Rocky Brands, Inc. (RCKY) Earnings Call Transcript & Summary

Really pleased to welcome back Rocky Brands. Rocky has been coming to the conference, I think, since 2004. Today, we have, as we did last year, Jason and Tom, CEO, CFO. They've got a new presentation they're going to run through on the business. And then if there's time, maybe do a few questions. If you have questions, don't get them answered here. The management team does have a breakout this afternoon. So with that, I'll turn it over to Jason.

Thanks, Brendon. Appreciate it much, and happy to be here again. This is our safe harbor statement. Where are we at, Tom, you just move really quick. We have a table of content here. We're going to run through a couple of different things for you today and give you a little bit of information about our company. So this is a little bit about Rocky. We started back in 1932. The company was called William Brooks Shoe Co. And move forward a little bit there into 1993, we did go public. We are under RCKY in the NASDAQ. We did an acquisition in 2005 of EJ footwear. EJ is actually the oldest footwear company in the United States, Endicott Johnson. And that's when we acquired the Georgia brand, the Durango brand and the Lehigh business, and we'll talk a little bit more about the Lehigh business later on. But this pretty much doubled us in size. We were about a $100 million business and went to about a $200 million business back in 2005. And then fast forward, I became CEO and Tom CFO in 2017. And then in 2021, we were able to do another acquisition from Honeywell, which was the extra tough Muck, Ranger, NEOS and Servus brands. We do have 3 different segments. We have the wholesale segment, which is our business to retailers, like Bass Pro and Boot Barn, Cavender's, stuff like that. We have a retail segment, which our Lehigh business, falls under, and that is B2B business. So we sell products to other manufacturing companies like Whirlpool. Again, we'll get into more detail on that. And then contract manufacturing would be what we do with our military contracts. And then we also do a little bit of private label with some of our wholesale customers. We do have 3 owned manufacturing facilities, 1 here in the U.S., 1 in the Dominican and then 1 in Mainland China. These are the portfolio of brands that we have. So the Muck brand, with the acquisition that we just did in 2021, which is a rubber neoprene type boots. Georgia Boot is the EJ purchase back in 2001 -- 2005. And then Durango is more of our Western brand. Rocky is our heritage brand. Lehigh, again, is our B2B business, and then XTRATUF is another rubber business. And then Ranger is more kind of a pack boot cold weather business. Our sales mix, you'll see here. 70% of our business is wholesale. So that would be us selling to a retail partner. That could be a key account like a Tractor Supply, Bass Pro, Cabela's, Boot Barn, where we also do a tremendous amount of business with our independent mom-and-pops. We have thousands of retailers across the country and then around the world as well. Our retail department is 27% of the business, which is our own website. So we have Rocky, Georgia, Durango, Muck, XTRATUF and Ranger. And those retails are dot-coms, and so we sell all there. And then also under retail is the Lehigh business. Manufacturing contract is 3% of our business. Here's the categories you'll see that we break down in. Pretty much all of our brands are categorized under the work category, right, so 45%. Outdoor is about 30%. And that falls under 2 different -- what I call 2 different outdoor categories. You might find hunting outdoor in there, right, for Muck and Rocky. But then XTRATUF outdoor is going to be more of your fishing, camping, outdoor activities like that. Durango and Rocky we have in our Western. And then Servus is our military and public service like police, fire department. It's about 8%, and then apparel is maybe about 2% of the business.

Then I'll touch on the Muck brand here. The Muck brand traditionally was the creator of the rubber neoprene boot. These are 3 styles on the board here. The 15-inch functional rubber boots worn in a lot of farm and ranching, but then also we have the outdoor hunt category. And then not featured on here, but we're also dabbling into kind of the gardening space. So thinking of like as Ace Hardware and boots that people would, hobbyists, chicken farmers, things like that. The categories again are work in outdoor. And then here's just a list of some of the key customers that you might expect to see the Muck brand at. The Muck brand by channel is really predominantly a wholesale business. About 17% of that business being DTC, which would be our originalmuckboot.com. And this just shows you that we have an area for growth where we can try to drive sales to our direct-to-consumer websites.

