Rocky Brands, Inc.

Greetings and welcome to the Rocky Brands Inc. First Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please signal the operator by pressing star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cody McElesto of ICR. Please go ahead. Thank you,

and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10K for the year ended December 31st, 2024. 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 questions. It has been a good start to 2025 despite growing macroeconomic uncertainty. During the first quarter, we experienced healthy demand within our brand portfolio and throughout our distribution channels led by a 20% top line growth in our retail segment. Demand was especially strong for our rubber boot business which includes both Extra Tough and Muck. The Extra Tough brand has been gaining momentum for several quarters with sell through online and at wholesale accelerating in Q1 as we increased our inventory position in key styles. With better full price selling, overall and retail increasing meaningfully as a percentage of the total sales, we achieved record first quarter gross margins and our second highest gross margin ever only behind the fourth quarter of last year. Combined with this significant reduction in interest expense, following our refinancing in April of last year and continued debt pay down, we increased adjusted debt income 78% year over year. Since our last earnings call in February, the world we are operating in has become much more dynamic following higher tariffs imposed by the US on most all trade partners, particularly China. While the situation is very fluid and the outcome of ongoing negotiations is uncertain, we've moved quickly to mitigate the impact of the higher tariffs and believe we have a sound plan in place to protect our gross profit dollars under multiple scenarios. Based on current tariff rates, we expect to implement price increases on the majority of our footwear styles in early June and will maintain flexibility to adjust prices accordingly based on any future changes as they are announced. We are also accelerating our efforts to reduce the amount of products we sourced from China. This includes procuring more footwear from partners in Vietnam, Cambodia, India, and as well shifting production to our manufacturing facilities in the Dominican Republic and Puerto Rico. While we anticipate that higher prices will put some pressure on the consumer demand, we believe the strength of our brands and the functionality of our products, along with our diversified sourcing structure has us well positioned to navigate current situation and allow us to achieve our financial targets for the year. Before I hand the call over to Tom for a more detailed look at the financials, I'll take a few moments to walk through our quarter brand and channel performance. Starting with extra tough, the brand continues its recent momentum and delivered another exceptional quarter with double digit growth in Q1. Importantly, we have seen the brand continue to expand its reach into new regions and niches, growing in popularity across the inland US and the new demographics outside of its core male consumer. In fact, at our spring 25 deliveries, our most popular new styles are the women's duck camo and ivory colored ankle deck boots. The brand performed strongly across key accounts, including sporting goods retailers, fishing shops, and even Western stores, with independent customers keeping pace as well. Many retailers saw excellent sell through on both proven classics and new colors, demonstrating strong retail demand for the brand. We also successfully launched extra tough at a key sporting retailer in Q1, leading to added styles, replenishment orders, and door expansions. Bookings are up approximately 80% versus last year. And as we move further into the spring season, we have many exciting launches ahead, including a summer delivery of the new Guy Harvey styles, including our first Guy Harvey's kid ankle deck boot, as well as a collaboration with the US rowing team, an online exclusive with pro teamer Andrew Cotton, and the launch of our partnership as an official boot sponsor of the sport fishing championship. Overall, there is a lot to be excited about with extra tough in the months to come. MUC also started 2025 with a better than expected growth. Better winter weather in much of the United States compared to the warm dry patterns of the previous two years, led to a significant uptick in the brand's performance. Our women's business was a surprise standout, delivering a double digit increase in the period. Additionally, improved inventory positions and key styles contributed to the successful quarter. From a marketing standpoint, our enhanced digital advertising continued to deliver strong results with a focused approach on the work and utility category during cold weather periods. In February, we took steps to consolidate our digital media buying, allowing for more nimble allocation to capitalize the best ROI. Coming off an exceptional 2024, the Durango brand sell into wholesale moderated in the first quarter, due in part to difficult comparisons and timing shifts as some Q1s orders were delivered early in late 2024. That said, we did see some underlying strength, particularly online and with our at once business, which was positive in the quarter, and we anticipate large volume orders in the back half of 2025, as retailers optimize their inventory levels. Importantly, our inventory position and top styles remain strong heading into the second quarter. While January and February are positive for Georgia boot, March was notably softer as the field customer base slowed orders due to the economic uncertainty. Additionally, we saw some sizable orders come a later this year, following into Q2, while we also did not anniversary some large orders from 2024, many of which were driven by retailers resetting assortments that are now established. Despite the sluggish orders from our retail partners, recent introductions like the Romeo Superlight continue to perform well to the point that we are chasing inventory in the first quarter. Other new offerings that are focused on hitting key price points while maintaining comfort and quality have resonated with retailers and consumers alike, continuing to sell through and recently being added at several major retailers for later this year. Turning to our Rocky brand group, both our work and outdoor categories showed increase compared to last year, with Rocky work delivering the strongest performance. Work style saw solid expansion with key national safety shoe distributor partners and regional and local shoe distributors in the period that drove its success. Rocky Outdoor, we were pleased to see a return to growth after a string consecutive difficult quarters. The brand delivered single digit increase over last year through solid distribution with e-commerce partners, national chains and independent retailers across the country. A renewed snake boot program with a prominent national retailer and strong sales on our e-commerce site contribute to the increase. Additionally, a longer winter season in most of the country provided extended opportunities with insulated boot selling, which has not been seen the case in recent seasons. New additions to our growing rugged casual business contributed to the solid quarter as well. While Rocky Western sales were down in Q1, it was largely to a touch comparison from elevated off-price sales of discontinued product in Q1 last year that did not anniversary in 2025. Particularly offset this headwind was the introduction of a Western boot to a key farm and ranch multi-store chain in the northwest, along with solid sales with our e-commerce drop ship partners. Lastly, in wholesale, our commercial, military and duty segment was down in Q1. Largely in line with our projections, the expected decrease was due to the benefit of a year ago from a sizable commercial military blanket purchase agreement that elevated early 2024 sales. On top of this, the order implemented by the Department of Government Efficiency in February, freezing all government purchasing cards was also a headwind in the first quarter. Shifting to retail, our B2B Lehigh business had a terrific quarter with sales increasing high teams, marking the third consecutive quarter of double digit gains. As the realignment of our sales team reaches its one year anniversary and new processes are firmly in place, the business is firing on all cylinders. Customer spending continues to be strong with improved subsidy utilization and increase in average subsidy dollars year over year. New customer acquisition remains robust with the addition of 190 new accounts this quarter with no indication of a market slowdown to date. Our direct to consumer business, which consists of our own branded websites and leading third party marketplaces grew at an even faster pace than Lehigh, led by marketplace volumes as clear through a good deal discontinued inventory in the quarter. Looking ahead, we acknowledge that there is a higher degree of uncertainty over the remainder of the year that we will outline our guidance in February. Our confidence in maintaining our outlook stems from our better than expected first quarter performance, the positive effect recent sales have had on our future bookings, and our ability to mitigate the impact of tariffs through recent inventory investments. Pricing actions and our diversified sourcing structure. I look forward to updating you on our progress on our second quarter call in July. I'll now turn the call over to Tom.

