Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third Quarter 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 will now turn the conference over to Brendon 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 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?.

Thank you, Brendon. With me on today's call is Tom Robertson. After Tom's and my prepared remarks, we will be happy to take questions.

We are pleased with our third quarter results, which were highlighted by a meaningful top-line improvement compared with the second quarter and a significant increase in profitability on both a sequential and year-over-year basis.

As we outlined on our Q2 call, we anticipated that our performance would start to rebound beginning in the second half, thanks to the sustained consumer demand we've seen all year for our product offering. It's important to remember that while 2023 got off to a difficult start.

Much of the top-line pressure was experienced, was related more to macroeconomic headwinds and industry dynamics, notably excess channel inventory along with tough comparisons versus the strength and desirability of our brands.

In fact, our sell-through has held up relatively well despite persistent inflation that has impacted consumer discretionary spending.

This performance, combined with early actions by retailers to better align overall inventory levels with the current demand environment drove an acceleration in at-once orders from many of our key wholesale partners as the third quarter progressed.

While third quarter sales did not reach our year ago levels, the work we've done enhancing our distribution and fulfillment capabilities, along with lower expense levels, including reduced freight rates allowed us to translate a 13% decrease in revenue into a 40% increase in operating income on an adjusted basis.

Tom will cover the numbers in more detail shortly. But before that, I would like to spend a few minutes reviewing the drivers of our recent top-line performance. Starting with Work.

Our four brands that make up this category, Georgia, Rocky, Muck and XTRATUF, collectively delivered a sequential sales increase in the third quarter after selling-in was severely impacted by high retail inventories in the first half of 2023.

And on a year-over-year basis, the decline moderated significantly from what we experienced in the first and second quarters. Momentum for the Georgia built throughout the quarter with sales turning positive in the month of September, as many key customer accounts began returning to more consistent ordering as their inventories further normalize.

At the same time, low pricing on a certain Georgia styles, which is the result of recently realized cost savings that we passed along to customers has spurred a notable pickup in demand. Looking ahead, we are optimistic about the brand's growth prospects. Consumer response to the Georgia's Fall 2023 line has been very positive.

While wholesale bookings for Spring have been much stronger than we've seen in quite some time. Our Rocky Work brand had a bit more challenge in the Georgia this quarter, with excess inventory levels continuing to impact replenishment orders.

However, there were some bright spots, particularly with strength in our own e-commerce channel, along with solid success with new key independent retailers, driven by new product introductions. Shifting to our rubber-based work product, both the Muck and XTRATUF brands delivered solid results.

While warm weather weighed on category demand and elevated inventories continue to impact sell-in, we saw a steady improvement in Q3 compared to the first six months of this year.

Of note, Muck's new Fall collection featuring 12 new styles and supported by a new marketing campaign that targets the brand's core consumer is performing well at the gate, setting the stage for continuing success in the months to come.

With XTRATUF, shipments were up year-over-year for the first time in 2023, as we deliver the brand's highly anticipated new Fall product. Inventory levels for our key partners have [Technical Difficulty] growing wholesale demand.

As we finalize our Spring '24 booking season, we are seeing continued success for the brand in both existing and new channels and expect this positive trajectory to continue into the fourth quarter and next year. Turning now to our Western business.

While inventory levels with some key account partners were again a hurdle, we saw steady sales improvements in the third quarter over the first half of the year. With Durango, strength in our direct-to-consumer channel and increases in our special makeup business helped offset a portion of the lower selling compared to a year-ago.

In terms of sell-through, lower MAP pricing on certain key products, which is the result of the affirmation cost efficiencies that we were able to pass through to customers, help drive demand and further reduce on-hand inventory levels for several retailers.

We also saw notable improvement with our Rocky-branded Western product driven by new distribution with key Western retailers. Along with these new partnerships, updates to long-standing Rocky Western best sellers drove new interest in the brand this quarter.

Looking ahead, the Durango and Rocky Western teams are focused on launching of existing new collections in Q4 and ensuring that the right wholesale partners have the right product to meet the needs of our consumers.

Outdoor, which includes under Rocky, Muck and XTRATUF brands was again the category most impacted by retailer inventory levels in the period. A poor 2022 for industry created greater carryover than normal, which led to reduced bookings for new products ahead of this year's primary Fall season.

