Rocky Brands, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third 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 here in 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 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. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocking 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'll take your questions. Overall, we are pleased with our third quarter results in light of what remains a difficult and dynamic operating environment. Sales for the quarter increased 7%. Gross margins were up 210 basis points. We delivered adjusted diluted EPS of $1.03, a 34% increase versus our Q3 last year. Our teams have done a great job at navigating higher tariffs imposed by the US on most trade partners, especially countries that count for the majority of global footwear production. We've moved quickly to diversify our sourcing base, including adding new Asian-based manufacturing partners outside of China and Vietnam, as well as leveraging our own facilities in the Dominican Republic and Puerto Rico. These actions, along with price increases and strong demand for our brands, should help mitigate the impact of the higher tariffs as they start to hit our P&L more meaningfully in the fourth quarter and next year. We are still ramping up production with our new partners which has resulted in some delayed shipments. However, we are confident that we'll start 2026 with our supply chain in a position of full capture demand. Tom will share more about our sourcing structure later in the call, but at first, I'll review the drivers of our third quarter performance by brand. Starting with Extra Tough, the brand continued its exceptional momentum delivering strong growth that significantly outpaced last year. U.S. wholesale stood out in the quarter, increasing double digits, while ExtraTough.com also posted double-digit growth compared with Q3 last year. From a product standpoint, our legacy 6-inch ankle deck boot, particularly the duck camo version, was once again the top performer and within the category of ADB Sports was the best performing collection. Camo continues to be in high demand across our men's, women's, and kids' offerings, demonstrating strong consumer performance for these designs. We were encouraged that the strong sell-through was broad-based with notable gains coming from big box sporting goods stores, traditional coastal retailers, pure play e-commerce retailers, and online marketplace. We are excited about the ExtraTuff prospects for the fourth quarter and with the launch of our cold weather collection, a Sesame Street collaboration for holiday at retail and online, plus several exciting ExtraTuff.com exclusives. Turning to Muck, coming off one of the strongest Q2 in years, The brand continued its positive trajectory in Q3, despite less favorable weather compared with a year ago period. Improved inventory positions, particularly in best-selling chore styles, combined with initial deliveries of our successful bone collector collaboration in the hunting channel, fueled double-digit growth in our U.S. wholesale business and meaningfully higher in our marketplace volumes. Also adding MUX performance and brand awareness was a highly successful feature on Good Morning America's Deals and Steals event over Labor Day weekend. Our women's business continues to be strong performance, led by the MUX2 Chicken Print series, while men's also had notable success in several regions. In terms of the channels, New product expansion fueled growth in the hardware stores, while our farm and ranch segments saw solid growth with multiple key retailers. As we anticipated, Durango sales were down year over year in Q3, as some key accounts pulled forward orders into Q2 ahead of the planned price increase we took to help offset higher tariffs. This was particularly offset by the consistent and steady growth Durango has experienced throughout this year in our farm and ranch accounts. Product highlights include Durango Shiloh Series, which continues to gain traction with consumers thanks to the great styling, great quality, and attractive price points. Our Legacy Rebel Series continue to sell through well at retail, and our On Trends Women Fashion Collection continues have proven extremely popular, leading into increased placement for these series. Georgia Boot delivered solid growth in the quarter, led by double-digit gains with major accounts and strong results in our field account business. This strength was driven by our largest farm and ranch accounts and e-commerce-only partners, supporting by successful new product launches and legacy bestsellers. New product launches were led by our Carbon Flex Wedge, a technology wedge with improved flexibility that booked so successfully we are launching a version in November featuring the BOA Lace Enclosure System. Field business followed similar patterns with new products, driving increases across most regions, compensation for mixed retail conditions in some areas. Rocky work, outdoor and western in total, was up versus last year, led by gains in the work and outdoor categories. Work was driven by new or expanding distribution across the country, including a new work program with a large farm and ranch retailer across the Mountain and Northwest region, led by several styles with the BOA lacing enclosure system. Rocky work also continued to sell well in key national safety footwear distributors plus multiple digital platforms. In outdoor, it was improved distribution nationwide with new and larger programs at key farm and ranch retailers and sporting good partners that fueled the year-over-year improvement. Within these channels, our new Wildcat series of hunting outdoor boots delivered great value at core price points, while premium Bearclaw outdoor boots reinforced Rocky's leadership and performance footwear. While Rocky Western sales declined year over year, our heightened focus on work Western products, particularly our Iron Skull Safety Toe Western Pull-On, is driving gains with several regional and national brick and mortars and online. Rocky Commercial Military and Duty posted its second consecutive quarter of improved results. Commercial military sales were up versus last year and exceeded plan as our strategic inventory management enabled us to maintain higher fill rates throughout the quarter. Duty also outperformed expectations driven by strong gains with our largest U.S. Postal Service customer, and continued double-digit growth in our FireBoot program. In retail, our Lehigh B2B business grew high single digits versus Q3 last year. We continue making operational improvements to our custom fit website and launched our new partnership with Bolle Eyewear for prescription safety eyewear through our managed PPE program. Customer spending remained consistent with good subsidy utilization, and new customer acquisition remained strong, more than offsetting impacts from supply chain and tariff uncertainty. Looking ahead, our view in the remainder of the year is based on the momentum we are currently experiencing with our brands, especially Extra Tough. Balanced with the Operate level of cautious, about the broader consumer environment and the anticipated impact on the fourth quarter gross margins from the higher tariffs. While there is still uncertainty with respect to the outcome of certain trade negotiations, we feel good about the changes we've made to our supply chain, in particular, the increased flexibility we have to shift sourcing and production if needed. And therefore, we are anticipating that the headwinds from higher tariffs implemented this year will abate midway through 2026. With that, I will turn the call over to Tom. Tom?

