Good afternoon, ladies and gentlemen.
Thank you for standing by, and welcome to the Rocky Brands Q1 2022 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. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at that time.
I would like to remind everyone that this conference call is being recorded and will now turn the conference over to Mr. Brendan Frey of ICR.
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 Securities and Exchange Commission, including our 10-K for the year ended December 31, 2021. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?
Thank you, Brendan. With me on today's call is Tom Robertson, our Chief Financial Officer. Following a successful 2021, the new year has gotten off to a good start as demand for our portfolio of leading brands continues to be strong.
We experienced solid growth across our wholesale and retail segments and throughout our diverse mix of distribution channels, including western, work, farm and ranch, outdoor, and family retail.
The combination of healthy inventory positions and additional fulfillment capacity allowed us to better capitalize on the market opportunities we are creating through our product and marketing strategies and focus on operational excellence. Unfortunately, the current cost environment and tight labor market has required us to spend more temporarily to bring our new distribution facility in Reno up to speed.
While this limited our ability to flow more of our revenue outperformance to the bottom line, we are making good progress gaining greater efficiencies and expect we'll be able to translate more of our top-line growth into enhanced profitability as the year proceeds. Tom will go through the numbers in more detail, but the quarter was highlighted by net sales of $167 million, representing an increase of 91% over the same period last year and a gain of 32% on a pro forma basis. Underlying these results were very strong performance for each of our brands, starting with Durango.
The brand continued to experience robust demand, finishing the quarter with mid-double-digit growth in both key and field accounts, driven by strong sell-through.
Durango's strategy of diversifying the line into new offerings, particularly in work and core Western, has been very beneficial as our farm and ranch and true Western retail partners have posted large year-over-year increases. Not only has demand remained incredibly strong, but we've been able to capture the demand with strong inventory and improving logistics capabilities, leading the increased shelf space again this quarter. Turning to Georgia Boot, the brand generated solid gains over 2021 as demand was once again strong.
New opportunities and expansion of current programs continue to drive business as the market looks for answers to the limited supply at retail, especially in key categories that Georgia Boot is an established leader. For example, Georgia Boot experienced tremendous growth of its popular logger collection, growing strong double digits in part because we were able to fill an inventory void created by peers reliant on Asian production.
We produced this line of boots in our own factory in the Dominican Republic and therefore are able to control inventory flow much more precisely and capitalize on the opportunities. The Rocky brand, which spans work, outdoor, western, commercial, military, and duty footwear, also had a very solid quarter.
Strong growth in Rocky outdoor and western was coupled with flat sales in work due to the timing of key orders in the year ago period that we didn't anniversary. Whether it be hunting product or rugged outdoor footwear for general outdoor activities, we saw ongoing strength as consumers continued the trend of getting outdoors and being active. We are encouraged by the resiliency of the demand we saw this quarter.
Unlike previous years, where Q1 outdoor sales are boosted by off-price sales of discontinued or overstock product from the past fall's hunting season, this was not the case in Q1 of 2022. The overall outlook for Rocky work, outdoor, and Western for the balance of 2022 remains solid. With respect to Rocky Commercial Military and Duty divisions, continued efforts over the past few quarters materialized in Q1 results exceeding expectations.
The arrival of much needed inventory helped commercial military sales continue the positive trend established in the Q4 . While our public service business had one of the best quarters as we've increased production of our duty footwear in our Puerto Rican facility.
Although there were a multitude of variable contributions to the growth in both categories, the drawdown of the pandemic restrictions in the military and numerous municipalities allowed our military members and public servants to train and work more often than in the last twelve months. Our Muck and XTRATUF brands both posted sizable gains in the Q1.
For Muck, core styles remain in high demand and sold through very well in farm and ranch and outdoor channels, while most new spring 2022 product is just now arriving, creating a nice tailwind for Q2. Muck certainly has a good backlog, and we are working to return to normal retail inventory positions. Additionally, we are beginning to see orders increase with most of our retail partners as they look ahead to fall and winter, which are the key seasons for the Muck brand.
At the same time, XTRATUF continues to gain momentum, especially with the brand's key outdoor and fishing retail partners. We are experiencing growth on two fronts, both on a door productivity basis as accounts expand into new styles, as well as expansion of doors from our existing accounts. This expansion positions us for a strong 2022 as our current backlog will only strengthen as we continue to launch new XTRATUF products this year.
Turning now to our retail segment. Q1 traffic and conversion of our own e-commerce sites was up nicely year-over-year, even as we pulled back on expensive performance marketing. In addition to double-digit e-commerce growth for both Rocky and Georgia, the Q1 was highlighted by the launch of a new I Am XTRATUF campaign on March 1.
