Oct 22, 2009
Executives
Brendon Frey – IR, ICR Mike Brooks – Chairman &Chief Executive Officer David Sharp – President &Chief Operating Officer Jim McDonald – Chief Financial Officer &Treasurer
Analysts
Reed Anderson – D. A.
Davidson & Co Kevin Kim – Robert W. Baird Bill Gordon – Gordon Capital
Brendon Frey
Thank you. Before we begin, please note that today’s discussion 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 change, 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 the reports filed with the Securities and Exchange Commission including Rocky’s Form 10-K for the year ended December 31, 2008 And now I’ll turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.
Mike Brooks
Thank you, and thanks to everyone for joining us this afternoon. With me on today’s call are David Sharp, President and Chief Operating Officer and Jim McDonald, Chief Financial Officer and Treasurer.
We are very pleased with our third quarter results, which represent our strongest earnings performance in 12 quarters. Our top line was down 8%, it was the smallest sales decline this year and the majority of the shortfall was attributed to the decline in our retail division where we had projected sales to be down due to the ongoing transition to an E-commerce platform.
In fact, our wholesale sales, which make up more than 80% of our total business, were down just 2% with several categories, including hunting, western, and duty up year-over-year, in some cases double-digits. So we have begun to see some stabilization to our sales base after what has been one of the most challenging retail environments that I can recall.
Importantly, even on lower sales volumes, we were able to improve our profitability due to the many steps we have taken over the last 18 months to create a leaner, more efficient organization. For the fifth consecutive quarter, our SG&A expenses were down double-digits compared to the prior year.
In the third quarter, we were down 15% driven primarily by cost reductions in our retail infrastructure, as part of the transition from mobile shoe stores to the Internet, but while retail sales were down this quarter, the division is moving toward is being more profitable in the years ahead. Our balance sheet, was also much improved, which helped fill out, which helped fill our bottom line results.
First, our inventory levels were down 18% compared with a year ago, while our day sales outstanding improved by 13 days. This allowed us to dramatically reduce the borrowing under our credit facility and reduce our debt level by nearly $24 million.
With interest expense and SG&A expenditures down meaningfully, we’re able to translate a down sales quarter into a 57% increase in net income. When you back out the $0.6 million tax benefit we received last year.
Again, we are very pleased with these results and as we begin the fourth quarter, we believe inventory levels in the channel are at the lean level, the leanest level they have been in sometime. Therefore, we are optimistic we should continue to see a nice improvement in reorders throughout the remainder of the year.
I will now turn the call over to David, who will review each division in more detail.
David Sharp
Thanks Mike. I'll begin with our wholesale division, where sales were $54.5 million compared to $55.6 million in the corresponding period a year ago.
As Mike stated, sales versus last year this division improved markedly, compared to our experience in the first half of the year where we had double-digit declines due to the economic downturn. Early in the quarter, we continue to see some softness within our work category, which includes footwear under our own brands Georgia and Rocky, and our licensed brands, Dickies and Michelin.
However, as we moved into September, we experienced increased demand in our at-once reorder fill-in business and we also made the initial shipments of our new fall collections. One product in particular, which we initially shipped in Q2 is performing exceptionally well at retail.
Some dealers are experiencing double-digit sell-throughs each week. This product, called the Flexpoint in our Georgia brand, has been expanded this spring and we believe it will continue to drive more business for us.
It is clearly differentiated from other products in the category and from our competitors’ offerings, and is a testament to the fact that consumers are still willing to part with discretionary dollars for relevant exciting products. Sales in our work category for the quarter this, were $20.8 million in the third quarter compared with $22.6 million in the prior year period.
Now to our hunting category, where we have had good success this year, as we began to ship our new hunting season future orders, third quarter sales increased 7% to $13 million per sales of $12.1 million last year. Due to the early cold and wet weather trends, we have been seeing strong at-once demand for our fill-ins across our entire customer base in both hunting footwear and hunting apparel.
In fact, our thermal underwear program at Wal-Mart has been very successful and will be a complete sellout, much earlier in the years than planned. Turning now to our western category second quarter sales were up 12% to $8.1 million versus $7.2 million a year ago.
