Rocky Brands, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Branch second quarter 2025 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 we'll now turn the conference over to Brendan 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 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 10-K for the year ended December 31st, 2024. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Thank you, Brendan. With me today is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we'll take your questions. We delivered very good Q2 results, significantly outperforming both last year and our own expectations through a strong execution across our diversified portfolio. High single-digit revenue growth and adjusted EPS that more than tripled to 55 cents per diluted share demonstrates the power of our multi-brand strategy and operational excellence. Three key drivers power this performance. First, broad-based revenue momentum. Multiple brands and channels contribute year-over-year growth with strong full-price selling driving a 230 basis point gross margin expansion despite challenging consumer conditions. Second, disciplined cost management. We controlled our fixed cost base effectively, delivering 59% operating income growth while reducing interest expense and debt levels year over year. Third, our outdoor category reassurance led by Extra Tough and Muck. Outdoor is re-emerging as a key growth engine alongside our traditional work and Western strengths. This outdoor transformation is particularly significant through the 2021 acquisition of the Extra Tough and Muck. We added two functional brands with deep fishing and farming routes, respectively. Now, especially with Extra Tough, We're building lifestyle components that broaden distribution and consumer reach. We are excited about the prospect of attracting more consumers to the brands and believe we are just starting to tap into an opportunity with a long runway of growth. Let me walk you through our Q2 brand performance. Extra Tough maintains its position as our fastest growing brand. building accelerating momentum across multiple quarters. We're working hard just to keep pace with demand and our expanding distribution network. U.S. wholesale significantly outpaced last year, increasing strong double digits with e-commerce growth equally as strong in the second quarter. EQ2 wins include sustained strength with authorized online partners, expansions into boot and western retailers, and new placement with prominent big box outdoor and fashion parts. Our fall-winter 25 lineup excites us. Fleece-lined ADBs, expanded tailgate collection styles, and a new Sesame Street children's line. Next, Muck delivered its best quarter-to-quarter comparison since 2023. Improved inventory positions, particularly in best-selling chore styles, combined with favorable weather drove strong performance. Men's business posted solid mid-single-digit gains with double-digit growth across the Upper Midwest, Northeast, and Southwest. Our women's business achieved strong double-digit increases versus Q2 2024. led by triple-digit growth in the Muckster 2 collection, including the Chicken Prince series. New digital advertising focus on working utility customers deliver our best campaign results in company history, driving brand awareness and e-commerce gains. Strategic partnerships include a collaboration with country star Dirk Bentley, furthering, amplifying our reach. Durango achieved a high single-digit growth driven by strong key account performance. Field accounts improved Q2 versus Q1, with momentum accelerating through May and June. Farm and Ranch remained consistent with steady replenishment, positioning us well for the second half of the year. Our inventory composition of new releases and legacy favorites continues delivering results. Georgia boot finished down modestly but showed progressive. Improvement throughout the quarter. Tariff-related timing shifts delayed a new fall product shipment by one month. Key accounts remained stable, driven by a large e-commerce partner and a working Western retailer chain returning to normal purchasing patterns. Farm and ranch softened due to Pacific Northwest weather impacts and inventory overstocks. while field accounts faced macroeconomic headwinds in May. The late quarter pickup should continue into the fall as our price point-focused offerings resonate broadly. Rocky work, outdoor, and western all grew for the first time in several quarters with outdoor and western double digits driven by new products, strong bestseller demand, and key partnership expansions. Profitability improved significantly through increased full-price selling versus the prior year's overstock focus. The work category strength came from online sales and improved farm store performance, plus continued expansion with national safety shoe distributors driving best-seller safety toe product. Outdoors showed encouraging signs despite lacking Q2 hunting seasonality, with hiking collections performing exceptionally well on our e-commerce site and partner platforms. Western work, Western hybrid products excelled, particularly in our Irons Call Safety Tow Western Pull-On at major industry outlets, supported by strong online and farm store performance. Commercial, military, and duty rebounded nicely, exceeding Q2 expectations After a difficult start, Public Service Division performed well, particularly USPS and the Code Red Fire Assortment. While commercial military segment momentum shifted as the U.S. government deployed allocated funds for the first time in months, we secured three substantial U.S. Navy orders, offsetting last year's contract sales. Looking ahead, we're optimistic about military prospects. Rocky Brands recently earned a USMC Hot Weather Boot Certification, enabling us to pursue large bid opportunities and provide individual marine sales going forward. In retail, our B2B Lehigh business grew mid-teens versus last year. As our sales team realignment reaches its one-year anniversary, new processes are generating sustainable double-digit growth. Customer acquisition and spending remain strong with improved subsidy utilization and higher average subsidy dollars year over year, largely offsetting supply chain and tariff pressure. Before turning to Tom, I want to thank the entire team for exceptional execution during a dynamic quarter. Despite the global tariff uncertainty and economic pressures, Our performance demonstrates our diversified portfolio's resilience. I'm particularly proud of how quickly we've adapted to the changing trade conditions, leveraging our Dominican Republic and Puerto Rican facility in implementing strategic sourcing changes that offset much tariff impact. While we remain appropriately cautious about the broader environment, our strategic positioning, manufacturing flexibility, and robust brand portfolio positions us well for continued growth and increased shareholder value. The momentum across key brands like ExtraTuff and Durango combined with our operational efficiencies and strong balance sheet gives us confidence to navigate the challenges while capitalizing on significant opportunities ahead. I will now turn the call over to Tom.