Thank you, Jason. We are pleased with the improvement in results we delivered year over year, especially given the changes in our sourcing structure. we've undertaken recently to help mitigate the impact of higher tariffs combined with what continues to be a choppy consumer environment. For the third quarter, reported net sales increased 7% to $122.5 million. By segment, wholesale net sales increased 6.1% to $89.1 million. Retail net sales increased 10.3% to $29.5 million, and contract manufacturing net sales increased 4.1% to $3.9 million. Turning to gross profit. For the third quarter, gross profit was $49.3 million, or 40.2% of net sales, compared to $43.6 million, or 38.1% of net sales in the same period last year. The 210 basis point improvement in gross margin was driven by higher wholesale and retail margins, which were fueled by brand mix and select price increases and higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. These gains were partially offset by 160 basis points and pressure from higher tariffs as product brought into the U.S. post-liberation day in April has become flowing for P&L. Reported gross margins by segment were as follows. Wholesale, up 200 basis points to 39.5%. Retail, up 320 basis points to 46.8%. And contract manufacturing margins were 6.9%. Operating expenses were $37.6 million, or 30.6% of net sales, compared to $33.6 million, or 29.3% of net sales last year. Excluding $700,000 of acquisition-related amortization in both periods, adjusted operating expenses were $36.8 million and $32.9 million for the third quarter of 2025 and 2024, respectively. As a percentage of net sales, adjusted operating expenses were 30.1% in the third quarter of 2025, compared with 28.7% in the year-ago period. The increase in operating expenses was driven primarily by higher outbound logistics costs and selling costs associated with the increase in our direct-to-consumer business, as well as an increase in our marketing investments compared with the year-ago period. Income from operations increased 15.5% to $11.7 million, or 9.6% of net sales, compared to $10.1 million, or 8.0 sales last year. On an adjusted basis, income from operations was $12.4 million, or 10.1% of net sales, compared to $10.8 million, or 9.4% of net sales a year ago. For the third quarter of this year, interest expense was $2.6 million, compared with $3.3 million last year. The decrease in interest expense was driven by lower debt levels, as well as lower interest rates. On a GAAP basis, net income was $7.2 million, or $0.96 per diluted share, compared to net income of $5.3 million, or $0.70 per diluted share in the third quarter of 2024. Adjusted net income was $7.8 million, or $1.03 per diluted share, compared with $5.8 million, or $0.77 per diluted share a year ago. Turning to our balance sheet, At the end of the third quarter, cash and cash equivalents were $3.3 million, and our total debt, net of unamortized debt issuance costs, totaled $139 million, a decrease of 7.5% since September 30th of last year. Inventories at the end of the third quarter were $193.6 million, up $21.8 million, or 12.7%, compared to $171.8 million a year ago. Of the approximate $22 million increase in inventories year over year, about $17 million, or nearly 80%, is attributable to higher tariffs, a small increase in pairs on hand, and the remainder in raw materials as we are now producing more footwear in-house. Of the approximate $17 million from incremental tariffs on our balance sheet, roughly $10 million will flow through our P&L in the fourth quarter, with the rest hitting in the first half of 2026. As we've touched on, we have taken actions this year to mitigate the impact of higher tariffs that started to pressure margins in Q3 and will intensify for the next few quarters, offset by price increases. We also made significant changes to our sourcing model. These include shifting more production to our own facilities in the Dominican Republic and Puerto Rico, and diversifying the geographic footprint of our third-party manufacturing to reduce our exposure in China. For 2026, we project that we'll manufacture approximately 50% of our inventory needs in-house, up from approximately 30% in 2025. Approximately 20% will be produced in China. However, only half of that, or 10% of the total, will be imported into the United States. The other 30% will be split between partners in Vietnam, Cambodia, Dominican Republic, and India. We anticipate our actions will allow us to return gross margins to the recent run rate in the high 30s, low 40s percent range in the second half of next year as we've moved through the incremental tariffs currently on the balance sheet. With respect to our outlook, based on the third quarter performance and current view of the remainder of this year, we are reiterating our prior guidance for 2025. We still expect revenue to increase between 4% to 5% compared to 2024 levels, with full-year gross margins down approximately 70 basis points to between 30% and 39%, consistent with our previous outlook. SG&A is still expected to be up in dollars from an increase in our marketing spend to support growth. especially during the key holiday season, and higher logistics costs from the projected increase in retail sales with modest expense leverage versus last year on higher sales. Finally, we still expect 2025 EPS to increase approximately 10% over last year's $2.54.