Hunting boots and apparel were most affected by carryover, and this was compounded by one large sporting goods retailer exiting the category altogether.

That said, as I mentioned, when discussing our Work product, both the 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 markets.

Last but not least, within our Wholesale segment, Commercial Military was a bright spot in the third quarter as orders from several suppliers to the U.S. Army and the United States Marine Corps drove the strongest Q3 in recent memory for the business.

Shifting to our Retail segment, where sales were up 5% over last year, thanks to a very solid quarter from our direct e-commerce channel. Each of our branded sites, Rocky, Georgia, Durango, Muck and XTRATUF were up double-digits which more than offset expected declines in marketplace transactions.

Through enhanced digital marketing efforts, we've been successful fostering more direct engagement with consumers, and we expect this trend to continue going forward, which should positively impact the segment's growth and margin portfolio. Shifting to our B2B Lehigh business. Sales were in line with the year-ago levels.

The temporary headwind from upgrades to our security protocols that we spoke about on our last earnings call in August are now fully behind us, and based on recent event bookings, we are optimistic about the return to growth in the fourth quarter. We are still very positive about our Lehigh business and the opportunity it provides in 2024 and beyond.

While overall market conditions remain challenging, we are confident that our top-line is positioned for further improvement on a sequential basis in the fourth quarter, with channel inventories continuing to come down and the demand for our durable, innovative and accessibility priced Work, Western and Outdoor footwear pick up.

The difference between our sell-through and sell-in is nearly parity. This dynamic, along with an improved balance sheet sets us up for a good finish to 2023 and a strong start to next year. I'll now turn the call over to Tom.

Tom?.

Wholesale, up 160 basis points to 34.7%, Retail, down 70 basis points to 48.0% and Contract Manufacturing down 390 basis points to 11.5%. Operating expenses were $32.3 million or 25.7% of net sales in the third quarter of 2023 compared to $40.3 million or 27.3% of net sales last year.

On an adjusted basis, operating expenses were $30.7 million this year and $39.5 million a year ago, with the decrease driven primarily by lower outbound freight expense, improved distribution center efficiencies and other variable expenses associated with lower sales volumes.

As a percentage of adjusted net sales, adjusted operating expenses improved 290 basis points to 24.5% in the third quarter of 2023. Income from operations was $14.3 million or 11.4% of net sales compared to $11.6 million or 7.9% of net sales in a year ago period.

Adjusted operating income was $15.8 million or 12.6% of net sales compared to adjusted operating income of $11.3 million or 7.9% of adjusted net sales a year ago. For the third quarter of this year, interest expense was $5.8 million compared with $4.2 million in the year ago period.

The increase reflects increased interest rates on interest payments on our senior term loan and credit facility. On a GAAP basis, we reported net income of $6.8 million or $0.93 per diluted share compared to net income of $5.7 million or $0.77 per diluted share in the third quarter of 2022.

Adjusted net income for the third quarter of 2023 was $8 million or $1.09 per diluted share compared to adjusted net income of $5.5 million or $0.74 per diluted share in a year ago period. Turning to our balance sheet. At the end of the third quarter, cash and cash equivalents stood at $4.2 million, and our debt totaled $213.9 million.

We've made good progress in paying down our debt over the last 12 months with total indebtedness down 24.9% from the end of last September and down 16.7% since the end of 2022. A big part of the debt paydown has been driven by our ability to strategically reduce inventory levels.

At the end of the third quarter, inventories were $194.7 million, down 26.5% compared to $265.1 million a year ago, and down 17.3% compared with the end of 2022. Our plan is to now exit 2023 with inventories of approximately $175 million compared with our prior target of $185 million. Now to our outlook.

Based on our year-to-date results and current view of the fourth quarter, we are reiterating our guidance for 2023 net sales to be approximately $470 million. This implies fourth quarter sales improved sequentially from Q3 and decline in Q4 on a year-over-year basis, further moderates compared to recent trends.

Following the discontinued inventory reduction actions we took in the third quarter and some planned promotions to move certain non-core products in the fourth quarter. We now expect full-year adjusted gross margins to be in the 38% to 39% range compared with 36.6% in 2022.

For comparative purposes, it is important to remember that in Q4 of last year, gross margins benefited by 230 basis points from a onetime tariff overpayment recovery.

