Rocky Brands, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Financial amounts below are in millions of dollars unless otherwise stated. The interim financial statements are unaudited.
Business context
Rocky designs, manufactures and markets footwear, apparel and accessories across outdoor, work, duty, commercial and military, and western markets. Its reportable segments are Wholesale, Retail and Contract Manufacturing. The company completed the sale of the Servus brand and related assets on March 30, 2023, following the 2022 sale of NEOS.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $99.8 | $162.0 | $210.3 | $329.1 |
| Gross profit / margin | $37.6 / 37.6% | $53.8 / 33.2% | $81.3 / 38.7% | $116.6 / 35.4% |
| Operating expenses | $35.4 | $48.2 | $75.0 | $97.8 |
| Operating income | $2.2 | $5.6 | $6.4 | $18.8 |
| Net income (loss) | $(2.7) | $0.9 | $(3.1) | $8.3 |
| Diluted EPS | $(0.37) | $0.12 | $(0.42) | $1.12 |
Q2 sales fell 38.4% year over year; six-month sales fell 36.1%. Wholesale was the main source of the decline: Q2 Wholesale sales decreased 45.5%, while Retail declined 3.6% and Contract Manufacturing declined 32.7%. For the six-month period, Wholesale declined 42.9%, Retail was nearly flat, and Contract Manufacturing declined 55.3%.
Gross margin rates improved, but lower sales reduced gross-profit dollars. Management attributed the rate improvement primarily to 2022 pricing actions and lower inbound logistics costs; Q2 mix also benefited from Retail’s higher margin profile. Operating expenses fell in dollars with lower variable costs, better distribution-center efficiency, lower discretionary spending and a leaner structure, but rose as a share of sales because of lower revenue. Q2 net loss included $5.6 million of net interest expense and other expense.
Cash flow, liquidity and debt
- Six-month operating cash flow was $19.7 million, compared with cash used of $8.6 million in 2022. Management cited reductions in inventory and trade receivables, partly offset by lower accounts payable.
- Investing activities provided $15.6 million, including $17.3 million of proceeds from the Servus sale; financing activities used $37.9 million, principally for revolving-credit and term-loan repayments. Cash declined $2.6 million to $3.1 million.
- At June 30, 2023, current assets were $308.2 million and current liabilities were $90.4 million, for working capital of approximately $217.8 million. Inventory was $218.3 million, down from $287.8 million a year earlier.
- Gross debt was $224.1 million ($221.7 million net of unamortized issuance costs), down from $287.8 million at June 30, 2022. The term facility’s effective rate was 12.77%. The company reported $26.9 million of ABL borrowing capacity and compliance with credit-facility covenants at quarter end.
- Capital expenditures were $2.3 million for the six months. The company said its ABL facility and operating cash flows should provide sufficient liquidity for at least the next 12 months, subject to operating performance, cash flows and covenant compliance.
Material changes, outlook and risks
- Management attributed the sales decline to elevated retailer inventories, softer demand and a difficult comparison with 2022, when delayed Fall 2021 deliveries had boosted first-half orders. The comparison also reflects the divestitures of NEOS and Servus. Retail e-commerce comparisons were affected by pent-up orders shipped after the Reno distribution facility opened in 2022; Contract Manufacturing sales were affected by expired U.S. Military contracts.
- The Servus transaction had approximately $19.0 million of total consideration, including $17.3 million received at closing and $1.7 million payable under the purchase agreement. The company recorded an approximately $1.3 million gain in the six-month period.
- In April 2023, the company identified restructuring actions. Six-month 2023 restructuring charges were $1.0 million; $1.1 million of severance and related costs remained accrued at June 30.
- The company is seeking refunds for excess duties resulting from misclassified tariff codes. Potential total refunds were approximately $7.7 million; $3.2 million was received in 2022 and $1.9 million in the first half of 2023. Further refunds were not recorded because collection was uncertain.
- The company is party to litigation with a manufacturing supplier and said it does not expect a material adverse impact; it recorded no litigation contingency. No specific revenue or earnings guidance was provided. Forward-looking risks include demand and forecast uncertainty, seasonality, competition, suppliers, international trade, operating disruptions, cybersecurity and foreign-exchange movements.
Important facts for investors to verify
- Whether retailer inventory levels, demand and Wholesale orders improve, and how the steep year-over-year sales decline develops.
- Available ABL capacity, covenant headroom and the effect of debt costs, including the term loan’s effective interest rate.
- Whether cash generation remains adequate as inventory and receivables change, and whether the stated 12-month liquidity expectation holds.
- The timing and collectability of remaining potential customs-duty refunds, which are unrecorded gain contingencies.
- The ongoing effects of the Servus and NEOS divestitures, expired military contracts and restructuring actions on sales and profitability.