Rocky Brands, Inc. (NASDAQ:RCKY) Q4 2023 Earnings Call Transcript
Rocky Brands, Inc. (NASDAQ:RCKY) Q4 2023 Earnings Call Transcript February 28, 2024
Rocky Brands, Inc. beats earnings expectations. Reported EPS is $0.98, expectations were $0.89. Rocky Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Fourth Quarter and Full Year 2023 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. [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: 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. 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 the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2022. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?
Jason Brooks: Thank you, Brendon. With me on today's call is Tom Robertson, after Tom and my prepared remarks, we will be happy to take questions. Our company has transformed significantly over the past few years following the impact from COVID. The organization did a very good job navigating the early days of the pandemic, integrating a large acquisition, bringing on a new distribution center, in servicing our customers and consumers, during this volatile market conditions. While 2023 had its share of challenges, the fundamentals of our business are solid, and we are in a great position operationally and financially to invest in our growth. Encouragingly, our reported results improved throughout the year as solid sell-through of our products, coupled with over inventory levels continuing to improve at the majority of our wholesale accounts positively impacted our sell-in.
Despite some unexpected headwinds in the fourth quarter, net sales improved sequentially and from the third quarter and year-over-year declines moderated to their lowest levels in 2023, due in part to high single-digit growth in our direct e-commerce channel. Equally important, we made great progress strengthening our balance sheet throughout 2023, highlighted by $66 million or 28% reduction in our inventories, and an $84 million, or 33% decline in our debt levels, compared with the end of 2022. Tom will cover the numbers in more detail shortly. But first, I want to spend a few minutes reviewing our fourth quarter sales performance by category and brands. Starting with Work. The four brands that make up this category, Georgia, Rocky and select styles under the Muck and XTRATUF brands, continued to improve this quarter, with several areas to highlight.
The Georgia brand continued to build momentum, from the third quarter as partner inventory constraints that, stalled reorders throughout 2023, began to moderate, driving wholesale demand, to the strongest level of the year. The brand saw a strong sell-in with several of our largest accounts, in the Farm & Ranch segment this quarter, increasing sales with these customers on both a sequential basis and compared to a year ago period. Additionally, this year's cost savings and subsequent selective price decreases on certain Georgia styles helped spur, a notable pickup in demand for the brand. While the recent inventory backlogs, caused many accounts to be more conservative, and narrow new orders to best-selling SKUs. Two new product introductions in 2023 that have been well received drove outsized demand this quarter, contributing significantly to George's recent progress.
Operator: Ladies and gentlemen, we seem to be experiencing some technical difficulties. Please remain on the line while we get the difficulties resolved. Thank you.
Jason Brooks: Hello, this is Jason Brooks. We got cut off there for a minute. So I will start with the Georgia brands. The Georgia brand continued to build momentum from the third quarter as a partner, inventory constraints that stalled reorders throughout 2023, began to moderate, driving wholesale demand to the strongest levels of the year. The brand saw strong sell-in with several of our largest accounts in the Farm & Ranch segment this quarter, increasing sales with these customers on both a sequential basis and compared to a year ago period. Additionally, this year's cost savings and subsequent selective price decreases on certain Georgia styles helped, spur a notable pickup in demand for the brand. While the recent inventory backlogs caused many accounts, to be more conservative and narrow new orders to best-selling SKUs. Two new product introductions in 2023 that, have been well received drove outsized demand this quarter, contributing significantly to Georgia's recent progress.
Strong sell-through for these new styles demonstrates that the Georgia brand remains relevant and in demand with consumers even in the current environment. Our Rocky Work brand remained challenged this quarter with excess inventory levels continuing, to impact replenishment orders. However, there was some positive momentum, particularly with new higher-priced products. We've seen strong sell-through with the top-tier work boots, and we introduced a new line of similar product that retailers, for more moderate prices in the fourth quarter. This new product line made in our own Dominican facility, should provide solid top line and margin contributions, for the Rocky Work in the years ahead. Shifting to our rubber-based work product, both the Muck and XTRATUF brands - on their positive 2023, momentum in the fourth quarter.
The Muck brand delivered a positive year-over-year comparison, underscoring the work we've done in recent quarters to reinvigorate the brand. As we continue to adjust Muck's brand message to communicate more directly with our targeted audience, we've seen the brand's marketing metrics significantly outperformed industry benchmarks, and consumers' demand has resonated in kind. For the first time this year, we saw year-over-year growth in the U.S. wholesale market for the Muck work. Also helping fuel this demand Muck decrease prices on several legacy products in November, and also introduced 12 new styles for the fall/winter season. While above-average temperatures to start the fall '23 season, posted a slight headwind, we are confident that Muck is well positioned coming into 2024.
