Rocky Brands, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Rocky Brand second quarter 2024 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. Instructions 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 I will now turn the conference over to Cody McAllister of ICR.

Thank you, and thanks to everyone for joining us today. Before we begin, please note that today's session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time. and are subject to changes, risks, uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31st, 2023. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Cody. 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 any questions. Our second quarter results modestly exceeded our expectations as we continue to effectively navigate an unprecedented consumer environment. I'll share more detail momentarily, but similar to last quarter, Durango and ExtraTuff led the way with double-digit year-over-year gains that offset some anticipated softness in other areas of our business. It is during a less robust macroeconomic backdrops like the present that this benefits of our diversified brand portfolio stands out. Over the past several years, we have taken action to improve the company's financial profile in order to reinvest in growth and drive increased shareholder value. This is evidenced by higher gross margins and lower operating expenses, both of which contributed to the improvements in earnings. We took a significant step forward, further enhancing our earnings power during the second quarter with the refinancing of our debt and simplification of our capital structure. The new credit and term facility we signed with Bank of America in April is projected to generate approximately $4.4 million in annualized interest expense savings starting in 2025. Before I hand it over to Tom for more detailed looking at the financials, I'll take a few moments to walk through our second quarter brand and channel performance. Starting with Durango, it continues to be one of the best performing Western brands in the channel, delivering strong double-digit gains this quarter. We experienced continued strength in bookings across key accounts and farm and ranch partners, along an acceleration in at-once business. The team is working to supply chain with more of the brand's core in-demand product, which along with a positive response to the fall 2024 line, sets Durango up to build upon its strong first half over the remainder of the year. Like Durango, Extra Tough maintained its strong momentum from early in the year and, again, outperformed expectations with a strong double-digit gain in Q2. Deliveries for spring 2024 were very healthy, and we also feel numerous replenishment orders for existing products as customers' appetite for Extra Tough continues to expand rapidly. Along with strong demand for its legacy outdoor products, Extra Tough saw a positive reception for new colors and collaborations with the launch of its 2024 spring line. The brand continues to see strong demand across a number of niche outdoor verticals, such as sport fishing and outdoor recreation that are leading not only in increased sales but increased distribution with large retailers that position Extra Tough for continued success. Moving forward, the team remains focused on securing new bookings for its upcoming spring 2025 line and filling in replenishment aggressively this year while maintaining efforts to source sufficient inventory to fulfill the strong and growing demand for the brand. Muck had a good start to the quarter with the launch of its spring 2024 line, Unfortunately, the unfavorable spring weather patterns in several areas of the country led to slower retail turns, and as a result, slower than anticipated restocks late in the quarter. Retail partners are making progress in working through the inventory, and we anticipate getting back into a more normal restock cadence. Even with a lack of adequate weather to drive demand, we continue to see strong engagement with customers throughout our new website, enhanced marketing campaign highlighting the brand's heritage, and influencer partnerships that are amplifying visibility. As a result, we continue to add a MUX account base and anticipate a rebound heading into the important fall season. Shifting to Georgia, it was a challenging second quarter for our work category, and the brand wasn't immune. Georgia continues to see more over-inventory pressure from smaller accounts, However, the team was able to offset much of this pressure with mid-single-digit increases with our key accounts business, which has largely resumed its normal order cadence, but the COVID-related supply chain disruptions and the excess inventory purchases that follow are behind us. Similarly, rocky work was also under pressure for much of Q2. However, momentum did build later in the quarter. Following a difficult April and May, we saw a notable uptick with June up nicely versus a year ago period. The late quarter rebound fueled by new and innovative product introductions in the last 12 months leaves us optimistic that Rocky Work can continue to trend positively in the second half of the year. In fact, the brand continued to expand distribution with key national suppliers, as well as with catalog and direct-to-consumer sites this quarter. positioning the brand for a stronger reach going forward. Meanwhile, our work repositioning Rocky Western with new value-driven product at more competitive price points continued in the second quarter. Unfortunately, it has taken longer than planned to move through the older, higher priced inventory in the channel, which is impacting sell-in. That said, we are encouraged by the initial reception of our new, more affordable product and remain confident that our current strategy for Rocky Western will continue to gain traction with consumers, retailers over the coming quarters. With respect to Rocky Outdoor, last year's poor hunting season continues to weigh on the business, limiting the typical bulk shipments that typically occur in the second quarter ahead of the start to the new season this fall. While the hunting market overall remains challenging, We saw our non-hunting footwear led by rugged casual styles trend positively this quarter. This is helping to expand the brand's retail partner base and reach a broader consumer audience. Lastly, in wholesale, our commercial military duty segment was down in line with our expectations as we completed the 2023 Military Blanket Purchase Agreement in Q1. A delay in the military budget release for 2024 is also impacting our sales cadence versus last year. Solid gains in our duty fire collection and our postal business helped to partially offset the current military headwinds. Shifting to retail, our branded e-commerce sites continue to trend nicely positive. Double-digit revenue gains from our extra tough Durango, Georgia, and Rocky sites led the way for our digital channel. We also utilized our dot-com business to move some overstock inventory in the quarter ahead of restocking our large wholesale channel with many of our brand's best sellers. Lastly, our B2B Lehigh business was flat compared to the second quarter of 2023. However, key customer account spending improved for Q1, driven by a shift in focus to exiting account retention and growth. Last year, we shared that we implemented a significant realignment of our sales organization to improve our sales pipeline and provide greater continuing in an account set up rollout and implementation. These changes are driving results leading to an improved sales pipeline that positions Lehigh for a return to growth in the second half. Before I turn the call over to Tom, I wanted to thank the entire Rocky team for their continued hard work this quarter and a solid first half of the year. While the operating environment remains a challenge, I am pleased to see our efforts with top line expansion and expense management, along with our improved balance sheet, deliver positive results and begin to translate into value for our shareholders. As we look to the second half of 2024, I am cautiously optimistic that we can continue to build on our momentum and drive continued success. I'll now turn the call over to Tom to cover the financial details. Tom?