That concludes the prepared remarks. Operator, we are now ready for questions.

Thank you. We'll 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 your question 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 poll for questions. Thank you. Our first question is from Janine Stichter with VTIG.

Hi. Good afternoon. I just wanted to start out with the consumer. You continue to mention a challenging environment, a dynamic environment. I'm just wondering if you could offer your thoughts on how you're thinking about the consumer now maybe versus three months ago and how that's embedded into your forecast. Thank you.

Yeah. Thanks, Janine. Great question. This has been... Probably one of the most dynamic years in my career with trying to understand the consumer. We get reports back from many of our retail partners and our products are still selling well. But I think there is still some cautious people being cautious about when and where they're going to spend those dollars and what they're going to spend those dollars on. So I think we are just trying to navigate it the best we can, try to provide the best inventory positions we can without being too crazy to support our retail partners and our own websites. But I think there's just – it's just a little unsettling out there, and if we could have a consistent – Consumer report, I think it would be better, but it just kind of goes up and down right now. So we're just being a little bit cautious.

Totally fair. All right. And then a couple more for me. You mentioned some delayed sales due to supply chain. Is there any way to quantify how much that was? And then as you think about tariffs and offsetting, it sounds like all of it from a gross margin rate perspective in the back half of next year. Maybe just walk us through what that embeds. Is there any additional pricing that you feel like you need to take to get there, or is that all just diversification of sourcing?

Yeah, I'll take this one, Janine. You know, I think, look, at the end of every quarter, we always have a little bit of missing inventory and a little bit we left on the table as we're chasing certain styles. This quarter, with all the sourcing changes, particularly with moving products to India, Cambodia, and Vietnam, we saw... you know, anywhere from a three-week to 30-day delay getting those products. And so that number was a little bit larger than usual, probably a few million dollars being transparent. And then I think as we look to next year, I think your second part of the question from a margin perspective, diversifying is certainly going to help, but I think the biggest driver in helping margins next year is going to be us bringing more and more product in-house. And so that'll help leverage our margins as we go into 2026.

Very helpful. Thanks very much. Thank you. Our next question is from Jonathan Komp with Baird.

Yeah. Hi. Good afternoon. Could I just ask, when you look at the third quarter results, how things played out generally versus what you expected, since I know you don't guide quarterly necessarily? When you look at, you know, the indicators you watch for your business, could you maybe remind us, you know, what visibility you have on sell-throughs in the marketplace, you know, either your or your partner's business, and just, you know, what you've observed more recently in terms of some of the trends you've seen?

Yeah, I can start here, and Jason can certainly weigh in. I mean, we have visibility into some of our larger national accounts. And there's been nothing that's been real concerning from a sell through a retail perspective. I think Jason was touching on a little bit of just retailer behavior maybe earlier. But to that point, our marketplace business continues to be very strong compared to last year, up strong double digits. Our e-commerce business, which I kind of use as our closest pulse, It was a little sluggish in the end of July and early August, transitioning over to our new platform. But we saw that recover nicely at the end of August. And then September was the strongest month of the quarter from an e-commerce perspective. So we're not seeing anything too troubling out there from a consumer standpoint.

John, I would just add, I think at the beginning of the question, you asked about our expectations about how Q3 came in and And I think we are pretty pleased with where we're at. I obviously would have loved to hit that top line number, but I think because of the transitions of the factories and what we had to do there, it made things a little bit more complicated for us. But I think we're really pleased with what Q3 was. And, you know, we're looking forward to Q4 and think it can be a good quarter as well, but just want to be cautious about it. Like I said, it seems to be an ever-ending story. One week it's really positive in the consumer's mind, and then the next week it seems to change. So we're just trying to take it kind of one week at a time and navigate that.

Understood. And maybe as a follow-up, are there any pockets of weakness that you're seeing that you're paying close attention to across your business? And when we think about the fourth quarter, you're reiterating the guidance for the year. It implies a wider range for the fourth quarter by nature. So any color on what might cause you to be closer to the high end or the low end as you think about the implied fourth quarter?

