
Speaker 4: operating expenses were $32.3 million or 25.7% of net sales in the third quarter of 2023 compared to $40.3 million or 27.3% net sales last year.
Operating expenses were $32 $3 million or 25, 7% of net sales in the third quarter of 2023 compared to $40 3 million or 27, 3% net sales last year.
Speaker 4: On an adjusted basis, operating expenses were $30.7 million this year and $39.5 million a year ago, with the decrease driven primarily by lower outbound freight expense, improved distribution center efficiencies, and other variable expenses associated with lower sales volume.
On an adjusted basis operating expenses were $30 $7 million this year and $39 5 million a year ago with the decrease driven primarily by lower outbound freight expense improved distribution center efficiencies and other variable expenses associated with lower sales volumes.
Speaker 4: As a percentage of adjusted net sales, adjusted operating expenses improved 290 basis points to 24.5% in the third quarter of 2023.
As a percentage of adjusted net sales adjusted operating expenses improved 290 basis points to 24, 5% in the third quarter of 2023.
Speaker 4: Income from operations was $14.3 million, or 11.4% of net sales, compared to $11.6 million, or 7.9% of net sales in a year-ago period.
Income from operations was $14 $3 million or 11, 4% of net sales compared to $11 6 million or seven 9% of net sales in a year ago period.
Speaker 4: Adjusted operating income was $15.8 million, or 12.6% of net sales compared to adjusted operating income of $11.3 million, or 7.9% of adjusted net sales a year ago.
Adjusted operating income was $15 8 million or 12, 6% of net sales compared to adjusted operating income of $11 3 million or seven 9% of adjusted net sales a year ago.
Speaker 4: For the third quarter of this year, interest expense was $5.8 million compared with $4.2 million in a year ago period. The increase reflects increased interest rates on interest payments on our senior term loan and credit facility.
For the third quarter of this year interest expense was $5 $8 million compared with $4 2 million in a year ago period. The increase reflects increased increased interest rates on interest payments on our senior term loan and credit facility.
Speaker 4: On a gap basis, we reported net income of $6.8 million, where 93 cents per deluded share, compared to net income of $5.7 million, or $77 cents per deluded share, in the third quarter of 2022.
On a GAAP basis, we reported net income of $6 $8 million or <unk> 93 per diluted share compared to net income of $5 $7 million were <unk> 77 per diluted share in the third quarter of 2022.
Speaker 4: Adjusted net income for the third quarter of 2023 was $8 million or $1.9 per deluded share compared to adjusted net income of $5.5 million or $0.74 per deluded share in a year ago period.
Adjusted net income for the third quarter of 2023 was $8 million or $1 <unk> per diluted share compared to adjusted net income of $5 5 million or <unk> 74 per diluted share and a year ago period.
Speaker 4: Turning to our balance sheet at the end of the third quarter, cash and cash equivalence stood at $4.2 million in our debt totaled $213.9 million. We've made good progress in paying down our debt over the last 12 months with total indebtedness down 24.9% from the end of last September and down 16.7% since the end of 2022.
Turning to our balance sheet at the end of the third quarter cash and cash equivalents stood at $4 $2 million and our debt totaled $213 $9 million. We've made good progress in paying down our debt over the last 12 months with total indebtedness down 24, 9% from the end of last September and down 16, 7%.
Since the end of 2022.
Speaker 4: A big part of the debt paydown has been driven by our ability to strategically reduce inventory levels. At the end of the third quarter, inventories were $194.7 million down 26.5% compared to 265.1 million a year ago. And down 17.3% compared with the end of 2022.
A big part of the debt Paydown has been driven by our ability to strategically reduce inventory levels at the end of the third quarter inventories were $194 $7 million down 26, 5% compared to 265.1 million a year ago and down 17, 3% compared.
At the end of 2022 or.
Speaker 4: Our plan is to now exit 2023 with inventories of approximately $175 million compared with our prior target of 185 million.
Our plan is to now exit 2023 with inventories of approximately $175 million compared with our prior target of $185 million.
Speaker 4: Now to our outlook. Based in our year-to-day results, in current view of the fourth quarter, we are reiterating our guidance for 2023 net sales to be approximately $470 million. This implies fourth quarter sales improves sequentially from Q3 and decline in Q4 on a year-over-year basis further moderates compared to recent trends.
Now to our outlook.
Based on our year to date results and current view of the fourth quarter. We are reiterating our guidance for 2023 net sales to be approximately $470 million. This implies fourth quarter sales improved sequentially from Q3 and decline in Q Q4 on a year over year basis further moderates compared to two.
Recent trends.
Following the discontinued inventory reduction actions, we took in the third quarter and some planned promotions to to move certain noncore products in the fourth quarter. We now expect full year adjusted gross margins to be in the 38% to 39% range compared with 36, 6% in 2022.
Speaker 4: Following the discontinued inventory reduction, actions we took in the third quarter and some plan promotions to move certain non-core products in the fourth quarter. We now expect full year adjusted gross margins to be in the 38 to 39% range compared with 36.6% in 2022.
Speaker 4: For comparative purposes is important to remember that in Q4 of last year, Gross margins benefited by 230 basis points from a one-time tariff over payment recovery.
Speaker 4: S-GNA is now expected to only be leveraged approximately 100 basis points from 2022's adjusted level and interest expense is now projected to be around $23 million due to higher interest rates.
Speaker 4: All this implies that the fourth quarter adjusted earnings per share will be similar to the third quarter this year and fourth quarter of 2022.
