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

Thank you. Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands' second quarter 2026 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 technical difficulties during the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference is being recorded, and I will now turn the conference over to Brendan Frey of ICR.

Thanks, everyone, for joining us. 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 assumptions available at this time and are subject to 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, our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31st, In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. I'll now turn the conference over to Mr. Jason Brooks, President and Chief Executive Officer of Rocky Brands. Jason?.

Thank you, Brendan. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we will take questions. After two consecutive quarters of high single-digit sales growth, our momentum accelerated in the second quarter with a sales increase of 12% on top of a 7.5% gain in a year-ago period. We are encouraged by the broad-based strength across our portfolio with several brands delivering solid double-digit growth, led by Extra Tough, followed by Georgia, Rocky, and our Lehigh B2B safety shoe business. Direct-to-consumer sales were particularly strong, while increased sell-through in our wholesale channel during the second quarter fueled strong bookings for the second half of the year. Tom will walk through the financials in detail shortly, but as you saw from our earnings release, we recorded a tariff-free fund receivable in Q2. We are very pleased to start receiving these funds after the amount of work and costs we incurred following the implementation of last year's IEPA tariffs. The actual and expected refund had a very positive impact on gross margins and profitability this quarter, and we plan to reinvest a portion into the business while also paying down debt. Now, let me walk you through our second quarter brand performance. Extra Tough delivered another outstanding quarter, extending its position as the fastest-growing brand in the portfolio. Wholesale posted a large increase over last year. E-commerce bested last year's already strong results, and Marketplace continued to grow at a healthy clip. Binding to push the brand total up significantly across all channels. Account momentum remained broad-based. Top performers included our authorized Amazon partner, a major outdoor retailer, and our fastest growing Western market account. sporting goods retailer that brought extra tough in store this year has quickly become one of our largest key accounts and is looking to add doors and styles going forward. We're also continuing to see the brand extend well beyond its marine roots as consumers adopt ExtraTuff for everyday use. Our product lineup continued to perform well, led by the 15-inch Legacy boot, alongside strong sales of our ankle deck boot styles in olive and duck camo. The new spring-summer line also delivered, highlighted by new ADV colorways and the kids' cruiser collection, along with new Guy Harvey collaboration styles for both women and girls. Looking ahead, Q3 and Q4 hold the largest set of pre-book orders in the brand's history. with a substantial new fall line and a winter bookings ahead of last year, positioning Extra Tough for a strong back half of 2026 across both wholesale and e-commerce. MUX U.S. business maintained good momentum across both our branded e-commerce site and wholesale partners, with both field and key accounts up year over year. Our Our new Rainscape collection, along with the brand's chicken boot and original ankle boot styles performed well, helping offset some softness in the Arctic products due to the milder, drier spring versus the extended cold weather we saw last year. Hardware and sporting goods channels grew nicely as we continued to expand shelf space and land new partnerships, and we're encouraged by the continued strength in the farm and ranch despite the drought conditions weighing on two of our largest customers in the channel. In total, muck sales were down modestly compared to a year-ago period, driven by a shift in timing of sell-in to the brand's international distributor. Georgia Boot delivered an outstanding quarter with broad-based growth across e-commerce and key and field accounts. Within key accounts, one of our largest farm and ranch customers expanded our best-selling wedge into more than 500 additional doors, and a large work and western retailer significantly expanded its Georgia Buddha sourcement behind the success of the BOA Carbon Flex Wedge. Our largest online retail partner also delivered exceptional growth after pre-booking ahead of the season and replenishing steadily throughout the quarter. Field accounts grew nicely despite ongoing macro uncertainty and cautious retailer inventory management, with growth widespread across the territories and healthy carryover business in work-focused accounts