Rocky Brands, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Rocky designs, manufactures and markets footwear, apparel and accessories. Its reportable segments are Wholesale, Retail and Contract Manufacturing. Financial figures below are in U.S. dollars; “million” amounts are rounded.
Financial results and liquidity
- Net sales: $110.4 million, down 33.9% from $167.0 million. Wholesale sales fell 40.2% to $80.1 million; Retail rose 3.1% to $29.5 million; Contract Manufacturing fell 80.1% to $0.9 million.
- Gross profit and margins: Gross profit was $43.8 million, down from $62.8 million. Gross margin improved to 39.6% from 37.6%, supported by 2022 pricing actions, lower inbound logistics costs and a higher Retail sales mix.
- Operating results: Operating expenses declined 20.2% to $39.6 million, but increased to 35.9% of sales from 29.7%. Operating income fell to $4.2 million from $13.2 million; operating margin was 3.7%, versus 7.9%.
- Net income and EPS: Net loss was $0.4 million, compared with net income of $7.3 million. Basic and diluted loss per share were both $0.05, versus basic EPS of $1.00 and diluted EPS of $0.99. Net interest expense and other items were $4.7 million, including a $1.3 million gain on the Servus sale.
- Cash flow: Operating cash flow was $20.8 million, versus $13.8 million, primarily reflecting decreases in receivables and inventory. Investing cash flow was positive $16.9 million, including $17.3 million received at closing for Servus. Financing used $38.4 million, mainly for debt repayments and $1.1 million of dividends. Cash decreased $0.8 million to $4.9 million.
- Balance sheet and debt: At March 31, cash was $4.9 million, inventory $224.1 million, current assets $310.6 million and current liabilities $91.0 million. Total debt was $222.3 million gross, or $219.8 million net of issuance costs; long-term debt was $217.0 million and the current portion $2.8 million. The Term Facility’s effective rate was 12.14%. ABL borrowing capacity was $37.4 million. The company reported covenant compliance.
Material changes and management commentary
- Management attributed the sharp Wholesale decline to elevated inventory at retail partners and softer demand. Retail’s modest growth reflected expansion in the Lehigh business. Contract Manufacturing declined following expiration of certain U.S. Military contracts, which also contributed to lower segment gross margin.
- On March 30, 2023, Rocky sold the Servus brand and related assets for approximately $19.0 million total consideration; $17.3 million was received at closing and $1.7 million remains payable under the agreement. Management said the sale allows it to focus on more profitable core brands.
- Operating expenses fell partly because of lower variable expenses and improved distribution-center efficiencies. Management’s adjusted comparison excludes $0.8 million of acquisition-related amortization in Q1 2023 and $1.0 million of acquisition-related amortization and integration expenses in Q1 2022.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management believes the ABL Facility and operating cash flow should fund operations and debt obligations for at least the next 12 months, while noting liquidity depends on operating performance, cash flows and covenant compliance.
- Debt is variable-rate and carries substantial interest costs. The Term Facility matures in 2026; the ABL Facility had $37.4 million of available borrowing capacity at quarter-end. In May 2023, after the reporting date, the company amended the Term Facility, including changes related to covenant calculations and fees.
- Rocky is seeking refunds for excess customs duties related to misclassified tariff codes. Potential total recovery is approximately $7.7 million; $3.2 million had been received in 2022 and $1.9 million in Q1 2023. Remaining potential refunds were not recognized because collection is uncertain.
- The company is party to litigation with a supplier of acquired brands; management does not expect a material adverse impact and has recorded no liability. Other stated risks include demand and forecast uncertainty, seasonality, competition, supplier and international-trade exposure, operational disruption, cybersecurity, and currency fluctuations.
- Management reported effective disclosure controls as of March 31, 2023, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp Wholesale sales contraction and retailer inventory pressure persist, and whether Retail growth can offset them.
- Progress on inventory reduction, gross-margin performance and operating profitability as sales volumes change.
- Debt balances, interest rates, ABL availability, covenant headroom and the terms or effects of the May 2023 amendment.
- Timing and collectability of the remaining Servus consideration and customs-duty refunds.
- Developments in the supplier litigation and the impact of expired military contracts on Contract Manufacturing.