Q3 2024 Rocky Brands Inc Earnings Call
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Speaker Change: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brand's third quarter 2024 innings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: Instructions will be provided at that time for you to queue up for questions.
Speaker Change: If anyone has any difficulties hearing the conference, please press star and then zero for operator assistance at any time.
Speaker Change: I'd like to remind everyone that this conference call is being recorded and I'll now turn the conference over to Brendan Frey of ICR. Thank you.
Brendan Frey: Thank you, Claudia, and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period, may contain four looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Brendan Frey: 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.
Brendan Frey: We assume no obligation to update such statements.
Brendan Frey: 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 10-K for the year ended December 31st, 2023.
Speaker Change: And I'm now turning the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?
Jason Brooks: Thank You Brendan. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks we will be happy to take questions.
Jason Brooks: Our third quarter performance does not reflect the underlying strength of our business. However, it does highlight the benefits of our multi-brand, multi-channel operating model.
Double-digit growth for Durango and Extra Tough in the U.S.
as well as our B2B Lehigh custom fit safety footwear platform nearly offset some softness in other areas of our business due to primarily to unfavorable weather
Jason Brooks: less promotional activity, and inventory shortages on certain key styles.
A warm dry fall like the one many regions of the U.S. have experienced this year would have severely impacted not only our third quarter but our annual performance 25 years ago when the business was largely just rocky hunting boots.
On top of this headwind, we were also less promotional than a year ago.
In the current environment, when consumers have appeared to pull back even further on discretionary spending outside of peak shopping periods.
Jason Brooks: This decision hurt sales more than we anticipated, but contributed to over 100 basis points of gross margin improvement.
Jason Brooks: Finally, because of delivery delays and stronger than expected demand, especially for Extra Tough, we left several million dollars in sales on the table during the third quarter.
Despite all this, sales were only modestly below plan and we delivered adjusted operating margins of nearly nine and a half percent.
Jason Brooks: While we believe it is prudent to be cautious about the remainder of 2024,
given the near-term macroeconomic environment.
Jason Brooks: and the fact that there are five shopping days between Thanksgiving and Christmas this year, there are several reasons to be optimistic about our growth prospects heading into 2025.
We are working on adding more manufacturing and sourcing capacity to ensure we are properly inventory to full capture future demand.
Jason Brooks: This work will benefit Q4 to some extent, but the majority of the upside will come in 2025, given certain product lead times. And most importantly, our current order book points to a very good spring season.
Before I hand over to Tom for more detailed looking at the financials, I'll take a few moments to walk through our third quarter brand and channel performance.
As I noted, Durango continued its recent momentum with notable gains in the third quarter. We again saw strong bookings across key accounts and farm and ranch partners, along with further acceleration of at-once business.
We've recently sold in more of the brand's top-performing, in-demand styles.
Setting Durango up for a strong finish to the year.
Jason Brooks: Equally important, spring bookings.
Jason Brooks: have been robust, pointing to a strong start in 2025.
Extra Tough also maintained a strong momentum in the third quarter driven by the positive reception to new product introductions as well as a continued demand for the brand's core styles.
Of particular note, this summer's collaboration with performance fishing brand Guy Harvey sold through at nearly 100% shortly after hitting shelves.
which was followed by the fall launch of a small collection of boots in partnership with Authentic Rugged Seas brand that also sold out very quickly.
Jason Brooks: Finally, we introduced our tailgate collection of ankle deck boots in sports-inspired colorways exclusively on TheExtraTough.com in mid-August.
Jason Brooks: We immediately witnessed a big spike in its site traffic and equally strong conversion as we sold thousands of pairs in less than two months.
Jason Brooks: Along with outsized core product and limited edition demand, the brand continues to see expansion into niche outdoor verticals such as sport fishing and outdoor recreation.
that are leading to new retail partnerships and door expansions with large existing partners. In the near term, the team is focused on securing inventory as the brand carries a lot of positivity into the holiday season.
Looking further out into 2025, the team has seen a significant increase in spring bookings compared to a year ago, which along with our manufacturing and sourcing expansion positions a brand for both near and long-term success.
Speaker Change: This year's dry, warm fall season has been a headwind for MUC, whose rubber neoprene product drives the vast majority of its sales. At once, orders did trend higher this quarter compared to a year ago, however, bookings remained sluggish in Q3.