And then we'll touch base a little bit on the Rocky brand. This is the most diversified brand we have. And so we touch on the military side. You'll see there our S2V boot, which is a really popular boot with our service departments. And then just to the right of that is our Alpha Force, which is something you're going to find in the police departments, maybe fire departments. And then we also do the outdoor hunting area, And then we do a little bit of casual. That's the outback. It's a Gore-Tex waterproof boot. But we also touch on Western product. And you see the categories there to the right where we see it the most categories within this. Some of the key customers, Avis is -- actually, I think Avis is the largest retailer in the world, and they sell on military bases all around the U.S. and actually all around the world, not just the U.S. Sportsman's Guide, Bass Pro Shops. Graingers are really great partner of ours, and they sell a lot of our products to their end users as work boots as well. You'll see here that from a wholesale standpoint, it's about 87% of our business. So that's again direct to our retail partners. And then about 13% is our DTC or rockyboots.com.

I'll touch on Georgia here. Georgia Boot brand is predominantly a work brand. This brand is regional, and that it is very popular in the Southeastern United States and then also in the Northwest -- Pacific Northwest. The brand originally had a logging industry. It traveled -- the boots traveled with the loggers as they went to the Pacific Northwest. But there's also some lifestyle offerings, like you can see here with the Romeo there. Plays just in the work category, and then you can see the key customers listed here as well. This brand actually only has 10% of its business in DTC. And so I think this speaks a little bit to the demographic of the consumer this plays to. And so you think about work boots, there's always a necessity to have a work boot to show up to work the next day. So a lot of times, we find that individuals are buying that product when the boot fails, and they have to go to the store that day. So an opportunity for us to certainly sell more direct-to-consumer. But this will -- there will always be a need for brick-and-mortar retailers when it comes to the work boot channel.

And then I'll touch on Durango. Durango is 1 of our fast-moving products right now. We're seeing really another big uptick. If everybody is familiar with Yellowstone, saw a nice move there. It kind of leveled off. And it seems like there's a new show out called Landman. If you haven't seen it, highly recommend it. A lot of good stuff going on around that. And pull-on, Wellington, Work, Western kind of boots are becoming popular again, and we're seeing that in the marketplace. We saw a pretty nice uptick in Q4. You'll see the different styles here. All traditional kind of Western look, but they're still very functional. And so even though we categorize this as Western, I would tell you that it's Western work type product. So they are still working in these groups a lot. We do have some boots that people might not want to go actually work in, like the pair I'm wearing here is an Ashridge. It's more like a $600 boot, and you wouldn't want to do a lot of oilfields in this. Again, key customers, Cavender's, Boot Barn has been a great customer, Tractor Supply, Academy. Again, as Tom mentioned in Georgia, really, if you think about all our brands, 91% of this business is done -- I'm sorry, wholesale, only 9% is DTC. So we have a big opportunity where we can continue to drive people to our own websites and grow that business, which I think could be really important for us and it's obviously a more profitable way to do business. But our wholesale partners are really important to us and helped us build our brands as we have over the years.