This is a very gratifying sales trend reversal, when we expect this trend to continue into next year. We want to capitalize on this trend, so for the first time this year we have moved our western salesforce annual sales meeting into October.
We want to preempt the 2010 Western market, which kicks off in January and be in the position to ship new products in the first half of next year. Finally, we are beginning to see real growth potential in our duty category.
Third quarter sales were up 10.5% to $5.2 million from $4.7 million last year. In our traditional commercial duty channel, there is a growing appetite for our special operations products built to military specification.
In particular, we see growing interest in our higher average selling price products that are loaded with features and benefits. Now for international sales, last quarter we reported the large sales gains that we won in 2008 were being lost in 2009 due to the global economic downturn.
During this third quarter we continue to be challenged, however perceptively, we have the following to report. Last week, when speaking with our three existing distributors who represent our Rocky hunting products in the United Kingdom, Italy, and Eastern Europe, they were pleased to report improving business conditions in the markets and the sales of our products are robust at retail and they had a place to fill-in orders.
Last month, we launched the B2C website serving the United Kingdom with our Durango brand, the sales from which are filled by a local retail partner. This is a test marketing effort to help us develop the right assortment for the U.K.
as we bring a distributor on board next spring. We anticipate having this agreement with this prominent lifestyle footwear sales organization for the U.K.
in place by March. Finally, at the international MICAM show in Milan, Italy in mid-September, we featured Durango and Giant by Georgia lifestyle products.
As a result, we are now engaged in discussions with a distribution partner for France and Germany. Now turning to our retail division.
As we had mentioned on previous calls, we are in the ongoing process of restructuring our retail business model. This has involved developing a web-based platform that will allow us to conduct a much larger percentage of our transactions via the Internet versus our fleet of mobile trucks.
Since the first quarter, sales through our websites have increased from 6.2% of our total retail business, to 13.6% of our total retail business. Year-on-year in the quarter, sales to the Internet grew 208% versus last year.
Third quarter sales were $11.6 million down obviously from the second quarter and just below planned, versus $15.3 million the year before. While some of the $3.8 million decrease in retail sales resulted from plant closings and layoffs in the manufacturing sector.
We know that our sales were negatively impacted by our ongoing transition to more Internet-driven transactions, and the removal of a portion of our Lehigh mobile stores from operations, which on the other hand contributed significantly to the large reductions in SG&A expenses in the quarter. Finally, sales to the military were $600,000 in the third quarter versus $1.6 million a year ago.
And included the initial shipments of insulated boots as part of the 205,000 pair order we received from the general services administration under the $29 million blanket purchase agreement we announced in the early August. I’ll now turn the call over to Jim, who will review the financials.
Jim McDonald
Thanks, David. Net sales for the third quarter decreased 8.2% to $56.6 million compared to $72.5 million for the corresponding period a year ago.
Gross profit in the third quarter was $24.7 million or 37.1% of sales compared to $27.1 million or 37.4% of sales for the same period of last year. Selling, general, and administrative expenses decreased 15.4% or $3.4 million to $18.6 million or 27.9% of sales for the third quarter of 2009 compared to $22 million or 30.3% of sales a year ago.
This marked the fifth consecutive quarter that SG&A dollars declined double-digit on a percentage basis. Decrease is primarily the result of reductions in salaries and benefits, freight, Lehigh mobile store expenses and trade show expenses.
Income from operations increased $1 million or 19.8% to $6.1 million or 9.2% of sales for the period compared to income from operations of $5.1 million, or 7.1% of sales in the prior year. Interest expense for the third quarter decreased 14.4% to $2 million from $2.3 million in the third quarter of 2008 as a result of lower borrowings under our credit facility.
For the quarter, we reported earnings before income taxes of $4.4 million, an increase 53.3% over last year's earnings before income taxes of $2.9 million. Net earnings decreased 17.1% to $2.8 million or $0.50 per diluted share versus net earnings of $2.4 million or $0.43 per diluted share a year ago.