Thanks, Jason. Echoing Jason's sentiment, I am very pleased with our start to 2025, especially considering the general uncertainty that has been dominating the headlines. The diversity of our brand portfolio and the appeal of our functional, excessively priced footwear has allowed us to adeptly navigate the current retail environment. Reported net sales for the first quarter increased .1% year over year to $114.1 million, which was slightly ahead of our expectations. By segment, wholesale sales were down $5 million, or .3% to $74.8 million, with $3 million of the decrease coming from the planned reduction in commercial military sales. Retail sales increased .5% to $36.6 million, and contract manufacturing sales were $2.6 million. Turning to gross profit. For the first quarter, gross profit was $47 million, or .2% of sales, which is the highest gross margin we've ever reported in Q1, compared to $44.1 million, or .1% of net sales in the same period last year. The 210 basis point increase was driven by higher wholesale margins that resulted from better full price selling and favorable product mix, combined with a higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. Reported gross margins by segment were as follows. Wholesale up 390 basis points to 40.3%, retail down 300 basis points to 45.7%, and contract manufacturing margins were 5.8%. Operating expenses were $38.3 million, or .6% of net sales in the first quarter of 2025, compared to $36.2 million, or 32% of net sales last year. Excluding acquisition related amortization in the first quarter of this year and last year, adjusted operating expenses were $37.6 million, and $35.5 million respectively, in Q1 of 2025 and Q1 of 2024. The increase in operating expenses was driven primarily by higher selling and outbound logistics costs associated with the increase in our direct to consumer sales compared with the year ago period. Income from operations was $8.7 million, or .6% of net sales, compared to $8 million, or .1% of net sales in the year ago period. Adjusted operating income was $9.4 million, or .2% of net sales, compared to adjusted operating income of $8.7 million, or .7% of net sales a year ago. For the first quarter of this year, interest expense was $2.4 million, compared with $4.5 million in the year ago period. The decrease reflects lower interest rates as a result of the debt refinancing we completed in April of 2024, as well as lower debt levels. On a gap basis, we reported net income of $4.9 million, or 66 cents per diluted share, compared to a net income of $2.6 million, or 34 cents per diluted share in the first quarter of 2024. Adjusted net income for the first quarter of 2025 was $5.5 million, or 73 cents per diluted share, compared to adjusted net income of $3.1 million, or 41 cents per diluted share a year ago. Turning to our balance sheet. At the end of the first quarter, cash and cash equivalents stood at $2.6 million, and our total debt, net of unamortized debt issuance costs totaled $128.6 million, a decrease of .5% since March 31st last year. Inventories at the end of the first quarter were $175.5 million, up 6.3%, compared to $165.1 million a year ago, and $166.7 million at the end of 2024. We purposely accelerated receipts in March after an initial round of tariffs were announced, and continued to bring product in early to avoid the impact of higher tariffs announced in April. And therefore we expect to increase borrowings under our credit facility in support of these investments in Q2, before starting to decline in the second half of the year. With respect to our outlook, based on the first quarter performance and inclusive of the tariffs that have been announced this year through today, we are reiterating our prior full year 2025 guidance. Revenue is still expected to increase in the low single digit range over 2024 levels, with the price increases we're implementing in Q2 to offset lower volumes as a result of the higher prices. As a reminder, our original guidance for the full year gross margins to decline modestly year over year, including roughly 110 basis points of headwind from the 10% increase in the Chinese tariffs announced prior to us reporting Q4 results in late February. We are forecasting additional pressure on gross margins from the tariffs announced in March and in April, but expect to hold gross profit dollars consistent with our initial outlook through the actions we've discussed, namely increasing prices. Rounding out our guidance, SG&A is still expected to be up in dollars as an increase in our marketing spend to support growth and realizing higher logistics and selling costs associated with the projected increase in retail sales. However, as a percentage of revenue expenses will be similar to last year. Finally, we still expect 2025 EPS to be just below 2024 adjusted EPS of $2.54. That concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. The first question comes from the line of Jenningen Stichter from BTIG, please go ahead.