supported by employer voucher programs. The CarbonFlex wedge has quickly become the second highest selling franchise behind only the Romeo, and will continue to expand BOA technology into women's products and warmer climate, non-waterproof options. Early response to our Spring 2027 line has also been encouraging, led by new safety versions of the Romeo Superlite and a refreshed Eagle-like collection. Rocky Work Outdoor and Western posted growth across all three categories. Wholesale was a particular strength as independent retailers continued to report strong sell-through, and we also grew at a key national retailer level as new product drove great brand exposure. New Fall 2026 product also arrived early, allowing us to ship several new fall styles during Q2 and setting up early retail sell-in and replenishment opportunities. The account growth was well balanced between national multi-store chains and strong regional independence, including a sizable new rugged casual program with a large southern sporting goods retailer and a southeastern family shoe chain. and outdoor sales were also strong as several Midwest farm and ranch retailers brought in product early for the fall season. continue to gain shelf space and industrial safety tow, including a test program with a major national boot retailer and expanded regional programs in the southeast and Texas. And e-commerce remains strong with our two largest online retail partners. Product highlights include continuing strong sell-through on our Ride LTE collection with a new Duck Camo colorway generating strong fall bookings and reaching market early in Q2. BOA equipped safety tow styles continued to gain strength and our Outback and Ridgetop GORE-TEX collection posted healthy growth. Retail partners are also stocking up ahead of hunting season on our snake boots and insulated wildcat collection. Durango sales were in line with our expectations, down year over year driven entirely by the key account channel, which lapped significant bulk buy orders placed by two major chains last year ahead of 2025 price increases. Excluding that dynamic, the remainder of the key account business posted solid growth. This farm and ranch channel was led by a rebel in Westward Collections, and our e-commerce partner accounts, along with sporting goods and outdoor channels, also had a good quarter. Field performance trended positively as well with several region strong increases. During the quarter, We also opened a new 82-door Midwest Farm and Ranch account with encouraging early sell-through, and demand remains strong within our Hispanic retail base. New Workhorse and Shiloh product delivered in Q2 continues to perform well at retail. In early sentiment and bookings for spring 27, including our Rebel USA made boots, Workhorse Light, and the new women's Shiloh and Crush styles are solid. giving us confidence heading into the back half of the year. Commercial, military, and public service exceeded our Q2 expectations, up mid-single digits versus last year, continuing the positive momentum from strong Q1. Public service outperformed expectations, while commercial military finished roughly flat to LY, but with positive momentum. positively underlying momentum. And given the current geopolitical environment, we expect commercial military demand to remain strong. B2B Lehigh delivered another strong quarter of growth driven by continued success in new customer acquisitions as we added a substantial number of new accounts. We also expanded our product portfolio with the addition of new brands, further strengthening our ability to meet customer needs. diverse needs across a broader range of industries and applications. Customer spending remained resilient despite ongoing cost pressure, with subsidy utilization and average subsidy dollars continuing to trend upward as employers remain committed to providing employees with PPE. While tariff uncertainty and inflationary pressure continue to influence the operating environment, Lehigh has successfully offset these headwinds through strong new customer growth, expanded product offerings, and continued execution of our strategic initiatives. As I just detailed, we have good momentum across our business heading into the second half. While we feel confident in the strength of our brands and our product offering, we think it is prudent to balance this optimism with some level of conservatism given the shifting tariff landscape. and uncertainty regarding the near-term health of the consumer. Tom will discuss our outlook in detail, but from a high level, we are taking up our full-year guidance to reflect our Q2 top-line outperformance and are modestly raising our sales projections for the third and fourth quarter. I want to thank our teams for their hard work driving the business forward while navigating the shifting tariff landscape. I am confident we are well positioned to continue capitalizing on the opportunities to expand sales and profitability over the remainder of 2026 and beyond.

