Rocky Brands saw net sales jump 23.1 percent to $162 million in its second quarter on net income of approximately $920,000, but a mixed overall performance and a lowered guidance sent the outdoor and work footwear seller’s stock down more than 11 percent in after-hours trading on Tuesday.
Despite sales coming in above Wall Street estimates of $145.6 million, adjusted earnings per diluted share of 34 cents fell well short of the anticipated mark of 86 cents.
In a Nutshell: To open the company’s quarterly earnings call, CEO Jason Brooks indicated that Rocky Brands will once again raise prices on Sept. 1, with the footwear seller expecting average hikes of $5 to $7 per pair.
Rocky Brands already raised prices to kick off 2022, which Brooks said wasn’t enough to fully offset the continued cost increases across materials from its suppliers in Asia, inbound freight and port-related logistics expenses, “which resulted in second quarter earnings coming in below our expectations.” However, Brooks said the company is starting to see costs declining, but just “not coming down as fast as [they] went up.”
Based on these factors, along with the more challenging macroeconomic backdrop, the Durango and Lehigh boots owner now expects full-year net sales to be toward the low end of company’s previous range of 21 percent to 24 percent growth over 2021.
The Durango brand finished with sales up by double-digits for the eighth quarter in a row, with the Georgia Boot brand also seeing a double-digit sales uptick. The namesake Rocky brand, which includes categories like work, outdoor, Western and commercial military, saw sales increase in the high teens. Brooks said the Muck Boot and Xtratuf brands posted “solid” gains in the quarter, with Muck seeing total shipments skyrocket 41 percent year over year.
The boots and outdoor footwear seller saw double-digit sales increases to the respective e-commerce sites of its Rocky, Georgia Boot and Durango brands, with average order values (AOV) on full-price items increasing in the mid-teens due to stronger sales and the price increases.
At the end of the quarter, inventories were $287.8 million, more than doubling the $143.5 million in the year-over-year period. The 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.
Compared with the three-month period ending March 31, 2022, inventories are down 0.5 percent including a $45 million reduction in in-transit inventory. The company plans to further realign inventory levels with sales growth and inventory purchasing strategies over the coming quarters.
Transit times are starting to normalize, with pre-pandemic times of 30-to-45 days becoming more common today, according to Brooks.
Chief financial officer Tom Robertson expects most of the costs related to logistics to ease up as well, since they are largely related to transporting inventory from one distribution center to another. The company’s Reno, Nev. facility recently opened in January, which has enabled Rocky Brands to fulfill Xtratuf and Muck Boot producte within one-to-two business days.
“Some of the transportation costs that were incurred in the second quarter really relate to our inventory position and us having to manage through all the logistics of getting the inventory into the DC,” Robertson said. “The takeaway from that is that some of these costs are really just temporary. As this inventory position works its way down, as we’re planning for Q3 and really for Q4, we’ll see those ‘extra’ type of logistics and port costs come down. That’s the optimistic point of view on this—some of these costs will go away as the inventory position gets better.”
Gross margin in the quarter was 33.2 percent of net sales, down 420 basis points (4.2 percentage points) from 37.4 percent of net sales, for the same period last year. Adjusted gross margin in the second quarter of 2021, which excluded a $2.3 million inventory purchase accounting adjustment, was $51.4 million, or 39.1 percent of net sales.
The gross margin cut was mainly attributable to increases in product costs, inbound freight costs and other shipping and logistics costs compared with the year ago period.
By segment, gross margin in wholesale dipped 500 basis points (5 percentage points) to 30.9 percent, retail margin decreased 80 basis points (0.8 percentage points) to 48.9 percent and contract manufacturing dipped 1130 basis points (11.3 percentage points) to 10.5 percent.
Rocky Brands expects gross margins to improve in the second half after it raises prices and sees supply chain challenges improve, with the company anticipating overall gross margin of 34 percent in the fourth quarter.
Cash and cash equivalents were $5.8 million at June 30, 2022 compared to $8.4 million on the same date a year ago. Total debt was $284.6 million, which includes $125.9 million of senior term loan and borrowings under the company’s asset-backed credit facility.
Net Sales: Second quarter net sales increased 23.1 percent to $162 million compared with $131.6 million in the second quarter of 2021.
Wholesale sales for the second quarter increased 29.7 percent to $131.2 million compared to $101.1 million for the same period last year. Retail sales jumped 16.4 percent to $26 million compared to $22.3 million for the same period last year.
Contract manufacturing segment sales, which include contract military sales and private label programs, were $4.9 million in the second quarter of 2022, down 39.5 percent from $8.1 million in the prior year. The decrease in contract manufacturing sales was due to expiring contracts with the U.S. military.
Net Earnings: Rocky Brands reported second quarter 2022 net income of approximately $920,000, or 12 cents per diluted share, compared to net income of $3.9 million, or 52 cents per diluted share in the prior-year quarter.
Adjusted net income was $2.5 million, or 34 cents per diluted share, down from the 2021 quarter’s adjusted net income of $7.4 million, or 99 cents per diluted share.
Income from operations for the quarter was $5.6 million, or 3.5 percent of net sales, a decrease from $8.4 million, or 6.4 percent of net sales, for the same period a year ago. Adjusted operating income for the second quarter of 2022 was $7.7 million, or 4.8 percent of net sales, dipping from last year’s adjusted operating income of $13 million, or 9.9 percent of net sales.
CEO’s Take: Brooks said the price increases will affect most products but the company is evaluating how the hikes will apply to each brand.
“There are definitely products that just cannot take those kinds of increases,” he said. “I would tell you Servus is one of the brands that when you’re talking about a price point type shoe, adding $5 would just kill it. So there might be some specific styles that we were only able to add a $1 price increase.”