Hi, thanks for taking my question. Was hoping you could elaborate a bit on the guidance. Really impressive to see that you were able to reiterate the profit guidance with everything going on with tariffs. Maybe help us understand how much you've been able to migrate out of China. What's going on with the China shipments you had originally planned? Were you able to pause those? Or it sounds like you were able to bring some in early. And then maybe some more color on the magnitude of price increases that you're planning. Thank you.

Yeah, I'll start off and then Jason could certainly chime in. I think one of the things we're recognizing is that we are in a very good inventory position. And so if you think about the investments we made in inventory at the beginning of this year and through March, we have about six, seven months on average of products to sell through this year. So we'll be able to get through the majority of this year without feeling a lot of the pain from the tariffs yet. And it's also gonna give us ample time to transition product out of China and into Vietnam, India, Cambodia, and then also transition into our own manufacturer facilities and Dominican Republic and Puerto Rico. So we will be able to use that inventory as a buffer to allow us to execute on this transition ahead of schedule from where we originally anticipated on the last call. And so as we looked today, we anticipate total volume out of China to be just less than 20% by the end of this year. And it's important to call out when we talk to that is that not all the product from China will be coming to the US, right? So we do have an international business that we're gonna leverage to ship product out of our Chinese facility for the rest of the year. So we're gonna continue to do that. From a pricing increase, we're not really prepared to share the price increase quite yet, but there's been a lot of analysis on it. Obviously, we are still waiting to see if there's any actions taken this week or last week as mentioned by the administration around China and a reduction there. So we'd certainly welcome a reduction in the Chinese tariffs, but we'll be announcing a price increase here regardless of any changes with the Chinese tariffs over the next week or two to go into effect in June as Jason touched on.

Yeah, and then just to kind of add on there, I think you'd also asked about what we're doing right now out of China. In some cases, we have paused some shipments, but are doing that very methodically and trying to understand the needs that we have in our consumers and retailers. So there are some areas that we have paused, some areas that we have slowed, and then as Tom indicated, we've been able to move some things around and say, well, this now is not gonna come to the US, it's gonna go to somewhere else in the world. So we've been able to do some of that as well.