The campaign has been a fantastic success for the brand thus far, generating a groundswell of demand and positive sentiment across both core and new consumer segments with more than 500,000 video views to date. While we are pleased with our Q1 e-commerce results, our fulfillment expansion activities did hinder our ability to ship all DTC orders in a timely manner.
This was most pronounced with our Muck and XTRATUF brands, as most of this inventory is processed in our new Reno DC, which wasn't fully operational until early April. We are excited to have all inventory now in our distribution and fulfillment system, and look forward to taking advantage of our enhanced capabilities to better capture the direct demand for all our brands.
Meanwhile, our Lehigh B2B retail business has had a very strong start to 2022, driven by significant growth in both new and existing accounts. This culminated in March, representing the highest single revenue month for CustomFit in Lehigh's history. With prices going up across the footwear industry, many of our customers have increased the subsidy amounts for their employees, helping fuel our top line performance. Additionally, many accounts are beginning to view providing safety PPE, such as footwear, orthotics, and compression socks, as a tool to drive employee retention.
With its wide offering of safety products, Lehigh has been able to organically drive additional revenue with existing accounts. As COVID concerns have continued to abate, our number of on-site fits events is gaining pace, which, combined with our email and SMS strategy, is driving higher account participation rates, increasing our account revenue and penetration rate.
Overall, I am very pleased with our start to 2022. Our continued focus on operational excellence, combined with our comprehensive portfolio of brands, have put us in a great position for upside in a challenging environment as we've seen over the past few years. Our strategies, people, and ability to satisfy every niche of the boot markets are what will drive our success this year and into the future. I'll now turn the call over to Tom. Tom?
Thanks, Jason. As Jason outlined, growing demand and strong inventory to meet that demand drove another solid quarter for Rocky. Reported net sales for the Q1 increased 90.5% year over year, or 32.2% on a pro forma basis to $167 million. By segment on a reported basis, wholesale sales increased 126.2% to $134 million, retail sales increased 19.3% to $28.6 million, and contract manufacturing sales were $4.4 million. Turning to gross profit. For the Q1 , gross profit increased 78.8% to $62.8 million, or 37.6% of sales, compared to $35.1 million, or 40.1% of sales in the same period last year.
The decrease in gross margin was mainly attributable to the increase in inbound freight costs, coupled with the delayed impact of our price increases and a lower mix of retail segment sales compared to a year ago period, which carry higher gross margins than our wholesale and contract manufacturing segments. Gross margin by segment were as follows. Wholesale down 160 basis points to 36%, retail up 30 basis points to 48.4%, and contract manufacturing down to 16.2% from 29.9% a year ago, due to labor costs and constraints in Puerto Rico. Operating expenses were $49.6 million, or 29.7% of net sales in the Q1 of 2022, compared to $28.6 million, or 32.6% of net sales last year.
Excluding $1 million in acquisition-related amortization and integration expenses for this quarter, and $5.2 million in acquisition-related expenses for the Q1 of 2021. Operating expenses were $48.6 million, or 29.1% of sales in the current year, and $23.4 million, or 26.7% of net sales in a year ago period. The 240 basis point increase in operating expenses as a percentage of net revenue was driven primarily by higher logistics and fulfillment costs, including temporary spending associated with the opening of the new Reno distribution facility. Income from operations was $13.2 million, or 7.9% of net sales, compared to $6.6 million, or 7.5% of net sales in the year ago period.
Adjusted operating income, which excludes the expenses related to the acquisition in both periods, was $14.2 million or 8.5% of net sales, compared to adjusted operating income of $12.1 million or 13.8% of net sales a year ago. For the Q1 of this year, interest expense was $3.9 million, compared to $747,000 in a year ago period. The increase reflects interest payments on our senior term loan and credit facility we used to fund the Honeywell footwear acquisition. On a GAAP basis, we reported net income of $7.4 million, or $0.99 per diluted share, compared to net income of $4.5 million, or $0.61 per diluted share in the Q1 of 2021.
Adjusted net income for the Q1 of 2022 was $8.2 million, or $1.10 per diluted share, compared to adjusted net income of $8.7 million or $1.19 per diluted share. Turning to our balance sheet. At the end of the Q1 , cash and cash equivalents stood at $15 million, and our debt totaled $267.7 million, consisting of $126.8 million term loan facility and borrowings under our asset-backed credit facility. As of March 31, 2022, we had $30.6 million of borrowing available under our credit facility. We are currently working with our lenders to temporarily increase the size of our credit facility by $25 million to provide working capital flexibility over the next couple months.