Thank you, Jason. The acceleration of both the top and bottom line we delivered in Q2 is a testament not only to the strength and resilience of our diverse brand portfolio, but also a reflection of the hard work of the entire organization. Our teams did an excellent job capitalizing on new opportunities and implementing strategic shifts throughout the period, allowing us to outperform expectations in a difficult operating environment. Reported net sales for the second quarter increased 7.5% to $105.6 million. By segment, wholesale sales net increased 7.1%, to $73.1 million. Retail net sales increased 13.9 percent to $29.7 million. And contract manufacturing net sales were $2.8 million. Turning to gross profit. For the second quarter, gross profit was $43.3 million, or 41.0 percent of net sales, compared to $38.0 million, or 38.7 percent of net sales in the same period last year. The 230 basis point improvement in gross margin was primarily driven by higher wholesale margins combined with a higher percentage of retail sales, which carry higher gross margins than our wholesale and contract manufacturing segments. Reporting gross margins by segment were as follows. Wholesale, up 300 basis points to 40.3%. Retail, down 170 basis points to 45.2%. and contract manufacturing margins were 12.4%. Operating expenses were $36.1 million, or 34.2% of net sales, compared to $33.5 million, or 34.1% of net sales last year. Excluding $0.7 million of acquisition-related amortization in both periods, adjusted operating expenses were $35.4 million and $32.8 million, respectively. The increase in operating expenses was driven primarily by higher selling costs associated with the increase in direct-to-consumer sales and incremental marketing investments to drive growth. Income from operations increased 58.7 percent to $7.2 million, or 6.8 percent of net sales, compared to $4.5 million, or 4.6 percent of net sales last year. On an adjusted basis, operating income was $7.8 million or 7.4% of net sales compared to $5.2 million or 5.3% of net sales a year ago. For the second quarter of this year, interest expense was $2.5 million compared with $6.1 million last year, inclusive of a $2.6 million one-time term loan extinguishment charge for the prior year period. excluding the one-time term loan extinguishment charge, interest expense in the second quarter for 2024 was $3.5 million. 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 GAAP basis, Net income was $3.6 million or 48 cents per diluted share compared to a net loss of $1.2 million or a loss of 17 cents per diluted share in the second quarter of 2024. Adjusted net income was $4.1 million or 55 cents per diluted share compared to $1.3 million or 17 cents per diluted share a year ago. Turning to our balance sheet, at the end of the second quarter, cash and cash equivalents were $2.8 million, and our total debt net of unamortized debt issuance costs totaled $132.5 million, a decrease of 13.1% since June 30th of last year. Inventories at the end of the second quarter were $186.8 million, up 6.8% compared to $175.0 million a year ago, with the increase driven by higher tariffs as pairs are relatively consistent year over year. As we mentioned last quarter, we purposely accelerated receipts in the first half of the year after the initial round of tariffs were announced, and we continue to bring product in early to avoid the impact of higher tariffs announced later this year. That said, we have approximately $11 million of incremental tariffs on the balance sheet that will flow through our P&L over the remainder of the year, with the bulk of the impact occurring in the fourth quarter. With respect to our outlook, based on the second quarter performance and inclusive of tariffs that have been announced this year through today, combined with the mitigation actions, we are increasing our prior year 2025 guidance. Revenue is now expected to increase between 4% and 5% compared to 2024 levels, up from our prior guidance for revenue to grow in the low single-digit range. We are forecasting gross margins to be down roughly 70 basis points from the 39.4% reported in 2024, inclusive of roughly $11 million of headwinds from tariffs currently in place, partially offset by our pricing actions. It is important to note that the margin benefits of shifting production to our own Dominican Republic and Puerto Rico facilities will take time to fully materialize, with the largest margin benefits beginning in 2026. SG&A is still expected to be up in dollars from an increase in our marketing spend to support growth and higher logistics costs from the projected increase in retail sales. However, we are now expecting to realize modest expense leverage versus last year on higher sales. Finally, we now expect 2025 EPS to increase approximately 10% over last year's $2.54 a share, up from our prior forecast for EPS to be down slightly year over year. In terms of the quarterly shape of the second half, we are expecting growth and gross margins to be stronger in the third quarter versus the fourth quarter, as we've adopted an appropriate conservative view on Q4, when most of the impact from tariffs on pricing and costs will hit consumers and our P&L. In addition, the fourth quarter includes a sequential step-up in marketing spend to drive demand during the key holiday season. That concludes our prepared remarks.

