Rocky Brands, Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Rocky Brands designs, manufactures and markets footwear, apparel and accessories through Wholesale, Retail and Military channels.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $77.8 million | $67.2 million | $189.7 million | $195.1 million |
| Gross margin | $29.8 million; 38.4% | $25.0 million; 37.2% | $68.6 million; 36.2% | $69.4 million; 35.6% |
| Operating income | $9.7 million | $7.0 million | $14.3 million | $15.4 million |
| Net income | $7.6 million | $5.6 million | $11.2 million | $12.4 million |
| Diluted EPS | $1.04 | $0.75 | $1.53 | $1.66 |
Q3 sales rose 15.8% year over year, with Wholesale up 19.3%, Retail up 11.4%, and Military down 2.8%. For the first nine months, sales declined 2.8%: Wholesale fell 3.6%, Retail grew 12.1%, and Military fell 29.1%. Nine-month operating expenses were nearly flat in dollars but increased to 28.6% of sales from 27.7%.
Cash flow and liquidity: Nine-month operating cash flow was $18.1 million, versus $4.9 million in 2019; investing cash outflow was $8.6 million and financing cash outflow was $5.1 million. Cash increased $4.4 million to $19.9 million. At September 30, current assets were $153.8 million and current liabilities were $36.3 million. The company had no revolver borrowings and reported $71.0 million of borrowing capacity, subject to borrowing-base calculations. Its $75 million asset-based facility matures February 13, 2024. The company said cash and its credit facility should be adequate for at least the next 12 months, contingent on operating performance, cash flow and covenant compliance.
Other metrics: Inventories were $80.7 million, up from $76.7 million at year-end 2019. Nine-month capital expenditure disclosure was $7.7 million in MD&A; cash-flow statement purchases of fixed assets were $8.6 million. The company paid $3.1 million in dividends and repurchased $2.0 million of stock during the first nine months.
Changes, management commentary and risks
- Q3 sales and earnings improved compared with 2019, supported by reopened wholesale stores, pent-up demand and increased online shopping. Management also cited brand investments, stronger initial margins on newer products, less discounting and manufacturing efficiencies.
- Retail’s direct-to-consumer e-commerce business benefited from online demand and prior investments. Military sales and margins remained pressured by lower orders, Puerto Rico facility disruption and COVID-related closure costs.
- For the first nine months, Military gross margin was affected by approximately $654,000 of facility-closure-related costs, net of employee retention credits. The comparable 2019 Military margin included a $581,000 one-time Hurricane Maria-related reimbursement. Management gave adjusted margin figures excluding these items.
- COVID-19 caused store closures, reduced orders, production disruption and a shift toward online sales. Management reported increased demand and production in Q3 carrying into Q4, but could not predict the pandemic’s ultimate effect on near- or long-term demand. No specific earnings or revenue guidance was provided.
- Other stated risks include consumer-demand and economic changes, seasonality and weather, competition, supplier and international-trade exposure, manufacturing or distribution disruption, cybersecurity and foreign-exchange fluctuations. Management reported no material change in market risk and concluded disclosure controls were effective; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Q3’s sales recovery and stronger margins continued after September 30, particularly as COVID-19 conditions and retail operations changed.
- How much of the nine-month Military margin decline was temporary COVID-related cost versus reduced orders or other ongoing factors.
- Inventory levels, customer receivables and payables, and the sustainability of operating cash flow as working-capital needs fluctuate seasonally.
- Available revolver capacity under the borrowing base, covenant triggers and restrictions on dividends, especially if business conditions weaken.
- The difference between MD&A capital expenditure of $7.7 million and $8.6 million of fixed-asset purchases in the cash-flow statement; the filing also reports $1.5 million of property and equipment purchases in accounts payable.