Thanks, Jason. As Jason discussed, we are pleased with our results as many of the drivers of our positive first quarter performance continued in the second quarter. Reported net sales for the second quarter were $98.3 million down 1.6% compared to $99.8 million in a year ago period. Excluding certain non-recurring sales from the year-ago period for sales related to the manufacturing of service product following the divestiture of the brand in March of 2023, our change to the distributor model in Canada in November of 2023, and temporarily elevated commercial military footwear demand throughout 2023, net sales increased 6.1% year-to-year. Excluding these non-recurring items by segment, wholesale sales were up 2.3% to $68.3 million. Retail sales increased 6.1% to $26.1 million. And contract manufacturing sales were up $3.5 million, were $3.5 million up $2.6 million from last year. Turning to gross profits. For the second quarter, gross profit was $38 million or 38.7% of net sales compared to $37.6 million or 37.6% of sales in the same period last year. The 110 basis point increase was driven by higher wholesale gross margins as well as higher percentage of retail net sales, which carry higher gross margins than our wholesale and contract manufacturing segments. Gross margins by segment were as follows. Wholesale, up 200 basis points to 37.2%. Retail, down 180 basis points to 46.9%. And contract manufacturing, up 420 basis points to 9.6%. Operating expenses were $33.5 million, or 34.1% of net sales in the second quarter of 2024, compared with $35.4 million or 35.4% of net sales last year. On an adjusted basis, operating expenses were $32.8 million this year, or 33.4% of net sales, and $33.6 million, or 33.2% of net sales a year ago. Income from operations was $4.5 million, or 4.6% of net sales, compared to 2.2 million, or 2.2% of net sales in a year-ago period. Adjusted operating income was $5.2 million or 5.3% of net sales compared with adjusted operating income of $5.7 or 5.6% of net sales a year ago. For the second quarter of this year, interest expense was $6.1 million, inclusive of a $2.6 million one-time loan extinguishment charge compared with $5.6 million in a year-ago period. On an adjusted basis, including the $2.6 million one-time term loan extinguishment charge. Interest expense for the second quarter of 2024 was $3.5 million. The decrease in interest expense on an adjusted basis was driven by lower debt levels and interest rates resulting from the debt refinancing completed in April of this year, compared with the second quarter of 2023. On a GAAP basis, we reported a net loss of $1.2 million, or 17 cents per diluted share, compared with a net loss of $2.7 million, or 37 cents per diluted share, in the second quarter of 2023. Adjusted net income for the second quarter of 2024 was $1.3 million, or 17 cents per diluted share, compared with breakeven a year ago. Turning to our balance sheet, at the end of the second quarter, cash and cash equivalents stood at $4.1 million, compared with $4.5 million, at December 31st and $3.1 million a year ago. Total debt was $152.4 million, a decrease of 12% since December 31st and a decrease of 31.3% since June 30th of last year. Inventories at the end of the second quarter were $175 million, up slightly compared to $169.2 million at the end of 2023 and down 20% compared to 2020. or $218.3 million a year ago. With respect to our outlook, we still expect net sales to be toward the high end of our initial range of $450 to $460 million. The only thing that has changed since our Q1 call in late April is our view on gross margins. Due to the rising ocean freight rates, volume shift within our wholesale channel to more of our larger key accounts, we now expect gross margins for 2024 to be slightly less than last year's 38.9% adjusted gross margin versus our prior guidance of a slight improvement. In terms of how this impacts the second half by quarter will depend on the timing of when the product sells, but we currently anticipate third quarter gross margins to decrease sequentially from Q2 gross margins before rebounding in the fourth quarter due to our mix of retail sales. That concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 keys. One moment please while we poll for questions. The first question is from Janine Stichter from BTIG. Please go ahead.