With that, I'll turn it over to Tom. Thanks, Jason. There were several highlights from the second quarter led by 12% sales growth, our highest growth rate since 2022. On top of this, gross margins reached a record level driven by a EPIT tariff refund receivable we recorded in the quarter, which in turn fueled a significant year-over-year increase in profits. As I go through the Q2 financials and outlook, I will at times discuss results excluding the net impact of the tariffs to provide a clearer look at the underlying performance of the business. reported net sales for the second quarter increased 12% year over year to $118.4 million, which exceeded our expectations. segment wholesale sales increased 7.9% to $78.8 million. Retail sales increased 21.8% to $36.2 million. And contract manufacturing sales were up 17.2% to $3.3 million. Turning to gross profit for the second quarter, gross profit was $60.8 million, or 51.4% of sales, compared to $43.3 million, or 41.0% of sales, in the same period last year. excluding the net tariff impact of $15 million, which includes $18 million of actual and expected IEPA tariff refunds, partially offset by approximately $3 million in IEPA tariff costs versus a year ago. Second quarter 2026 gross margins were approximately 38.7%. Included in this year's gross margins are incremental costs incurred as a result of adjusting our initial manufacturing and sourcing and shipping plans and higher expedited freight in order to meet customer demand. We also had select incentives to capture additional shelf space with key customers and opportunistic selling of more discontinued styles in the second quarter of this year. Gross margins by segment, excluding the net benefit from tariffs, were as follows. Wholesale margins declined 430 basis points. to 36.3% versus 40.5%, with the decline driven by the multiple headwinds I just outlined. Retail margins were up 120 basis points to 46.6% from 45.3%. Contract manufacturing margins were down 320 basis points to 9.3%. Operating expenses were $41.1 million, or 34.7% of net sales, in the second quarter of 2026, compared to $36.1 million, or 34.2% of net sales last year. Excluding $0.7 million of acquisition-related amortization in the second quarter of this year and last year, adjusted operating expenses were $40.4 million and $35.4 million, respectively. As a percentage of net sales, adjusted operating expenses were 34.2% this year and 33.5% in Q2 last year. The increase in operating expenses as a percentage of net sales was given primarily by a $1.1 million write-off of accounts receivable associated with a customer bankruptcy. increased outbound freight rates from fuel surcharges implemented in the second quarter, and higher logistics costs associated with the increase in retail sales. Income from operations was $19.7 million, or 16.6% of net sales, compared to $7.2 million, or 6.8% of net sales in the year-ago period. adjusted operating income improved to $20.4 million, or 17.2% of net sales, compared to adjusted operating income of $7.8 million, or 7.4% of net sales a year ago. driven by the recognition of the aforementioned net tariff impact this year. For the second quarter of this year, interest expense was $2.1 million, compared with $2.5 million in the year-ago period, reflecting the decrease in debt levels year-over-year. On a GAAP basis, we reported net income of $13.9 million, or $1.83 per diluted share, compared to net income of $3.6 million, or $0.48 per diluted share in the second quarter of 2025. Adjusted net income for the second quarter of 2026 was $14.4 million, or $1.90 per share, compared with adjusted net income of $4.1 million, or $0.55 per diluted share a year ago. Turning to our balance sheet, at the end of the second quarter, cash and cash equivalents stood at $2.6 million, and our debt net of unamortized debt issuance costs totaled $122.4 million, a decrease of 7.6% since June 30th last year. During the second quarter, we repurchased approximately 54,000 shares at an average price of $37.09 for a total of $2 million. We also announced that the Board approved an increase in our quarterly dividend to $0.17, which was paid out to shareholders in June. Inventories at the end of the second quarter were $173.5 million, down 7.1%, compared to 186.8 million a year ago, and down 4.2%, compared to 181 million at the end of 2025. pleased with the quantity and quality of our inventory as we're able to successfully move through some discontinued styles in the second quarter of this year. Now to our outlook. Based on our second quarter performance and updated bookings for the second half, as well as the net impact of tariffs, we are raising our guidance for 2026. We now expect revenue to increase approximately 8.5% over 2025, with the fourth quarter growing modestly faster than the third quarter. With respect to margins, our prior guidance was for gross margins to be down modestly from the 40.9% we reported in 2025, inclusive of roughly $10 million in IPA tariffs that hit our P&L in the first half. As I mentioned when discussing our Q2 performance, we have experienced some additional cost headwinds from adjusting our manufacturing and sourcing plans to meet demand with expedited shipping to continue during the second half of this year. We also are continuing to see higher inbound freight rates, along with increased component costs due to higher oil prices. This is putting some additional pressure on gross margins, which are now forecasted to be approximately 40 percent, excluding the actual unexpected tariff refund. Q3 and Q4 gross margins improving sequentially into the low 40% range. Since our last earnings call, we incurred $1.1 million write-off in accounts receivable due to a customer bankruptcy, and we are experiencing higher outbound freight costs due to fuel surcharges, as well as a higher mix of retail segment sales. We are also stepping up our investment in digital advertising to capitalize on the momentum in the future. fast-growing D2C business. Based on these factors, we are now expecting SG&A as a percentage of sales to increase slightly from prior year. With an additional benefit of roughly $2 million expected in Q3 from the tariff benefit. The full year gross benefit will be approximately $20 million or $10 million on a net basis. Our plan is to invest a portion of these proceeds back into the business, such as investing and expanding our distribution center as well as paying down debt. This all translates into EPS excluding the actual and expected tariff refund similar to last year's $3.26 and EPS on a reported basis to be in the neighborhood of $5 and finally on a net basis which excludes the $20 million refund and the $10 million incremental IEPA tariffs that flow through the E&L, EPS would be around $4 a share. With that, that concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Jonathan Komp with Baird.