Operator, we are now ready for questions.

Thank you. We will now be conducting a 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Jonathan Cump with Baird. Please proceed with your question.

Yeah. Hi. Good afternoon. Thank you. I want to start, if I could ask, just how things have gone in terms of shifting the supply chain. I know you talked quite a bit on the last call about some of the changes, but any reaction or results so far there? And then separately on pricing, could you just comment on how you're seeing the pricing flow through, either through your own retail business or the price increases you've passed along to some of your wholesale partners.

Yeah, hey, John. Thanks for being on the call. I'll take the first part on sourcing and let Jason weigh in on the pricing. But, you know, we're ahead of schedule in getting our production shifted from other countries. I would tell you that we are at our expectation really, as we see it now in China, from a go-forward standpoint. Again, things could shift and change after August 1st, which seems to be a date that we're going to get some more news on tariffs. But I think what we're most proud about is our ability to shift production to our Dominican Republic facility first, and now we're starting to shift production to our Puerto Rican facility. We are ahead of schedule in the DR, and we have boots inbound to us now, and we have for a couple weeks. So we're excited to see that plan coming to fruition. We'll just be cautious about any changes that come about, you know, August 1st, whether there's an extension with a deadline or if there's more color on changes. But everything is going as planned from a sourcing and manufacturing perspective. We just need to see the game changes here later this week.

Yeah, and then from a pricing standpoint, I would tell you that Pretty much all of our retail partners were understanding. We got a little pushback, but I think the world, really, the U.S., knew where everything was and that things were coming. We've heard of some of our competitors having significantly higher returns. price increases. And then we've heard some that have had, you know, lower than what we took. So it's taken us some time. That price increase went into effect in June. And we've had to work with some of our retail partners to get it into place throughout June. So it was a process, but I feel pretty good about where we're at.

Yeah, I think just to add on there, we were particularly cautious when we did our price increase to make sure that we

maintain retailers margins at map or minimum advertised price so so we think that helped with with delivering the message because we know that not all brands took that position okay that's helpful color and then as a follow-up I want to ask about the guidance raised Tom would you think about the drivers of the increase could you help us understand just how much was related to second quarter outperformance versus You know, any change in how you're thinking about the back half and any of the order indications you're seeing? Just, you know, want to get a better understanding of the drivers?

Yeah. So, you know, if you look at the updating guidance, you know, I think we're, you know, the win in Q2 from a top line perspective is essentially, you know, the implied increase that we have for the rest of the year. As we look to the third and fourth quarter, our bookings for Q3 continue to look very strong. But we'll also, and more importantly, we'll be in a better inventory position for Muck and Extra Tough, particularly in the third quarter than we were in the prior year. And so we feel stronger about the third quarter than we do the fourth. And then, you know, there's always this cautious – in us with the price increase and seeing how that plays out at retail because the reality is we haven't had enough time to see how the market acts with the price increase. But we do think we're very competitive compared to what our peers and other brands have done.

Yeah, just to add, I think one of the things that we are really pleased with is pretty much all of the brands have Georgia was kind of flat down a little, but we've seen Rocky come back a little bit, right? Durango's been doing pretty good. Extra Tough has been strong. And now we've seen Muck kind of come back. We're anticipating, because of what Tom said about us having better inventory in Q3 and Q4, that we'll hopefully see that driver happen with all of the brands and and maybe even Georgia will start to see some pickup too. So I think the fact that we've got, you know, the brands all kind of moving in the right direction is really a positive for us as well.