Speaker 4: That concludes our prepared remarks. Operator, we are now ready for questions.
Speaker 1: If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to-
Speaker 1: The participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment.
Speaker 1: Our first question comes from Jessica with B or Iley. Please proceed with your question.
Our first question comes from just like with be Riley. Please proceed with your question.
Speaker 5: Hi guys, congrats on a great quarter.
Hi, guys.
Does that sound great quarter.
Speaker 5: Jason, I was curious, you mentioned that SELIN and FELT through are at parity now. So I guess that's the implication there is, you're fulfilling kind of one for one. I'm just kind of curious, where has the improvement picked up the most? And you also made the comment that the spring orders were stronger than quite sometimes. I'm just kind of curious, there's things involved in Q3 and now we start to look at the spring, where have things picked up the most?
Jason I was curious you mentioned that sell in and sell through it parity now so I guess, that's the implication. There is you know you're you're fulfilling kind of you know one for one I'm just <unk> I'm kind of curious where has the improvement picked up the most in in where you know and then you also made the comment that the spring orders were stronger than <unk>.
Wait some time, so I just kind of curious as things evolved in Q3 and now we start to look at the.
The spring aware of things picked up the most.
Yeah. Thanks, Yeah, I would tell you it it might be easier to tell you where things are the slowest the outdoor category.
Speaker 3: Yeah, thanks, Jeff. I would tell you, it might be easier to tell you where things are the slowest. The outdoor category is still our most difficult. So in the work, in the work Western, and then really the extra tough, you know, ankle deck boots and stuff, that's all doing much better. I will tell you though, the retailers are still being very cautious.
It's still our our most difficult so in the work and the work Western and then really be extra tough you know ankle that goods and stuff. That's all doing much better I will tell you, though the retailers are still being very cautious.
Speaker 3: And they're ordering from us on a little more regular basis, but I don't see any big things coming there, just more of a normal pattern. And then yes, we are definitely seeing good spring bookings for all the brands. Outdoor again is the smaller of any of them, and that would probably be pretty normal for spring product.
And and they're they're ordering from us on a little more regular basis, but I don't see any any big you know big things coming there just more of a a normal pattern.
Yes, we are definitely seeing good spring bookings for for all the brands.
<unk> again is the smaller of any of them and that would probably be pretty normal for for spring product anyway.
Speaker 5: And then as it relates to SG&A, Tom, it's obviously you guys are, you know, that's become a source of some upside. I'm just curious, where's that coming from in terms of just different types of buckets?
And then as it relates to SG&A Tom <unk>. Obviously, you guys are you know that's become a source of.
Upside I'm, just curious where where's that coming from in terms of just different types of buckets.
Yeah, I would hey, Jeff. Thanks, I would say that the two biggest areas are very clearly.
Speaker 4: Yeah, I would, hey Jeff, thanks. I would say that the two biggest areas are very clearly on the freight and handle inside. So, you know, renegotiations of parcel rates, part of that, part of it us being more effective on where we're shipping product from, right? And we've talked a lot about getting inventory in the right distribution centers. We've made progress there. And we've also, we're shipping products smarter than we ship product in the same period last year.
On on the the freight and handling side. So you know renegotiation of Parcelle race part of that part of it as being more effective on where we're shipping product from <unk>, we've talked a lot about getting inventory and the right distribution centres. We've made progress there and we've also we're shipping product smarter than we should product.
In the same period last last year also you know a lot of work has been put into the distribution centers themselves and and and reducing a lot of the the the cost associated with picking and packing orders. So we're just being really overall more efficient on all inventory going out bound you know <unk>.
Speaker 4: Also, a lot of work has been put into the distribution centers themselves.
Speaker 4: and reducing a lot of the costs that it associated with picking and packing orders.
Speaker 4: And so we're just being really overall more efficient on all the inventory going out.
Speaker 4: You know, also, you know, we've talked about some of the synergies we recognize and from some of the reorganization too. And so we're seeing some of the benefits, you know, from a from a wage and benefit.
So you know we've talked about some of the synergies be recognized and from some of the reorganization too and so we're seeing some of the benefits you know from a from a wage and benefit standpoint as well.
Speaker 5: And so the freight and handling, since we were talking about S-GNA, that's you're talking about outbound freight then, correct?
And so the freight and handling since we were talking about a <unk> you're talking about outbound freights incorrect.
Yes, correct.
Speaker 5: And then if I could just one more question, you'd mention your, on retail, your direct sites, each of the five were up double digits. I'm curious, you know, Q4 is your biggest kind of retail component given the holiday season. Anything you could elaborate on there, and just in terms of what you're seeing and how you're feeling about holiday.
Okay, and then if I if I could just one more question you had mentioned that you're you're on retail your direct sites. Each of the five were up double digits. I'm curious you know Q4 is your biggest can retail component uhm, giving you the holiday season anything you could elaborate on that.
You are interested in terms of what you're seeing and you know how you're feeling about holiday.
Yeah, I can I can start off.
And I think you were feeling very good about.
R. R E Commerce business. We think this is again the one area that it kind of takes out any kind of inventory challenge that we have it in in the wholesale category.
Speaker 4: challenge that we have in the whole so category. An important call out too is that is that we have been much more promotional with our discontinued product online. It's the most profitable way for us to to to unload our discontinued inventory. And so we've been much more aggressive in marketing that and and we're we're priced much more aggressively. Hence the flight decrease in retail margins.
An important call out too is that is that we have been much more promotional with or discontinued product online. It's the most proper way for us to to to unload are discontinued inventory and so we've been much more aggressive marketing that and and we're we're we're price much more aggressively.