XTRATUF carried its positive momentum from Q3 into Q4, outpacing expectations driven, by significant year-over-year growth in both the U.S. wholesale market and the e-commerce scale. We saw partner inventory positions improve as the quarter progressed, driving stronger bookings for 2024 in the period. At the same time, we persistently added at-once business for in-demand styles that resulted in very strong sell-through, and left us chasing inventory in key sizes. With awareness of XTRATUF surging, we will look to capitalize on the growing relevance, of the brand and ensuring product availability, for our growing XTRATUF consumer base in 2024. Turning now to our Western business. While many top accounts are currently operating on replenishment-only ordering Durango was able to secure several nice bookings in the period that, accelerated fourth quarter results, well ahead of the trend earlier in the year.
We saw strong orders from key accounts in both replenishment inventories, due to the strong sell-through, and to the stock for holiday '23 and early '24. We also saw the best quarter of the year, from our field accounts with new distribution channels, and an improving retail climate, acting as positive catalyst for the brand. Most importantly, customers are reporting that, they are now in significantly improved inventory positions, which allow with our focus on modernizing our inventory to eliminate slow-moving styles, and better stock, or best sellers to take advantage of growing demand, positions the brand for higher turns, and more favorable results going forward. Our Rocky Western business continues to stabilize, and we saw several bright spots this quarter across the channel.
This included strong growth, with our own e-commerce channel, along with solid results, from our dot-com partners and within key Western Boot retailers, who saw better sell-through in the quarter. Looking ahead, we are optimistic that the improving retail trends we've seen this quarter will allow our overall Western business, to return to its historical growth trajectory. Outdoor, which includes styles under our Rocky Muck and XTRATUF brands, began to stabilize in the fourth quarter after a very difficult first nine months of the year, particularly for our Rocky Outdoor Boot and apparel lines. Though the quarter was still challenged, by unfavorable weather conditions e-commerce gains, improving wholesale trends and partner inventory improvements helped the category reposition, to take advantage of improving trends going forward.
Also, as I mentioned when we discussed our Work product, both XTRATUF and Muck brands delivered a notable improvement in this quarter, driven in part by new penetration of the outdoor product and more outdoor-focused marketing. Last but not least, within our Wholesale segment. Commercial Military was a bright spot in the fourth quarter, as it has been all year, orders from suppliers of the U.S. Army, and for the division's Code Red Fire collection, drove a great fourth quarter to cap off the strongest year in recent memory for this business. Shifting to our Retail segment. Sales increased low single-digits, compared to a year ago period, thanks to a very solid quarter, for our direct e-commerce channel, each of our branded sites, Rocky, Georgia, Durango, Muck and XTRATUF saw double-digit traffic and sales increases in the quarter.
We continue to enhance our digital marketing efforts allowing us to engage with consumers more directly, and we expect this trend to continue going forward, which should positively impact, the segment's growth and margin profile. Lastly, our B2B Lehigh business was down year-over-year in line with expectations as we lapped a very strong quarter of growth in 2022. We expect that sales, to rebound in 2024 as comparisons ease, and events bookings continue to increase, along with the introduction of the several new key accounts slated for this year. As ready as I am to put 2023 behind us, I am pleased that the work we did strengthening our product innovation, brand building, consumer connections and fulfillment capabilities started to translate into improved results towards the end of the year.
By focusing on controlling what we can control, we exited 2023, with good momentum and - well situated to deliver growth enhanced earnings in 2024. Before I turn the call over to Tom, I want to thank the entire Rocky team for their efforts, and their commitment to excellence. We have weathered the ups and downs over the past four years, and have emerged a stronger organization that I am confident will benefit the business, our shareholders over the next year and long term. Thank you. Tom?
Thomas Robertson: Thanks, Jason. As Jason shared, we are pleased to see recent top line pressures to our wholesale business, beginning to moderate this quarter, resulting in sequential quarter-over-quarter growth in sales and the lowest level of year-over-year, declines we've seen all year. For the fourth quarter, sales decreased 9.3% year-over-year to $126 million, or 6% when you exclude service brand sales, of $4.9 million, from the year ago period. By a segment on a reported basis, wholesale sales decreased 13.3% or 8.8%, excluding the service to $85.8 million. Retail sales increased 1.5%, to $37.8 million, and contract manufacturing sales, were $2.3 million. Turning to gross profit. For the fourth quarter, gross profit was $50.7 million, or 40.3% of sales, compared to $56.7 million, or 40.8% of sales in the same period last year.
The 50 basis point decrease in gross margin as a percentage of net sales was mainly attributable to a tough year-over-year comparison, related to a tariff recovery within an approximate impact of $2.1 million in the prior year period. This was partially offset by a higher mix of Retail segment sales, which carry higher gross margins than the Wholesale and Contract Manufacturing segments. Gross margins by segment were as follows: Wholesale, down 120 basis points to 35.4%, however, excluding the tariff recovery benefit a year ago, Wholesale gross margins were up 120 basis points. Meanwhile, Retail gross margins were down 30 basis points to 52.9%, and Contract Manufacturing was down to 13.7%. Operating expenses were $36.0 million, or 28.6% of net sales in the fourth quarter of 2023, compared to $43.1 million, or 31% of net sales last year.