And last one for me, could you just maybe give us an update? How, you know, how would you frame up the relative size of the outdoor versus work business across your brand portfolio? And And any comment on sort of relative, you know, top line revenue growth rates for the year? Thanks again.

Yeah, so I would say that our outdoor category is certainly growing at a rate faster than our other areas. We're trying to look it up here, John, real quick. But the work category is our biggest, though. The work category is our biggest category. followed by the outdoor category. With a lot of that growth happening is an extra tough and muck as Jason touched on in his prepared remarks. As we look at it for the quarter, the outdoor category made up about a third of the sales for Q2. And so I think that As we get into the Q3 and Q4, we'll see that acceleration continue, and so outdoor is going to continue to be a bigger piece of the total pie.

That's very helpful. Thanks again. Thank you. Thank you.

Our next question comes from the line of Janine Fisher with BTIG. Please proceed with your question.

Hi, good afternoon. I'm hoping just to get your thoughts on how you're feeling about the state of the consumer versus when we last spoke. On one hand, we see a nice increase in retail sales there in Q2, but then you do mention weakened visibility into consumer demand. Just curious what signals you're getting from the consumer. And I know it's still early, but any data or thoughts you have on the sell-throughs since you've raised prices would be really helpful. Thank you.

Yeah, great question, by the way, because I would tell you that the consumer is a little confusing right now. When you read the data that we get from our retail partners and we look at the sell-through, we're getting really positive information there. And I know not all categories in the marketplace are getting the same kind of results, but when you look at the work category, the farm and ranch category, the outdoor category, we're seeing pretty good sell through at those retailers. And so we're excited about that. We, again, are pretty cautious and trying to be cautiously optimistic about it. But it seems like our guy is doing okay, but they're also very fickle. And you can see one week where the numbers are really strong and then the next week, maybe not so. So We're just following through it and seeing where it ends up. But I think we, again, are cautiously optimistic that they're doing okay.

Yeah, I think, Janine, just to dive in a little bit, you know, we look to our e-commerce websites to give us the biggest pulse or barometer of how pricing is impacting the customer. And so, you know, when we look at June, the pricing, you know, June 1 on the websites. And so we actually saw similar growth in June as we saw in the rest of the quarter from an e-commerce perspective. In July so far, it's relatively flat on e-commerce, on our e-commerce websites. There are some challenging comps in there for prime days and things like that. So we're going to keep our eye on this. But there doesn't appear to be a dramatic shift on the websites one way or the other with the pricing going into place.

All right, that's helpful, Keller. And then, you know, maybe just on Extra Tough, really interesting about the lifestyle opportunity there. If you could just maybe help us size up what the opportunity looks like there and how you would expect that to evolve, you know, within the next year or so.

Yeah, I'll jump in. I'm sure Tom will add. He loves Extra Tough. One of the things we're seeing is the move from men's to women's and then also kids. So we are seeing some pretty good growth in women's footwear and some pretty good growth in kids' footwear, which is expanding into probably more use for maybe what we would talk about, maybe soccer moms. or even as just a normal rain boot. So if it's just raining out there, they're kicking those on instead of some other rubber boot that they used to have maybe. And so it's not... It's still a very functional product and use of it, but the activity is being done and the colorways that are being done and the people that are using it are really just kind of blowing it up. And then we're seeing more expansion inland. So the farther you get away from the water, we're starting to see more people use it in those areas as well.

Yeah, I mean, just, I mean, Jason pretty much hit it. But, you know, I think as you look to, we continue to expand the ADB sport line. That is our fastest growing collection and extra tough. And what we've been able to realize, and you can see this migration in your sales heat maps, is that it's more than just fishing consumers now. It's being carried by retailers that normally wouldn't even sell to that demographic. And so it's really exciting to see it. on retailers and on retailers' websites that's really going to broaden the reach of the brand to new consumers. And in that couple of weeks, we've got more and more different type of, you know, different footwear products, and we've also added some apparel assortment to the brand as well. So, you know, our Riptide collection, our Anna standout collection is performing well, and so we're excited to see where that would go because, you know, ExtraTuff is so much of the six-inch ankle-deck boot to most consumers. Those same consumers wear flip-flops. They wear EVA shoes as well. And so we want them to grab ExtraTuff instead of, you know, grabbing a brand that they were wearing before.

