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Rocky Brands Inc (RCKY) Q2 2019 Earnings Call Transcript

By Motley Fool Transcribers - Jul 24, 2019 at 8:24PM

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RCKY earnings call for the period ending June 30, 2019.

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Rocky Brands Inc (RCKY 4.94%)
Q2 2019 Earnings Call
Jul 24, 2019, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter Fiscal 2019 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 the time for you to queue up for questions.[Operator Instructions] I'd like to remind everyone that this conference call is being recorded.

I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Brendon Frey of ICR.

Brendon Frey -- Investor Relations 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 statement. 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 31, 2018.

And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Jason S. Brooks -- President and Chief Executive Officer

Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. As you saw from our earnings release issued earlier today, we delivered another quarter of solid results. Our performance was highlighted by growth in each of our 3 segments: wholesale, retail and military, and a 20% increase in earnings per share versus a year ago.

By staying focused on executing our key strategic initiatives, we achieved a meaningful improvement in second quarter net sales led by a strong double digit gain in our retail division and increased overall gross margins by 100 basis points. I know we've outlined our strategy initiatives on previous earnings calls, but they bear repeating given their importance to our success.

They are exciting our consumers with great new products, increasing brand awareness and stimulate demand through improved marketing with an emphasis on digital, providing excellent retail support and expand distribution with our key brick-and-mortar and e-tail partners, accelerating expansion of our Lehigh CustomFit program through investments in the technology and personnel and utilizing the internal production capacity to capitalize on the growing number of commercial military opportunities and improve the efficiencies of our factories.

I'll review some of the highlights for each of our segments and then Tom will go through the financials in more details, after which we will be happy to answer any questions. Starting with wholesale, our largest segment, sales increased 2.1%. I don't believe this growth rate is an indication of the underlying strength of our wholesale division. As a result of our leading brands in Work Western and outdoor were solidly positive as was our domestic commercial military business.

This was partially offset by declines in the international commercial military sales as we did not anniversary a large order from a year ago period. Looking at the performance of each brand, beginning with Georgia. In addition to a solid sell-through of core styles, during Q2, we successfully launched the new revamp Romeo collection with key retail partners in the Northwest, making great use of the regional icon Sasquatch to help tell the product's new fit and comfort story. The initial run sold out quickly, and we are continuing to chase the inventory.

After landing at retail in May, Georgia's new Eagle One collection of work boots has performed very well, particularly the Chelsea Height silhouette, which has led strong reorders. Moving to Durango. Sales were up high single digits compared with a year ago, keyed by gains at several major retailers including Boot Barn, Tractor Supply and Cavender's. Fueling the brand's success at Boot Barn was the launch of an exclusive new flag boot designed to celebrate the 10th anniversary of Durango's top-selling style. The launch enjoyed great marketing support including a joint Durango Boot Barn sweepstakes that was heavily promoted on social media.

Meanwhile, Tractor Supply introduced new kids western styles for both boys and girls and Cavender's rolled out the Rebel Pro, an exciting new line that they are promoting in a new advertising campaign aimed at driving brand and product awareness. Looking at the performance of Rocky Brand, there were a number of bright spots in the quarter. First, our outdoor business was able to maintain positive year-over-year growth even as we have moved into that warmer spring summers selling season and started to face tougher comparison.

This was driven primarily by our penetration in the rubber boot market and distribution wins for the product at Bass Pro Shops, Field & Streams and Dunham Sports. Sales of Rocky Work were also up nicely, thanks in part to the initial shipment of some special makeup product for a new customer. With respect of our commercial military business, we had a good quarter here in the U.S. as all the military exchanges experienced positive gains led by AAFES, the Army and Air Force Exchange Services. We also enjoyed a very positive start to our relationship with the Navy and Coast Guard exchanges, which are proving to be excellent selling environments for the Rocky Brand.

However, the biggest highlight of the quarter was the certification of the United States Marine Corps tropical weather boot, the first Rocky Brand boot certified by the USMC. This opened several channels for the Rocky sales team which they are working quickly to capitalize on. Now to retail, which had a very solid quarter. Total sales increased 20% as Lehigh continues to demonstrate strong, sustainable growth through CustomFit, our differentiated safety shoe business model. Sales were driven by continued improvements in account retention as well as new operational process introduced to enhance our on-site iFit ordering events.

At the same time, new account acquisition continues at a strong rate outpacing last year. During Q2, we brought online 2 large national accounts, Frito-Lay and Coca-Cola Southwest bottling, both of which contributed to our growth in the second quarter. Our partnership with Aetrex also continues to strengthen.