Got it, that's helpful color. And then maybe just with the wholesale business, it sounds like based on the color you gave, you haven't really seen any meaningful change to wholesale order books. What are you hearing from your wholesale partners who just love a little bit more color about how they're thinking about the consumer's ability to absorb some of these price increases and just the health of the consumer?

Yeah, I'll start this one and Tom can chime in next. So just to kind of back up, our bookings going into Q1 were really strong. So we have a really nice booking set for fall this year, in particular in Extra Tough and some of the other brands, all the brands did well. We haven't seen anything crazy from our retail partners with like trying to beat a price increase or trying to understand where that is. We've had a few conversations where people are like, well, maybe I'll buy into some, maybe I won't. A lot of our mom and pops have talked about just trying to navigate it and seeing when and where they will have to take price increases. I find it really odd, but the consumer doesn't seem to be freaking out about this right now. It's really interesting because I think everybody, including us is just kind of like, okay, let's manage our business, let's get through this, let's see how things kind of fall through and fall out and make the best business decisions we can with the information we have, but it doesn't seem to be a panic right yet from the consumer standpoint. And therefore our retail partners are doing kind of the status quo, taking advantage of some things here and there, but nothing too crazy.

Yeah, I think just to add on there, I think one of the things we're monitoring obviously is what our peers are doing. And so it seems like we've seen some price increases from some of our peers, but it feels like a lot of them are waiting to see what happens with the tariffs, Chinese tariffs particularly. And so we know that there's a lot of folks, including ourselves in some cases that have paused inventory coming from China. And so we're trying to speculate about whether or not there's gonna be scarcity on the shelf later this year as inventory is not flowing as it normally would, particularly at a time when brands like ours are building inventory for fall and for holiday. So it'll be interesting to see how that plays out. I do think that we are in a competitive advantage situation. We have our facility in the Dominican Republic, which is going to allow us to ramp production there. And important to call out that we're not starting this factory out of this tariff situation. We've been making boots in the Dominican Republic for over 40 years. And so we're gonna continue to leverage that asset for us this year as well as our Puerto Rican facility is it's gonna be a much more meaningful asset given the dynamic that's going on in the world right now.

Super helpful and definitely interesting times. Thanks a lot and best of luck.

Yeah, thank you.

Thank you.

The

next question comes from the line of Jonathan Com from BAD, please go ahead.

Yeah, hi, thank you. Good afternoon, Tom, just, can I start with

a clarification? So I might've misheard the guidance for the year. I think you said unchanged revenue assumption, lower gross margin percentage, but unchanged gross profit dollars. I just wanna make sure I heard that because that doesn't sound like the right math for those three all to be equal.

Yeah, so our plan is to implement a price increase. So we will certainly have some wins there from a revenue perspective. And so we probably have our top line growth slightly over what we had originally guided. However, we're tempering that with the expectation that we could see some uncertainty with volume. And so from a margin perspective, our goal is to maintain those gross profit dollars, which would result in a lower gross profit percentage for the year to basically get to the end goal here of maintaining our EPS guidance for the year of just under last year's.

Okay, that's helpful, thanks for clarifying. And then thinking about the timing of some of the impacts, just specifically on the price increases, will you be only passing along price increases that you receive from the manufacturers or is there any opportunistic chance to front run the RU pricing for market conditions? And even though you have some coverage of lower cost inventory, just wondering sort of that dynamic of strategically how you're planning the price increases.

Yeah, so right now as we look to the price increase, we're still trying to discern what's gonna happen with tariffs in the future. But our current position is to preserve gross profit dollars. So we're doing a price increase now that basically is gonna allow us to kind of cost average inventory that we have in on hand already, as well as with inventory that's gonna be coming in at a higher tariff. And as well as us executing the sourcing and manufacturing changes that we've already talked about. So we're trying to do a price increase that's going to not slow down retail very much, remain defensive to keep our shelf space, yet preserve the gross profit dollars, if that makes sense.

John, I would just add, right? If you think about our brands and then where we source product from all around the world, we've had to take tariff increases everywhere we source from, right? So like Tom said, we've been in Dominican for almost 40 years now, and all of a sudden we have a 10% tariff out of the DR. 10% is nothing compared to what is being hit in China. So the idea of us looking at it holistically is really important for us to be able to say, okay, how do we make this work for all of the products and really the most important products? So I wouldn't say that we're being opportunistic, but there might be some places that if we think we can get a little bit better there, we might take that because we can't take that kind of price increase out of something that is still coming out of mainland China.

