Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Rocky Brands' Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAlester of ICR..

Thank you, and thanks to everyone for 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, 2023. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands..

Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we will be happy to take any questions. Our second quarter results modestly exceeded our expectations as we continue to effectively navigate an unprecedented consumer environment.

I'll share more detail momentarily, but similar to last quarter, Durango and XTRATUF led the way with double-digit year-over-year gains that offset some anticipated softness in other areas of our business. It is during a less robust macroeconomic backdrops like the present that this benefits of our diversified brand portfolio stands out.

Over the past several years, we have taken action to improve the company's financial profile in order to reinvest in growth and drive increased shareholder value. This is evidenced by higher gross margins and lower operating expenses, both of which contributed to the improvements in earnings.

We took a significant step forward, further enhancing our earnings power during the second quarter with the refinancing of our debt and simplification of our capital structure.

The new credit and term facility we signed with Bank of America in April is projected to generate approximately $4.4 million in annualized interest expense savings starting in 2025. Before I hand it over to Tom for more detail looking at the financials, I'll take a few moments to walk through our second quarter brand and channel performance.

Starting with Durango, it continues to be one of the best-performing Western brands in the wholesaler channel, delivering strong double-digit gains this quarter. We experienced continued strength in bookings across key accounts and Farm & Ranch partners, along an acceleration in at-once business.

The team is working to supply chain with more of the brand's core in-demand products, which along with a positive response to the fall 2024 line, sets Durango up to build upon its strong first half over the remainder of the year.

Like Durango, XTRATUF maintained its strong momentum from early in the year and again, outperformed expectations with a strong double-digit gain in Q2. Deliveries for spring 2024 were very healthy, and we also filled numerous replenishment orders for existing products as customers' appetite for XTRATUF continues to expand rapidly.

Along with strong demand for its legacy outdoor products, XTRATUF saw a positive reception for new colors and collaborations with the launch of its 2024 spring line.

The brand continues to see strong demand across a number of niche outdoor verticals, such as sport fishing and outdoor recreation that are leading not only in increased sales but increased distribution with large retailers that position XTRATUF for continued success.

Moving forward, the team remains focused on securing new bookings for its upcoming spring 2025 line and filling in replenishment aggressively this year, while maintaining efforts to source sufficient inventory to fulfill the strong and growing demand for the brand. Muck had a good start to the quarter with the launch of its spring 2024 line.

Unfortunately, the unfavorable spring weather patterns in several areas of the country led to slower retail terms, and as a result, slower-than-anticipated restocks late in the quarter. Retail partners are making progress in working through the inventory, and we anticipate getting back into a more normal restock cadence.

Even with the lack of adequate weather to drive demand, we continue to see strong engagement with customers throughout our new website, enhanced marketing campaign, highlighting the brand's heritage and influencer partnerships that are amplifying visibility.

As a result, we continue to add to Muck's account base and anticipate a rebound heading into the important fall season. Shifting to Georgia. It was a challenging second quarter for our Work category, and the brand wasn't immune. Georgia continues to see more over-inventory pressure from smaller accounts.

However, the team was able to offset much of this pressure with mid-single-digit increases with our key accounts business, which has largely resumed its normal order cadence with the COVID-related supply chain disruptions, and the excess inventory purchases that follow are behind us. Similarly, Rocky Work was also under pressure for much of Q2.

However, momentum did build later in the quarter. Following a difficult April and May, we saw a notable uptick with June, up nicely versus a year ago period.

The late quarter rebound fueled by new and innovative product introductions in the last 12 months, leaves us optimistic that Rocky Work can continue to trend positively in the second half of the year.

In fact, the brand continued to expand distribution with key national suppliers as well as with catalog and direct-to-consumer sites this quarter, positioning the brand for a stronger reach going forward. Meanwhile, our work repositioning Rocky western with new value-driven product at more competitive price points continued in the second quarter.

Unfortunately, it has taken longer than planned to move through the order, higher-priced inventory in the channel, which is impacting sell-in.

That said, we are encouraged by the initial reception of our new more affordable product, and remain confident that our current strategy for Rocky western will continue to gain traction with consumers, retailers over the coming quarters.

With respect to Rocky Outdoor, last year's poor hunting season continues to weigh on the business, limiting the typical bulk shipments that typically occur in the second quarter, ahead of the start to the new season this fall.

While the hunting market overall remains challenging, we saw our nonhunting footwear led by rugged casual styles trend positively this quarter. This is helping to expand the brand's retail partner base and reach a broader consumer audience.

Lastly, in Wholesale, our commercial military and duty segment was down in line with our expectations, as we completed the 2023 military blanket purchase agreement in Q1. A delay in the military budget release for 2024 is also impacting our sales cadence versus last year.