SG&A is now expected to only deleverage approximately 100 basis points from 2022's adjusted level and interest expense is now projected to be around $23 million due to higher interest rates. All of this implies that the fourth quarter adjusted earnings per share will be similar to both third quarter of this year and fourth quarter of 2022.

That concludes our prepared remarks. Operator, we are now ready for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Jeff Lick with B. Riley. Please proceed with your questions..

Hi, guys. Congrats on a great quarter. Jason, I was curious, you mentioned that sell-in and sell-through are at parity now. So I guess that's the implication there is you're fulfilling kind of one for one.

I'm kind of curious where has the improvement picked up the most? And where -- and you also made the comment that the Spring orders were stronger than quite some time.

So I'm just kind of curious as things evolve in Q3 and now we start to look at the Spring, where have things picked up the most?.

Thanks, Jeff. I would tell you, it might be easier to tell you where things are the slowest. The Outdoor category is still our most difficult. So in the Work, in the Work Western and then really the XTRATUF ankle-deck goods and stuff, that's all doing much better.

I would tell you, though, the retailers are still being very cautious and they're ordering from us on a little more regular basis, but I don't see any big things coming there, just more of a normal pattern. And then yes, we are definitely seeing good Spring bookings for all the brands.

Outdoor, again, is the smaller of any of them, and that would probably be pretty normal for Spring product anyway..

And then as it relates to SG&A, Tom, obviously, you guys are -- that's become a source of some upside.

I'm just curious where is that coming from in terms of just different types of buckets?.

I would -- hey, Jeff, thanks. I would say that the two biggest areas are very clearly on the freight and handling side. So renegotiation of partial rates, part of that, part of it us being more effective on where we're shipping product from, right? We've talked a lot about getting inventory in the right distribution centers. We've made progress there.

And we've also -- we're shipping products smarter than we shipped product in the same period last year. Also, a lot of work has been put into the distribution centers themselves and reducing a lot of the cost that is associated with picking and packing the orders. So we're just being really overall more efficient on all the inventory going outbound.

Also, we've talked about some of the synergies we recognized from some of the reorganization, too. And so we're seeing some of the benefits from a wage and benefit standpoint as well..

And so on the freight and handling, since we were talking about SG&A, that's okay, and then if I could just one more question, you had mentioned that on Retail, your direct sites, each of the five were up double-digits, I'm curious, Q4 is your biggest kind of retail component given the holiday season.

Anything you could elaborate on there just in terms of what you're seeing and how you are feeling about holiday?.

Yes, I can start off and Jason can add in. I think we're feeling very good about our e-commerce business. We think this is, again the one area that kind of takes out any kind of inventory challenge that we would have in the Wholesale category. An important call out too, is that we have been much more promotional with our discontinued product online.

It's the most profitable way for us to unload our discontinued inventory. And so we've been much more aggressive in marketing that, and we're priced much more aggressively. Hence, the slight decrease in Retail margins. But we've continued to see a similar trend year after the start of Q4 from an e-commerce perspective..

Yes, I would just add, weather like today and this week that's happening, really on the East Coast is definitely going to help us. It's unbelievable, and particularly in the Muck brand when weather comes, how it affects that brand. It really affects all the brands.

If it's cold and nasty and wet outside, people are more likely to go buy some new boots to keep their feet warm and dry. I will say that I think we are being cautiously optimistic in regards to the economy, and what might happen from a holiday standpoint.

And I think most of the retail partners are taking a similar kind of approach just to be -- they want to have the product and they want to have the inventory, but they're being cautious about it. So I think it's going to be fine, but it's -- I don't think it's going to be a slam dunk..

I think to Jason's point there, we're seeing our at-once business compared to bookings as a percent of sales over the last quarter and certainly over the last few quarters has been elevated, right? So that just shows you that retailers are buying when they need it versus booking at advance. So that's probably a little bit of cautiousness in Q4..

Great, I'll let someone else to ask the questions..

Thanks, Jeff..

Thanks, Jeff..

Our next question comes from Jonathan Komp with Baird. Please proceed with your questions..

Yes, hi, thanks. Good afternoon. Maybe just a follow-up there to start, Tom, I know previously, you're expecting to get back closer to flat year-over-year revenue growth in the fourth quarter.