And then to touch on XTRATUF. Our XTRATUF brand in its origin is a really commercial fishing brand. And if you look at the boot on the far left here, 15-inch rubber boot, worn predominantly in Alaska, commercial fishing. And everybody in the Deadliest Catch, for example, wears this product. And we picked these boots up here because it kind of tells the story of how this brand has transitioned over the last 10 years or so. And so the commercial fishermen in Alaska would fish. In the off-season, they would go down to Florida and the Gulf Coast and they would go fishing. And what they would actually do is they'd cut the boot off, and they make the boot essentially shorter so it would be cooler. And so the product team at XTRATUF went through and said, "Well, we can do that already, right?" And so they cut the boot off and we made a 6-inch version of that boot, and it has grown widely popular. We actually sell 4:1 the 6-inch ankle deck boots than we do the commercial fishing boot on the left there. And then as the popularity has grown beyond just commercial fishermen and charter boat fishermen, it has gotten more into the lifestyle, either recreational fishermen or even the lifestyle outdoor person. And so we've done fun collaborations, like the Guy Harvey collaboration that's shown here. Guy Harvey, a big influential sport fish artist, if you will. And so we've seen big success with some of these collaborations. But the really unique 1 is the 1 on the bottom here, the kids boot, the pink boot. We have seen this brand really transition from a predominantly male focused brand, closer to 70%, 75% of the brand when we acquired it in 2021. Today, about 50% of the product is male. So men are still dominant in the fish space, but 50% of the product is now sold to women in kids, and this is our fastest-growing area. And that correlates into where they're buying the boots. And as you can see here, the amount of DTC business is greatest for us in this brand, which is also where we have the most women shopping, who are also probably likely the buyers for children's footwear as well. And so we're really excited about where this brand is going. We are hyper focused on keeping it to its core, an authentic brand, if you will. But as this product moves away from just fishermen and into Middle America, we're adding things like fleece lining, insulated product as the boots are moving inland. And we're all seeing -- if you were to look at the heat map for this brand, we're seeing sales in Jackson Hole and Denver, in areas like that, where people are taking their ski boots off or their snowboard boots off and they're slipping these on. And so this is our fastest-growing brand right now. It's doubled since we acquired it 3 years ago. And so we're excited to see where this brand goes. And you can see we're putting a lot of investment from a marketing perspective into XTRATUF as we go into 2025. The Lehigh business, Jason touched on this a little bit before. This is a B2B business. We basically enter into relationships with companies that have some type of safety footwear need. And so the example we like to use is Whirlpool. If you work for Whirlpool, you make washers and dryers. You get -- the employees get a subsidy to buy boots every year. And so what we do is we create a custom website. It looks and feels like that employer's company website. And those employees are able to log on and it is proprietary to us. They are able to purchase their boots. They can buy our boots, and we hope they buy a Rocky, Georgia, Durango. But they can also buy other brands, like Timberland, Ariat, Justin. And we were able to take those vouchers electronically, use credit cards for differences, ship the boots directly to the employee, free shipping, free returns. And this has been a business that's been growing low double digits for us the last few years. We've seen recent success, particularly in the last 6 months, as people are getting more and more accustomed to buying products online. Important to call out, a lot of the customers that we acquire through this business capture are being serviced through the truck model. There's a lot of -- there's a whole industry of truck there that drive up to these facilities and try the shoes on. And we've seen recent success at knocking some of those competitors out of the way with our digital format. This is just a list of some of the more national key accounts that we serve through our Lehigh business. What we found is, is that bigger, multi-location national accounts are really in our sweet spot because we're able to offer all their employees, all their facilities, regardless of their geography, the same level of service, same product offerings. We can offer consolidated billing. And 1 of the other things that we've really leaned in on is providing back those safety managers or HR, whoever is in charge of safety, for these corporations. We can give them data and reporting, right? So if they have a claim, if somebody gets hurt, we can prove that, hey, this individual got their free pair of boots from the employer. Just to touch on a little bit of our operational footprint. The blue boxes here, we distribute all of our products in the United States through 2 distribution centers, 1 in Ohio, 1 in Reno, Nevada. The vast majority or 70%, 75% of our product comes out of Ohio distribution center. If you think about where our customers are, we're much more East Coast than we are West Coast. And so we'll continue to see that in 2025. The red boxes here point to where we have our owned and operating manufacturing facilities. We're a little unique in that we still make our own boots. We still make about 30%, 35% of our products. The rest of it comes from sourcing partners, as you can see the stars here. Those stars, there's some that have been added since the last time we spoke here. India particularly is growing. And given all the concerns around China and tariffs, we are diversifying outside of China as well. Important to call out. I think there's been a lot of conversation about tariffs. And more recently, we've seen conversation around a 10% incremental tariff coming out of China. And the fact that we own our own manufacturing facility in China has raised a lot of questions. And so 1 important thing to note is that even with a 10% tariff, we can still be very competitive with our manufacturing facility in China versus buying it somewhere else because that person or that company we'll be sourcing from would have their own markup on it. So we're going to continue to mitigate and diversify out of China, but just an important call-out for our own facility in China. Just some financial highlights. As you can see, the big acquisition in 2021 doubled our size overnight. 