Q1 2024 Rocky Brands Inc Earnings Call

Participants

Brendon Frey; IR; ICR, Inc.

Jason Brooks; Chairman of the Board, Chief Executive Officer; Rocky Brands Inc

Tom Robertson; Chief Financial Officer, Chief Operating Officer; Rocky Brands Inc

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

Janine Stichter; Analyst; BTIG LLC

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by, and 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. Instructions will be provided at that time for you to queue for questions. If anyone has any difficulties hearing the conference, please press star zero for an 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 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, and 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 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. 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 we'll 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 extra top brands. While the micro economic outlook remains uncertain, we continue to be cautiously optimistic that the business is well positioned to generate enhanced profitability and increase 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 rightsized 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 extra tuff 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 products and several new product launches last year. Selective price decreases on certain Georgia styles are resonating with consumers leading to faster sell through importantly, George'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 max heritage and influencer partnerships that are amplifying visibility. Interest in the legacy Merck product remains 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 counts. 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 resorts 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 just adding a overstock product which key western promotional retailers. At the same time we've reduced SKU count and eliminated duplicate styles to better focus on Rocky Western line on its key demographic with more targeted product.
Our outdoor category delivered solid growth with a very strong performance from extra tough more than offsetting modest declines in Rocky and muscle demand for extra tough outdoor styles continued 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 extra time with respect to Rocky and much sales were 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 Ridge top and Outback hikers and the muck gardening and dog walking boots and shoes have shown 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 extra tuff posted strong traffic and sales increases this quarter with total channel sales up double digits compared to Q1 of 2023. We also utilized our website 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 Lee I 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 open 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 customer 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 to 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 the 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 the call to Tom to cover the financial details. Tom?

Tom 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 definitely 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 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 carries 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 31, 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 utilized 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 2.4% compared to $169.2 million at the end of 2023.
With respect to our outlook, based on 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 interest and 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.

Question and Answer Session

Operator

(Operator Instructions) Jonathan Komp, Baird.

Jonathan Komp

Yes, hi, good afternoon. Thank you for your question. Tom, first question, if I could follow up just on the guidance commentary. If you look at the underlying growth rate you highlighted, I think in the press release, you indicated up 7% excluding the noncomparable revenue last year and the guidance for the year now at the higher end of $450 million to $460 million, which would be, I think, 4% underlying growth. So any color as you look ahead or if there's something in the first quarter that was unsustainable or and what you're building into the outlook in terms of the moderated pace of underlying growth for the year?

Tom Robertson

John, thanks for the question. And I think as we look at Q1, there were a couple of opportunities that we took advantage of from a closeout perspective, which is why our margins probably came in slightly under where we had internally forecasted them. And so I think some of those some of those sales, we're certainly incremental those opportunities arise in the future. We'll continue to take advantage of those to convert inventory to cash, but we don't normally break it into our into our model. And I think, yes, I think this is all overall, just kind of a sense of being cautious here about the future and what it holds for the rest of the year, but we feel good about the higher end of that range that we guided to.

Jason Brooks

Yeah, I would just add, John, that with the election year election years always seem to be an odd year. So depending on where that kind of ends up as the year goes through, I think I think we're just being cautious. And that was one other reason why?

Tom Robertson

Yeah, the one other thing that jumps to my mind, too, John, is that Jason called out in his remarks that we were at the end of a of a contract for our commercial military products. And so we see that if there's another opportunity, we'll certainly bid on them and trying to win those. But that's something that we won't see or we don't have planned in the next three quarters.

Jonathan Komp

That's really helpful. And if I can follow up on the wholesale performance is there any way to talk maybe across maybe there's differences across brands or segments or categories, but how would you characterize the first quarter performance as calm as it relates to underlying consumer demand, any changes that you're seeing in sort of the sell-through indications versus you're really sort of a catch up and sell in versus sell through? And how should we think about those dynamics going forward?

Jason Brooks

Yeah, that's a great question, John. I think it's something that we continue to evaluate, right? We will I think we talked about this on the last earnings call, we have data that we gather from some of our retail partners about their sell through and in particular in the Durango brand and the extra tuff brand. We're seeing really great sell through. So the sell in then to the retailer is being positive. The work category is probably the one area, right? And that touches Georgia and Rocky and might even touch during a little bit, but it's a phenomenon as Western just seems to be a little higher right now and then the muck brand as well.
So from a work standpoint, sell through at retail is not as good. And so I think that's why we're seeing the sell-in not quite as hot. And then the worst category is the outdoor hunting category. And that really just took of the weather was bad. And hopefully we'll see some stronger weather patterns come this year and be able to pick some up there. But I think that covers and hopefully answers your question.