As a reminder, in the third quarter of 2008 we received a one-time prior year tax benefit of approximately $600,000 or $0.10 per diluted share. Excluding this benefit, our third quarter diluted EPS increased 51.5% over last year.
Turning to the balance sheet. Inventory decreased $15.3 million or 18.3% to $68.1 million as of September 30, 2009 compared with $83.3 million on the same date a year ago.
Our accounts receivable decreased 19.8% to $58.3 million versus $72.7 million. And our day sales outstanding improved 15.5% or 13 days for the three-months ended September 30, 2009.
Public debt as of September 30, 2009 decreased 22.4% or $24.1 million to $83.4 million compared to $107.6 million at September 30, 2008. I'll now turn the call back to Mike for some closing comments.
Mike Brooks
Thanks, Jim. Our plan this year has been the focus on the areas of the business that are under our control, and best position the company for growth, once the economic recovery gets underway.
While the six months of 2009 were particularly challenging from the sales perspective, we were confident that our work to reduce our operating expenses and improve our manufacturing efficiency would produce positive earnings growth during the peak selling season, the back half of this year. As we look out to 2010, we are optimistic about our continued prospect for growth given the easier comps we are up against in the first and second quarter.
At the same time, retail response to several of our new styles have been very encouraging. This includes our traditional work Western and Hunting categories.
As well as our new casual footwear collections that we are introducing under the Rocky and Georgia brands this spring. We will also see increased sales to the military, thanks to the blanket purchase agreement we received from the general service administration back in July.
As David mentioned earlier, we've began shipping the first pairs from the initial order of 205,000 insulated boots in late September and expect the volumes to increase over the next few quarters. Not only will we experience higher sales due to this purchase order, we should benefit from increased efficiencies at our manufacturing facility in Puerto Rico as well.
Long term I am excited about the many opportunities that exist going forward. In addition to operating a diverse portfolio of popular and authentic brands, I think the Company has learned a great deal from the tumultuous economic events of the past year, which will serve the Company and its shareholders well in the years ahead.
We thank you for your continuous interest and support and we are now ready to open the calls up for your questions. Operator?
Operator
Thank you, sir. We will now be conducting a question-and-answer session (Operator Instructions).
Thank you. Our first question is from Mr.
Reed Anderson with Davidson. Please proceed with your question.
Reed Anderson – D. A. Davidson & Co
Good afternoon. Hi guys
Mike Brooks
Hi Reed.
Reed Anderson – D. A. Davidson & Co
Hey, nice job. A couple questions, Mike is curious, that the pick up you talked about in particularly probably aided by weather, but you saw it in hunting work in western, but from a timing standpoint, would you say that was kind of mid way through the quarter or even later?
Or was it sooner than that?
Mike Brooks
Well, I believe we didn't quite realize it midway through the quarter until late in the third quarter, but I think it was evident to us here in the last 10 days, which is really in the fourth quarter, but we haven't had anything good to talk about or see in such a long time and to be frank with you, we could feel a little momentum, but we’re afraid to get too excited about it, but it did repeat itself again in the last 10 days two weeks.
Reed Anderson – D. A. Davidson & Co
Understood. That's good.
And then also, related to that, to the extent that whether it's weather or whether it's just ultimately demand that takes up who knows, But what is your ability to fulfill that? I mean are you taking a little more speculative position now are you just not wanting to do this, what's your thought on that whole aspect?
Mike Brooks
We are not, as you saw, our inventories are down and our borrowings are down. And we believe our retail partners are very lean on inventory as well.
So nobody's taking a speculative position on inventory including us. So, we'll probably miss some sales that we may have gotten in the part but…
Reed Anderson – D. A. Davidson & Co
But you'll get the full margin on what you
Mike Brooks
We'll get better margin and we'll feel better about our borrowing and our interest rate. So, we think we're doing the right thing.
Reed Anderson – D. A. Davidson & Co
Okay, that makes sense. And then just a couple more, on the Lehigh or the retail business.
I mean we've seen on last two quarters are similar in level. I mean that we its the sense that we've kind a stabilized there, might even see it kind of tick up a little or is just too early to tell.