We've seen steady growth in our product sales via the use of specialized foot scanning equipment. This technology capability is enhancing our business model and augmenting our manage safety footwear programs with a health and wellness component. The additional offering is being well received by our customers as they are increased -- as they've increased their focus on developing a healthy and active workforce. Turning to e-commerce. We continue to see strong growth as we drive more traffic to our branded websites with new and exciting marketing programs. Additionally, we have recently been adding web-exclusive products to our lines giving consumers a reason to visit our websites more often.

We are also having good success expanding our business on several marketplaces led by Amazon. We expect this trend to accelerate as our warehouse has recently granted seller fulfilled Prime status, allowing us to make of our entire catalog Prime eligible, capturing those consumers that only shop Prime-eligible products on Amazon. Finally, military segment sales were up high single digits in the second quarter as we continued to lap the industry headwinds that affected the business beginning in early 2018. We also benefited from some accelerated shipments that are pulling sales into the first half of the year from the second half due to the decision by the Department of Defense to end one of their current contracts early.

In terms of prospects for this business, as we announced in May, we received a purchase agreement from the Defense Logistic Agency to produce general-purpose safety boots for the United States Navy. Under the terms of the purchase agreement, the Defense Logistic Agency has the right to purchase approximately 27 million of these boots through May 2022. We expect the first shipment to go out late this year and add approximately 2 million in incremental sales to our military segment in 2019.

In closing, we are very pleased with our overall performance in the second quarter. Looking ahead, we are excited to begin delivering our fall '19 product in Q3 and start booking our spring '20 line, growing our existing relationships through new product introductions. Great service is our main focus over the remainder of the year. With an emphasis on in-store presentation, we are well positioned to add the sell-through to ensure success for our Rocky and our retail partners.

I will now turn the call over to Tom. Tom?

Thomas D. Robertson -- Executive Vice President and Chief Financial Officer

Thanks, Jason. Net sales for the second quarter were $62 million compared to $58.2 million in the corresponding period a year ago, an increase of 6.4%. By segment, wholesale sales for the second quarter increased 2.1% to $40.6 million, retail sales increased 20.2% to $14.1 million and military sales increased 8.4% to $7.2 million.

Gross profit in the second quarter increased to $21.4 million or 34.6% of sales compared to $19.5 million or 33.6% of sales in the same period last year. The 100 basis point increase was driven by a higher percentage of retail sales, which carry higher gross margins than wholesale and military sales combined with higher wholesale and military margins. Gross margins by segment were as follows: Wholesale, 33%; retail, 43.3%; and military, 26.8%. Selling, general and administrative expenses increased to $17.5 million or 28.2% of sales for the second quarter of 2019 compared to $16.2 million or 27.8% in the period a year ago.

The $1.3 million increase in SG&A expense was driven primarily by increased investments in our marketing and personnel to support future growth as well as higher variable expenses associated with the increase in retail sales. Income from operations was $3.9 million or 6.4% of sales compared to income from operations of $3.4 million or 5.8% in the prior period. Net income increased to $3.2 million or $0.42 per diluted share compared to net income of $26 million or $0.35 per diluted share. Turning to the balance sheet.

As of June 30, 2019, we had cash and cash equivalents of $15.7 million, an increase of 88.7%. We had no funded debt at the end of both periods. And inventory at the end of Q2 2019 was $77.5 million, up 6.6% compared to $72.6 million on the same date a year ago. Regarding our outlook for 2019, based on our first half performance, we now expect revenues to increase to the mid-single-digit range over 2018. We're looking at the second half -- when looking at the second half by segment, we anticipate wholesale revenue between low and mid-single digits for both third and fourth quarters while retail growth in Q3 will once again be up low double digits before moderating in Q4 as the division starts to lap tougher comparison.

In terms of our military segment, sales will be down in Q3 due to the accelerated shipments Jason mentioned earlier, which pulled sales into the second quarter and then returning to growth as we begin shipping product from our recent contract win. In terms of expenses, a couple of things to note. As we previously discussed, we're reinvesting a portion of our cash position in the business primarily in additional marketing programs to support our portfolio of authentic brands and unique business-to-business direct model. The majority of the spend will occur in the second half of the year, especially in the fourth quarter.

Secondly, the continued growth in our retail sales will drive overall SG&A dollars up due to the higher variable expenses associated with our direct channels. That said, this dynamic will have a positive impact on overall gross margins as the segment carries higher gross margins in our wholesale and military business. That concludes our prepared remarks.

Operator, we are now ready for questions.

Questions and Answers:


[Operator Instructions] And we will take our first question today from Jonathan Komp with Baird.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Yeah, hi. Thanks, guys. Wanted to first ask maybe when you look at the wholesale business, it sounded like you had a mix, stronger performance domestically versus international from the shipment differences year-over-year. But domestically, what are you seeing in terms of growth rates across the key end markets, and any color on how some of your key work in western partners are holding up, any more color there?