Janine Stichter Hi, good afternoon. I want to ask a bit about supply chain. I think you talked about chasing inventory for Durango and Extra Tough. Maybe you could just comment on the current state of the supply chain environment, your ability to chase and kind of where we are in terms of bottlenecks or how the inventory flows stand. And then with that, I would just love a little bit more color on what you're seeing with ocean freight rates, how much you have locked in, and how much visibility you have there. Thank you.

Yeah. Hey, Jenny. Thanks for being on the call. So as we talk about chasing some inventory for Durango and Extra Tough, the sales for those brands have exceeded our expectations a little bit in the first half of this year. We are seeing a little bit of delays from a supply chain perspective, but we feel, as you can see with our inventory being up, we've a lot of inventory coming our way and manufacture our own inventory to prepare us for Q3 and for Q4. And so we're trying to catch some inventory on those two brands, but I think our inventory is well positioned for the last half of this year. As it relates to container prices, we definitely have seen an increase, particularly in the month of June. They've gotten a little softer in the month of July so far, but we're monitoring that, and that's why we've been a little cautious with our margin guidance for the rest of the year. All right, great.

And then maybe just one more on the work brands. It sounds like you're seeing some pressure there, but it's really – more on the smaller accounts than the national accounts. Can you just comment on what's going on there? How much of it is the end consumer or general softness in the work market versus the retailers that you're selling into? We'd just love to understand the dynamics there.

Yeah, absolutely. Thanks for the question, Janine. So what we are finding that we call mom and pops, the independents, are just being a little bit more conservative. Our brands are still checking at retail. As we stated online or on the call here too, our key account business is actually doing significantly better. And so same kind of product, it's being sold. But what we believe is the mom and pops are just being more conservative. So if they have three size 10s and they sell one, they used to buy back into it. But now they're saying, I'm going to wait and I'm going to get down to one. or maybe even zero pair, and then I'll buy back into it. So we're not concerned with the brands at all. We're just watching the retailers be very conservative. I think there's probably a little bit of play here with the election year also. We typically see the mom and pops in particular get a little antsy around election year. So we think we're in good shape here, and we just got to kind of mull through the cautiousness.

