Business context and reporting period
Rocky Brands, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2016. The company sells footwear and apparel through Wholesale, Retail and Military segments. Results are compared with the three and six months ended June 30, 2015.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $62.6 million | $68.6 million | $120.1 million | $134.0 million |
| Gross margin | $16.3 million; 26.0% | $22.6 million; 33.0% | $35.2 million; 29.3% | $44.6 million; 33.3% |
| Operating income (loss) | $(2.5) million | $3.3 million | $(2.8) million | $5.7 million |
| Net income (loss) | $(1.8) million; $(0.23) per share | $2.0 million; $0.26 per share | $(2.0) million; $(0.26) per share | $3.4 million; $0.45 per share |
Q2 sales declined about 8.8% year over year and first-half sales about 10.4%. SG&A was $18.8 million in Q2 and $37.9 million in the first half, down from $19.4 million and $39.0 million, respectively; however, SG&A rose as a share of sales to 30.1% in Q2 and 31.6% for the half.
For the six months, operating cash flow was $5.6 million, capital expenditures were $3.5 million, and cash declined $0.9 million to $2.5 million. Operating cash flow benefited chiefly from higher accounts payable and accrued liabilities and lower receivables; inventory growth and higher other current assets partly offset those sources. The company paid $1.7 million in dividends and repurchased $1.2 million of stock.
At June 30, 2016, current assets were $138.9 million and current liabilities $29.3 million; cash was $2.5 million and inventory $87.6 million. Long-term debt was $23.5 million. The revolving facility had $63.1 million of capacity at that date, subject to borrowing-base limits; it matures in November 2019. The fixed-charge coverage covenant was not in effect because no triggering event had occurred.
Material changes and management commentary
- Wholesale sales fell $12.4 million in Q2 and $23.2 million in the first half. Management attributed weakness to low retail store traffic, warmer weather, softer economies—particularly areas tied to oil and gas—and resulting inventory overhang affecting replenishment of the Georgia Boot, Rocky and Durango brands.
- Retail sales were approximately flat. Military sales rose to $10.7 million in Q2 from $4.5 million and to $16.5 million for the half from $7.1 million, reflecting shipments under U.S. military combat-boot contracts, including a Temperate Weather order that began shipping in March 2016.
- Gross margin deterioration was driven mainly by higher manufacturing costs during the Puerto Rico facility production ramp-up. Wholesale Q2 margin fell to 27.7% from 32.5%; Military Q2 margin fell to 1.4% from 13.3%. Wholesale average selling prices also contributed to the Q2 decline.
- Management cited lower freight and handling costs as the main reason SG&A declined. The estimated tax rate was 34% versus 35% in 2015; management said expected additional permanent capital investment in the Dominican Republic would reduce dividends subject to U.S. income tax.
Outlook, risks and unusual items
Management anticipated approximately $6.9 million of capital expenditures for 2016. The filing provides no specific sales or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
Key exposures include continued wholesale demand weakness and channel inventory overhang, manufacturing costs and production ramp-up, seasonal working-capital needs, customer collections, inventory obsolescence and potential impairment of intangible assets. The $7.5 million repurchase authorization runs through March 1, 2017; $6.3 million remained at quarter-end. No legal proceedings or material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether wholesale demand, retailer traffic and channel inventories improve, and whether Military contract shipments continue at comparable levels.
- Whether Puerto Rico production ramp-up costs subside and segment gross margins recover.
- Inventory levels, inventory reserves and cash conversion, given inventory of $87.6 million and the first-half inventory cash outflow.
- Borrowing-base availability and revolver usage through seasonal working-capital peaks, alongside the facility’s covenant terms.
- Progress against the $6.9 million capital-expenditure estimate and the remaining share-repurchase authorization.