Rocky Brands, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Rocky Brands designs, manufactures and markets footwear, apparel and accessories across outdoor, work, duty, military, commercial military and western markets. Its reportable segments are Wholesale, Retail and Contract Manufacturing. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $112.9 million | $110.4 million |
| Gross margin | $44.1 million; 39.1% | $43.8 million; 39.6% |
| Operating expenses | $36.2 million; 32.0% of sales | $39.6 million; 35.9% of sales |
| Operating income | $8.0 million; 7.1% of sales | $4.2 million; 3.8% of sales |
| Net income (loss) | $2.6 million; diluted EPS $0.34 | $(0.4) million; diluted EPS $(0.05) |
| Operating cash flow | $17.4 million | $20.8 million |
| Cash and cash equivalents, quarter-end | $3.1 million | $4.9 million |
| Total debt, net of issuance costs, quarter-end | $156.0 million | $219.8 million |
| Inventory, quarter-end | $165.1 million | $224.1 million |
Net cash used in investing activities was $0.3 million; financing activities used $18.5 million, principally for debt repayments and dividends. Cash declined $1.4 million during the quarter. The company reported $40.0 million of borrowing capacity under its ABL Facility at March 31, 2024. Long-term debt was $153.3 million, with $2.7 million classified as current. The Term Facility’s effective rate was 13.20%; ABL rates varied by borrowing type.
Changes and management commentary
- Sales increased 2.2%. Wholesale sales were nearly flat as reported; excluding the divested Servus brand, management said Wholesale sales rose 7.0%, helped by stabilizing retailer inventory. Retail sales grew 3.0%, attributed to direct-to-consumer e-commerce and targeted digital marketing.
- Contract Manufacturing sales increased to $2.7 million from $0.9 million, with the first full quarter of shipments under a new multi-year U.S. Military contract. The contract requires minimum shipments through 2026 and has an option to extend.
- Reported gross margin declined 50 basis points. Management attributed the comparison to a $1.3 million net tariff refund included in Q1 2023; excluding that refund, it said gross margin improved 70 basis points, reflecting the Servus divestiture and product mix.
- Operating expenses fell 8.7%, which management attributed to 2023 restructuring and cost-saving initiatives, operational efficiencies and lower outbound freight expense. Operating income nearly doubled.
- Debt net of issuance costs declined 29% year over year. Management said lower debt levels reduced interest expense compared with Q1 2023 excluding the Servus sale gain.
Liquidity, outlook and risks
Management said the ABL Facility and operating cash generation were expected to provide sufficient liquidity for operations and debt obligations for at least the next 12 months, subject to operating performance, cash flows and compliance with financial covenants. The company reported compliance with its credit-facility covenants during Q1. No specific revenue or earnings guidance was provided.
On April 26, 2024, after quarter-end, the company retired its Term Facility and refinanced its ABL Facility through a restated facility comprising a $175 million revolving credit facility and a $50 million term loan facility. Pricing depends on availability and loan type; Level III pricing applies through June 30, 2024.
Risks highlighted include sales forecast accuracy, consumer demand, seasonality and weather, competition, supplier dependence, international trade, retail trends, disruptions to manufacturing or distribution, cybersecurity, foreign-exchange movements and broader economic changes. The company is pursuing a potential refund of duties it believes were overpaid: estimated potential recovery was approximately $7.7 million, of which $5.1 million had been received by March 31, 2024. No additional refund was received in Q1 2024; uncollected potential refunds were not recorded because collection is uncertain. Management said ordinary-course legal matters were not expected to be materially adverse; no related contingent liabilities were recorded. The company also noted that it is evaluating new income tax, segment-reporting and SEC climate-disclosure requirements.
Important facts for investors to verify
- Review the terms, pricing, covenants and borrowing availability of the April 26, 2024 restated credit facility, and the impact of refinancing on interest expense and liquidity.
- Track progress and margins under the U.S. Military contract, including whether shipments meet the contract’s minimum requirements.
- Assess whether operating expense savings and improved underlying gross margins continue, while distinguishing results from prior-period tariff refunds and the Servus divestiture.
- Monitor inventory, seasonal working-capital needs, cash generation and debt reduction; Q1 operating cash flow was lower year over year.
- Confirm any further customs-duty refunds as received; the remaining potential recovery is uncertain and unrecognized.