All right. Thanks so much.

Thank you.

The next question is from Jonathan Komp from Baird. Please go ahead.

Yeah. Hi. Good afternoon. Thank you. Tom, I was hoping you could share a little more, if you look to the back half, just what type of underlying wholesale growth you're expecting and any more color to, you know, the order book support that you have sitting here currently?

Yeah, you know, I think for our wholesale business, you know, if you're looking at it from a non-recurring perspective, which is how we're viewing it this year with the changes with the Canadian distributor and the commercial military contracts, you know, we're targeting that mid-single-digit type of growth in wholesale and then probably a little bit more in that retail area, particularly in the e-commerce channel. So I would say, you know, We're still targeting that 450 to 460 range, the high end of the range. And so we're not making really any revisions upwards, but the key account growth is certainly going to help us get to that mid-single digit growth that we talked about.

Yeah, great. Thank you. And when you look at the Western category specifically, either based on indications you see in your retail business or sell through that some of your key partners, what's your best sense of the health of that category? And how are you thinking about sort of the end market rate of sell through overall?

There's a great question. You know, I think everybody is kind of aware what's kind of happened in the Western business, or maybe even if you think about the country music business is really kind of, Spike some stuff there. So we believe that we are seeing a little bit of that, but not a lot. Single digit kind of partial growth there from the popularity of what's going on with country music and Western boots. But our boots are still just really functional boots. And I think a lot of the people that are buying The other kind of boots, they're just going to Amazon looking for a cheap boot, and it looks like they want it to look, and so they're buying that. So I think it will affect some of those kind of brands more so, but I think the traditional brands like we are, I think will be okay. And, you know, right now, we don't see it slowing down this year, and we'll keep a close eye on it for next year.

Yeah, I think, John, we have limited visibility into some of the sales. some of our Western retail customers. And we're seeing good sell through there. I think we're seeing a greater wholesale selling as people start to normalize their inventories a little bit as well. That's my take on it.

Yeah, very helpful. Maybe last one just related to the margin. Could you maybe quantify what type of increase you're seeing or building in from a freight perspective in the gross margin update, and then is there any ability or willingness to pull back a little on SG&A, or are you still expecting to de-lever slightly based on investments in the incentive comp? Thanks again.

Yeah. So, yeah, look, container prices, we saw container prices almost 2X what they were in June from May, right? Again, they've started to soften a little bit. This is the ocean container. Soften a little bit in July. So we're watching price. We're watching our peers. We haven't really seen anybody take pricing adjustments yet. If I were to kind of quantify, we're probably a couple hundred basis points difference, you know, over at LY, just on an ocean freight piece of it. But we're continuing to monitor that. And really, that'll depend on when and what product sells. As John, you know, you've followed us a long time. We source a significant amount of our product from the Western Hemisphere. So we're getting a lot of product from Puerto Rico and from the Dominican Republic. So we'll probably be less impacted than some of our peers that source more predominantly or exclusively from Asia. But we're continuing to monitor it. And it'll certainly have an impact on us. We're going to try to mitigate that. As it relates to you know, operating expenses, we are still trying to manage to the operating income goals we set at the beginning of the year. So, yeah, we are looking for areas where we can cost to try to maintain that operating margin.

And so that's the goal for the next five months. Okay. Thanks again. Thanks, Sean.

There are no further questions at this time. I would like to turn the floor back over to Jason Brooks for closing comments.

Great. Thank you. I just want to reiterate one more time a big thanks to the Rocky team. Everybody is working really hard to navigate this year, a complicated year. And I also want to say thanks to our shareholders and all their support. And we look forward to finishing out a good year. 2024 and continuing to grow these brands in 25 in the future so thank you very much this concludes today's teleconference you may disconnect your lines at this time thank you for your participation