Hence the slight decrease in retail margins, but you know we've continued to see a similar trend.
Speaker 4: But we've continued to see a similar trend. You have to start at Q4 from the Commerce perspective.
You have to start a cue for from the camera's perspective.
Speaker 3: Yeah, I would just add, you know, weather like today and this week that's happening here really on the East Coast is definitely going to help us. It's unbelievable. In particularly in the month brand, when weather comes, how it affects that that brand.
Yeah, I would just add.
Whether like today and this week that's happening you really on the East Coast is definitely gonna help us it's unbelievable.
And particularly in the muck bran when weather comes how how it affects that that brand is.
Speaker 3: It really affects all the brands. If it's cold and nasty and wet outside, people are more likely to go buy some new boots to keep their feet warm and dry. I will say that I think.
It really affects all the brands, if it's cold and nasty and went outside people are more likely to go buy some some new boots to keep your feet warm and dry uhm I will I will say that I think.
Speaker 3: We are being cautiously optimistic in regards to the economy and what might happen from a holiday standpoint. And I think most of the retail partners are taking a similar kind of approach just to be, you know, they wanna have the products and they wanna have the inventory, but they're being cautious about it. So I think it's gonna be fine, but it's, yeah.
We are being cautiously optimistic in regards to the economy and what might happen from a holiday standpoint.
And I think most of the retail partner sure are taking a similar kind of approach just to be you know they want to have the product and they want to have the inventory, but they're being they're being cautious about it so.
Unknown Attendee: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands third quarter, 2023 earnings conference call. At this time, all participants are in a listen only mood. Following the presentation, we will conduct a question and answer session. Instruction 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 think it's gonna be fine, but it's.
Speaker 4: I don't think it's going to be a slam dunk. Yeah, I think the Jason's point there, we're seeing our at-1s business compared to bookings as percent of sales, over less quarter, and certainly over the last few quarters, has been elevated, right? So that just shows you the retailers are buying when they need it versus booking it in advance. So that's probably a little bit of the cautiousness in Q4.
You know I don't think it's gonna be a slam now yeah, I think to Jason's point. There were seen are at once business compared to bookings you know it was a per cent of sales over the last quarter and so in their last few quarters has been has been elevated right. So that just shows you the retailers or are buying when they needed versus looking at it and.
<unk>, so that's probably a little bit of a of a consciousness and thank you for.
Brendon Frey: I would like to remind everyone that this conference call is being recorded and will now turn the conference over to Peter and 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 security litigation reform act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risk, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.
Great I'll, let someone else got some questions.
Thanks, Jeff.
Our next question comes from Jonathan Com. Please proceed with your question.
Speaker 1: Our next question comes from Jonathan Combsberg. Please proceed with your question.
Speaker 6: Yeah, I think it's good afternoon. Maybe just to follow up there to start calm. I know previously you're expecting to get back closer to flat, you're over your revenue growth in the fourth quarter. So could you just talk a little bit more about sort of the revised view of shaping that and how much if any sort of third and fourth quarter is more one time in nature to clear good versus what you see for underlying demand signals.
Hi, Thanks, Good afternoon, maybe just to follow up there to start time I know previously.
You're expecting to get back closer at a flat you over your revenue growth in the fourth quarter. So could you just.
Talk a little bit more about sort of the revised dear what's shaping mat and how much if any sort of third and fourth quarters.
Brendon Frey: For a complete discussion of the risk and uncertainties, please refer to today's press release and our reports follow the Securities and Exchange Commission, including our 10K for the year-end of December 31st, 2022.
Or one time in nature declared guards versus what you're safer underlying demand signals.
Mmm.
Speaker 4: Yeah, sure, John . I think we are, again, to Jason's, you know, you Jason's vocabulary or being cautiously optimistic for the fourth quarter and just reiterating overall pop line guidance.
Yeah sure gun you know I think I think we are I get into Jason's, you Jason's vocabulary or being cautiously optimistic for the fourth quarter.
Jason Brooks: I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason. Thank you, Brandon.
And just reiterating overall topline guidance you know two three with a little bit better than we anticipated and and you know, there's probably low single digits, there's a million dollar range millions.
Speaker 4: Q3 was a little bit better than we anticipated and there's probably...
Jason Brooks: With me on today's call is Tom Robertson. After Tom's and my prepared remarks, we will be happy to take questions. We are pleased with our third quarter results, which were highlighted by a meaningful top-line improvement compared with the second quarter and a significant increase in profitability on both a sequential and year-over-year basis. As we outline on our Q2 call, we anticipated that our performance would start to rebound beginning in the second half.
Speaker 4: load of single digits, the million dollar range, millions of, low million dollar range of discontinued product that moved out in the third quarter and will probably continue that into Q4. But I think we're just gonna continue to be cautious here, as we work through the rest of the year given everything's going on, Mac in the macro environment.
<unk> a million dollars range, a discontinued product moved down in the third quarter and will probably continue that into two four but I think we're just going to continue to be cautious here you know as soon as it worked for the rest of that you're given everything's fine on Mac and the macro environment.
Okay, and then if I could just ask maybe a broader question given some of the commentary of shared around.
Speaker 6: Okay, and then if I could just ask maybe a broader question, given some of the commentary you shared around order bookings and some of the product initiatives, when you think out looking forward beyond fourth quarter, how soon do you think you can return to growth overall, just based on your planning and what you see in the environment?
