Rocky Brands, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Rocky Brands designs, manufactures and markets footwear, apparel and accessories through Wholesale, Retail and Military channels. Results are unaudited.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $56.2 million | $62.0 million | $111.9 million | $127.9 million |
| Gross profit / margin | $19.5 million / 34.6% | $21.4 million / 34.6% | $38.8 million / 34.7% | $44.4 million / 34.7% |
| Operating income / margin | $3.1 million / 5.5% | $3.9 million / 6.4% | $4.6 million / 4.2% | $8.4 million / 6.6% |
| Net income | $2.4 million | $3.2 million | $3.6 million | $6.8 million |
| Diluted EPS | $0.33 | $0.42 | $0.49 | $0.91 |
Sales declined 9.3% in Q2 and 12.5% in the first half year over year; net income fell about 23% and 46%, respectively. Gross margin percentage was unchanged, but operating margin narrowed as revenue fell and operating expenses consumed a larger share of sales.
Cash flow and liquidity: First-half operating cash flow was $18.9 million, versus $10.6 million in 2019; investing cash outflow was $5.5 million, including fixed-asset purchases, and financing cash outflow was $3.1 million. Cash increased $10.3 million to $25.8 million. The operating cash improvement primarily reflected lower receivables and inventory and changes in payables. At June 30, current assets were $140.8 million and current liabilities $26.2 million (working capital of approximately $114.5 million).
Debt: No borrowings were outstanding under the revolving credit facility at June 30. The asset-based facility has a $75 million stated commitment, subject to borrowing-base limits; reported capacity was $60 million. The facility matures in February 2024. Fixed-charge coverage covenants were not in effect because no triggering event occurred.
Changes by channel and versus prior year
- Q2 Wholesale: Sales fell 15.6% to $34.3 million; gross margin was 31.4%, down 1.6 percentage points.
- Q2 Retail: Sales rose 15.8% to $16.3 million; gross margin increased to 48.1% from 43.3%, reflecting a greater direct-to-consumer mix.
- Q2 Military: Sales declined 22.8% to $5.6 million; gross margin fell to 14.9% from 26.8%.
- For the first half, Wholesale sales decreased 16.6%, Retail sales increased 12.4%, and Military sales decreased 38.5%. Total gross margin percentage remained 34.7%, despite lower segment gross profit.
Outlook, management commentary and risks
Management said COVID-19 was driving channel shifts, weaker wholesale orders, lower production and temporary manufacturing closures, and expected pandemic effects to continue for the remainder of fiscal 2020. Retail e-commerce benefited from increased online shopping and prior investments. Production was also affected by worker health precautions, absenteeism and government-mandated closures. Management could not predict the pandemic’s ultimate impact and provided no specific revenue or earnings guidance.
Temporary manufacturing-closure costs reduced Q2 Wholesale and Military margins by approximately $656,000 and $330,000, respectively. For the first half, the net effect of closure-related costs and CARES Act employee retention credits was approximately $1.32 million in Wholesale and $654,000 in Military. Management estimated adjusted Q2 margins of 33.3% for Wholesale and 20.9% for Military; adjusted first-half margins were 33.7% and 22.4%, respectively.
Management expected available liquidity to support operations and obligations for at least the next 12 months, subject to operating performance, cash flows and covenant compliance. Key risks include prolonged COVID-19 effects on consumer spending, retail customers and orders, suppliers, manufacturing, distribution and logistics. The company also cited seasonality, competition, suppliers, international trade, cybersecurity and foreign-exchange risks. Disclosure controls were reported effective as of June 30, 2020; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether COVID-related closures, production constraints and wholesale order reductions persist, and whether e-commerce growth continues.
- Whether reported operating cash flow is sustainable; first-half cash generation benefited substantially from working-capital movements.
- How closure costs and employee retention credits affected segment margins, and whether those effects recur.
- Borrowing-base availability, covenant triggers and liquidity needs through seasonal working-capital swings.
- Capital spending: the cash-flow statement reports $5.5 million of fixed-asset purchases for the first half; the MD&A separately states capital expenditures of $3.5 million, so investors should clarify the difference.
- Shareholder returns: the company paid $2.1 million in first-half dividends and repurchased $1.0 million of stock; no shares were repurchased during Q2, and approximately $6.5 million remained under the announced authorization at quarter-end.