On an adjusted basis, operating expenses were $35.2 million in the current year period and $41.4 million in a year ago. The decrease is largely attributable to cost savings reviews and operational efficiencies that we achieved through strategic restructuring initiatives implemented over the past year. As a percentage of sales, adjusted operating expenses, were 27.9% in the fourth quarter of 2023, compared to 29.8% in a year ago. Income from operations, was $14.7 million, or 11.7% of net sales, compared to $13.6 million, or 9.8% of net sales in the year ago period. Adjusted operating income was $15.5 million, or 12.3% of net sales, compared to adjusted operating income, of $15.3 million, or 11% of net sales a year ago. For the fourth quarter of 2023 interest expense was $5.3 million, compared with $5.9 million in the year ago period.
The decrease reflects lower debt levels in the quarter, compared to the fourth quarter of 2022. On a GAAP basis, we reported net income of $6.7 million or $0.91 per diluted share, compared to net income of $6.5 million, or $0.89 per diluted share in the fourth quarter of 2022. Adjusted net income for the fourth quarter of 2023 was $7.3 million, or $0.98 per diluted share, compared to adjusted net income, of $7.9 million, or $1.08 per diluted share a year ago. The effective tax rate for the fourth quarter of 2023, increased to 29%, compared to 16.1% a year ago. The year-over-year increase, which was higher than our initial projections, was driven primarily, by a return to provision adjustment, resulting from foreign tax credits, recognized in the fourth quarter of 2023.
Turning to our full year results. While the year was challenged by our wholesale partners working through excess inventories, we were encouraged by solid retail sell-through and the growing performance of our e-commerce sites. 2023 was also a year in, which we made great progress strengthening our balance sheet and positioning the company for future growth. For the full year, net sales were down 25%, or 24.3% on an adjusted basis, to $463.4 million, excluding NEOS and service brand sales, which were divested in September of '22 and March of '23, respectively, adjusted net sales decreased approximately 20.9%. By segment, Wholesale decreased 30.5%, or 27.2%, excluding the NEOS and service brands, Retail was up 1.4% and Contract Manufacturing, decreased 48.4%.
In terms of profitability, adjusted operating income decreased 13.7% to $41.9 million, while adjusted operating margins increased 110 basis points, to 9% of net sales. Adjusted net income was $14.3 million and adjusted EPS was $1.93. For the full year, interest expense was $22.7 million, an increase of 24%, compared with $18.3 million in 2022 and our effective tax rate for 2023 was 26.3%, compared to 20.6% in the prior year, which was above our projected tax rate for 2023 of 20.8%, due to the foreign tax credit adjustment in the fourth quarter, I mentioned a moment ago. Turning to our balance sheet. At the end of the fourth quarter, cash and cash equivalents stood at $4.5 million and our debt totaled $173.1 million. We made excellent progress paying down our debt over the last 12 months with total indebtedness, 32.6% lower, compared to the end of last year.
A big part of the debt paydown has been driven, by our ability to strategically reduce our inventory levels. At the end of the fourth quarter, inventories were $169.2 million, down $66.2 million, or 28.1%, compared to $235.4 million a year ago. Now to our outlook. Before I get into how we are thinking about 2024, I want to highlight a couple of business changes that impact year-over-year comparisons. First, as you recall, we sold the service brand, at the end of the first quarter of last year. Following the sale, we continue to manufacture and supply product, to the new owners of the brand, for several months as part of the transition process. The second change had to do with our distribution in Canada. In November, we switched from direct operations to a distributor model for our Rocky, Georgia Boot, Durango, Muck and XTRATUF brands.
While this decision negatively impacts our top line in the near term, it contributes positively to profitability, as there is little to no SG&A associated with the new agreement. In addition to these two changes, we also fulfilled an elevated amount of orders to a customer that supplies the U.S. Army with footwear. This temporary spike in demand was driven by escalation in global geopolitical events, and given their current inventory position, we do not expect this level of sell-in to repeat itself. In total, we anticipate approximately $26 million in revenue from 2023, will not reoccur in 2024. Looking at this year, we expect revenue, to be in the range of $450 million to $460 million. This represents approximately 3% to 4% growth, over 2023's adjusted base of $438 million, which excludes the aforementioned nonrecurring revenue.
In terms of cadence of revenue, we expect to see slight growth in the first half of the year, before accelerating in the second half. We expect margin - gross margin to remain consistent with – consistent, or to see slight improvement from the adjusted gross margins we delivered in 2023. This will be partially offset by SG&A deleverage as 2024, includes investments in marketing for our brands, as well as performance-based compensation, as we did not pay any bonuses in 2023. The biggest change year-over-year, will be in our interest expense, as a result of the progress we made paying down our debt. Based on the year-end debt levels, and current interest rates, we expect interest expense to be down approximately $5 million. That concludes our prepared remarks.
Operator, we are now ready for questions.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Janine Stichter with BTIG. Please go ahead.
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