Yes, hi, thanks. Good afternoon. Tom, I want to start off. You mentioned, you know, this the strongest growth since 2022. Could you maybe share a little bit more detail on where you've seen acceleration across your business? And then I know, Jason, you mentioned part of the raised full-year outlook includes a higher plan for Q3 and Q4. Could you just share more, as you look into the second half, maybe what's shaping up better than you were thinking previous.

please. Yes. Yes, you know, I'll start off, John, I think the really exciting thing here was that we're really seeing success across all of our brands. You know, we walked into the quarter, we knew We knew Durango had a very tough comparison to last year. And so we knew we were going to be down from out wide because of some pre-buys before the price increase last year. And then we know that, you know, MUC, which was just down slightly for the quarter, is really just a timing issue with an international distributor. Outside of that, all of our brands grew significantly. you know, greater than our expectations. As Jason pointed out, we saw our strongest growth with Extra Tough for the quarter. You know, wholesale and e-commerce both outperformed expectations there. I would tell you the other thing that has been really great to see is the success that we're having in our own DDC on our branded websites. So we're able to see that these investments that we're making are driving more volume and more traffic to our websites. And so that's been a bigger surprise for us than we originally anticipated with those investments.

Yes, and then just to talk a little bit more about Q3 and Q4, I think John, we've seen some pretty significant bookings for pretty much all the brands. And so I think we're pretty excited about where that's at. We talked a little bit or I talked a little bit about how we have been able to gain some new shelf space. And we've seen those styles checkout. at retail and so we're seeing continued fill-ins on those. And then, as Tom just kind of mentioned, right, our e-commerce business for all the brands is performing very well, and we don't see any reason why that won't continue through time. through Q3 and Q4, which is really a little bit better, stronger quarters for us because of the type of product that we have. Yes, just to add on there, John, you know, the bookings,.

The bookings are really exciting because our bookings are up really across all brands. And so, you know, I think our guidance there of the 8.5% sales growth is straightforward. trying to bake in a little conservatism for how much of our at once business, which is historically our largest part of the business, You know, what that will be in fall, given the order book that we're looking at for the next two quarters.

And maybe just one follow up there, is there a meaningful benefit from new doors or new customers or are you seeing the strength really across your organization?.

your existing base of accounts? Yes, I mean, I can start with this one. For us, when we look at our key accounts, right, it's really easy for us to just retain if we've gained shelf space or not. And so we have certainly executed on that with our larger key accounts. whether it be in Western or farm ranch or even sporting goods. And so we're very excited about that because we know that that's all incremental. As you look at the independent retailers, the smaller independent retailers, it's hard to disertain exactly shelf space gains there, but the bright side of that is that our bookings are up meaningfully, even for our field or independent retail accounts as well. time will tell in Q3 and Q4 as we see what happens with that once. But we're very excited about the second half of the year. Yes, and I just would add on, like I mentioned in my script about.

about the Boa Boot and it was tested in, I don't know, 200 doors, I believe it was, and it did so well, it's being expanded into all doors, right? And so when we see that happen, we're really confident about the sell-through and therefore more at once business that style should be coming in Q3 and Q4 because we're expanding it into more doors. And then I talked a little bit about that with Extra Tough and a large retailer. They did basically the same thing, tested it out last year. And it saw really good sell through. And it continues to add styles, but even adds doors. And so that's where I know we're picking up some shelf space.

Okay, great. And then the outlook for SG&A for the year, I just want to understand, it looks like, you know, the full year growth, more than a few percentage points higher than you were thinking previously. Could you maybe just give a little more airtime to the, you know, individual drivers or some of the investments you're choosing maybe to pull forward. And then just more broadly, as you think about the operating margin you know potential for this business uh retail your your some of your fastest growing brands seem like high margin you know segments of your business overall. So just what do you think that means longer term about the profitability of where, where operating margin can go for Rocky?.

