Image source: The Motley Fool.
Rocky Brands Inc (RCKY -3.21%)
Q3 2020 Earnings Call
Oct 27, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands' Third Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I would now turn the conference over to Brendon Frey of ICR. Please go ahead.
Brendon Frey -- Investor Relations
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 31, 2019. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?
Jason S. Brooks -- President, Chief Executive Officer
Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. We hope everyone on the call and listening via the webcast is staying safe and healthy. As you saw from our earnings release, it was an outstanding quarter from both a top and bottom line perspective. Our results were fueled by the resurgence of our wholesale business, combined with the continued strength of our direct-to-consumer channels. Following a challenging second quarter, when many of our retail partner stores were either closed or experiencing reduced traffic levels due to COVID-19 restrictions. Wholesale trends bounced back nicely in Q3.
Like we discussed on our last earnings call, sell-through started to pick up in June as the number of new cases started to slow and stores reopened. This momentum accelerated as we moved into the third quarter, driven by strong full price selling. Tom will go through the financials in more detail, but here are just a few of the highlights. Net sales increased 15.8% to $77.8 million. Gross margin improved 120 basis points, and earnings per share grew 38.7% to $1.04. Our recent performance amid the ongoing health pandemic underscores the strong consumer connections we forged and the desirability of our product lines. The importance of our brands are our wholesale partners and the work we've done, creating a more nimble and efficient organization that has been able to quickly adapt to the changing market conditions.
Looking at our third quarter results in more details, starting with our wholesale segment, with all of our wholesale doors open and many resuming normalized hours and operations and the U.S. consumer in a much stronger position, the selling environment at the start of third quarter was dramatically better than just three months earlier. With many of our retailers reducing inventory levels and canceling receipts early in the pandemic, there was definitely pent-up demand for product as consumers started to return to stores in greater numbers. This is reflected in our strong sell in results as wholesale revenue increased 19.3% for the quarter. More importantly, sell-through was also strong compared with a year ago period for the data we received from several of our large retailers.
In terms of category and brand performance, Work, our largest category, was up 20%, led by Georgia Boot as the brand's new collections performed very well at key retailers like Tractor Supply, Boot Barn, Coastal Farm & Ranch, along with many of our smaller independent accounts. We've also seen interest spike in several of Georgia's core items such as the Romeo and the Giant, driven by more casual work from home policies that are still in effect in many parts of the country. Our Western category experienced a dramatic turnaround from the second quarter, increasing 27% year-over-year. As consumer shopping in stores and online responded very favorably to our Durango brand's new series like the Rebel Pro and the Maverick. Kids' product has also been a huge hit recently as have our U.S.A. and Texas flag boots.
The Rocky brand had another solid quarter. Our outdoor business has held up well during this pandemic as travel restrictions have kept people closer to home and social distancing requirements have benefited outdoor activities. Sales were also helped by several compelling new products introduced this year, particularly with our Rubber Boot category, which have resonated strongly with our core consumer. Rocky Western experienced strength across its entire customer base, thanks to key product introductions like our new Legacy 32 Boot that brings a unique look and improved level of fit and comfort to the western market and expanded programs with many of our major independent accounts.
Finally, Rocky Work grew at its fastest pace in some time as it continued to supply essential workers that have remained on the job throughout the pandemic with safety footwear. With respect to Rocky Commercial Military division, the business posted a substantial year-over-year increase, thanks to, in large part, to our work with Atlantic Diving Supply or ADS. On supplying military footwear forces of several bases around the world with one of our insulated waterproof S2V boots. This great partnership also yielded a large order with the U.S. Marine Corps for our popular tropic weather boot. Turning to our retail segment. Strong growth in our e-commerce channel, which consists of both our branded websites and online marketplaces fueled another double-digit gain in the quarter. Total web sales were up 50% with Georgia, Rocky and Durango, all increasing strong double digits. Even as consumers resume shopping at brick-and-mortar retail in greater numbers, we continue to see increased engagement online with both existing and new customers.
The work we've done, enhancing the functionality of our branded desktop and mobile sites and expanding our direct-to-consumer efforts on marketplaces, particularly Amazon, where you will recall, we gained seller fulfilled Prime status last year, has proved us the opportunity to capitalize on this change in buying behavior. Meanwhile, our Lehigh Safety business remained active signing up new accounts, which will provide a nice tailwind, 2021 and beyond. In terms of current business, trends have improved since the second quarter when many Lehigh customers were operating with reduced workforces in order to maintain social distancing. Many companies have resumed more normalized operations and have allowed us back on-site to execute our iFit event.