Even with the lack of adequate weather to drive demand, MUC units domestically are slightly up this year, underscoring the resiliency of the brand and the increased consumer interest in MUC's more competitive price points that were introduced earlier this year.
Looking ahead, we did see sales start to pick up in the final weeks of the quarter as parts of the South and Southwest were hit with heavy rains and have seen the momentum carrying into the early weeks of the fourth quarter.
Turning to the Georgia Boots, which is, as we've discussed in recent earnings calls, has experienced some headwinds throughout 2024, including changes in order size and frequency from our large account base.
more recently unfavorable weather. This year the Georgia team has focused much of its energy and finding the value sweet spot for our work-based product and has recently seen more of these concepts begin to pay off.
Speaker Change: driving increased volumes at retail.
Speaker Change: Looking ahead, we anticipate that the change in partner buying habits will remain a challenge, but we are cautiously optimistic about our new product approach and the reversal of recent weather-related headwinds to fuel improved trends.
Meanwhile, Rocky Work also...
were flat to the year-ago period which was ahead of first-half trends with an uptick in units from increased consumer adoption of our new value focused product driven the sequential improvement.
Speaker Change: We experience better results with our independent retailer base as well as our branded websites where we've elevated the placement of industrial safety tow product.
Speaker Change: Sticking with the Rocky brand, we continued our progress, repositioning Rocky Western with new value-driven product, a more competitive price point this quarter.
We saw strong reception to our new Fall 2024 lineup, with our new lightweight and flexible options at competitive price points, driving stronger gains compared to last year.
Looking ahead, we are confident that our new value-based product positioning will set up Rocky Western for continued success.
With respect to Rocky Outdoor, while we did see slight uptick at once demand ahead of prime hunting season in late Q3, it was not enough to make up for the shortfall in preseason bookings.
The short seasonal window combined with back-to-back years of mild weather led to an over-inventory of hunting footwear and apparel with many of our key retail partners.
While the hunting market overall continues to be softer, we saw our non-hunting footwear led by rugged casual styles continue to trend positively this year.
This is helping the Rocky Outdoor brand reach a less specialized consumer segment and will act as a broader and more diversified base for the future growth.
Lastly, in our rocky commercial military and duty segment, was down in line with our expectations.
We are still up against a sizable military blanket purchase agreement that elevated 2023 sales and in Q3 we were also lapping a large USMC boot purchase that did not repeat this year.
A delay in military budget release for 2024 is also impacting our sales cadence versus last year.
While we expect some offsets to these headwinds, primary from the strength of our fire category, we anticipate that comparability to our outsize 2023 will continue to impact the commercial military and duty segments in the near future.
Shifting to retail, we saw notable areas of strength this quarter with both our Extra Tough and Durango sites posting strong double-digit revenue gains.
Speaker Change: Due to the growing popularity of these brands and the new push toward having AOV as well, interesting and exclusive drop ships like the Extra Tough Tailgate Collection in mid-August.
Shifting to our B2B lead business, sales were up double digits compared to a year ago period, making a welcoming shift in recent trends.
Over the last two quarters, we shared that we implemented a significant realignment of our sales organization to improve our sales pipeline and provide greater continuing-to-account setup, rollout, and implementation.
These changes are now driving results with the addition of more than 200 new accounts in the third quarter.
Along with these notable sales gains, customer spending continues to be strong, which leads us to believe Lehigh will continue its momentum into year end and beyond.
While we continue to face some near-term challenges, I remain encouraged about our progress building a more diversified, more sustainable, and more profitable business.
Speaker Change: We are making strategic investments in Durango and Extra Tough to capitalize on their momentum and reach a broader consumer audience.
At the same time, we are leaning into the value proposition for our other brands to drive higher volumes and gain share.
We believe this approach positions us to improve our overall top-line performance throughout 2025.
which, combined with our enhanced capital structure, will allow us to grow earnings faster than sales.
Speaker Change: I will now turn the call over to Tom. Tom?
Tom Robertson: Thanks, Jason.
We were encouraged by the underlying strength of our business in the third quarter, especially from an in-demand perspective, while acknowledging that certain transitory headwinds kept us from achieving our plan.
Tom Robertson: As a reminder, last year's Q3 included sales that would not reoccur in 2024.
Excluding these from comparison, sales of $114.5 million were down 2.4% year-over-year.