Solid gains in our duty fire collection and our postal business helped to partially offset the current military headwinds. Shifting to Retail. Our branded e-commerce sites continue to trend nicely positive. Double-digit revenue gains from our XTRATUF, Durango, Georgia and Rocky sites led the way for our digital channel.

We also utilized our dot-com business to move some overstock inventory in the quarter ahead of restocking our large wholesale channel with many of our brand's bestsellers. Lastly, our B2B Lehigh business was flat compared to the second quarter of 2023.

However, key customer account spending improved for Q1, driven by a shift in focus to exiting account retention and growth. Last year, we shared that we implemented a significant realignment of our sales organization to improve our sales pipeline and provide greater continuing in account setup, rollout and implementation.

These changes are driving results, leading to an improved sales pipeline that positions Lehigh for a return to growth in the second half. Before I turn the call over to Tom, I want to thank the entire Rocky team for their continued hard work this quarter and a solid first half of the year.

While the operating environment remains a challenge, I am pleased to see our efforts with top line expansion and expense management, along with our improved balance sheet, deliver positive results and begin to translate into value for our shareholders.

As we look to the second half of 2024, I am cautiously optimistic that we can continue to build on our momentum and drive continued success. I'll now turn the call over to Tom to cover the financial details.

Tom?.

Wholesale, up 200 basis points to 37.2%; Retail, down 180 basis points to 46.9%; and Contract Manufacturing up 420 basis points to 9.6%. Operating expenses were $33.5 million, or 34.1% of net sales in the second quarter of 2024 compared with $35.4 million, or 35.4% of net sales last year.

On an adjusted basis, operating expenses were $32.8 million this year, or 33.4% of net sales and $33.6 million, or 33.2% of net sales a year ago. Income from operations was $4.5 million, or 4.6% of net sales compared to $2.2 million, or 2.2% of net sales in the year ago period.

Adjusted operating income was $5.2 million, or 5.3% of net sales compared with adjusted operating income of $5.7 million, or 5.6% of net sales a year ago. For the second quarter of this year, interest expense was $6.1 million, inclusive of a $2.6 million onetime loan extinguishment charge compared with $5.6 million in the year ago period.

On an adjusted basis, excluding the $2.6 million onetime term loan extinguishment charge, interest expense for the second quarter of 2024 was $3.5 million.

The decrease in interest expense on an adjusted basis was driven by lower debt levels and interest rates resulting from the debt refinancing completed in April of this year compared with the second quarter of 2023.

On a GAAP basis, we reported net loss of $1.2 million, or $0.17 per diluted share compared with a net loss of $2.7 million, or $0.37 per diluted share in the second quarter of 2023. Adjusted net income for the second quarter of 2024 was $1.3 million, or $0.17 per diluted share compared with breakeven a year ago. Turning to our balance sheet.

At the end of the second quarter, cash and cash equivalents stood at $4.1 million compared with $4.5 million at December 31 and $3.1 million a year ago. Total debt was $152.4 million, a decrease of 12% since December 31 and a decrease of 31.3% since June 30 of last year.

Inventories at the end of the second quarter were $175 million, up slightly compared to $169.2 million at the end of 2023 and down 20% compared to $218.3 million a year ago. With respect to our outlook, we still expect net sales to be toward the high end of our initial range of $450 million to $460 million.

The only thing that has changed since our Q1 call in late April is our view on gross margins.

Due to the rising ocean freight rates, the volume shipped within our Wholesale channel to more of our larger key accounts, we now expect gross margins for 2024 to be slightly less than last year's 38.9% adjusted gross margin versus our prior guidance of a slight improvement.

In terms of how this impacts the second half by quarter will depend on the timing of when the product sells, but we currently anticipate third quarter gross margins to decrease sequentially from Q2 gross margins before rebounding in the fourth quarter due to our mix of Retail sales. That concludes our prepared remarks.

Operator, we are now ready for questions..

[Operator Instructions] The first question is from Janine Stichter from BTIG. Please go ahead..

Hi, good afternoon. I want to ask a bit about supply chain. I think you talked about chasing inventory for Durango and XTRATUF. Maybe if you could just comment on the current state of the supply chain environment, your ability to chase and kind of where we are in terms of bottlenecks or where the -- how the inventory flows stand.

And then with that, I would just love a little bit more color on what you're seeing with ocean freight rates, how much you have locked in and how much visibility you have there? Thank you..

Janine, thanks for being on the call. So as we talked about chasing some inventory for Durango and XTRATUF, those -- the sales of those brands have exceeded our expectations a little bit in the first half of this year. We are seeing a little bit of delays from a supply chain perspective.

But we feel -- as you can see with our inventory being up, we're -- we've -- a lot of inventory coming our way and manufacture our own inventory to prepare us for Q3 and for Q4. And so we're trying to catch some inventory on those two brands, but I think our inventory is well positioned for the last half of this year.