Ordered order book games, and some of the product initiatives. When do you think out looking forward beyond fourth quarter.
Jason Brooks: Thanks to the sustained consumer demand, we've seen all year for our product offering. It's important to remember that while 2023 got off to a difficult start, much of the top-line pressure was experienced, was related more to macroeconomic headwinds and industry dynamics, notably excess channel inventory, along with tough comparisons versus the strength and desirability of our brands. In fact, our sell-through has held up relatively well despite persistent inflation that has impacted consumer discretionary spending.
How soon do you think you can return to growth overall, just based on your planning and what you'd see in the environment.
Jason Brooks: This performance combined with early actions by retailers to better align overall inventory levels with the current demand environment, drove an acceleration in at-once orders for many of our key wholesale partners as a third quarter progress. While third quarter sales did not reach our year-go levels, the work we've done enhancing our distribution and fulfillment capabilities along with lower expense levels, including reduced rate rates, allowed us to translate a 13% decrease in revenue into a 40% increase in operating income on an adjusted basis.
Speaker 3: Yeah, it's a great question. You know, we have been really trying to dig into this and understand. I think we are going to take a pretty cautious...
Yeah, Great. It's a great question you know we <unk>, we have been really trying to dig into this and understand.
I think we're gonna take a a pretty cautious approach to what that might look like in 2024.
Speaker 3: approach to what that might look like in 2024. We're coming off one of the.
We're coming off one of the.
Speaker 3: In my opinion, one of the craziest years in 2023 and we're getting ready to go into a 2024 election year, which is also another challenging component. So I think our plan will be to go into 2024.
In my opinion, one of the craziest years in 2023, and we're getting ready to go into a 2024 election year, which is also another challenging components. So I <unk> I think you know our plan will be to go into 2024 continue to stay focused on our operations.
Speaker 3: Continue to stay focused on our operations, our internal operational excellence and manage our S-G-N-A and try to continue to find ways to grow the brands where we see the opportunities.
Our internal operational excellence, and and and manage our SG&A and and try to continue to find ways to grow the brand's where we see the opportunities.
Speaker 3: Like I said, we're still excited about Lehigh and we think that that might be a different kind of approach next year or different opportunity next year too. So, you know.
I said, we're still excited about Lee I, and we think that that might be a different kind of approach next year different opportunity next year or two so I'm.
Speaker 3: Excited to get the hell out of 23 and get into 24 and get back kind of on our regular pattern, John , of just...
Excited to get the Hell out of 23, and and get into 24 and.
Get back kind of on a regular pattern John of of you know just.
Speaker 3: returns money the bond line
Slow growth, but throw in some money and the bottom line.
Speaker 4: I think just that onto that, John , you know, this course is a good example of how the operations have kind of been right sized. And so we'll be prepared for 2024, right? And you know, retail will do what retail's gonna do and the economy's gonna do what the economy will do, but we'll be able to take advantage of it if the sales come.
I think just add onto that John you know the score is a good example of how the operations of kind of been right size and so and so will be prepared for for 2024, right and and and you know the retail will do a retail is gonna do and and the economy's Gonna do with the economy will do but we'll be able to take advantage of.
Jason Brooks: Tom will cover the numbers in more detail shortly, but before that, I would like to spend a few minutes reviewing the drivers of our recent top-line performance. Starting with work, our four brands that make up this category, Georgia, Rocky, Muck, and ExtraTub collectively delivered a sequential sales increase in the third quarter after selling in was severely impacted by high retail inventories in the first half of 2023. And on a year-over-year basis, the decline moderated significantly from what we experienced in the first and second quarters.
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Speaker 6: It makes sense. And just last one for me, Tom and maybe Jason too. Just if you shared any color on the CFO transition back to Utah and then how long you'll be willing to take on the role again since you had other responsibilities just any broader sounds there. Thanks again.
It makes sense of just the last one for me, Tom and maybe Jason to just have you shared any color on the CFO transition back back to Utah and then.
How long you'll be willing to take on the role again since you had other responsibilities just any brought us out there.
Jason Brooks: Momentum for the Georgia built throughout the quarter was sales turning positive in the month of September. As many key customers, key customer accounts began returning to more consistent ordering as their inventories further normalized. At the same time, load pricing on a certain Georgia styles, which is the result of recently realized cost savings that we passed along to customers, has spurred a notable pickup in demand. Looking ahead, we are optimistic about the brand's growth prospects.
Thanks again.
Speaker 4: Yeah, no, yeah, so I was see if I'll rock you for for
Yeah, I think so.
Huh.
Yeah, you know so yeah I was gonna see if Iraqis were for six six years, but when I was six and a half years before we welcome the last CFO and and I think the the plan any attention is is is that we're going to take our time re iron Uhm, we want to make sure. We find find the right candidate you know we were very fortunate that that.
Speaker 4: six years, but I was thinking half years, before we welcome the last CFO . And I think the plan in the intention is is that we're going to take our time re-iring. We want to make sure we find the right candidate. We're very fortunate that I've done this for so long. And it's not going to be a big burden on me to continue to do this while we look for the next CFO . So, do the Ford updating you guys on that later.
I've done this for so long and and you know.
It's not going to be a big burden on me to continue to do this why we why we look for the next to your phone. So we look forward to update you guys on that list.
