Rocky Brands, Inc. — Q2 2019 Form 10-Q
Business context and period: Rocky Brands designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Georgia Boot, Durango and Lehigh. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $62.0 million | $58.2 million | $127.9 million | $119.6 million |
| Gross margin dollars | $21.4 million | $19.5 million | $44.4 million | $40.5 million |
| Gross margin rate | 34.6% | 33.6% | 34.7% | 33.9% |
| Operating income | $3.9 million | $3.4 million | $8.4 million | $7.6 million |
| Net income | $3.2 million | $2.6 million | $6.8 million | $5.9 million |
| Diluted EPS | $0.42 | $0.35 | $0.91 | $0.79 |
Q2 sales rose 6.4% year over year and first-half sales rose 6.9%. Operating expenses increased 8.3% in Q2 and 9.4% in the first half, outpacing sales growth; as a share of sales they were 28.2% and 28.1%, respectively. Effective tax rate was 21.0%, compared with 20.5% in 2018.
Sales by segment
Q2 sales: Wholesale $40.6 million, up 2.1%; Retail $14.1 million, up 20.2%; Military $7.2 million, up 8.4%. First-half sales: Wholesale $83.0 million, up 3.5%; Retail $29.5 million, up 19.1%; Military $15.3 million, up 5.3%.
Management attributed Retail growth to Lehigh’s CustomFit expansion and customer retention, alongside e-commerce growth following website investments. Wholesale growth was associated with product introductions and marketing in work, western, outdoor and commercial military categories. Military revenue benefited partly from shipments accelerated into the first half following Department of Defense notifications.
Cash, liquidity and capital
- Cash and cash equivalents were $15.7 million at June 30, 2019, versus $10.2 million at December 31, 2018 and $8.3 million at June 30, 2018.
- First-half operating cash flow was $10.6 million, compared with $11.1 million in 2018. Capital expenditures were $3.5 million versus $2.6 million; cash dividends paid were $1.9 million versus $1.7 million. Cash increased $5.5 million during the first half.
- The company had no revolver borrowings at June 30, 2019. Its new senior secured asset-based revolving facility provides up to $75 million, subject to a borrowing base; reported capacity was $62.7 million. The facility matures February 13, 2024. Fixed-charge coverage covenants apply upon specified triggering events; none occurred in the first half.
- Current assets were $140.4 million and current liabilities $30.2 million at June 30. Inventory was $77.5 million, up from $72.8 million at year-end.
- Operating lease adoption added $1.3 million of lease liabilities and a $1.3 million right-of-use asset at June 30. Management said adoption materially affected the balance sheet but not cash flows.
Changes, outlook and risks
- Segment margin trends were mixed: Military margin improved substantially, supported by greater Puerto Rico facility efficiency; Wholesale margin improved in Q2 but declined for the first half, partly due to sales of aged discontinued inventory; Retail margin declined as lower-margin Lehigh sales became a larger share of Retail.
- Operating expense growth reflected investment in core brands and sales-related variable costs. Management said it expected 2019 inflationary pressures could potentially be offset through price increases. The filing provides no numerical revenue or earnings guidance.
- Management believed cash and the credit facility would provide sufficient liquidity for at least the next 12 months, subject to operating performance, cash flow and covenant compliance. The business is seasonal, with working capital generally highest May through October.
- Risks cited include consumer demand and forecasts, seasonality and weather, competition, supplier reliance, international trade, retail trends, manufacturing or distribution disruption, cybersecurity, foreign exchange and economic conditions. Management reported no material changes to previously disclosed risk factors or market risk.
- The company declared dividends of $0.12 per share in Q1 and $0.14 per share in Q2. No shares were repurchased in the quarter; a $7.5 million repurchase authorization remains in effect through February 28, 2020.
Investor verification points
- Assess whether Retail and e-commerce growth, including Lehigh CustomFit, is durable and supports margins.
- Monitor inventory growth, seasonal working-capital needs and operating cash conversion.
- Verify the timing and sustainability of Military shipments, given management’s note that some shipments were accelerated into the first half.
- Review borrowing-base availability, covenant triggers and the terms of the new credit facility.
- Track margin effects from product mix, discount-channel inventory sales, Puerto Rico facility efficiency and potential pricing actions.