We are also deploying new digital tactics to drive demand when our teams aren't on-site such as enhanced contact techniques and a virtual fitting program that is currently in beta testing and expected to roll out before the end of the year. Lastly, in terms of our manufacturing facilities, both Puerto Rico and the Dominican Republic are running at 100%. We've recently had to adjust productivity to keep up with demand for some key styles and compensate for some of our suppliers who have been shifting constrained due to the COVID-related restrictions. This ability to dial up and dial down our production schedules in response to the market, volatility and speed to market, underscore the benefits of our vertically integrated manufacturing structure, which we believe is a key competitive advantage. I am very pleased with how our organization has performed under the circumstances.
We've emerged from a challenging second quarter and quickly capitalized on the wholesale opportunities created by the improving store environment while continuing to deliver great service to consumers who are direct-to-consumer channel. Our teams are doing a great job executing our growth strategies, while continuing to provide and prioritize the health and safety of our employees, our consumers and the communities we operate in. While it is still unclear what impact COVID-19 will have on our industry and the overall economy over the near and long term, we are feeling better about our outlook for the remainder of this year based on our recent performance and current momentum.
We do expect trends to moderate from third quarter levels as the pent-up demand, we experienced early in the store reopening process, continues to fade. That said, our brands and products remain in high demand with consumers, which should drive solid gains in both our wholesale and retail segments during the fourth quarter. Looking beyond this year, I am confident that the combination of our people, business model and balance sheet has Rocky well positioned to emerge from this period of uncertainty poised for sustained success.
I will now turn the call over to Tom to review the financials in more detail. Tom?
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Thanks, Jason. We are pleased with our third quarter performance, which was highlighted by most -- all key metrics coming in well above of last year and ahead of our expectations. Net sales for the third quarter increased 15.8% to $77.8 million compared with $67.2 million a year ago. By segment, wholesale sales increased 19.3% to $56.3 million, retail sales increased 11.4% to $16.1 million and military sales were $5.3 million compared to $5.4 million last year. Gross profit in the third quarter was $29.8 million, or 38.4% of sales compared to $25 million or 37.2% of sales for the same period last year.
The 120 basis point increase in gross margin was primarily attributed to higher wholesale margins, which were driven by increased full price selling and less discounting, along with higher retail margins. Gross margins by segment were as follows: wholesale, 37.1%; retail, 46.7%; and military, 26.6%. Selling, general and administrative expenses were $20.2 million or 25.9% of net sales compared to $18 million or 26.8% of net sales last year. We were able to leverage operating expenses by 90 basis points on higher sales despite higher variable expenses from the increase in sales, thanks to steps we've taken to create a leaner and more efficient operating structure. Income from operations increased 38.2% to $9.7 million or 12.4% of net sales compared to to $7 million or 10.4% of net sales in a year ago period, driven by healthy gross margin expansion and expense leverage.
Net income for the quarter was $7.6 million or $1.04 per diluted share compared to net income of $5.6 million or $0.75 per diluted share in the year ago period. Turning to our balance sheet, which at the end of the quarter, continued to be in a very strong position. Cash and cash equivalents at September 30, 2020, totaled $19.9 million compared to cash and cash equivalents of $6.4 million at the end of Q3 2019, an increase of 210%. During the quarter, we did resume our share repurchase activity, buying back approximately 41,000 shares. We ended Q3 this year with no debt and $71 million in a variable borrowing capacity on our credit facility. Inventories at September 30 were $80.7 million, down 2.7% and from $82.9 million at the end of the third quarter last year. Our inventory is in very good shape, with the majority being core product that is in line from year-to-year and as Jason said, we've had to adjust our manufacturing to build up stock on some key and demand products.
While we are not reinstating our outlook we provided at the start of 2020, visibility into near-term trends have continued to improve. This is a volatile environment, and things are changing quickly, assuming there isn't another wide-scale lock down, we do expect our business to be up in the fourth quarter led by continued resurgence in our wholesale business. However, the rate of growth on a year-over-year basis will be below Q3 as we won't benefit from the initial pent-up demand we experienced in the start of the third quarter when stores were just starting to reopen.
We are looking forward to a solid finish to this year and moving into 2021 with good momentum. That concludes our prepared remarks. Operator, we are now ready for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Jonathan Komp with Baird. Please go ahead.
Steve -- Baird -- Analyst
Yeah, hi, thanks. This is Steve [Phonetic] on for John. Our first question is really just around inventory. I mean it looks pretty clean. So I guess just trying to dig a little bit deeper there on how you feel about that headed into holiday here and really how clean the channels are? I mean, I know you said sell-throughs have been good. So just trying to get a sense of some of those moving parts and how you feel about your ability to maybe chase demand if that's an opportunity here during holiday?
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Yes. Steve, thanks for calling in. Yes, I mean, as it relates to -- I'll speak to the inventory, specifically, and maybe Jason can get a little bit into the channels. But our inventory is down over LY. We -- the business snapped back a little bit faster than we anticipated, and we were conservative on our ordering as the pandemic started. So we are chasing some inventory and some key styles. That being said, we feel really good about the inventory that we have on the balance sheet. And we had a lot of inventory in transit to try to meet expectations for the fourth quarter. From a channel specific, I'll let Jason kind of touch on it.
