Yahoo Finance Rocky Brands, Inc. (NASDAQ:RCKY) Q1 2024 Earnings Call Transcript
Rocky Brands, Inc. (NASDAQ:RCKY) Q1 2024 Earnings Call Transcript April 30, 2024
Rocky Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter 2024 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. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded. And we'll now turn the conference over to Brendon Frey of ICR. Please go ahead, sir.
Brendon Frey: 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, 2023. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?
Jason Brooks: Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we will be happy to take any questions. We are pleased with our first quarter results as sales and earnings came in ahead of our expectations. Following the implementation of several cost saving initiatives throughout last year, we have reinvested a portion of the savings into additional advertising programs, which fueled stronger-than-anticipated growth and meaningful expensive leverage. I'll go into more detail about the drivers of our top line performance momentarily, but we are encouraged by the momentum we experienced across our business, highlighted by double-digit gains for our Durango and our XTRATUF brands.
While the microeconomic outlook remains uncertain, we continue to be cautiously optimistic that the business is well positioned to generate enhanced profitability and increased shareholder value as 2024 unfolds. Before Tom covers the numbers, I'll spend a few minutes going through the first quarter sales performance by category and brand. In our sales channel, the majority of retailers have right-sized their inventories, and reorders are now more closely aligned with sell-through, bringing greater stability to our sell-in cadence to start 2024. While this has benefited the work, Western and outdoor categories to different degrees based on partner inventory levels, we are pleased to see this start to return to normalcy. across the industry. Our work category, which includes our Georgia, Rocky and select styles under the Muck and XTRATUF brands had several bright spots in the quarter.
Georgia boot delivered a single-digit sales increase in the quarter, driven by strong demand for our legacy product and several new product launches. Last year, selective price decreases on certain Georgia styles are resonating with consumers, leading to faster sell-through. Importantly, Georgia's sell-through is now better translating to improved sell-in, leading to strong gains with both key accounts and online retail partners. In fact, we saw strong double-digit growth this quarter with several of our large key accounts and the strong growth trajectory with online retail partners has advanced beyond what was established last year. As the industry backdrop improves, we expect Georgia growth to accelerate. While Rocky work remained under some pressure early in the year, as key retail partners work through certain slower selling product, the business is improving and is now in a better position at retail to take receipt of the brand's best sellers.
During Q1, we also shipped a new line of Rocky work boots that brings both a value and quality to the competitive work boot market. This new product line made in our own Dominican facility should provide both top line and margin contributions as we move through 2024. Shifting to our rubber work boot business, the first quarter was highlighted by starting the celebration of the Muck brand's 25th anniversary. To support this milestone event, we introduced a redesigned homepage in conjunction with the launch of an enhanced marketing campaign highlighting the Muck's heritage and influencer partnerships that are amplifying visibility. Interest in the legacy Muck product remain solid, especially in the US where brand sales were up mid-single digits as our recent marketing efforts helped to accelerate demand as the first quarter progressed.
Turning to our Western category, Durango delivered a very good first quarter lifted by strong bookings across key accounts and farm and ranch partners, along with an acceleration of at-once business. With moderate partner inventory levels, better-than-expected consumer demand for key Durango styles led to some brief and early stock-outs. However, we moved quickly and we were able to fulfill orders late in the quarter and ship additional inventory of in-demand product which should lead to even higher turns for Durango going forward. This, coupled with an improving wholesale climate. and the addition of new distribution channels in late 2023 and early 2024, have positioned Durango to build upon its strong first quarter results. For Rocky western, our focus in the first quarter was on improving inventory health and setting the business up for better full price selling later in the year.
Sales were up low-double-digits, driven primarily by discounting of overstock product with key Western promotional retailers. At the same time, we've reduced SKU count and eliminated duplicate styles to better on Rocky western line on its key demographic with more targeted product. Our outdoor category delivered solid growth with a very strong performance from XTRATUF, more than offsetting modest declines in Rocky and Muck. Demand for XTRATUF outdoor styles continue to build with healthy double-digit growth in both our wholesale and direct e-commerce channel. After helping our wholesale customers rebalance inventories last year, bookings and at-once orders for key styles accelerated, leaving us chasing some inventory with higher-than-expected turns on a new spring item and legacy products.
Looking ahead, we are focused on securing new bookings and filling in replenishment aggressively while maintaining efforts to source sufficient inventory for XTRATUF. With respect to Rocky and Muck sales, we're pressured by a mild winter throughout the country that limited sales of insulated and rubber footwear. While these outdoor categories remain challenged, casual styles like our Rocky Ridgetop and Outback hikers and the Muck gardening and dog walking boots and shoes have showed very positive results. Going forward, we are introducing new non-hunting, value-driven products in the category that we believe will help improve sales. Lastly, in wholesale, commercial military sales were up meaningful in the first quarter as the team completed its last shipment under an elevated purchase agreement to a customer that supplies to the US Army with footwear and other gear.