Speaker 3: Yeah, I would just add that, you know, we have a great team of people here that are supporting Tom as well from the CFO side. We got a great team of people that are helping and supporting Tom and me from the COO side or the operation side. And the team has really stepped up and done an amazing job and getting us, you know, where we are today through Q3. And so as Tom said,
Yeah, I would I would just add that yeah, we have a great team of people here that are supporting Tom as well from the CFO side, we got a great team of people that are helping and supporting Tom N. N me from from you know the C. L O side of the operation side and and the team has really stepped up and done an amazing job <unk>.
Jason Brooks: Consumer response to the Georgia Spa 2023 line has been very positive, while wholesale bookings for spring have been much stronger than we've seen in quite some time. Our Rocky work brand had had a bit more challenge in the Georgia this quarter, with excess inventory levels continuing to impact replenishment orders. However, there were some bright spots, particularly with strength in our own e-commerce channel, along with solid success with new key independent retailers driven by new product introductions.
In getting us where we are today or two three and so as Tom said, we we the culture of our company is really important to both of US and I think everybody in the company and so we're gonna we're gonna be cautious here and take our time and and make sure. The next.
Speaker 3: We, the culture of our company is really important to both of us and I hate everybody in the company and so we're gonna...
Speaker 3: We're going to be cautious here and take our time and make sure the next fit is right for us.
Jason Brooks: Shifting to our rubber-based work product, both the muck and extra-tough brands delivered solid results. While warm weather weighed on category demand and elevated inventories continued to impact sell-end, we saw steady improvement in Q3 compared to the first six months of this year.
Fit is is right for us.
Alright, Thanks again.
Okay sure.
Speaker 1: Our next question is from Janine Stichter from BTIG. Please proceed with your question.
Our next question is from Janine sticking from D. T. I G. Please proceed with your question.
Speaker 7: Hey, you got Ethan Saggy on for Janine. I hope you guys are doing well. I just got one on my end. You know, it's regarding SGNA margin. I was just wondering if you could give any color on what that might look like in Q4 and going forward. And if we should maybe expect it to stay lower in that kind of mid-20s range or if we should expect it to go kind of back further towards the high-20s low-30s range. Thanks.
Hey, you got <unk> I Hope you guys are doing well I just got one on my end you know it's regarding SG&A margin I was just wondering if you could give any color on <unk> on what that might look like in Q4 and going forward and if we should maybe expect it to stay you know lower than that.
Jason Brooks: Of note, Muck's new fall collection featuring 12 new styles and supported by a new marketing campaign that targets the brand's core consumer is performing well at the gate, setting the stage for continuing success in the to-come. With extra-tough, shipments were up year over year for the first time in 2023, as we delivered the brand's highly anticipated new fall product. Inventory levels for our key partners have begun to write size, resulting in a return to steady and growing wholesale demand.
Kind of mid twenties range or if we should expect it to go back further towards the high 20th slope 30 strange. Thanks.
Yeah. He's in I'll take this one and Jason feel free to add but you know I think we kind of guided to to the the deleveraging and and the and the prepared remarks, but you know it implies essentially kind of you know.
Speaker 4: Yeah, hey, then I'll take this one and Jason Pufried had, but, you know, I think, you know, we kind of guided to the the the de-livered in the...
Speaker 4: and the prepared remarks, but it implies essentially kind of in between
In between you know in between the 25 and 30 per cent range, probably leaning closer to the higher twenties and and I think it's important to call out that is if you think about the mix of sales in the fourth quarter. So it gives me more ecommerce orders in particular, so we see and you are afraid as a per cent of sales and even our handle it as per cent of sales pick up in the fourth quarter.
Speaker 4: In between the 25 and 30% range, probably leaning closer to the higher 20s.
Jason Brooks: As we finalize our spring 24 booking season, we are seeing continued success for the brand in both existing and new channels and expect this positive trajectory to continue into the fourth quarter and next year.
Speaker 4: And I think it's important to call out that if you think about the mix of sales in the fourth quarter, significantly more e-commerce orders in particular. So we see, you know, our freight is a percentage of sales, and even our handling is a percentage of sales, pick up in the fourth quarter historically. So I would put it in that, you know, 27 to 29% rate.
Historically, so I would I would put it in that too.
Jason Brooks: Turning now to our Western business, while inventory levels with some key account partners were, again, a hurdle, we saw steady sales improvements in the third quarter over the first half of the year. With Durango, strength in our direct to consumer channel and increases in our special makeup business, help offset a portion of the lower selling compared to a key products which is the result of the affirmation cost efficiencies that we were able to pass through to customers.
27% to 29% range.
Speaker 7: Got it. Appreciate it. And congrats on the nice quarter.
Got it I appreciate it and congrats on the nice court.
Saint <unk>.
Speaker 1: There are no further questions at this time. I would now like to turn the floor back over to Jason Brooks for clues.
There are no further questions at this time I would now like to turn the floor back over to Jason Brooks for closing comment.
Speaker 3: Great, thank you very much. Just to wrap things up, I'd really like to thank your shareholders, our vendors and customers.
Great. Thank you very much just to wrap things up I'd really like to think you know our shareholders our vendors and customers.
Speaker 3: as we've really had to navigate a challenging 2023, which has been challenging for a lot of companies and people. And then I really would like to thank the entire rocket team.
As we've really had to navigate a challenging 2023, and which has been challenging for for a lot of companies and people and then I really would like to thank the entire Rocky team, who is just works effortlessly in diligently to make rocky brands the best company.
Jason Brooks: Help drive demand and further reduce on-hand inventory levels for several retailers. We also saw notable improvement with our Rocky Branded Western product driven by new distribution with key Western retailers. Along with these new partnerships, updates to longstanding Rocky Western best sellers drove new interest in the brand this quarter. Looking ahead, the Durango and Rocky Western teams are focused on launching existing new collections in Q4 and ensuring that the right wholesale partners have the right product to meet the needs of our consumers.