Speaker Change: By segment, wholesale sales were down 9.7% to $84 million. Retail sales increased 11.8% to $26.8 million. And contract manufacturing sales were $3.6 million up $3.4 million from last year.
Turning to gross profit for the third quarter, gross profit was $43.6 million, or 38.1% of sales, compared to $46.5 million, or 37% of sales, in the same period last year.
Speaker Change: The 110 basis point increase in gross margin as a percentage of net sales was attributable to higher wholesale gross margins and higher mix of retail segment sales, which carry higher gross margins than the wholesale and contract manufacturing segments.
Gross margin by segment were as follows. Wholesale up 280 basis points to 37.5%, retail down 440 basis points to 43.6%, and contract manufacturing up 50 basis points to 12%.
The wholesale gross margins in the third quarter of 2024 compared to the third quarter of 2023 can be attributed to
Speaker Change: The lower promotional activity in the current year period, as well as opportunistic purchases by certain international and key wholesale partners in the third quarter of 2023, which contributed to lower gross margins in the prior year period.
Operating expenses were $33.6 million, or 29.3% of net sales in the third quarter of 2024, compared to $32.3 million, or 25.7% of net sales last year.
Speaker Change: On an adjusted basis, operating expenses were $32.9 million this year for 28.7% of net sales and $30.7 million
Speaker Change: or 24.5% of net sales a year ago.
The increase in expenses was primarily due to increased brand and marketing investments to support future growth and a higher mix of retail sales in the quarter, as these sales carry additional expenses like shipping and handling versus the other two segments.
Income from operations was $10.1 million or 8.8% of net sales compared to $14.3 million or 11.4% of net sales in the year-ago period.
Adjusted operating income was $10.8 million, or 9.4% of net sales, compared to adjusted operating income of $15.8 million, or 12.6% of net sales a year ago.
Speaker Change: For the third quarter of this year, interest expense was $3.3 million, compared with $5.8 million in the year-ago period. The decrease reflects lower debt levels and interest rates as a result of the debt refinancing completed in April 2024.
On a gap basis, we reported net income of $5.3 million, or $0.70 per diluted share, compared to net income of $6.8 million, or $0.93 per diluted share, in the third quarter of 2023.
Speaker Change: Adjusted net income.
So the third quarter of 2024 was $5.8 million, or $0.77 per diluted share, compared to adjusted net income of $8 million, or $1.09 per diluted share in the year-ago period.
Turning to our balance sheet, at the end of the third quarter, cash and cash equivalents stood at 3.7 million dollars compared to 4.5 million dollars at December 31st and 4.2 million dollars a year ago.
Speaker Change: Total debt was $153.3 million, a decrease of 13.2% from December 31st, and a decrease of 29.7% since September 30th last year.
Inventories at the end of the third quarter were $171.8 million, up slightly from $169.2 million at the end of 2028, and down 11.8% compared to $213.9 million a year ago.
Speaker Change: Turning now to our outlook, while we were capturing a portion of the extra tough sales missed in Q3 during the fourth quarter, we expect to be chasing inventory into 2025 based on current demand for the brand.
Speaker Change: Taking this into account, combined with our overall third quarter results, we now anticipate full year sales to be at the low end of our initial range of $450 to $460 million.
Nothing has changed with respect to our view on gross margin. We still expect 2024 gross margins to be similar to that of 2023's adjusted gross margins of 38.9%.
Speaker Change: We are spending
slightly more as a percentage of sales in 2024 as we invest in additional brand marketing programs to drive long-term growth. However, this is being more than offset by a five million dollar reduction in interest expense versus 2023 as a result of our debt pay down over the past 12 months combined with the refinancing we completed in April.
Speaker Change: With the divestiture of certain lines of our business last year, combined with our enhanced capital structure, 2024 was about getting more nimble and more profitable. We are pleased with our progress against this goal, and we look forward to combining this work with sustained top-line growth in 2025.
That concludes our prepared remarks. Operator, we are now ready for questions.
Thank you very much. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. You may press star and then 2 if you would like to remove your question from the queue.
This question comes from Janine Stichter from BTIG. Please proceed with your questions Janine.
I was hoping you could elaborate a little bit on some of the delays you're seeing or the inventory shortages, specifically what bottlenecks are driving that, and then maybe just some more color around your initiatives to get back in stock in Q4 and into early next year. Thank you.