Okay, understood, very helpful. Two more questions, if I could, just one on the pricing that you're planning to communicate. Have you gone down the path? Have you had those conversations yet in terms of the actual communication? And have you got any direct feedback from your customers on the pricing plans at this stage?

Yeah, so we have definitely talked to some key retailers. We have heard from many that the idea around a line item tariff price, surcharge, thank you, Tom, is really not something they would be excited about. And I think we tend to agree with them. And then obviously trying to keep the price increases as limited as possible without slowing retail down. And then I think most retailers, in particular your key retailers, key account retailers, they really don't like to make these changes very often. And so if we can make one adjustment and not have to make that adjustment again for maybe another 12 months, then we want to try to do that with the volatility of the government right now. I don't know if that's gonna be possible. We'll see how things go, but we're trying to be patient and take our time and do this in the nicest, cleanest way possible. And I think everybody in the world kind of understands where things are at and what's going on. So the goal would be not to be as disruptive, to be as least disruptive as possible.

Yeah, I think, you know, as Jason kind of called out earlier, and I think retailers are sophisticated enough to know this that essentially everywhere got, you know, unless it's USMCA, everywhere got 10%. So the cost of products has gone up 10% at first cost. And so the retailer is going to anticipate a price increase. I think everybody's just stalling a little bit to see what happens with China.

Right, and then just last one, and this has been very helpful.

You mentioned shifting to third party capacity in Vietnam, India, and Cambodia. Any further ability to quantify how much capacity, round numbers you're looking to shift, and do you have a good line of sight to those commitments, or is it gonna be difficult to secure that much incremental capacity with some of the third parties? Thanks again.

Yeah, great. Sorry, sorry. Great question. Obviously everybody is navigating this right now. So we had been in this process really for some time, right? And we were slowly starting to move things. We have great relationships with these factories, either in mainland China, and some of them are moving to these countries and building factories there, or those factories have already been there, and we are slowly doing it. Obviously under the circumstances, we decided to move a little quicker. And so we believe that we've got the capacity that we need. We are being very cautious about it. It's not simple just to move a boot from one factory to another. It sounds like it should be, but it's complicated. And the last thing we wanted to do is deliver bad product. So we are moving quicker, but we are doing it methodically. And I think we have the capacity that we need to manage it here in 2025, and then in 2026 and beyond continue to do less in China. We will always, well, I don't know about always, but we will still be doing some manufacturing in mainland China, and a lot of that product will be sold and distributed in other parts of the world versus the United States. Yeah, I guess

John, to try to put some numbers around it, I would say we found the right home for about 90 to 92% of our product. And so we're working to get those facilities up to speed which would include our third party factories, but as well, the facilities that we own. And so there's about 8% is still in China that we think we could potentially find a new home for. And so we're working diligently, and that number really comes down about every week or two as we find new homes and we come up with new ideas. But to Jason's point, the reality of it is is where we're moving in Cambodia and Vietnam, particularly, or with partners that we've been partners with for decades. And so we have a lot of faith in our ability to execute on the sourcing change. It certainly is, there's going to be a 90 to 120 day timeframe where you have ramp up time to execute on that. And this is where we hope that that inventory buffer we have will help get us through that challenge and ultimately keep boots flowing to the shelves where maybe some of our peers won't have had the inventory position that we have or might have a harder time transitioning. So to me, it feels a little eerily similar to April of 2020 when everybody canceled POs at the beginning of the pandemic. And we were able to demonstrate then, and our goal is to demonstrate again here that we're able to move faster than our peers when it comes to getting inventory because we have the ability to manufacture our own products in the Dominican and Puerto Rico and leverage our operations in China as well.

Yeah, that's great. Thanks again for taking all my questions.

Absolutely, John, thank you. Thanks, John.

Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Jason Brooks for his closing comments. Jason.

Great, thank you. On behalf of Tom and myself, I just wanted to extend my sincere thanks to our shareholders, board members, and employees for the continued support and dedication. Your trusted guidance and hard work has been instrumental in delivering a strong Q1, and we look forward to a strong 2025. Thank you very much.

Thank you. Ladies and gentlemen, the conference of Rocky Brands has now concluded. Thank you for your participation. You may now disconnect your lines.