Inventory at the end of the Q1 was $289.2 million, compared to $125.1 million a year ago. The increase in inventory was driven by overall cost increases and strong sales growth, combined with additional inventory as a result of the increased transit times and the distribution and fulfillment challenges experienced in the second half of 2021. While inventory at the end of March was higher than we would have liked, it has come down over the past month. The company plans to realign inventory levels with the sales growth and inventory purchasing strategies by the end of 2022. With respect to our outlook, based on the Q1 sales results, we are raising our full year projections.
We are now expecting sales for 2022 to increase between 21% and 24% over 2021, up from our prior outlook of 16%-19%. In terms of gross margin, we still expect wholesale margins to remain under pressure in the first half of the year, with second quarter gross margins down slightly compared to the Q1 , before improving starting in the third quarter as our price increases go into effect and start flowing through the income statement. Based on the outlook for wholesale margins and our projected sales mix by segment, we still expect we'll move towards overall gross margins of approximately 40% by the Q4 of this year.
As stated earlier, we expect to gain efficiencies in our distribution and fulfillment capabilities as the year progresses, while also working to identify synergies and other cost saving opportunities now that the integration of our two organizations is complete. We did spend more than we planned during the Q1 on temporary help at our Reno distribution center, but expect to start phasing this extra expense out during the Q14 .
Our current view is that we will generate slightly better expense leverage in Q2 versus Q1 in an adjusted basis, and then start driving down SG&A as a percent of sales into the 26%-27% range in the second half of the year. For the full year, we are now targeting achieving approximately 60 basis points of expense leverage over 2021 adjusted levels and are making further progress next year. This will help to transform our top line success into stronger earnings, which, along with the cash generated by reducing inventories, put us in a good position to begin paying down our debt. That concludes our prepared remarks. Operator, we are now ready for questions.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes to the line of Susan Anderson with B. Riley. You may proceed with your question.
Hi, it's Alec Legg for Susan. Thanks for taking our question. First off, nice job on the quarter. Then my question.
Thank you.
Yep, you're welcome. Just on the Nevada distribution center. Sounds like it's mostly done, but the current challenges are related to labor. Is there anything else that needs to happen in the Nevada distribution center or it's mostly just labor there?
Yeah. Hi, Alec. This is Tom. I'll start with this one. Yeah, the good news is that the Reno distribution center, as we sit here today, has full capabilities to process, you know, all the different types of orders that it is needed to process, whether it be case to carton or sorted product or e-commerce DTC type orders. We did have to use a significant amount of temporary labor in the Q1 . And as we outlined a few minutes ago, we plan to phase out a lot of that temp labor.
We had ramped up the temp labor in Reno as we tried to dig out of the backlog once the capabilities became live, which was in March and then in April from a DTC standpoint. We'll phase out temp labor as we go through the second quarter. We are making good progress in hiring people every week.
I will just add, there are small issues around getting equipment and things in that area, but not nearly as bad as it was, you know, 6-8 months ago. To Tom's point, the labor is the biggest issue, but there are still, you know, issues around getting equipment and other things.
The other thing to call out with the Reno facility is that not only will we see temporary labor come down over Q2 and Q3, but I believe that the teams will become more efficient.
Yeah.
They're learning new processes. There's still efficiency improvements to be made in 2022 at the Reno facility.
Got it. A follow-up just on how we should think about wholesale and retail sales throughout the rest of the year. Before, I remember you were focusing on wholesale just to kind of gain shelf space. How should we think about the sales growth between wholesale and retail, just the cadence-wise going in through the rest of the year?
Yeah. I'll start this one off. You know, I think you're right. The strategy was in Q1 that we wanted to defend our shelf space with the retailers. We focused and prioritized those type of shipments. Now that we have the ability to ship Muck and XTRATUF, but really the entire catalog that's in Reno, I think we will see the e-commerce business recover nicely. It was down slightly in the Q1 for those brands that were housed in Reno. I do think that the bulk of the growth will still happen in wholesale. That's where we're seeing the strongest demand. However, you know, our retail category, both Lehigh and our e-commerce business is growing nicely.
I would probably say that the stronger growth will be in wholesale for the year.
Thank you.
Our next question comes from the line of Camilo Lyon with BTIG. You may proceed with your question.
Oh, great. Thanks. This is Mackenzie Boydston on for Camilo. Thanks for taking our questions. My first question was just about the price increase that I believe you took January first. Can you just kind of help us understand, was that an across the board kind of price increase and how you kind of looked at that from like an Ohio group versus Boston group perspective? Also, did you see any price resistance from the consumers with that price increase? Do you have any price increases that you're planning for the rest of this year?