Yeah, hey Janine, thanks for being on the call. I'll take this one and Jason feel free to chime in.
You know, I think as it relates to the extra tough product, I mean, we really just outpaced, the demand outpaced our forecast and what we had purchased or made for.
Speaker Change: this quarter. Wouldn't really say, I mean, the lead times on the Extra Tough product to the rubber-based product are longer than generally speaking our leather product.
and so we're chasing inventory for the rest of this quarter.
particularly for Extra Tough and for the beginning of 2025, but it's really just longer lead times and demand outpacing our expectations for that. For the other brands, I mean, we always end up carrying a little bit of missing inventory over into the following quarter. Durango's demand was high in the third quarter too, and we just came up a little short there. So
Speaker Change: Nothing glaring, just need more capacity and we're working with those source partners and I'm confident we have this figured out. We just need to get caught up.
Speaker Change: Okay, great. And then maybe one more. If you could just help square some of the comments around being less promotional but then also a cautious consumer and kind of weak macro. Just curious into your promotional philosophy, how do you think about maybe dialing back up the promotions if the consumer remains soft?
Speaker Change: I think people were being a little more promotional this year even than we anticipated, but we were able to, you know, that 100 basis points be there. And so our inventory is in a much better place. We don't have as much of a, you know, slower moving inventory, so we just didn't feel like we needed to be that promotional.
in Q3 of this year. And so I think we've seen the retailers are selling the product.
pretty well.
The key accounts seem to be moving it better than our mom and pops or at least the mom and pops seem to be
Speaker Change: maybe a little more cautious with their inventory, so they're buying a little closer. And so I think that was really our thought process around the promotional side of it was just, we didn't need to do it as much this year.
Yeah, Janine, just to add on to that, you know, if you think about
our financing, our debt structure last year, right? We had...
We were trying to make sure we were covered there from a covenant perspective, and so our thinking last year was...
was probably generally a little bit more short-term than we would have liked to be, to Jason's point. And as we refinance that debt,
And so getting promotional to sell into a retail a little harder in the third quarter just didn't make sense for us when we don't think it was going to change the sell-through at retail. So we're taking a longer.
Speaker Change: perspective you know going forward and we've been able to really since since April of this year.
Perfect. That's great, Collar. Thanks very much.
Yeah, thank you.
Thank you. The next question comes from Jonathan Komp from Baird.
Speaker Change: Please proceed with your questions, Jonathan.
Jonathan: Hi, good afternoon. Thank you. I just want to follow up. It's not entirely clear when you look at the second half, maybe if you could start by sharing your updated thoughts on wholesale growth for the second half.
And if you look at the change in plan, I guess what's not clear is how much was...
maybe aggressive assumptions of what you could do versus a change in the marketplace and maybe where any of those changes are concentrated. So just any more color there would be helpful.
Speaker Change: Yeah, so I'll start.
I think as we as we got through the so we had the warm or dry third quarter
then we anticipated, which particularly impacted the Mott brand the most, right? And in this quarter, we weren't able to capture all the sales.
for Extra Tough to try to to try to catch up.
We're make up for those differences. And so as we look to the rest of the year knowing that that we're going to Knowing that we're going to be chasing inventory for for the extra top brand
Speaker Change: I would say from a wholesale, retail mix.
Speaker Change: I would say that we think that the retail sales will probably have a slightly higher growth.
than we've gone into the year with, just given the recent success of our Lehigh business following that sales reward.
And then our e-commerce had a really strong last year, so even our e-commerce business being up slightly, you know, over last year will be a win for us, but I would say wholesale business probably being relatively flat.
for the fourth quarter would be our goal there. Jonathan, I would just add too, you know, we kind of missed things on both ends, right? So we missed.
The Durango and extra tough upside and then we probably were a little over
Confident in the muck, Georgia and Rocky.
maybe more so in the muck.
We just kind of miss those combinations of things.
Cody McAllister, Jason Brooks, Thomas Robertson, Jason Brooks, Thomas Robertson, Jason Brooks,
and sourcing it, but we just kind of missed both sides.
We were probably a little overconfident in the other brands. Yeah, John, just to clarify my comment there, the wholesale business will be, you know, our goal is to be relatively flat.