Jason S. Brooks -- President, Chief Executive Officer
Yes. I think, as Tom indicated, we really slowed down orders. We didn't cancel anything. So we feel pretty good -- even though we are chasing it, we feel pretty good about where the year is going to end. We have seen probably a bigger issue in the western channel than any other channel. But we still feel pretty good about that channel as well. And obviously, the western channel in Q3 had a pretty nice quarter. So we'll see where it kind of falls out. But there's -- we're chasing some stuff, but I don't think it's going to affect us too terribly bad in the fourth quarter.
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Yes. Just to touch on that to Jason spoke to it I think in his prepared remarks, but the fact that we have our own manufacturing facility in both Puerto Rico and the Dominican, we have much shorter transit times, and we've got great flexibility since it's a company-owned manufacturing facility. So we are able to adjust our scheduling for what shoes and what boots we're going to make. And I think that's going to give us a better ability to react than maybe some of our peers.
Jason S. Brooks -- President, Chief Executive Officer
And that will even go into -- we don't do a lot of western boots in those factories.
Steve -- Baird -- Analyst
Yes. Great. And that's maybe a good transition to my next question, which is more just anything more you can share on digging into some of those categories? I mean, I think it's pretty good to see. It seems like the strength is pretty broad-based right now across a number of categories. So maybe just where you feel the most confidence maybe heading into next year across Work and Western and Outdoor and some of your different categories?
Jason S. Brooks -- President, Chief Executive Officer
Yes. So I think Work is absolutely one of the strongest, right? We build tools. We build essential items and those people didn't stop working, fortunately. Unfortunately, the people who did stop working don't really buy our product, right? They work in restaurants and casinos, and we don't do a lot of business there. The construction workers didn't stop working. So we've continued to see pretty positive things in the Work category as we've just reported. The Hunting category continues to be a real positive for us because I think people aren't able to travel and go on vacations and do the things they want to do but they can do it locally. And so I think Hunting is taking on a new life of its own for a family and maybe their sons or daughters and taking them hunting. Hunting is a seasonal program.
So I think it will not be, in my opinion, as strong going into next year. But we see no reason that it won't continue to be as strong in 2021 in total. And then the Western market probably took the biggest hit from the pandemic in regards to stores that maybe were closed or closed a little bit longer or had to reduce hours. But we've seen it come back really nice in Q3. I think that one probably was the biggest pent-up demand issue. And so that one may level off a little bit more here, and our expectation is it will it will do that again in 2021. Tom, I don't know if you wanted to add anything?
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
No. I mean, I think we saw a really good snap back in our commercial military business too. There's a lot of lockdowns with armed forces moving and transitioning in different bases and trainings and that such. So we saw a strong resurgence in that in the third quarter. I anticipate that, that will continue to fade into our fourth quarter here.
And I think the outdoor space is the ones that I've got my biggest question mark around, I think that as Jason alluded to, more people are out there Hunting because there's less other -- there is less things to do, and Hunting has been perfect, socially distant activity to do. So we will see how that continues in the fourth quarter but I have high expectations for that as well.
Steve -- Baird -- Analyst
Yes. Great. And maybe just on the e-commerce, obviously, really, really strong results here in the quarter. How do you see kind of your mix playing out over time? Do you think that's something that's going to continue to come down or do you think that's going to stay elevated? And what do you think is a good target for the company over time?
Jason S. Brooks -- President, Chief Executive Officer
The target is a great question. I'm not sure that we have a definitive answer on that one. I think the way we are looking at e-commerce right now is that it spiked so quickly and so -- the increase was huge, and it happened in such a short period of time. I think we believe it has to continue to come down a little, but we do believe that this consumer has turned the corner and so I'm not sure where the floor is. But I do believe it's got to come down a little bit, but it's still going to be strong. We're still going to see nice increases there, we're still going to see nice business there. But that -- it spiked so hard and so fast. I just don't know that we can maintain that.
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Yes. I think when I think about our e-com business, which would include our own branded websites, the rockyboots.com and also our marketplaces, I think that we had a lot of consumers that transition into shopping online and went directly to our websites or to marketplaces. And so our -- the biggest challenge we have is how do we keep some of those consumers, right? And how do we keep them coming back to rockyboots.com to purchase their product. So I think that business will continue to see increases over LY. But to Jason's point, it will have to decelerate a little bit. From a marketplace standpoint, we talked about an initiative we had in earnings two or -- one or two calls ago about increasing our third-party brand presence on marketplaces, and we've seen some small victories there.
