Rocky Brands Swings to Net Loss in Q4

Rocky Brands, Inc. fourth quarter net sales fell 5.7% to $70.6 million versus net sales of $74.9 million in the fourth quarter of 2005. The company reported a net loss of $100,000, or one penny per diluted share, versus net income of $2.6 million, or 46 cents per diluted share, for the fourth quarter of 2005.

The fourth quarter of 2005 included $8.7 million of footwear sales to the military compared to zero footwear sales to the military in the fourth quarter of 2006.

For the full year 2006, the Company reported net sales of $263.5 million versus net sales of $296.0 million in 2005. It is important to note that 2005 included $27.7 million of footwear sales to the military compared to $1.1 million in 2006. Net income for the full year 2006 was $4.8 million, or $0.86 per diluted share, versus net income of $13.0 million, or $2.33 per diluted share in 2005.

Rocky Brands also announced that it recently conducted its annual evaluation of the intangible assets on its balance sheet. Based on the results, the Company recorded a non-cash impairment charge in the fourth quarter of $0.5 million after-tax or $0.09 per diluted share reflecting the write-down of intangible assets related to the Gates trademark.

Mike Brooks, Chairman and Chief Executive Officer, commented, “Our revenues came in slightly below our forecast primarily due to continued weakness in our women's western footwear category during the fourth quarter. Additionally, our earnings were negatively impacted by higher than anticipated selling, general, and administrative costs and an increase in our interest expense. That said, in the fourth quarter we did witness sales increases in our outdoor footwear and apparel on a year-over-year basis for the first time in 2006 as well as increased sales in our retail business. We continue to be optimistic about the long-term prospects for our established brands while at the same time we are encouraged about the initial product launches for our two newest brands, Zumfoot and Michelin.”

Net sales for the fourth quarter of 2006 were $70.6 million compared to $74.9 million a year ago. The decrease in sales was attributable to a decline in footwear sales to the military, which were zero in the fourth quarter of 2006 compared to $8.7 million in the fourth quarter of 2005.

Gross profit in the fourth quarter of 2006 was $28.2 million, or 40.0% of sales, compared to gross profit of $27.2 million or 36.3% of sales, for the same period last year. The 370 basis point increase in gross margin was primarily due to the decrease in shipments to the U.S. military in the fourth quarter of 2006 compared to the fourth quarter of 2005. Military boots are sold at lower gross margins than branded products.

Selling, general and administrative (SG&A) expenses were $25.2 million, or 35.7% of sales, for the fourth quarter of 2006 compared to $21.2 million, or 28.3% of sales, a year ago. The increase was primarily a result of higher payroll and healthcare costs, licensing fees, trade show expenses, distribution expenses and the Gates trademark impairment charge.

Income from operations was $3.0 million or 4.2% of net sales for the fourth quarter of 2006, down from $6.0 million or 8.0% of net sales in the prior year period.

Net sales for the year ended December 31, 2006 were $263.5 million compared to net sales of $296.0 million for the year ended December 31, 2005. The decrease in sales was primarily attributable to weaker than expected results in the outdoor footwear and apparel and women's western footwear categories and a decline in footwear sales to the military, which were $1.1 million in 2006 compared to $27.7 million in 2005.

Gross profit was $109.3 million, or 41.5% of sales, compared to $111.2 million, or 37.6% of sales, for the same period last year. The 390 basis point increase was primarily due to the decrease in shipments to the U.S. military in 2006 compared to 2005. Military boots are sold at lower gross margins than branded products.

Selling, general and administrative (SG&A) expenses were $90.4 million, or 34.3% of sales, compared to $83.2 million, or 28.1% of sales, a year ago. The increase was primarily a result of higher payroll and healthcare costs, trade show expenses, marketing and advertising expenditures, professional fees and the Gates trademark impairment charge.

Income from operations was $18.9 million or 7.2% of net sales versus $28.1 million or 9.5% of net sales in the prior year.

The Company's funded debt at December 31, 2006 was $110.5 million versus $105.4 million at December 31, 2005. Interest expense increased to $3.3 million for the fourth quarter of 2006 versus $2.7 million for the same period last year, and to $11.6 million for 2006 versus $9.3 million for 2005. These increases were primarily due to an increase in borrowings and higher interest rates versus a year ago.

Inventory increased to $77.9 million at December 31, 2006 compared with $75.4 million on the same date a year ago.

Based on current information, the Company expects fiscal 2007 revenues to increase approximately 5% over 2006 levels, and diluted earnings per share to increase approximately 35% over 2006 levels.

Mr. Brooks concluded, “We are disappointed in our performance this past year as revenues and profits came in below our original estimates. We have recently taken steps towards improving our operating platform including realigning our sales force and restructuring our commission program in order to better maximize the opportunities for our portfolio of brands. Additionally, we are exploring ways to reduce our fixed costs going forward. As we begin the new year we are committed to better executing our growth strategy and dedicated to returning increased value to our shareholders.”