As it relates to container prices, we definitely have seen an increase, particularly in the month of June. They've gotten a little softer in the month of July so far, but we're monitoring that. And that's why we've been a little cautious with our margin guidance for the rest of the year..

All right. And then maybe just one more on the Work brands. It sounds like you're seeing some pressure there, but it's really more on the smaller accounts than the national accounts.

Can you just comment on what's going on there? How much of it is the end consumer or general softness in the work market versus the retailers that you're selling into? Would just love to understand the dynamics there..

Yes, absolutely. Thanks for the question, Janine. So what we are finding that we call mom-and-pops, the independents, are just being a little bit more conservative. Our brands are still checking at Retail. As we stated online or on the call here, too, our key account business is actually doing significantly better.

And so same kind of product, it's being sold. But what we believe is the mom-and-pops are just being more conservative. So if they have three size 10s and they sell 1, they used to buy back into it. But now they're saying, I'm going to wait, and I'm going to get down to one pair or maybe even zero pair and then I'll buy back into it.

So we're not concerned with the brands at all. We're just watching the retailers to be very conservative. I think there's probably a little bit of play here with the election year also. We typically see the mom-and-pops, in particular, get a little antsy around the line here.

So we think we're in good shape here, and we just got to kind of move through the cautiousness..

All right. Thanks so much..

Thank you..

The next question is from Jonathan Komp from Baird. Please go ahead..

Hi. Good afternoon. Thank you.

Tom, I was hoping you could share a little more as you look to the back half, just what type of underlying Wholesale growth you're expecting? And any more color to the order book support that you have sitting here currently?.

Yes.

So I think for our Wholesale business, if you're looking at it from a nonrecurring perspective, which is how we're viewing it this year with the changes with the Canadian distributor and the commercial military contracts, we're targeting that mid-single-digit type of growth in Wholesale and then probably a little bit more in that retail area, particularly in the e-commerce channel.

So I would say we're still targeting that $450 million to $460 million range, the high end of the range. And so we're not making really any revisions upwards, but the key account growth is certainly going to help us get to that mid-single digit growth that we talked about..

Yes. Great. Thank you.

And when you look at the western category specifically, either based on indications you see in your Retail business or sell-through at some of your key partners, what's your best sense of the health of that category? And how are you thinking about sort of the end market rate of sell-through overall?.

This is a great question. I think everybody is kind of aware what's kind of happened in the western business or maybe even if you think about the country music business is really kind of spiked some stuff there. So we believe that we are seeing a little bit of that, but not a lot.

The single-digit kind of partial growth there from the popularity of what's going on with country music and western boots. But our boots are still just really functional boots.

And I think a lot of the people that are buying the other kind of boots, they're just going to Amazon looking for a cheap boot and it looks like they wanted to look, and so they're buying that. So I think it will affect some of those kind of brands more so. But I think the traditional brands like we are, I think we'll be okay.

And right now, we don't see it slowing down this year, and we'll keep a close eye on it for next year..

Yes. I think, Jon, we have limited visibility into some of the sales of some of our -- style for our western retail customers. And we're seeing good sell-through there. I think we're seeing a greater Wholesale sell-in as people start to normalize their inventories a little bit as well. That's my take on it..

Yes. Very helpful. Maybe last one just related to the margin.

Could you maybe quantify what type of increase you're seeing or building in from a freight perspective in the gross margin update? And then is there any ability or willingness to pull back a little on SG&A? Or are you still expecting to delever slightly based on investments in the incentive comp?.

Yes. So look, container prices, we saw container prices almost 2x what they were in June from May, right? Again, they've started to soften a little bit. This is the ocean container [technical difficulty] softened a little bit in July. So we're watching price. We're watching our peers. We haven't really seen anybody take pricing adjustments yet.

If I were to kind of quantify, we're probably a couple of hundred basis points difference over LY just on the ocean freight piece of it. But we're continuing to monitor that.

And really, that will depend on when and what product sells, as Jon, you know, you followed us a long time, we source a significant amount of our product from the Western Hemisphere. So we're putting a lot of products from Puerto Rico and from the Dominican Republic.

So we'll probably be less impacted than some of our peers that source more predominantly or exclusively from Asia. But we're continuing to monitor and it'll certainly have an impact on us, and we're going to try to mitigate that.

As it relates to operating expenses, we are still trying to manage through the operating income goals we said at the beginning of the year. So yes, we are looking for areas where we can [technical difficulty] on cost to try to maintain that operating margin. And so that's the goal for the next five months..

Okay. Thanks again..

Thanks Jon..

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

Great. Thank you. I just want to reiterate one more time, a big thanks to the Rocky team. Everybody is working really hard to navigate this year, a complicated year. And I also want to say thanks to our shareholders and all their support. And we look forward to finishing out a good year in 2024 and continuing to grow these brands in '25 and the future.

So thank you very much..

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