Rocky Brands, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Rocky Brands designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Georgia Boot, Durango and Lehigh. Its reportable channels are Wholesale, Retail and Military. This unaudited filing covers the three and nine months ended September 30, 2019; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $67.2 | $65.9 | $195.1 | $185.5 |
| Gross profit / margin | $25.0 / 37.2% | $22.4 / 34.0% | $69.4 / 35.6% | $62.9 / 33.9% |
| Operating income | $7.0 | $5.6 | $15.4 | $13.2 |
| Net income | $5.6 | $5.0 | $12.4 | $10.9 |
| Diluted EPS | $0.75 | $0.67 | $1.66 | $1.47 |
- Q3 sales rose 1.9% year over year; nine-month sales increased 5.2%. Gross margin expanded 3.2 percentage points in Q3 and 1.7 points year to date.
- For the nine months, operating cash flow was $4.9, investing cash outflow $6.1 and financing cash outflow $2.6. Cash declined $3.7 from year-end 2018 to $6.4. Capital expenditures were approximately $5.8.
- At September 30, current assets were $145.0 and current liabilities $31.2. Inventory was $82.9, up from $72.8 at December 31, 2018; trade receivables were $50.7, versus $43.3 at year-end.
- No revolver borrowings were outstanding. The asset-based facility had $74.9 of total capacity at quarter-end, subject to borrowing-base limits; it matures in February 2024. Operating lease liabilities totaled $1.8.
Changes and management commentary
- Retail was the main sales growth driver: Q3 revenue increased 21.6% and nine-month revenue 19.9%, supported by Lehigh CustomFit account expansion and e-commerce growth. Wholesale increased 0.5% in Q3 and 2.4% year to date. Military sales fell 22.2% in Q3 and 3.7% year to date after completion of a multiyear Department of Defense contract.
- Management attributed improved gross margin to stronger initial margins on newer products, fewer discontinued-product sales, improved Puerto Rico facility efficiency, and one-time Hurricane Maria-related expense reimbursements of $169,000 in Wholesale and $581,000 in Military. Retail Q3 margin benefited from a greater e-commerce mix.
- Operating expenses rose 7.4% in Q3 and 8.7% year to date, principally from increased brand investment and variable selling costs. The effective tax rate rose to 20.1% for Q3 and 20.6% year to date, compared with 10.5% and 16.2%, respectively, in 2018; management cited the prior-year tax-rate reduction related to the transition tax.
- The company paid dividends of $0.14 per share in Q3 and $0.40 per share during the first nine months. No shares were repurchased in Q3; a $7.5 million authorization remained through February 28, 2020.
Outlook, risks and other matters
The filing gives no specific revenue or earnings guidance. Management said cash from operations together with the credit facility should provide sufficient liquidity for at least the next 12 months, contingent on operating performance, cash flows and covenant compliance. It noted possible 2019 inflationary pressure and said potential price increases could help offset it.
Risks identified include changes in consumer demand, seasonality and weather, competition, supplier reliance, international trade, retail trends, manufacturing or distribution disruption, cybersecurity, foreign-exchange movements and broader economic conditions. Management reported no material change to previously disclosed risk factors or market risks. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported. Adoption of the lease standard added right-of-use assets and lease liabilities to the balance sheet.
Important facts for investors to verify
- How much of the margin improvement reflects recurring performance versus the $750,000 total one-time Hurricane Maria reimbursements.
- Whether higher inventory and receivables convert to cash, given nine-month operating cash flow was below net income and cash declined.
- The sales and margin trajectory following the completed Department of Defense contract, and the sustainability of Retail and e-commerce growth.
- The expected effects of brand investment, inflation, tax-rate normalization and the share-repurchase authorization on future earnings and liquidity.
- Borrowing-base availability and covenant conditions under the revolving facility, particularly as seasonal working-capital needs fluctuate.