Yeah. Thanks for the question, Mackenzie. We didn't see much price resistance, right? The marketplace, everybody was taking price increases. There's still competitors in the marketplace taking price increases. I think the market's okay with it. The market's never okay with price increases, but under the circumstances it seemed to go better than normal. We did take a price increase on all brands and when we went across, so all the Rocky, Georgia, Durango, Muck, XTRATUF, Servus, NEOS and Ranger brands, we did take a price increase on all of those. There was one more part of that question. I forgot it. We do not have-
That would be for any other price increases planned.
Yeah. Yep. I just remembered that. We do not have any planned at this time. We are evaluating that, really as we speak. We are coming into a sales meeting timeframe here in the end of May, but we do not have anything planned for a price increase at this time this year.
Got it. Thank you. Just on your supply chain and your exposure to Asia, I believe the Boston group is a little bit more exposed to Asia than your legacy brands. Can you just talk about any impact that you're seeing from the manufacturing side from the lockdowns in Asia? You know, have you been able to shift maybe any additional manufacturing to your U.S. facilities? Just understand, like, your exposure and your impact from the lockdowns there.
Yeah, sure. Actually the Muck and XTRATUF brands, excluding our own factory in Quzhou, we do not produce any other products in mainland China. Those products are all made in Indonesia and Vietnam. We saw actually less issues with the Muck and XTRATUF from the shutdown standpoint. Our factory was shut down for like 5 days, so not terrible. We did have one other factory that we do business with in some of the other brands, Rocky, Durango, that we did have a shutdown, again about a week, I think 6 days. That wasn't too awful from a COVID standpoint, where we saw any major delays. What we are still seeing are long lead times all around the world really.
you know, we used to be able to get products placed and shipped and delivered to us maybe within 90 days and, you know, we're seeing stuff in 120, 130, 140 days, and the lead times have just become much longer in regards to that.
Yeah, I think these longer transit times, it's impacting us a couple ways. When we're chasing inventory on a particular style or for a particular brand, you know, it is causing a little bit of issue in trying to get the rest of those orders out the door. But it's also put a strain on working capital as we have, you know, almost four times the amount of inventory in transit today than we did a year ago. Those long transit times are, you know, it's putting a lot of inventory on our balance sheet that we haven't had a chance to even distribute and turn into cash yet.
I think the transit times out of Asia, I'm optimistic that we will start to see a little bit of relief there, and we'll just have to take that into account as we're doing our future purchasing out of Asia.
That's really helpful. Thanks. Just last one for me. I think on the last earnings call, you mentioned that your wholesale partners were being a little bit more aggressive with their orders, just to make sure they had enough product this year. Are you seeing any kind of caution from your wholesale partners today for fall, just given, you know, an increased macro uncertainty, you know, recessionary fears, you know, war in Ukraine, et cetera? Just any incremental caution from them, or is it pretty much the same as it was last quarter?
I don't know if it's caution based on the things going on in the world, or if they've just gotten back to a more normal inventory position in their stores, right? We have definitely seen the bookings become more normalized. We're still have a tremendous backlog. Not a tremendous backlog, but we have some backlogs. We have some bookings. We feel pretty good about where we're at from that standpoint. Obviously there's a lot of conversation going on around the economy and is there gonna be a recession. We're being very cautious around that and watching it. We still think that our brands are a little safer when it comes to that, right? People are still working, people are still out, people are still active.
We feel pretty good about where we're at there and haven't seen anything too crazy from our retail partners in regards to it.
Perfect. Thank you so much. That's all from us for the rest of the year.
Thank you.
Our next question comes from the line of Jonathan Komp with Baird. You may proceed with your question.
Yeah. Hi, thank you. Maybe a broader question on the sort of the base business, if you wanna call it that, but if you look excluding the you know the Boston brands, you know, the Rocky business generated more than $100 million of revenue in the quarter. That looks like a new high water mark and certainly a step up from the last few quarters. Just any more color on what you've seen, you know, for that business and kind of broader context on, you know, that step up in the sales levels?
Yeah. Hi, John. I'll start with this one and Jason certainly will add on. You know, I think we continue to see strong demand for the Rocky, Georgia and Durango brands. In the Q1 , I would say was a high mark for them. I think you know, these brands benefited from being in our Ohio distribution center. Then I think, as Mackenzie pointed out, we source more of that product out of our Dominican Republic facility than Muck and XTRATUF, and so they benefited from shorter lead times. Not to mention that when coming out of Asia, there's shorter lead times on these three, our legacy brands here, as they generally come through Seattle versus Long Beach.