On an adjusted basis, if you're looking at last year's reported numbers, we would be slightly down as we don't have those reoccurring sales that we've been talking about for the last nine months.
Okay, great. And one follow-up, are you willing to share maybe just the current relative size of a couple of those brands if we're thinking about...
Durango, Extra Tough, and Muck, you know, within Wholesale, just trying to...
Speaker Change: make sure we're thinking about the relative size of those correctly.
I think, yeah, I think any of this time we're going to kind of keep that close to our chest. What I'll tell you, there's not a vastly...
difference, big difference between all the brands at this point and so we'll see how growth for each of those brands goes over the next few years but there's not one that's vastly bigger than the other.
Okay, great. And then as we think forward to spring and really maybe first half of 25, what's your current visibility around both, you know, the brands that are trending well and then correcting some of the issues for the brands that aren't trending as well?
Yeah, so for a Q1 standpoint, we have pretty good visibility, and I think...
extra tough in Durango, so
We see that trend happening, and as we stated, we are taking a more aggressive stance on making sure we have that inventory.
Speaker Change: and we think we'll be in a much better place for those brands in Q1. You know, as far as the other three brands go, we want to continue to invest in them. We want to continue to try to find the right product mix.
and make sure that we're getting in front of the consumers and helping our retail partners out. So we're gonna continue to drive that and as Tom indicated, we're in a much better place where we can think more long-term.
and continue to build that up as we get into 2025 and continue to...
to be a more profitable company.
Yeah, just to add on, John, look, we'll give obviously much more thorough guidance for 2025.
at the next call. But as we look at 2025, we will have a little bit of comparability issues still with some of the big military contracts that Jason talked about that hit our commercial military business and the wholesale segment. We'll have a little bit of that at the beginning of 2025. We'll lap that, I think, at the end of the first quarter.
Speaker Change: the low single-digit growth rate for the wholesale business and maybe a more aggressive position, mid to high single-digit growth for the retail segment is probably what we'll target. But again, we'll have a lot more color for you at the next call.
Okay, great. That's really helpful.
Speaker Change: Thanks again.
Thanks, John. Thanks, John.
Thank you. The final question comes from Bruce Geller from Geller Vaynerchuk.
Please proceed with your questions.
Thank you. Thank you.
Hi, good afternoon, gentlemen.
Speaker Change: Thank you. Bye.
Historically, the fourth quarter has been pretty good for cash generation. Can you give some insight into where you expect to finish the year in terms of both inventory and debt levels?
Yeah, sure. Thanks, Bruce. Thanks for being on the call.
The inventory one is dynamic right now. And just to paint the picture for you a little bit, we've got.
Speaker Change: an inventory decrease meaningfully over last year.
Speaker Change: However, our in-transit inventory is up as we're trying to rebuild inventory for some of the demand that we're seeing for a couple of the brands. And so we will probably be pushing our factories and our source partners as hard as we can to get inventory. I'm a little hesitant to give you a firm number, but I would tell you I think inventory
Speaker Change: By the end of the year, we'll be down seven figures, but not the $10 million to $15 million that we anticipated more at the beginning of the year, just given the uptick in demand.
And so we'll be chasing inventory, like I said.
Speaker Change: From a debt perspective, the fourth quarter is a good cash flow quarter for us, so if you think about we're collecting a lot of those wholesale sales that we saw in the third quarter, and then also our e-commerce business, which obviously has a very quick cash conversion cycle. So, you know, we anticipate to continue to pay down debt.
Speaker Change: in the fourth quarter, and I would like to say probably another 10 to 12 million dollars. But again, I'd like to see, you know, we're going to push that envelope as hard as we can as we go through the rest of the year.
Speaker Change: Okay, thank you and good luck.
Thank you, ladies and gentlemen, we have reached
We have reached the end of the question and answer session and I'd now like to turn the call back to Mr. Jason Brooks for closing remarks. Thank you, sir.
Thank you very much. First, I'd like to thank our
investors, board members, and customers for supporting.
Jason Brooks: all our brands and the company.
Jason Brooks: and secondly I would like to thank the entire Rocky Brands team. I'm very proud of the accomplishments that we've been able to do in 2024 and I look forward to finishing a strong year with you and working together to make 2025 and beyond even better. So thank you all very much.
Speaker Change: Thank you very much. So, ladies and gentlemen, that does conclude today's call.