What you think?
Mike Brooks
I think that's probably too early to tell Reed. We're still the restructuring of the business is ongoing and we're measuring the performance of every mobile asset and every warehouse services those mobile assets monthly.
And so however, we are encouraged by the significant lack of the web business and leveraging that advancement that we've made over the last 18 months over a much larger part of the business.
Reed Anderson – D. A. Davidson & Co
Okay. And then lastly, just on the military piece, I mean based on what, Mike, you said for timing is it just as simple as, we think about what you did in this quarter and basically multiply it by three?
I mean is it that simplistic to think about it going forward or is it what you think?
Mike Brooks
No, it's not that simplistic. We just caught a very tiny amount in the third quarter and we'll start hitting our stride in this quarter, in the fourth quarter and Q1 and Q2 of next year.
So, we’ve got almost a quarter of million pair to deliver and so we’ve got to get cracking some boots and shoes, which we are.
Reed Anderson –D. A. Davidson & Co
Okay. Make sense good.
That’s all I have. Thank you.
Mike Brooks
Thanks Reed.
Operator
Thank you Mr. Anderson.
Our next question is from Mitch Kummetz. Mr.
Kummetz, please go ahead.
Kevin Kim – Robert W. Baird
Hey guys, this is actually Kevin Kim calling. So a couple of quick question Spring backlog what do you guys seeing out there in terms of bookings?
Mike Brooks
Kevin, this is Mike I'll take the first part of it and may be David can put some color on also…
Kevin Kim – Robert W. Baird
Sure.
Mike Brooks
We don’t get the backlog that we used to get so our delivery model has changed. Most of our customers expect us to have inventory, so there is not a huge percentage of backlog.
And I wish there was, but just there just isn’t today. And so we try to get the commitments.
We get forecasts from our customers and they sell a pair, they’re going to buy back a pair. If they sell a 100 pair.
They’re going to buy back 100 pair. David, any..
David Sharp
Yeah, I think that with respect to this new, there is ongoing fill-in business and there is new product business. With respect to the new product business, I think that our order book today on new product is much larger than it was at the end of the year, last year and also going into spring of next year.
We’ve spent a lot of time in the last couple of years really focusing on how to get product right. And how to get it to market right.
And I think some of that’s paying off. But with our customers are eating the dog food as it were.
So we’re pleased with the backlog in new product and certainly in the last few weeks with this weather trend and going into the part of our hunting business and delivering insulated work boots and waterproof work boots. The order book has been strong.
Kevin Kim – Robert W. Baird
And then Jim. I guess a couple of questions about guidance.
I know that at the end of the Q2 you mentioned that expecting an improved profitability in the second half and you definitely saw that in Q3. And it seems like there was maybe a little bit more benefit to SG&A cuts than maybe more than we were expecting, but what you looking at for Q4?
Are do you still expecting gross margins to improve? Or anniversary?
And then what kind of SG&A drop in terms of absolute dollars are you expecting?
James E. McDonald
I think from a gross margins prospective, our wholesale gross margin was up slightly in a quarter. I think that trend will continue, but it was marginal 30 or 40 basis points and retail margins will be similar to what they were last year for the fourth quarter.
And then you throw in the military at our normal 10 and 12% margins since next and that all blended together should have margins I think relatively in total, relatively flat with last year…
Kevin Kim – Robert W. Baird
Okay.
James E. McDonald
Down slightly because of the military and throwing that in, so we may be down a little bit, but not significantly.
Mike Brooks
James E. McDonald
I think our margins will be our segment-by-segment basis will be similar to what they were last year other than military, which I guess we did have some last year military will be in the 10% range. So, last year we ran a 34% margin in wholesale and 51% in retail.
And we should be in similar positions there. With regard to the SG&A, I think it will be down again the year-over-year again maybe its not quite to the magnitude that we saw in the second quarter and third quarter, because we are starting to anniversary some of these expense reductions that we have that started for most part particularly on our Lehigh business in the fourth quarter last year.