Jason S. Brooks -- President and Chief Executive Officer

Sure. Jon, thanks for being on. I think, for us, we are feeling pretty confident in our core businesses, our core, Work Western. The outdoor business is holding on really well where we're seeing some nice things happening there for the fall in Q3 and Q4. And then Work and Western are just pretty steady and -- but still doing well. So we're pretty comfortable with where we're at there and we think those look pretty good for the rest of this year. We're still hearing reasonably good stuff in the marketplace from our competition. The work boot business is still doing well. Western boots seem to be regionally doing well and hunting boots, we really won't see a big indication on that here for about another month or so.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay. Great. Then -- and maybe on Durango. I think last quarter it was up just a little bit and now, it's up high single digits in the second quarter. Can you just remind us kind of -- I know you had some constraints in the first quarter, like what do you think kind of the normalized growth rate for that brand is?

Jason S. Brooks -- President and Chief Executive Officer

So I think what happened for us was really a timing issue when you look at Q1 and Q2. So a blended rate there might be a good indicator of what's going on with Durango. We anticipated some things to happen in Q1 and they got kind of pushed into Q2.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay. Great. And then the retail business, helpful color on how you're thinking about the second half. Is there a potential that you continue to get some more wins that as you cycle higher growth for the Lehigh business last year that you keep the momentum going?

Jason S. Brooks -- President and Chief Executive Officer

So I think we're really excited about what's happening with Lehigh. We are really pretty comfortable with Q3 and the momentum that we have. Q4 is going to just be a little tougher one for us. We had some pretty good wins last year and so that one to anniversary I think is going to be a little more difficult, but we're working hard right now to find those wins and make those happen and hopefully be able to pull off the mid- to high double digits in Lehigh.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay. Great. And then just the kind of drilling down to the earnings in the back half. I know the first half had a pretty good flow-through close to 7% top line growth and about double that on the EPS growth. How are you thinking about that relationship in the second half just given some of the commentary, Tom, that you provided around some of the reinvestment opportunities in the brands?

Thomas D. Robertson -- Executive Vice President and Chief Financial Officer

Yes. So I think that we kind of gave fairly clear guidance from a top line perspective. I think our gross margins will hold pretty steady. One of the things to keep in mind on the retail side of -- or by category, it should hold pretty steady. One of the things to keep in mind on the retail segment is that as Lehigh continues to grow, it becomes a bigger proportion of our total retail bucket of sales. And our Lehigh CustomFit business carries a lower gross margin than our e-commerce business, and so we might see a little bit of decline in our retail business. And our military margins, we're very happy with where the margins were at -- were in Q2.

I would expect that those would probably come down a little bit for the last half of the year, particularly because of the production -- for sales being down in military in the third quarter. But overall, I think the margins, because we're expecting retail to -- growth to outpace our wholesale segment. Overall, I think the margins will creep up. From the SG&A standpoint, we talked about a lot of the investments. If you think about -- our peak seasons are Q3 and Q4, so a lot of our advertising and marketing investments, they happen in those quarters.

So we're going to see an uptick in our SG&A spend there as well as particularly in the fourth quarter as we are on the holiday season, we're doing a lot more drop shipments and a lot more e-commerce business. And so the variable costs associated with those shipping 1 pair versus shipping a 6-pack, it becomes a much higher percentage of sales. So I think we're going to see an increase in SG&A both in dollars and as a percent of sales for the remainder of the year, but particularly in the fourth quarter.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay. Very helpful. And then just last one. The balance sheet, the cash balance is up quite a bit comparing to last year. Any updated thoughts -- any thoughts on the plans there in terms of the cash balance and any uses you might have?

Thomas D. Robertson -- Executive Vice President and Chief Financial Officer

So we don't disclose a whole lot on our future plans with our cash. I think you did probably see our increase in our dividend. We're always weighing our options with share repurchase. And if we see some opportunities to buy the stock that we'll perceive to be undervalued, we would. And then also we're going to be making those investments in our marketing, and we're also making some more investments and we're using some cash for our distribution and for our manufacturing facility, specifically in the Dominican Republic as we continue to try to eliminate some of our risk from sourcing from China and drive more payers and more volume efficiencies to the Dominican Republic. So we'll see some investments there as well.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay. Got it. Thanks for -- thanks for taking all of my questions.

Thomas D. Robertson -- Executive Vice President and Chief Financial Officer

Thank you, John.


[Operator Instructions] And that will conclude today's question-and-answer session. I'd now like to turn the conference over to Mr. Brooks for any additional or closing remarks.

Jason S. Brooks -- President and Chief Executive Officer

Thank you very much, operator. Just want to say thanks to the Rocky team for a great quarter, and look forward to finishing out a great year. Thank you very much.


[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Brendon Frey -- Investor Relations of ICR

Jason S. Brooks -- President and Chief Executive Officer

Thomas D. Robertson -- Executive Vice President and Chief Financial Officer

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

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