So could you just talk a little bit more about sort of the revised view, what's shaping that? And how much, if any, sort of third and fourth quarters more onetime in nature to clear goods versus what you see for underlying demand signals?.

Yes. Sure, Jon. I think we are -- again, to Jason -- use Jason's vocabulary being cautiously optimistic for the fourth quarter and just reiterating overall top-line guidance. Q3 was a little bit better than we anticipated.

And there's probably low single-digits in the $1 million range -- low million dollar range of discontinued product that moved down in the third quarter, and we'll probably continue that into Q4.

But I think we're just going to continue to be cautious here as we work through the rest of the year given everything that's going on in the macro environment..

Okay. And then if I could just ask maybe a broader question, given some of the commentary you shared around order bookings and some of the product initiatives.

When you think out looking forward beyond fourth quarter, how soon do you think you can return to growth overall just based on your planning and what you see in the environment?.

Yes, it's a great question. We've been really trying to dig into this and understand. I think we are going to take a pretty cautious approach to what that might look like in 2024.

We're coming off one of the -- in my opinion, one of the craziest years in 2023, and we're getting ready to go into a 2024 election year, which is also another challenging component.

So I think our plan will be to go into 2024, continue to stay focused on our operations, our internal operational excellence and manage our SG&A and try to continue to find ways to grow the brands where we see the opportunities.

Like I said, we're still excited about Lehigh, and we think that, that might be a different kind of approach next year or different opportunity next year, too. So excited to get the hell out of '23 and get into '24 and get back kind of on our regular pattern, Jon of just slow growth, but throwing some money on the bottom line..

I think just to add on to that, Jon. This quarter is a good example of how the operations have kind of been rightsized. And so we'll be prepared for 2024, right? And Retail will do what Retail is going to do and the economy is going to do, what the economy will do, but we'll be able to take advantage of it if the sales come..

That makes sense. And just last one for me, Tom, and maybe Jason too. Just have you shared any color on the CFO transition back to you, Tom. And then how long you'll be willing to take on the role again since you had other responsibilities, just any broader thoughts there? Thanks again..

So I was the CFO Rocky for six years, six and a half years, before we welcome the last CFO. And I think the plan and intention is that we're going to take our time rehiring. We want to make sure we find the right candidate.

We are very fortunate that I've done this for so long, and it's not going to be a big burden on me to continue to do this, while we look for the next CFO. So we look forward to updating you guys on that later..

Yes, I would just add that we have a great team of people here that are supporting Tom as well from the CFO side. We've got a great team of people that are helping and supporting Tom and me from the COO side or the operations side and the team has really stepped up and done an amazing job in getting us where we are today through Q3.

And so as Tom said, the culture of our company is really important to both of us, and I think everybody in the company. And so we're going to be cautious here and take our time and make sure the next fit is right for us..

All right, thanks again..

Thanks, Jon..

Our next question is from Janine Stichter from BTIG. Please proceed with your questions..

Hey, you got Ethan Saghi on for Janine. I hope you guys are doing well. I just got one on my end. It's regarding SG&A margin. I was just wondering if you could give any color on what that might look like in Q4 and going forward.

And if we should maybe expect it to stay lower in that kind of mid-20s range or if we should expect it to go kind of back further towards the high 20s, low 30s range? Thanks..

Yes, hey Ethan, I'll take this one. And Jason, feel free to add. But I think we kind of guided to the deleveraging in the prepared remarks. But it implies essentially kind of in between the 25% and 30% range, probably leaning closer to the higher 20s.

And I think it's important to call out that if you think about the mix of sales in the fourth quarter, significantly more e-commerce orders in particular. So we see our freight as a percent of sales and even our handling as a percent of sales tick up in the fourth quarter historically. So I would put it in that 27% to 29% range..

Got it. I appreciate it. And congrats on the nice quarter..

Thanks..

Thanks, Ethan..

There are no further questions at this time. I would now like to turn the floor back over to Jason Brooks for closing comments..

Great. Thank you very much. Just to wrap things up, I'd really like to thank our shareholders, our vendors and customers as we've really had to navigate a challenging 2023, which has been challenging for a lot of companies and people.

And then I really would like to thank the entire Rocky team who has just worked effortlessly and diligently to make Rocky Brands the best company it can be. The team's morale as well, and we are excited about the future of this company and look forward to continuing to build Rocky Brands. So thank you all very much, Rocky..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..