So as we continue to leverage some of our relationships with other partners that we have from our Lehigh business and sell those in marketplace in the marketplaces, I think that business will continue to grow pretty strongly. One thing, I guess, one thing to think about from a comparison standpoint is that in the fourth quarter of last year was when we really started doing, particularly the Amazon marketplace self-sell products. So we're running up in the tougher comps, really starting a few weeks ago. And so we know that we'll decelerate there, but we think overall, we'll continue to grow that business, particularly if we're able to continue to add third-party brands.
Steve -- Baird -- Analyst
Yes. Great. And a couple more for me. I guess on -- are you seeing any impact even pretty recently here in markets that have seen a recent uptick in virus case counts. I know it's starting to become more of a headline nationally. So just wondering if you see risk there if those numbers keep going up here?
Jason S. Brooks -- President, Chief Executive Officer
So I think if you don't consider it a risk, then you're missing the boat. We monitor it and track it. And we are very concerned about it and how it's happening. But I will tell you, we have not seen those upticks affect our business right now. And I think it's because we don't see -- we see a lot of conversations about it, but I don't see or hear or feel much about shutdowns and much about less hours and much about where those policies might go. So in the short-term here, we have not seen any real reduction in that.
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Yes. Steve, with the uptick in cases that we've seen recently, the place that gives me the most heartburn is probably in our Lehigh business, we were starting to see some good momentum. And we do get some visibility into our fittings from a scheduling perspective. And so if the -- if companies start pulling back on our ability to do fittings and keeping workforces at reduced levels, I think that will impact our Lehigh business. But I do still believe there's a lot of pent-up demand there. And given, as Jason noted, given our increase in our new account acquisition there. I do think once things settle down we will have some significant pent-up demand. And hopefully, we get there sooner rather than later.
Steve -- Baird -- Analyst
Great. And maybe just one last one for me. I think my question is really looking into next year, obviously, there's a lot of things that's going to work themselves out around COVID and everything else, but in the event that it's a more normalized environment and cycling some easier compares in the first half. Is there anything you think structurally that has changed by your business because of the COVID that on be able to recoup some of the lost revenue and some of the margin pressure you've seen over the last, call it, six to nine months, just in in a vacuum if things were more normalized next year or even beyond next year?
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
So big question there. And so obviously, Jason and I have been talking a lot about this. I think as we look into 2021 and think about how our business has changed, there's a couple of key things that I think may have changed and maybe structured differently. And so one is our retail business, right? We believe that the Lehigh model is still the best model particularly in a post pandemic world for providing safety footwear to your employees.
So I think we'll continue to see account growth there versus the Truck model. It's just less -- it's a touchless way of getting safety shoes to your employees. The other area is in our own e-commerce in our marketplace business. I think you'll continue to see consumers go there as they look to purchase footwear in the future. We think that's certainly accelerated consumers to purchase more digitally. But I think that also impacts our wholesale business as we've seen strong demand for our drop shipments from a lot of our key retailers. So if they're not buying are the product on our company-owned websites, they're buying more is getting bought on the websites of our retail partners, such as Tractor Supply and Boot Barn.
And so I think we'll continue to see an increase in drop shipments for those customers, which in turn could result in us having to invest in a little bit more inventory. But again, our inventory is generally pretty core and carries over from year-to-year. Jason, anything else you want to touch on when it comes to 2021?
Jason S. Brooks -- President, Chief Executive Officer
Yes. I think as everybody is trying to figure out 2021 and what's it going to look like and how it's going to kind of unfold? I think, again, we're fortunate that our products are relatively essential. Our customer base is relatively essential. And I think as Tom hit, we're going to continue to focus on the core aspects of digital and trying to increase our ability there. But I also think -- and I don't have any data around this, but we think that this kind of increase we just saw in Q3 is really a shelf space stealing. And so we're feeling pretty confident that the consumer base is liking our brands and more attracted to our brand. And so our goal is to continue rolling that into 2021 and getting a more normal stable kind of year. But finding a way to have an increase throughout 2021 as well.
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Great, thanks for taking all the questions that I have to. Good luck.
Steve -- Baird -- Analyst
Yeah. Great, thank you.
Jason S. Brooks -- President, Chief Executive Officer
Thanks, Steve.
Operator
[Operator Instructions] There are no further questions. I would like to turn the floor over to Jason for closing comments.
Jason S. Brooks -- President, Chief Executive Officer
Great. Thank you very much. I just want to say thank you to all our employees that have done a great job through this crazy 2020. Thank you to all the supporters and stockholders. We look forward to finishing out a strong year and moving on to 2021. Thank you all. Be safe.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Brendon Frey -- Investor Relations
Jason S. Brooks -- President, Chief Executive Officer
Thomas D. Robertson -- Executive Vice President, Chief Financial Officer
Steve -- Baird -- Analyst