Yes, certainly. So if you were just to look at Q2 by itself, right, the accounts receivable write-off for a large account of ours of $1.1 million was certainly unexpected. And so if you were to strip that out of this quarter alone, we would have had slight operating leverage. That coupled with, you know, we were optimistic that we would see fuel surcharges and fuel prices come back down to more, normal levels. Um, and so right now we're running freight up about 80, 80 basis points as a percent of sales. Um, and so we're baking that into our guidance the rest of the year. Hopefully we can see some relief there. Um, but we're baking that into, to, uh, the guidance for the rest of the year. Um, The other, from an operating margin perspective, I think we've got some challenges with, short term challenges with our gross margin, right? As we talked about, oil prices prices driving up our raw material and component costs. But then also, given our order book, we are essentially sourcing boots from the fastest source possible, not necessarily the most cost effective, right? And so we walked into the year for 2026, we had a plan of making a meaningful amount of our products in the Dominican Republic. The reality of it is given demand and sales, coming in higher than we anticipated. We're having to kind of bypass the Dominican Republic in some cases. You know, it adds about 65 days of transit time just from Asia to the Dominican and then add a few more weeks in the Dominican to finish the product. So we've had to source more products out of Asia than we originally intended. And so that's impacting our margins. But as you look to the future and we're able to build raw material inventories in the Dominican Republic. We definitely see our operating margins increasing over the current year guidance. you know the difficult part of getting the shelf space is is you know we've executed on that and now we just have to um you know optimize it by getting the product sourced from whether the right countries or our own in-house manufacturing facilities. And so we'll give more guidance at the next call probably on the future applications.

outlook for operating margins. Yes, I just want to add, like, our intention is still the plan we talked about in moving more production to the Dominican. we are going to continue to do that. It's still the right decision. But like Tom said, because of the demand that we've had, we've had to make decisions to get the inventory here to get on the shelves. And so I believe it was the right decision for right now, but the idea going forward is to capitalize on our Dominican facility for sure.

Okay, great. I appreciate all the color. Thank you.

Thank you. Our next question is from Janine Stichter with BTIG.

Good afternoon. A few more just digging into some of the input costs. So make sure I understand tariffs right now flip to a negative, but we also have new tariffs that are recently put in place. When will we see those start to take hold and flip to a year over year headwind? And then you alluded to it a bit, but based on what you're seeing right now on raw materials and freight, would your expectation be for input costs to continue to rise? And then maybe just tying that all together.

How are you feeling about pricing? Are there any plans for further pricing action? Yes, no, good question, Janine. You know, so, you know, let's start with the component cost, right? So we're seeing about, on average, a mid single digit 5, 6% cost increase on first cost of the product, right? When that would be for oil based components typically, that are driving that. The other thing is container prices have crept up over, you know, since our last call. Again, really driven by oil. It was, you know, further exacerbated by the fact that we were having to use expedited, you know, shipping carriers to get product here faster. And so we are continuing to evaluate that. As it relates to tariffs, right, so we've kind of guided the rest of the year at this 10%. So the new tariffs that went in place, the 301s that went in place on Friday, most of that, the incremental piece, will not hit us until the very end of 2026. or the beginning of 2027, as those tariffs will have to flow through our inventory and through the P&L. We are expecting that we will see the next round of 301s at some point this year. There's been a lot of conversation around those happening kind of after the midterms, and And so we are kind of waiting to see what happens with those to determine pricing for you know pricing changes for 2027. If those happen as expected, the good news for us is that the forced labor 301s impacted the Dominican Republic. It's a net 2.5% bad guy from where we were a week ago. but they are not on the ballot for any more 301s. So our whole plan of leveraging our Dominican facility will likely still make a ton of sense coming into this year. Okay, great. And then on pricing? Yes, I think I'm pricing, you know, we're monitoring it. You know, if we were to take out the noise, from this quarter with the sourcing challenges, the expedited freight, all those things, our margins would have been just slightly up compared to LY. And so we're continuing to evaluate it, but we would be really interested to see where we land on these other 301s to determine if and how big a price increase would need to be for 2027.