So, they’ll be down, but not quite to the magnitude that they’re in third quarter.
Kevin Kim – Robert W. Baird
Okay, that make sense and then Mike, do you guys mentioned casual footwear was Rocky and Georgia brands and I think Durango a little bit deeper in there. But with this launch in spring ’10, have you been able to open new accounts.
How’s the reception of that been, so far?
Mike Brooks
The reception has been good. We’ve taken into new accounts, brand new accounts and then we’ve a necessarily open new accounts.
As you can imagine, retail is very stingy about putting new brands in right now. But we have gotten good feedback, but we’ve also offered these new designs to our current accounts and we’ve gotten commitments there.
We’ve gotten commitments. They’re expanding a brand.
But we still have some work to do on brand new accounts that we’re targeting, but we’ve made the first call and we’ve got to go back and make a two or three or four or five. I don't know if you have anything to add or is that.
Kevin Kim – Robert W. Baird
Can you guys quantify how big of an opportunity that is? Or kind of what the bookings looks like in your existing accounts for those brands?
Mike Brooks
,
Kevin Kim – Robert W. Baird
Okay. All right.
Well, that's it for my questions. It sounds like thanks for getting better for you guys.
So, good luck.
Mike Brooks
A little more time, thanks gentlemen
Operator
(Operator Instructions). Our next question comes from the line of Mr.
Bill Gordon from Gordon Capital. Please proceed with your question.
Bill Gordon – Gordon Capital
Mike Brooks
Well, Bill Mike and David, and we've been working on these designs and this rollout for quite some time. As I mentioned we wanted to make sure we got it right, we have our sales meeting coming up early next month.
This is truly a late first half rollout of 2010. Every indication is that we're on target with that same feeling other people are talking about and what you and I see at retail and at catalogs.
We are a boot guy, we are a boot house and whether we got late to the market I don’t know, don't really care but we are on the right track and we've got a host of exciting, attractive branded items that our customers are going to buy. Some new customers a lot of old customers.
But it's really too early to put any numbers on it, David I'll.
David Sharp
Bill Gordon – Gordon Capital
David Sharp
Yes. Those are all strategies that we kick around in here all the time.
Bill Gordon – Gordon Capital
What about seasonality? I mean how does this all, how is the Internet and how is everything else affecting us?
How are we driving business through the Internet? Let's try that one.
Is it just a matter of Googling and searching? Or is there some sort of way of cataloging some [inaudible]
David Sharp
Well, let me give you an example. The GSA orders the $29 million or $28 million order we got.
We got that through the Internet. So, we are probably not in the leader in the Internet, but we've come a long way in the last two, three years.
I'm actually pleased that we've made the decision to go forward and change our retail division to a very expensive delivery system on trucks to the web. So, I think we're making great strides there.
And so we’ve got a multitude of different tools at our disposal as far as Internet and we are trying to use all them to our advantage.
Bill Gordon – Gordon Capital
Should this flatten out the seasonality? Should we have less seasonality?
Or how do you perceive that in terms of what's going on today to product mix?
David Sharp
We're in the boot business and the boot business for 100 years as far as, I've know I'm not 100 years old, it's always a second half business and I don't see that changing. We're always going to do a larger percentage of our business in the second half of the year
Bill Gordon – Gordon Capital
Mike Brooks
That fact that, well, hopefully we're going to improve on historical levels, but we certainly have a taking a substantial amount of our fixed SG&A out. As we move forward, our variable SG&A as sales and improved runs anywhere from probably about 15% to at a high 20%.
And of sales dollar, and so we're going to be adding a lot of operating margin profit as we leverage those fixed, smaller fixed SG&A dollars over a larger base.
Bill Gordon – Gordon Capital
Okay. Thank you much.
Mike Brooks
Thanks Bill.
Operator
Okay. There are no further questions at this time.
I would like to turn the floor back over to management for closing comments.
Mike Brooks
Well. Thank you, ladies and gentleman.
Appreciate you listening in to our conference call. Look forward to working hard for our stockholders and we'll talk to you next quarter.
Thank you operator.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.