Yeah, so from a branding standpoint, the only brand that is kind of funky right now is Durango. But as I said in the script, we had quite a few key accounts pull some business ahead there before the price increase. So our fill-in business wasn't quite as good in Q3. So I would say Western, Durango is maybe the only brand that we're just, you know, maybe watching a little bit closer. Muck and Extra Tough, like I said, are doing really well. Was really pleased to see Rocky in a better place in Q3. And then also Georgia really had a nice quarter. So I think that's kind of where we're at. And then, obviously, Lehigh is still doing very well for us.

Yeah, just to touch on the Durango piece a little bit, you know, I think – In the middle of the summer and dragging into a little bit of fall here, we've seen a little bit of softness in kind of our independent Hispanic retail accounts. And so we've been keeping an eye on that. That appears to have to have recovered a little bit here in September. So we'll continue to monitor that and then to the sourcing comment and the missing inventory from a minute ago. Durango was, was detrimented the most here as the vast majority of that product historically was made in China. And so that's where you've seen a lot of the sourcing changes, particularly to Cambodia and to India. And so there was a couple million dollars there that just didn't get here as we had originally hoped.

Great.

One follow-up then, if I could. Tom, on the implied profit guidance in the fourth quarter. I know you still are expecting earnings growth around 10% for the year. After a good third quarter, that implies a pretty steep decline in the fourth quarter and a pretty steep fall off in gross margins. So I guess, are you assuming that pricing doesn't offset the tariff impact as it looks like it has started to, or just any Any further color on what you're embedding there?

Yeah, so the pricing certainly will be in effect. And every month that's gone by since the price increase, we've realized more and more of that. And so we'll continue to recognize that. The reason the margins will be more depressed in the fourth quarter is, one, because of the $10 million that I noted before. But if you think about how the timing of all this played out when When the tariffs came out, they were initially really, you know, higher, particularly out of China. And so, as inventory was still flowing to us, we were paying kind of larger than higher reciprocal tariffs than we're currently paying today. And we weren't able to make all those sourcing changes that we've been able to execute on. Those sourcing changes are getting better every day, but the results of those changes will lag into the P&L. In my opinion, Q4 of 25 will be the worst quarter from a tariff perspective, and we'll only start improving from there. Certainly, we'll be a headwind in Q1 and in Q2 of 2026.

Okay, great.

And then last one for me, just bigger picture as we look forward into 2026. Any thoughts that you have just you know, knowing your business and your brands, whether or not, you know, stimulus could be something you can take advantage of or that might benefit, you know, any thoughts there? And then when you think of the momentum for Extra Tough, could you maybe just frame up, you know, what you're planning for that business and any updated thoughts on what the, you know, the potential might be as we look forward?

John, can you elaborate more on the stimulus?

I'm not sure what the question is.

Yeah, I wonder if early 2026 stimulus to the consumer from the tax bill is something you're looking forward to as a potential driver or not for the consumer or for businesses on the tax side. you know, if that's something that you've considered for your business.

Gotcha. Yeah, I'm sorry. Yeah, I think any time the consumer is going to get any kind of stimulus, I think we all saw this during COVID. And then obviously, this is a very different, you know, tax bill and stuff. But I think any time our consumer gets a little kick, they are willing to spend some more. So, I think we will be prepared if it happens. We'll have the inventory, and we'll be able to take advantage of it. But it's not something that is a huge focus of ours, but we'll be prepared if it does come, for sure.

Yeah, and then as we look to 2026, John, we can look at our order book and our Our bookings are up year over year, which is positive. It's up in dollars and in pairs, which shows you it's not just the price increase. If you look at our spring 2026 product, it looks exceptionally well. Kudos to our product development team for everything they've done there. As it relates to the extra tough comment, it feels like extra tough is starting to accelerate a little bit. It's been running up low-mid double digits throughout the year, and it's accelerated a little bit in the third quarter here. We're very, very interested to see how this new cold weather line that we've really invested in, how that plays out as inventory is starting to arrive every day now here at the warehouse. So we'll see how that plays out in 2026 as well.

And we're continuing to see that product come more inland, John. So obviously the coastlines, the fishing, the boating was really where that product was killing it. And we're starting to see that come a little bit more inland. Not real fast, but we're definitely seeing it happen. So we're pretty excited about that. I would tell you that 2026 is going to be a fun ride with extra time.

That's great. I appreciate taking all the questions here. Thank you, John. Thanks, John. Thank you.

There are no further questions at this time. I'd like to hand the floor back over to Jason Brooks for any closing comments.

Great. Thank you. I'd like to thank the entire Rocky team for all their efforts this year. It has been a real challenge, and particularly in our sourcing department, and that team has just done an amazing job to try to navigate what we've had to do. So thank you, Rocky team, and thank you to our investors, and thank you to the board. We look forward to finishing 2025 and kicking some butt in 2026.

Thank you. This concludes today's conference. We thank you again for your participation. You may disconnect your lines at this time.