2022 was a high point for us, a couple of call-outs. During that transition, when we did the acquisition, we had some distribution challenges. Jason have talked about it a lot. But important to call out about $50 million of sales from 2021 rolled into 2022. And then also we divested, as Jason pointed earlier, 2 of those brands represent about $30 million of sales. And so that was part of the big decrease in 2023. 2023 also was challenged. Just like everybody else in retail, a lot of our retail partners were over-inventoried, particularly our key accounts. They were pulling back as they rightsize their inventory, and it was a big strain and challenge on our wholesale business. And so that kind of explains the decrease in sales. But as you can see, our income from operations actually grew from '22 to '23. So we are more profitable and we're more profitable on an operating standpoint. Net income is down. A lot of that was driven by debt levels. So as we got over inventory and everybody else got over inventory, we had to draw down on our revolver pretty meaningfully to pay for those boots. And so as our debt has come down, we've seen a little bit of relief from interest rates. We also did a refinance in April of 2024, which really lowered the cost of our debt as well. You can see the inventory decrease in the balance sheet data below as well and the decrease in debt. This is just kind of the same numbers in chart form. I won't spend too much time on that, except I do want to call out that the ability for the team here at Rocky to bring inventory down $130 million while expanding our gross margin, part of that was a little bit of help from container rates coming down. But also with us being a functional footwear company, we do not have to discount our product to move through it. It is a -- it happens over time because our product is consumed. We're not a fashion brand that's trying to get out of flip flops before fall comes and vice versa in the spring. And so the black rubber boots, the brown leather boots, we are simply able to weather that storm and not have to get promotional to bring that inventory level down. For our 2024 outlook, we put net sales between $450 million and $460 million. I know that's slightly less than what I showed you for 2023. There was about $30 million of nonrecurring revenue that we had in 2023 that we knew we walked in '24 knowing we weren't going to have. That represented 1 of the brands that we divested. Also, we continue to make product for the buyer of 1 of those brands for about 9 months. And so we had sales that we knew we weren't going to anniversary as we got out of producing that product for them. And then we also made a go-to-market change in Canada. And so we used to have a team in Canada, a distribution center in Canada. We were selling directly to retailers in Canada. And so while we pulled back on that and we now go through a distributor model in Canada, where we're getting a royalty, which has proven to be a much more profitable way for us to sell products in Canada. So we knew we were going to be a little bit smaller because of that nonrecurring revenue, but ideally more profitable. Gross margins, we've guided to be consistent with LY, around 39%. And then a little bit of modest deleverage in 2023, really because we're trying to drive that growth in our brands, particularly in the XTRATUF and Durango brand. And so we've invested in there. And if you look back to 2023, given where our debt financing was, we were pulling back everywhere we possibly could. And some of it was probably short-term focused. And now as we got into 2024, focused on long-term growth, in making some of those reinvestments in marketing and also people. And an important call out with that debt refinance and the pay down of debt, about a $5 million year-over-year reduction in interest expense. So just to recap on some of the investment highlights. We've got a diversified brand portfolio. While some brands will win, they can offset some losses in the other brands. We also have a diversified channel mix. As Jason touched on, we sell to a lot of brick-and-mortar retailers, who are also selling a lot of product online. But we also have our own distribution -- sorry, our own DTC model through our website in our Lehigh channel. We own our own manufacturing that allows us to be more nimble and flexible. And so as the world gets crazy with changes in supply chain, with tariffs or the container rates that happened a few years ago, we can flex more than a lot of our peers. We also pay a quarterly dividend of about 3% yield right now. And then we wanted to highlight the significant improvement on the balance sheet. We've reduced our debt by over 50% of our inventory to 30% over the last 1.5 years.

We've got a couple of minutes. So you talked about the XTRATUF brand, the fastest-growing brand, probably the biggest opportunity for the business or the company at the moment. Maybe dig a little deeper in as we go from '24 to '25, what's going to drive that growth? I know you're reaching a larger consumer. Are you opening a lot of new doors to that brand? Or is it increasing shelf space? And then how do you manage maybe not growing too fast, over distributing the product, keeping the brand hot, but again not kind of taking a near-term view on growth for that brand?