Rocky Brands, Inc. (RCKY)

Q2 2010 Earnings Call

July 28, 2010 04:30 am ET


Brendon Frey - ICR

Mike Brooks - Chairman & CEO

Jim McDonald - CFO & Treasurer

David Sharp - President & COO


Mitch Kummetz - Robert W. Baird

Reed Anderson - D. A. Davidson



Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands second quarter fiscal 2010 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.

(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.

Brendon Frey

Before we begin, please note that today’s discussion 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 change, risk 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 the reports filed at Securities and Exchange Commission including Rocky’s Form 10-K for the year ended December 31st 2009. I will now turn the conference over to Mr. Mike Brookes, Chairman and Chief Executive Officer of Rocky brand.

Mike Brook s

Thank you and thanks for everyone for joining us this afternoon. With me on today’s call are David Sharp, President and Chief Operating Officer and Jim McDonald, Chief Financial Officer and Treasurer.

We’re very pleased with our second quarter performance, particularly the dramatic improvement in our bottom line versus the same period a year ago. During the past two years, we’ve undertaken several strategic initiative to right size our infrastructure and better position the company to deliver profitable growth on a consistent basis.

This is enabled, this is entailed lower in our corporate overhead improving the efficiency of our supply chain, which includes our company-operated manufacture facilities, restructuring our retail operations and reducing our debt levels. While we still have work to do, our second quarter non-GAAP EPS of $0.17 is evident of the positive progress we have made, toward achieving our objectives.

Specific to the second quarter, our wholesale business which makes up roughly approximately 70 % of sales contributed much higher profitability versus a year ago, driven by lower manufacturing costs on a per pair basis at our facilities in the Caribbean. We currently produce about 25%of our annual inventory needs.

However, this number could increase in the future as we explore additional manufacturing options in the region in order to offset potential cost increases coming from our China suppliers. And while they carry a much lower gross margin compared to our wholesale and retail business, the increase in sales for the US military helped us better leverage the fixed cost in our factories during the second quarter.

At the same time, our operating expenses are down approximately 11% from a year ago and we are down nearly 30% from the second quarter of 2008. A good portion of the decrease is attributed to the ongoing overhaul of our retail business as we move to a more flexible less-capital intensive order and delivery method. Finally, and perhaps most importantly, we continue to significantly reduce our debt levels during the second quarter.

Using all the proceeds from our successful equity offerings that we completed in May along with availability under our credit facility, we paid off $29 million of our $40 million senior-term loan which carries an annual interest rate of 11.5%. Not only did we end the second quarter with debt levels down $51 million or 58% from a year ago, but we project, we will save approximately $3 million in interest expense per year going forward.

Jim will now review the financials in more detail and then David will discuss our growth plans for the remainder of the year.

Jim McDonald

Thanks Mike. Net sales for the second quarter increased 7.9% to $55.2 million compared to $51.2 million for the corresponding period a year ago. Wholesale sales for the second quarter increased 1.6% to $38.5 million compared to $37.9 million last year. The sales increase was driven by a 10.5% gain in our work categories with our own brands, Georgia Boot and Rocky, increasing 13% and 15% respectively, partially offset by a 25% decline in our licensed brand Dickies. At the same time, 13% sales increases in both our hunting and duty categories helped more than offset a 15% decline in western sales.

Retail sales for the second quarter were $11 million, down $1.3 million from the sales of $12.3 million a year ago. The modest decline was a result of our ongoing transition to a more direct order, direct ship program and the decision to remove a portion of our Lehigh mobile stores from operation to help lower costs.

Military segment sales were $5.7 million versus $900,000 for the same period in 2009. Gross profit in the second quarter was $90.1 million or 34.6% of sales compared to $17.7 million or 34.6% of sales for the same period last year.

Gross margins in our wholesale segment rose 370 basis points driven by the increased manufacturing efficiencies that Mike discussed earlier. However, this is offset by lower retail gross margin as a result of our ongoing transition to more internet-based transactions and the increase in sales to the military.

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