Speaker 3: who has just worked effortlessly and diligently to make Rocky Brands the best company it can be.
Can be the team's morale as well and we are excited about the future of this company and and look forward to continuing to build Rocky branch. So thank you all very much rock.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker 1: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker 8: The I.
Mmm.
[music].
Jason Brooks: Outdoor, which includes, which includes under Rocky, Muck, and extra tough brands was, again, the category most impacted by retail or inventory levels in the period. A poor 2022 for industry created greater carryover than normal, which led to reduced bookings for new products ahead of this year's primary fall season. Hunting boots and a pair were most affected by carryover and this was compounded by one large sporting goods retailer exiting the category altogether.
Jason Brooks: That said, as I mentioned, when discussing our work product, both the extra tough and Muck Brands delivered a notable improvement in this quarter, driven in part by new penetration of the outdoor product and more outdoor focus market.
Jason Brooks: Last but not least within our wholesale segment, commercial military was a bright spot in the third quarter. As orders from several suppliers to the US Army and the United States Marine Corps drove the strongest Q3 in recent memory for the business.
Jason Brooks: Chifting to our retail segment where sales were up 5% over last year thanks to a very solid quarter from our direct e-commerce channel. Each of our branded sites, Rocky, Georgia, Durango, Muck, and extra tough were up double digits, which more than offset expected declines and marketplace transactions. Through enhanced digital marketing efforts, we've been successful fostering more direct engagement with consumers and we expect this trend to continue going forward which should positively impact the segment's growth and margin portfolio.
Mm.
[noise].
Jason Brooks: Chifting to our B2B Lehigh business. Sales were in line with the year ago levels. The temporary headwind from upgrades to our security protocols that we spoke about on our last earnings call in August are now fully behind us and based on recent event bookings, we are optimistic about the return to growth in the fourth quarter. We are still very positive about our LEI business and the opportunity it provides in 2024 and beyond.
Jason Brooks: While overall market conditions remain challenging, we are confident that our top line is positioned for further improvement on a sequential basis in the fourth quarter, which channel inventories continuing to come down and the demand for our durable, innovative and accessibility priced work, Western and outdoor footwear pickup, the difference between ourself through and sell in is nearly parity. This dynamic along with the improved balance sheet sets us up for a good finish to 2023 and a strong start to next year.
Tom Robertson: I'm now turn the call over to Tom. Thanks Jason. As Jason shared, an improving wholesale inventory landscape along with our greater ability to convert sales into year-over-year earnings growth allowed us to deliver better than expected results in the third quarter.
Tom Robertson: Net sales for the third quarter decreased 14.8% year-over-year for 12.7% on an adjusted basis to $125.6 million. Fiescagment on a reported basis, wholesale sales decreased 17.4% or 14.9% on an adjusted basis to $99.7 million. Retail sales increased 4.7% to $24.5 million, and contracting and factory and sales were $1.4 million. Turning to gross profit for the third quarter of gross profit was $46.5 million or 37% of sales compared to adjusted gross margin of $50.8 million or $35.3% of sales the same period last year.
Tom Robertson: The 170 basis point increase in adjusted gross margin as a percentage of adjusted net sales was mainly attributable to increased wholesale segment gross margins as we realized the benefit of pricing actions taken in 2022 as well as lower end bound logistics costs compared with the same period last year. A higher mix of retail-fake sales which carry a higher gross margin than wholesale and contract manufacturing segments also contributed to the expansion in overall gross margins.
Tom Robertson: During Q3 this year we capitalized on some strategic opportunities to move certain discontinued products in our inventory. While these sales were dilutive to gross margins versus our plan this decision puts us on track to come in below our initial year in inventory target and sets us up to begin 2024 in a much cleaner position. Gross margins by segment were as follows. Full sale of 160 basis points to 34.7% retail down 70 basis points to 48.0% and contract manufacturing down 390 basis points to 11.5%.
Tom Robertson: Operating expenses were $32.3 million or 25.7% of net sales in the third quarter of 2023 compared to $40.3 million or $27.3% net sales last year. On an adjusted basis, operating expenses were $30.7 million this year and $39.5 million a year ago with the decrease driven primarily by lower outbound freight expense, improved distribution center efficiencies and other variable expenses associated with lower sales volumes. As a percentage of adjusted net sales, adjusted operating expenses improved 290 basis points to 24.5% in the third quarter of 2023.
Tom Robertson: Income from operations was $14.3 million or $11.4% of net sales compared to $11.6 million or $7.9% of net sales in a year ago period. Adjusted operating income was $15.8 million or $12.6% of net sales compared to adjusted operating income of $11.3 million or $7.9% of adjusted net sales a year ago. For the third quarter of this year, interest expense was $5.8 million compared with $4.2 million in a year ago period. The increase reflects increased interest rates on interest payments on our senior term loan and credit facility.
Tom Robertson: On a gap basis, we reported net income of $6.8 million or 93 cents per diluted share compared to net income of $5.7 million or $0.77 per diluted share in the third quarter of 2022. Adjusted net income for the third quarter of 2023 was $8 million or $1.9 per diluted share compared to adjusted net income of $5.5 million or $0.74 per diluted share in a year ago period. Turning to our balance sheet, at the end of the third quarter, cash and cash equivalence stood at $4.2 million in our debt totaled $213.9 million.
