Rocky Brands' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Rocky Brands, Inc. ( RCKY)

Q3 2011 Earnings Conference Call

October 26, 2011 4:30 PM EST

Executives

Brendon Frey – ICR

David Sharp – President and CEO

Jim McDonald – CFO

Analysts

Reed Anderson – D.A. Davidson

Mitch Kummetz – Robert W. Baird

John Sullivan – Olstein Capital Management

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands third quarter fiscal 2011 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 will now turn the conference over to Brendon Frey of ICR.

Brendon Frey

Thanks. 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, 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 reports filed with the Securities and Exchange Commission, including Rocky’s Form 10-K for the year ended December 31 st, 2010.

And, I’ll now turn the call over to Mr. David Sharp, President and Chief Executive Officer of Rocky Brands.

David Sharp

Good afternoon and thanks for joining us. With me on the call is Jim McDonald, our Chief Financial Officer.

Overall, we were pleased with our third quarter results. We continued to experience increased demand for our Rocky-owned brands and our core western work and hunting categories. At the same time, our commercial military business, which was launched in 2010 and falls under our wholesale segment, more than doubled compared to the year-ago period. This helped to partially offset the significant decline in military segment sales and the loss of Dickies license business which in the third quarter of last year generated sales of $4.3 million and $2 million respectively, a total of $6.3 million.

Wholesale sales were modestly below our expectations. However, we feel that consumer demand is stronger than our results indicate. We believe many of our wholesale accounts have recently decided to operate with leaner inventory levels in response to a potential slowdown in the economy. Our performance in retail was evidenced by many key accounts that we monitor is solid, but reorders are not currently matching sell-throughs. Order rate should accelerate as the season unfolds and the weather becomes wetter and colder.

A few of the highlights from our wholesale division included our western boot segment sales increased 11% with growth coming from both the Durango and Rocky brands. We saw a good response to our women’s fashion product as well as our new little Durango kid’s line of boots. The growth of Rocky western products was driven by increased demand for our long range and original ride product lines at several key retailers.

The Georgia brand sales increased 8% on the strength of new product introductions and better inventory positions on core styles. Our hunting sales were up modestly in the third quarter and had recently picked up as the hunting season has gotten underway. And finally, our commercial military sales increased a 163% to $4.3 million in the third quarter.

As a clarification, our commercial military sales are those to on-based peers’ exchanges and off-based private sector retail stores to service uniformed service people. This high margin business is in contract to and should not be confused with our low-margin government contracts that we receive from time to time, which we report as our military segment.

We have two products in particular that appeal to the service people that they’re buying in increasing numbers. They are fully drainable boots we developed for the US Navy Seals and a hyper lightweight boot that soldiers like to wear on base and when they’re travelling in uniform. Soldiers are purchasing more and more of their own gear as the government is decentralizing its procurement matters. So we plan on this trend to continue into 2012.


Now, some comments on our retail division, where our operating performance improved dramatically in the third quarter. Our slightly lower sales volumes, we swung from a loss in the year-ago period to profitability on both higher gross margins and expense leverage. The number of accounts using our customized account websites grew by 15% and that enabled [ph] sales growth of 38% with that account population.

Also of note, our national account customers did 57% of their business online or direct in the third quarter, up from 41% last year. This has allowed us to significantly lower our expense base by reducing the number of mobile stores or trucks in operation. We now operate 42 trucks versus 63 last year at the end of this period. And now we’re operating just three stores compared to 14 in the third quarter of 2010. As accounts continue to seek out more cost savings, the interest level in our new web-based platform is increasing and we expect current trends to continue in 2012.

I’ll now turn the call over to Jim, who will review the financial details of the third quarter.

Jim McDonald

Thanks David. Net sales for the third quarter were $71 million compared to $74.8 million for the corresponding period a year-ago. Wholesale sales for the third quarter increased 1.4% to $60.2 million compared to $59.4 million last year. The sales increase was driven by 11% gain in our western category offset by a decline in our work category, due primarily to the discontinuation of our license agreement with Dickies at the end of 2010. We also experienced a significant increase in our commercial military business versus a year-ago.

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