Rocky Brands, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Rocky Brands designs, manufactures and markets footwear, apparel and accessories across Wholesale, Retail and Contract Manufacturing channels.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $125.6m | $147.5m | $335.9m | $476.5m |
| Gross margin | $46.5m; 37.0% | $51.9m; 35.2% | $127.9m; 38.1% | $168.5m; 35.4% |
| Operating income | $14.3m | $11.6m | $20.6m | $30.4m |
| Net income | $6.8m | $5.7m | $3.7m | $14.0m |
| Diluted EPS | $0.93 | $0.77 | $0.50 | $1.89 |
Q3 sales declined 14.8% year over year, while operating income rose 22.8% and net income rose about 20%. Higher gross margin rates and lower operating expenses supported the improvement. For the first nine months, sales fell 29.5% and net income fell about 73%, reflecting lower sales and higher net interest expense.
Segment trends: Q3 Wholesale sales fell 17.4%, Retail rose 4.7%, and Contract Manufacturing fell 58.5%. Management attributed Wholesale weakness to retailer inventory levels and a difficult macroeconomic environment; Retail growth was associated with digital marketing; Contract Manufacturing sales were affected by expired U.S. Military contracts.
Cash, liquidity and debt
- Nine-month operating cash flow was $31.1m, versus cash used of $9.3m in 2022. Inventory reduction was a major source of cash.
- Investing activities provided $14.4m, including $17.3m received at closing from the Servus sale. Financing activities used $47.0m, primarily for revolving-credit and term-loan repayments. Cash declined $1.5m to $4.2m.
- At September 30, current assets were $309.4m and current liabilities $89.7m. Inventory was $194.7m, down from $265.1m a year earlier.
- Total debt was $216.0m gross ($213.9m net of issuance costs), compared with $287.7m gross a year earlier. The term facility’s effective rate was 12.77%; ABL SOFR borrowings were at 7.25%. ABL borrowing capacity was $37.6m.
- The company reported compliance with credit-facility covenants at September 30. Management believes available ABL capacity and operating cash flow should fund operations and debt obligations for at least 12 months, subject to operating performance, cash flows and covenant compliance.
Changes, outlook and notable items
- Management said Q3 results improved compared with the first half of 2023. It cited 2022 pricing actions, lower inbound logistics costs, a greater Retail sales mix, lower outbound freight and variable costs, distribution-center efficiencies and reduced discretionary spending.
- Comparisons are affected by late delivery of Fall 2021 inventory into early 2022 and the subsequent divestitures of NEOS (2022) and Servus (March 2023). Management sold Servus to focus resources on core brands; the sale generated an approximately $1.3m gain and $17.3m cash at closing, with approximately $1.7m remaining payable under the agreement.
- No numerical revenue or earnings guidance is provided in the filing. Management identifies softer demand, elevated retail-partner inventories and macroeconomic conditions as challenges.
- October 2023 amendments to both the term facility and ABL facility followed the reporting date, including covenant-related EBITDA adjustments; the term-loan amendment also adjusted performance pricing and leverage provisions through June 30, 2025.
- Restructuring charges were $1.5m for the first nine months of 2023, including workforce reductions. The company also reported $0.4m of costs related to the Rock Island facility closure.
- A supplier-related lawsuit is not expected by management to have a material adverse effect; no litigation liability was recorded. The company is seeking approximately $7.7m in potential customs-duty refunds; it received $1.9m during the first nine months of 2023 and $3.2m in 2022. Further refunds are uncertain and unrecorded until received.
- Goodwill was $47.8m; annual impairment testing is performed at the beginning of the fourth quarter. Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Wholesale demand and retailer inventory levels recover, and whether Retail growth can continue.
- Available revolver capacity, debt repayment progress, interest costs and compliance with amended credit-facility covenants.
- Whether expected operating cash flow and liquidity remain adequate as seasonal working-capital needs fluctuate.
- Results of the upcoming goodwill impairment review and the outcome and timing of remaining customs-duty refund claims.
- How much of reported improvement reflects durable operating gains versus lower freight costs, expense reductions and portfolio changes.