Tom Robertson

Yeah, I think the only other color out there that I have is that a meaningful increase that we saw kind of across board with accounts and key accounts performed very well for us and started to buy back in and as Jason alluded to earlier, more than normal cadence. And so we're starting to see more normalized behavior, which is which is good for Q1 and hopefully the rest of the year.

Jonathan Komp

Okay. And can you remind me, have you given a rough split, how much of your business is key account oriented versus growth? Non-cash?

Tom Robertson

We have we have not shared that John from before, and we'll probably keep that to ourselves for now.

Jonathan Komp

Okay, makes sense. Last two, just modeling questions, Tom, any color Q2 revenue should we expect it to be the low point? And I think cycling a fair amount of non-comparable business yet to any color there you can offer in that on SG&A, I know you're still talking the leverage for the year after achieving pretty big hot, pretty meaningful leverage in the first quarter. So how should we think about quarterly progression on that on the SG&A expense? Thanks again.

Tom Robertson

Yes. So from a top line perspective, yes, we have we had Q2 being our low point for the year and then obviously accelerated in third and fourth quarter, which are typically our strongest quarters. We have had the fourth quarter given what we've seen in the e-commerce space is our largest quarter for 2024. As SG&A spend relates, I think that you'll see kind of a low point from an SG&A spend in the second quarter as well. You'll see a lot of those investments that we've talked about, a lot of that being digital spend.
You'll see that when we hit our peak season in Q3 and in Q4 as well. I think we talked about a slight de-leverage with a slight And I said the increased SG&A spend in 2024 one thing I just wanted to make sure we got across on the call is that we are we are we're protecting we're trying to protect our operating income comparability to the prior year and so, you know, as we see what happens with sales throughout the rest of the year will come. We'll adjust our plan and we've learned how to flex that muscle like we did last year, and we can pull back on discretionary spend to help protect that operating income and for 2024.

Operator

Janine Stitcher, BTIG.

Janine Stichter

Hey, thanks. A couple for me. First on the it sounds like you took some of the cost savings and redirected that into higher advertising spend. Can you just talk a little bit more about and from our standpoint, it seemed like some of the upside or most of the upside was on the wholesale side versus the retail side of the business. Just want to understand if this is something that impacts both channels or how to think about where the where the benefit is there?

Jason Brooks

Yes. So I'll start, Tom, probably I'll add on. Thanks for the question. It is more of a wholesale play. And for us, it's really about just staying in front of the consumers. We want to make sure that the consumers are aware of our brands are aware of our new products that we're introducing and continuing to drive that business.
So our retail partners and also driving to our own websites from where obviously we make a little bit better margin, but we feel like we have to continue to drive the brands and support the brands. So investing back in them is important and some and it really focuses mainly on wholesale a little bit from a retail standpoint from the dotcoms, but not now the budget that we did for Lee eyes really stayed about the same.

Janine Stichter

Okay, great. And then it sounds like you're chasing and extra tough in Durango, I'm you're able to fulfill some of those with at-once orders. But is there any of that that spilled over into Q2? And then I guess, bigger picture, I mean, how is the fact that you're seeing out of stocks and having to chase, is that encouraging your your wholesale partners to place orders earlier? Just how to think about that dynamic of at-once versus upfront orders?

Tom Robertson

Yes, I'll take this one and Jason certainly add. And I think that there was maybe a slight spillover, but not but not much and into Q2 I'm particularly proud of the team for getting all the inventory here and getting it turned around towards the end of the quarter. So we saw a phenomenal turn of that inventory in March. Very proud of the team for that. And I think what we're seeing is, as we're stepping on the gas side, our in-transit inventory is up, particularly on the on the styles that we're chasing. And yes, you're dead, right.
We are counting every account to book it if they want it. I mean, I think if you think about what's happened with your supply chain over the last few years with the I've been pulling back on inventory, particularly in Asia over the last year, 18 months from getting these factories back up getting them restaffed to production levels from two years ago is taking a little bit more time.
So we're trying to, particularly for the muck of core styles that mature boot, the extra tough and the Durango product, we're trying to get people to book that as aggressively as they can for fall was before our busy season.

Operator

Ladies and gentlemen, we have no further questions in the queue, and I would like to turn the call back to Jason Brooks for some closing remarks.

Jason Brooks

Great. Thank you very much. I just want to again reiterate Tom and I's appreciation to the Rocky team. We are excited about Q1 and 2024, how we've executed in the first three months of the year, and we look forward to finishing strong and we thank our investors for their commitment and thank you all so much.

Operator

Thank you very much. And ladies and gentlemen, that concludes today's conference. You may disconnect your lines at this time and thank you for your participation.