Awesome. Thanks so much.

Thank you.

Thank you. And as our final question, we have from the line of Bruce Geller with Geller Ventures. Please proceed with your question.

Hey, good afternoon, gentlemen. Hi, Bruce. Hey, congratulations on doing a very admirable job in a difficult consumer environment here.

Thank you.

My first question relates to, are you seeing... the prospects for or any actual market share gains related to your ability to manage or to manufacture product in-house?

Yeah, I'll start with this one, Bruce.

I think we're going to continue to leverage our in-house operations. We've touched on the Dominican Republic and Puerto Rico. We are going to be able to keep our costs down. you know, better than some of our peers. And it's also making us more nimble and flexible. And so, you know, if you just take rubber boot production, for example, we will have twice the amount of volume come out of the Dominican Republic, which currently is at 10% compared to what we did in 2024 and through the date of 2025. And so that's going to materialize because a lot of our peers, you know, we have a lot of the capacity in both in-house and outsourced in the Dominican Republic. And a lot of our peers are in geographies that have higher tariffs. And so we should be able to be more competitive than our peers in that situation.

That's great. And what percentage of your overall product will be manufactured in-house, say, next year in the full calendar year of 2026?

So we're still working on that number, but I would put the number probably somewhere closer to 40, 45%. We are going to push as much as we can, and if we can hit 50%, that would be ideal. But we're making this transition. We're doing it as quickly as we can, but we're doing it very methodically to make sure that we don't have any quality issues or things like that that would turn away a customer.

That's great to hear. It seems like a real competitive advantage at this point in time. I have another question related to your overall mix of business. It seems like maybe it's been shifting a little bit more towards your own direct-to-consumer e-commerce over the past few years. Can you or do you disclose the breakdown between wholesale and direct-to-consumer, and can you discuss how that has been shifting recently and what the implications are on your overall gross margin mix going forward as that continues to move towards direct-to-consumer? Sure.

Yeah, so we don't disclose our D2C being in our branded websites.

We do have the retail segment, obviously, which we disclose. I would tell you that in that retail segment, about half of the sales, a little bit more than half of the sales are Lehigh business, and the other half being both our branded e-commerce websites and our marketplace sales where we're selling directly on marketplaces. And as we touched on in the prepared remarks, you know, Lehigh continues to grow at the mid-teens numbers. And so, with the total increase of 13.9%, we saw the branded websites fall a little short of the average there from a blended standpoint. But I think the really unique thing is the DTC breakout between brands and the differences in the percentage of sales there. When you look at a brand such as Extra Tough, it is a much higher percentage of its sales online. And part of that's driven probably by the consumer buying it and the lack of Extra Tough's presence in some big box retailers, which is getting better. But Extra Tough is by far the leader in our DDC business.

And I think I'll just add, Bruce, it's absolutely somewhere we are focused on and have been focused on, you know, over the last four or five years. But we do have to balance it, right? We do have a very big wholesale business that we have to manage with our wholesale customers and try to make sure that we can, you know, both live together there. But the reality is, is everybody has their own websites and that's where we're going to

try to drive people too and and hopefully their experience is good there and and we can continue to grow that business great thanks for the update on that and my last question relates to the balance sheet uh you guys have done a great job over the last 12 to 18 months or so with getting getting the balance sheet back into uh more comfortable shape um I believe typically you do pretty well in terms of cash generation in the second half of the year. Based on where you stand today and the guidance you've laid out, how much debt do you think you will be able to pay down in the second half of this year?

It's a really good question, Chris. The reality of it is that these tariffs have been a strain on cash flow. Ideally, the price increase will realize that and convert that. I don't think we will see the same pay down that we saw in the last half of last year, but to continue to have debt down 10%, 13% from prior year is certainly something we see to be able to do.

Terrific. Well, congrats again and best of luck in the second half.

Hey, thanks, Bruce. And we'll keep working on that debt, I promise you.

I know you will. Thank you.

Thank you. And we have reached the end of the question and answer session. Therefore, I will now turn the call back over to Jason Brooks for a closed remark.

Great. Thank you. First, I just want to thank the Rocky team here. They have really been doing an amazing job for the first half of 2025 and put us in an amazing position to finish 2025 strong. And I look forward to working with all of you to make that happen. And thank you to our shareholders and our board members. And let's finish strong in 2025, team. Thank you.

Thank you, and this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.