Tom Robertson: We've made good progress in paying down our debt over the last 12 months with total indebtedness down 24.9% from the end of last September and down 16.7% since the end of 2022. A big part of the debt paydown has been driven by our ability to strategically reduce inventory levels. At the end of the third quarter, inventories were $194.7 million down 26.5% compared to 265.1 million a year ago and down 17.3% compared with the end of 2022. Our plan is to now exit 2023 with inventories of approximately $175 million compared with our prior target of $185 million.
Tom Robertson: Now to our outlook. Based in our year-to-day results, in current view of the fourth quarter, we are reiterating our guidance for 2023 net sales to be approximately $470 million. This implies fourth quarter sales improves sequentially from Q3 and decline in Q4 on a year-over-year basis further moderates compared to recent trends. Following the discontinued inventory reduction, actions we took in the third quarter and some plan promotions to move certain non-core products in the fourth quarter.
Tom Robertson: We now expect full-year adjusted gross margins to be in the 38-39% range compared with 36.6% in 2022. For comparative purposes, is important to remember that in Q4 of last year, gross margins benefited by 230 basis points from a one-time tariff over payment recovery. S-GNA is now expected to only be leveraged approximately 100 basis points from 2022's adjusted level, and interest expense is now projected to be around $23 million due to higher interest rates. All this implies that the fourth quarter of adjusted earnings per share will be similar to both third quarter of this year and fourth quarter of 2022.
Unknown Attendee: That concludes our prepared remarks.
Unknown Attendee: Operator, we are now ready for questions. Thank you.
Unknown Attendee: 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 that 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 key. One moment please, will we pull for questions?
Jessica: Our first question comes from Jessica with B or Iley. Please proceed with your question. Hi, guys. Congrats on a great quarter. Jason, I was curious. You mentioned that SELIN and SELTRU are at parity now, so I guess that's the implication there is, you know, you're fulfilling kind of one for one. I'm just kind of curious, you know, where has the improvement picked up the most and where, you know, and you also made the comment that the spring orders were stronger than quite some time. So I'm just kind of curious, there's things involved in queue three and now we start to look at, you know, the spring, you know, where have things picked up the most?
Jason Brooks: Yeah, thanks, Jeff. I would tell you, it might be easier to tell you where things are the slowest. The outdoor category is still our most difficult. So in the work, in the work Western, and then really the extra tough, you know, ankle deck boots and stuff, that's all doing much better. I will tell you, though, the retailers are still being very cautious, and they're ordering from us on a little more regular basis, but I don't see any big, you know, big things coming there just more of a normal pattern. And then yes, we are definitely seeing good spring bookings for all the brands. Outdoor again is the smaller of any of them, and that would probably be pretty normal for spring product anyway.
Tom Robertson: And then is it relates to SGNA, Tom, you know, obviously you guys are, you know, that's become a source of the upside. I'm just curious, where's that coming from in terms of just different types of buckets? Yeah, I would, hey Jeff, thanks. I would say that the two biggest areas are very clearly on the freight and handle inside. So, you know, renegotiation of parcel rates, part of that, part of it us being more effective on where we're shipping product from, right?
Tom Robertson: And we've talked a lot about getting inventory in the right distribution centers. We've made progress there, and we've also, we're shipping products smarter than we shipped product in the same period last year. Also, you know, a lot of work has been put into the distribution centers themselves, and we've been reducing a lot of the costs that are associated with picking and packing orders. And so, we're just being really overall more efficient on all the inventory going outbound.
Tom Robertson: You know, also, you know, we've talked about some of the synergies we recognize, and from some of the reorganization too, and so we're seeing some of the benefits, you know, from a wage and benefits standpoint as well. And so the freight and handling, since we were talking about S-G-N-A, you're talking about outbound freight then, correct? Yes, correct. Okay, and then if I could just one more question. You'd mention on retail your direct sites, each of the five were up double digits.
Tom Robertson: I'm curious, you know, Q-4 is your biggest kind of retail component given the holiday season. Anything you could elaborate on there and just in terms of what you're seeing and, you know, how you're feeling about holiday. Yeah, I mean, I can start off in that and I think we're feeling very good about our E-commerce business. We think this is, again, the one area that kind of takes out any kind of inventory challenge that we have in the whole cell category.
Tom Robertson: An important call out too is that is that we have been much more promotional with our discontinued product online. It's the most profitable way for us to unload our discontinued inventory. And so we've been much more aggressive in marketing that and we're priced much more aggressively, hence the flight decrease in retail margins. But, you know, we've continued to see a similar trend. You have to start at Q-4 from the E-commerce perspective.
Tom Robertson: Yeah, I would just add, you know, weather like today and this week that's happening here really on the East Coast is definitely going to help us. It's unbelievable. And particularly in the Muff brand, when weather comes, how it affects that brand, it really affects all the brands. If it's cold and nasty and wet outside, people are more likely to go buy some new boots to keep their feet warm and dry. I will say that I think we are being cautiously optimistic in regards to the economy and what might happen from a holiday standpoint.
Tom Robertson: And I think most of the retail partners are taking a similar kind of approach just to be, you know, they want to have the products and they want to have the inventory, but they're being cautious about it. So, I think it's going to be fine, but it's, you know, I don't think it's going to be a slam dunk. Yeah, I think to Jason's point there, we're seeing our at-1s business compared to bookings, you know, as percent of sales, over less quarter and certainly over the last few quarters has been elevated, right?
Tom Robertson: So, that just shows you the retailers are are buying when they need it versus booking it in advance. So, that's probably a little bit of the cautiousness in Q4. Great, I'll let someone else discuss the questions. Thanks, Chef.