Shifting to retail, each of our branded e-commerce sites for Rocky, Georgia, Durango, Muck, and XTRATUF posted strong traffic and sales increases this quarter, with total channel sales up double digits compared to Q1 of 2023. We also utilized our websites to move some overstock inventory in the quarter, which was at a higher margin compared to the traditional discount wholesaler channel. Lastly, our reoccurring, custom-fit B2B Lehigh business was up over last year's first quarter as we had several account renewals and onboarded new accounts in the quarter. At the same time, companies refreshed their budgets, increased subsidies, and opened employee eligibility to start the new year, paving the way for continued improvement as we progress through 2024.
In addition to the discontinuation of some cruise line programs that offset our custom fit gains in Q1, I want to point out that we recently realigned our sales organization to improve our sales pipeline and provide greater continuation in account setup, rollout, and implementation. While these changes disrupted sales as they were rolled out, we expect that they will positively impact the business in the future quarters. Before I turn the call over to Tom, I want to thank the entire Rocky team for a promising start to 2024. The moderation of partner inventory levels and subsequent return of wholesale demand is allowing a strong sell-through and resilient consumer demand we've seen across the brand portfolio translate into better financial results.
This improving industry dynamic, coupled with our continued focus on top line expansion, expense discipline, and balance sheet improvement should provide a strong foundation for favorable results in the year ahead. I'll now turn the call over to Tom to cover the financial details. Tom?
Thomas Robertson : Thanks, Jason. As Jason discussed, we are optimistic about the start of 2024 as the diversity of our product categories and steady consumer demand for our brands has allowed us to adeptly navigate the current retail environment. Reported net sales for the first quarter increased 2.2% year-over-year to $112.9 million. Excluding the service brand net sales from a year-ago period, net sales increased 7.6% or 9.3% when you also factor in the Canadian distribution model change we made in the late 2023. By segment, wholesale sales excluding the service brand and the Canadian distribution model change were up 8.5% to $79.8 million. Retail sales increased 5% to $30.4 million after factoring in the Canadian distribution model change.
And contract manufacturing sales were $2.7 million. Turning to gross profit. For the first quarter, gross profit was $44.1 million or 39.1% of sales compared to $43.8 million or 39.6% of sales in the same period last year. Gross margin in the first quarter of 2023 benefited from a net $1.3 million tariff recovery. Minus the recovery, gross margins were up 70 basis points year-over-year, driven by the divestiture of the service brand which carry lower gross margin than the rest of our product portfolio. Reported gross margins by segment were as follows. Wholesale down 20 basis points to 36.4%, retail flat at 48.7%, and contract manufacturing up to 11.7% from 8.1%. Excluding the tariff recovery, wholesale margins were up 140 basis points. Operating expenses were $36.2 million or 32% of net sales in the first quarter of 2024 compared to $39.6 million or 35.9% of net sales last year.
On an adjusted basis, operating expenses were $35.5 million this year or 31.4% of net sales and $38.8 million or 35.2% of net sales a year ago. The decrease in operating expenses was largely attributable to cost savings reviews and operational efficiencies achieved through strategic restructuring initiatives implemented in 2023, as well as lower freight expense in the current year. Income from operations was $8 million or 7.1% of net sales compared to $4.2 million or 3.8% of net sales in the year ago period. Adjusted operating income was $8.7 million or 7.7% of net sales compared with adjusted operating income of $4.9 million or 4.5% of net sales a year ago. For the first quarter of this year, interest expense was $4.5 million compared with $6 million in the year-ago period.
The decrease reflects lower debt levels in the quarter compared with the first quarter of 2023. On a GAAP basis, we reported net income of $2.6 million or $0.34 per diluted share compared with a net loss of $0.4 million or $0.05 per diluted share in the first quarter of 2023. Adjusted net income for the first quarter of 2024 was $3.1 million or $0.41 per diluted share compared to adjusted net loss of $0.8 million or $0.12 per diluted share a year ago. Turning to our balance sheet, at the end of the first quarter, cash and cash equivalents stood at $3.1 million and our total debt, net of unamortized debt issuance costs, totaled $156 million, a decrease of 29% since March 31st last year. As we announced yesterday, we signed an upsized, amended and extended ABL facility with Bank of America, the new facility which amends and restates our existing revolving $175 million credit facility and is comprised of a $175 million revolving credit facility and a $50 million term facility.
We utilize a portion of the proceeds from the refinancing to retire our existing senior secured term loan facility with TCW Asset Management. We project these transactions will generate interest savings of $2.9 million over the remainder of 2024, offset by fees and amortization associated with the retirement of the senior secured term loan facility of approximately $2.6 million. Starting in 2025, these transactions are expected to generate a combined annualized savings of approximately $4.4 million. Inventories at the end of the first quarter were $165.1 million, down 26.3% compared to $224.1 million a year ago and up 2.4% compared to $169.2 million at the end of 2023. With respect to our outlook, based on the first quarter performance, we now expect revenue to be towards the high end of our range of $450 million to $460 million.
We still expect margin to remain consistent or to see slight improvements from the 38.9% adjusted gross margins we delivered in 2023, partially offset by SG&A deleverage due to investments in marketing of our brands, as well as performance-based compensation. Finally, the additional $2.9 million in savings from the combined refinancing transactions, we now expect 2024 adjusted interest expense to be down approximately $7.9 million from 2023 versus our prior guidance of approximately $5 million. That concludes our prepared remarks. Operator, we are now ready for questions.
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