Supply chain was working in the favor of those brands. I think the demand is still very strong for the XTRATUF and Muck brands as can be seen in the results. We were able to execute on the demand in a better way for the Rocky, Georgia and Durango brands.
Yeah, that's helpful. Maybe thinking about the full year guidance and the update, how much of the update and the increase, you know, relates to the first quarter versus any changes for the balance of the year? It looks like the midpoint, you're assuming, you know, close to 10% growth for the balance of the year. Is that still concentrated in third quarter with Q2 and Q4 flat-ish or how are you thinking about the year as you look across the quarters?
Yeah.
Go ahead. Sorry.
You know, I think the messaging is still the same. I mean, Q3 for us last year was kind of the peak for the distribution challenges that we had. You know, that is gonna be a very easy comparison. We do have line of sight at our bookings. We think that we will cover nicely, really for all brands, but particularly for Muck and XTRATUF, which were really hindered by the distribution challenges last year. Our expectation is that most of that growth will come in the third quarter.
Just so we're aligned, do you expect to still grow in Q2 and Q4 or should we be expecting anything that would impact those two quarters?
Yeah. We're expecting growth in the second quarter certainly. That is up on a tougher comparison, 'cause if you recall, at that part of the year, we were processing the Rocky, Georgia, Durango brands out of Logan. We really hadn't started the move out of the Honeywell facility, and so we were not as hindered. We weren't hindered as much in Q2. It is also the first full quarter of the combined organizations from a sales perspective. In the Q4 , I think, you know, growth will be challenged a little bit, but that's certainly not speaking to the demand of the brands.
I think that it is, it's speaking to, we don't anticipate rolling into the Q4 of this year with a backlog, and open orders that we did last year with the miss in the third quarter.
Understood. Maybe last topic. Just on the balance sheet, any color on sort of your plans and your expectations from an inventory perspective? Are you targeting a certain, you know, level of inventory turns or weeks on hand? Maybe similar to just for the overall balance sheet leverage, how quickly do you think you can start converting the working capital to cash? You know, any expectations for the leverage, you know, for this year or after that? Thanks.
Yeah. As we alluded to on the call earlier, you know, we've already seen, you know, decreases in inventory levels. I think they hit their peak probably about the middle of March, and they've been working their way down nicely since. We'll continue that trend. You know, if we had to set a target, I think it would be around a $40 million decrease in inventory by the end of the year. That's what we're internally working towards, and obviously there's a lot of factors that'll go into play there, for us to achieve that goal. We're gonna manage inventory down and use that working capital to the change in working capital obviously to pay down debt by the end of the year.
That's Tom, that's against the Q1 balance or the Q4 balance, just for the base year, that $40 million reference?
Correct. Q1, sorry. Down from Q1.
Okay. In the $250 million range is the goal?
Yeah. Yes, correct.
Okay, great. Thanks again.
Thanks, John.
Thank you, John.
Our next question comes from the line of Rob Shapiro with Singular Research. You may proceed with your question.
Hi. Besides the increase in expenses in Reno, have you seen any other impacts of the inflationary environment on other parts of the business?
Yeah, yeah. I want to. You know, just to be clear there too, 'cause, you know, in hindsight, it might have got blended in our prepared remarks. We saw a significant increase in temp labor in Reno, but we also saw significant freight increases, and that's what we meant by fulfillment costs. Freight increases, particularly outbound freight, is what we'll be referring to, which shows up in operating expenses for us. We saw with fuel prices increased rates from our freight partners and LTL carriers. The other added cost there that would certainly be temporary in my mind was we made some freight concessions with some of our retail partners as we were shipping product to them late.
That is something that we would not see on a go forward basis. That definitely added cost to our operating expenses was the outbound freight cost.
All right. Well, can you comment on the higher accounts payable this quarter?
That's simply a reflection of inventory. In reality it's inventory in transit. I alluded to before, a significant increase in in-transit inventory. You know, while that inventory is traveling to us, it would sit in accounts payable.
Okay. That's all for me. Thank you.
Great. Thank you.
Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Jason Brooks for closing remarks.
Great. Thank you very much. Just wanna say thanks to everybody on the call and our investors and really wanna put out a thank you to all the Rocky Brands employees and the efforts that they've put in to make Q1 happen in 2022. We look forward to finishing out the year and another successful quarter for Rocky Brands. Thank you so much.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.