Jonathan Comford: Our next question comes from Jonathan Comford, Spare, please proceed with your question. Yeah, hi, thanks. Good afternoon.
Tom Robertson: Maybe just to follow up there at a start, Tom. I know previously you're expecting to get back closer to a flat, you're over your revenue growth in the fourth quarter. So, could you just talk a little bit more about sort of the revised view of shaping that and how much if any sort of third and fourth quarters get more one-time in nature to clear good what you see for underlying demand signals?
Tom Robertson: Yeah, sure, John. You know, I think we are, again, to Jason's, you know, use Jason's vocabulary or being cautiously optimistic for the fourth quarter and just reiterating overall pop line guidance. You know Q3 was a little bit better than we anticipated and and you know, there's probably low single digits in the million dollar range, millions of, you know, low million dollar range of discontinued product that moved out in the third quarter and will probably continue that into Q4. But I think we're just going to continue to be cautious here. You know, as we, as it worked for the rest of the year given everything's going on, Matt in the macro environment.
Jason Brooks: Okay, and then if I could just ask maybe a broader question given some of the commentary you shared around order, order bookings and some of the product initiatives. When you think out looking forward beyond fourth quarter, how soon do you think you can return to growth overall just based on your planning and what you see in the environment? Yeah, great. It's a great question. You know, we have, we've been really trying to dig into this and understand.
Jason Brooks: I think we are going to take a pretty cautious approach to what that might look like in 2024. We're coming off one of the, in my opinion, one of the craziest years in 2023 and we're getting ready to go into a 2024 election year, which is also another challenging component. So I think, I think, you know, our plan will be to go into 2024, continue to stay focused on our operations, our internal operational excellence and manage our SGNA and try to continue to find ways to grow the brands where we see the opportunities.
Jason Brooks: Like I said, we're still excited about Lehigh and we think that that might be a different kind of approach next year or different opportunity next year too. So, you know, excited to get the hell out of 23 and get into 24 and get back kind of on our regular pattern, John, of, you know, just slow growth, but throwing some money to the bottom line. I think, I think just that on to that, John, you know, of course, a good example of how the operations have kind of been right sized.
Jason Brooks: And so, and so we'll be prepared for 2024, right? And, and, you know, retail will do what retail is going to do and the economy is going to do with the economy will do. But we'll be able to take advantage of it if the sales come. That makes sense.
Tom Robertson: And just last one for me, Tom and maybe Jason too.
Tom Robertson: Just if you shared any color on the CFO transition aspect to you Tom and then, you know, how long you'll be willing to take on the role again since you had other responsibilities. Just any broader sounds there. Thanks again. Yeah, thanks Tom. Yeah, you know, so I was CFO rocky for six, six years, but six and a half years before we welcome the last CFO. And, and I think the, the plan intention is, is that we're going to take our time reiring.
Tom Robertson: We want to make sure we find, find the right candidate. You know, we were very fortunate that, that I've done this for so long and, and, you know, it's not going to be a big burden on me to continue to do this while we, why we look for, for the next CFO.
Jason Brooks: So, you look forward to updating you guys on that later. Yeah, I would just add that, you know, we have a great team of people here that are supporting Tom as well from the CFO side. We've got a great team of people that are helping and supporting Tom and me from, from, you know, the COO side or the operation side. And, and the team has really stepped up and done an amazing job in, in getting us, you know, where we are today through Q3.
Jason Brooks: And, and so, as Tom said, we, we, the culture of our company is really important to both of us. And I think everybody in the company and so we're going to, we're going to be cautious here and take our time and, and, and make sure the next fit is, is right for us.
Unknown Attendee: All right, thanks again.
Ethan Saghi: Our next question is from Janine Stichter, from BTIG. Please proceed with your question. Hey, you got Ethan Saghi on for Janine. Hope you guys are doing well. I just got one on my end. You know, it's regarding SGNA margin. I was just wondering if you could give any color on what that might look like in Q4 and going forward. And if we should maybe expect it to stay, you know, lower in that kind of mid 20s range, or if we should expect it to go kind of back further towards the high 20s low 30s range. Thanks.
Tom Robertson: Yeah, hey, then I'll take this one and Jason feel free to add, but you know, I think, you know, we kind of guided to the the de-laverging in the in the prepared remarks. But, you know, it implies essentially kind of, you know, in between, you know, in between the 25 and 30% range, probably leaning closer to the higher 20s. And, and I think it's important to call out that is, if you think about the mix of sales in the fourth quarter, significantly more e-commerce orders in particular.
Tom Robertson: So we see, you know, our freight is a percent of sales, and even our handling is percent of sales, pick up in the fourth quarter, historically. So I would, I would put it in that, you know, 27 to 29% range. Got it. Appreciate it. And congrats on the nice quarter. Thanks. Thanks, Ethan.
Unknown Attendee: There are no further questions at this time.
Jason Brooks: I would now like to turn the floor back over to Jason Brooks for closing comments. Great. Thank you very much.
Jason Brooks: Just to wrap things up. I'd really like to thank your shareholders, our vendors and customers. As we've really had to navigate a challenging 2023, and which has been challenging for a lot of companies and people. And then I really would like to thank the entire Rocky team who has just worked effortlessly and diligently to make Rocky brand the best company it can be. The teams morale as well. And we are excited about the future of this company and look forward to continuing to build Rocky brand. So thank you all very much, Rocky.
Unknown Attendee: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you. .