Rocky Brands, the owner of footwear brands including Rocky, Georgia Boot, Lehigh and The Original Muck Boot Company, saw third-quarter net sales jump 17.5 percent to $147.5 million, up from $125.5 million a year ago.
Despite net income improving to $5.7 million, or 77 cents per diluted share, the company is taking a more cautious guidance for the full-year as it anticipates a sales decline in the fourth quarter.
In a Nutshell: Already having expected full-year net sales to be toward the low end of its previous range of 21 percent to 24 percent growth, Rocky Brands now expects sales growth to hover around 18 percent. Gross margins are still expected at around 35 percent for the full year.
The guidance update indicates that Rocky Brands expects revenue to decrease in the fourth quarter.
Chief financial officer and chief operating officer Tom Robertson said in an earnings call that the outdoor footwear manufacturer and seller is going against tough comparisons from the prior year, when the company’s sales surged 93.4 percent to $169.5 million.
“The third quarter of 2021 is when we ran into our distribution challenges post-acquisition, so there were a lot of sales that should have originally shipped in the third quarter of 2021 that ultimately got shipped in the fourth quarter of 2021,” Robertson said.
When pressed by an analyst that fourth quarter sales would likely be down in the range of 20 percent, Robertson did not confirm the official outlook range. Instead, he said sales would be “slightly less” sequentially than the third quarter.
The earnings report came less than a month after the company said it sold its Neos Overshoe brand to SureWerx, a global manufacturer of safety, tool and equipment products. Terms were not disclosed.
Rocky Brands acquired Neos Overshoe in March 2021 when it purchased the performance and lifestyle footwear business from Honeywell. That deal also included the Original Muck Boot Co., fishing boot and deck shoe outfitter Xtratuf, cold and wet weather boot brand Ranger and protective rubber boot brand Servus. Neos Overshoe has been designing and manufacturing premium overshoes built to protect workers and consumers alike from the elements since 1993.
Inventories at Sept. 30 were up 31.1 percent to $265.1 million, compared to $202.2 million on the same date a year ago. The year-over-year change in inventories was driven by the distribution and fulfillment challenges experienced in the second half of 2021 and overall cost increases and strong sales growth, combined with additional inventory on hand as the result of increased transit times. The company says it plans to further realign inventory levels with sales growth and inventory purchasing strategies over the coming quarters.
Compared with June 30, inventories are down $22.7 million, or 7.9 percent. Robertson said the company plans to cut approximately $40 million in inventory by year-end, and use that freed up capital as a source of cash to pay down debt.
“I will tell you, the $40 million is still very attainable and we’re going to even aim for more if we can,” Robertson said. “We’ve just been moderating our purchases with our sourcing partners and managing our production and our manufacturing facilities. And we think we’ve gotten through the hard part of managing the inventory.”
Third-quarter gross margin was 35.2 percent of net sales down from 37.4 percent in the prior-year period. Excluding the cost of goods sold related to the Neos brand inventory sold, adjusted gross margin for the third quarter 2022 was 35.3 percent of adjusted net sales, down from last year’s 38.1 percent.
The decrease in gross margin as a percentage of adjusted net sales was mainly attributable to increases in product costs, inbound freight costs and other shipping and logistics costs compared with the year ago period.
Cash and cash equivalents were $7.3 million as of Sept. 30, compared to $12.9 million on the same date a year ago. Total debt on that date was $284.8 million, which includes $122.1 million of senior term loan and $165.6 million of borrowings under the company’s senior secured asset-backed credit facility.
Net Sales: Third-quarter net sales at Rocky Brands increased 17.5 percent to $147.5 million, up from $125.5 million in the 2021 period. Adjusted net sales, which exclude the sale of inventory related to the divesture of the Neos brand during the quarter, ticked up 14.7 percent to $143.9 million.
Wholesale sales for the third quarter increased 25.8 percent to $120.7 million from $96 million, while retail sales jumped 7.3 percent to $23.4 million from $21.8 million.
Contract manufacturing sales, which include contract military sales and private label programs, were $3.3 million in the period, down from $7.7 million in the prior year due to the expiration of certain contracts with the U.S. military.
Net Earnings: Rocky Brands reported third-quarter net income of $5.7 million, or 77 cents per diluted share compared to a net loss of approximately $375,000, or a 5 cents per diluted share loss in the third quarter of 2021. Adjusted net income for the quarter was $5.5 million, or 74 cents per diluted share, compared to adjusted net income of $2.5 million, or 34 cents per diluted share in the year ago period.
Income from operations for the third quarter of 2022 was $11.6 million, or 7.9 percent of net sales, compared to $2.8 million or 2.2 percent of net sales for the same period a year ago. Adjusted operating income for the third quarter of 2022 was $11.3 million, or 7.9 percent of net sales, compared to adjusted operating income of $6.5 million, or 5.2 percent of net sales a year ago.
CEO’s Take: Jason Brooks, chairman, president and CEO, was upbeat overall consumer demand and the company’s ability to book orders for next year.
“Our products are still more of a need than a want and so I don’t believe that we’re feeling it quite as aggressive as maybe some other types of footwear in the marketplace,” Brooks said. “We feel our bookings in the next year look reasonable. It’s a really hard thing to navigate as we went through the acquisition last year and where those orders fell, but we still believe the brands are strong and that that we’ll finish this year in a good place and be able to continue that drive in 2023.”