Rocky Brands, Inc. reported profits rose 20 percent in the third quarter ended September 30 due to the benefits of pricing actions taken in the second half of 2022 as well as lower costs. Sales were down 14.8 percent in the period but the rate improved versus the second quarter with a benefit from improved retailer inventory positions.

Third Quarter 2023 Overview

  • Net sales were $125.6 million, a decrease of 14.8 percent (or 12.7 percent on an adjusted basis)
  • Wholesale segment sales decreased 17.4 percent (or 14.9 percent on an adjusted basis)
  • Retail segment sales increased 4.7 percent
  • Gross margin as a percentage of net sales increased 180 basis points to 37.0 percent
  • Operating income increased 22.8 percent to $14.3 million and increased 39.8 percent to $15.8 million on an adjusted basis
  • Net income increased 20.0 percent to $6.8 million or $0.93 per diluted share
  • Adjusted net income increased 47.6 percent to $8.0 million or $1.09 per diluted share
  • Inventories decreased 26.5 percent year-over-year
  • Total debt at September 30, 2023 was down 24.9 percent compared with September 30, 2022

Jason Brooks, chairman, president and chief executive officer, said, “Our quarterly performance saw meaningful improvement on a sequential basis as demand for our product improved, resulting in further reduced channel inventory levels and an acceleration in at-once orders from many of our key wholesale partners. Despite the difficult start to 2023, we were confident that our results for the first half of 2023 reflected macroeconomic headwinds and industry dynamics more than the strength and desirability of our brand portfolio. While current market conditions remain challenging, the pace of our sales picked up in the third quarter driven by improved retailer inventory positions and ongoing consumer demand for our durable, innovative and accessibly priced work, western and outdoor footwear. At the same time, the work we’ve done to enhance our distribution and fulfillment capabilities and reduce operating expenses translated into significantly higher quarterly profitability year-over-year, which along with lower inventories allowed us to pay down debt by nearly 25 percent over the same time period. Looking ahead, we believe we are well positioned to improve on recent trends in the fourth quarter and begin 2024 with an improved balance sheet and good momentum across our business.”

Third Quarter 2023 Review
Third-quarter net sales decreased 14.8 percent to $125.6 million compared with $147.5 million in the third quarter of 2022. Adjusted net sales, which exclude the sale of inventory related to the divestiture of the Neos brand during the third quarter of 2022, decreased 12.7 percent. Wholesale segment sales for the third quarter decreased 17.4 percent to $99.7 million compared to $120.7 million for the same period in 2022. Retail segment sales for the third quarter increased 4.7 percent to $24.5 million compared to $23.4 million for the same period last year. Contract Manufacturing segment sales, which include contract military sales and private label programs, were $1.4 million in the third quarter of 2023 compared to $3.3 million in the prior year period. The decrease in Contract Manufacturing segment sales was due to the expiration of certain contracts with the U.S. Military.

Gross margin in the third quarter of 2023 was $46.5 million, or 37.0 percent of net sales, compared to $51.9 million, or 35.2 percent of net sales, for the same period last year. Excluding the cost of goods sold related to the NEOS brand inventory sold during the year-ago period, the adjusted gross margin for the third quarter 2022 was $50.8, million, or 35.3 percent. The 170-basis point increase in adjusted gross margin as a percentage of net sales was driven by higher Wholesale segment gross margins from the realization of pricing actions taken in the second half of 2022, as well as decreases in in-bound logistics costs, and a higher mix of Retail segment sales which carry higher gross margins than sales from Wholesale and Contract Manufacturing segments.

Operating expenses were $32.3 million, or 25.7 percent of net sales, for the third quarter of 2023 compared to $40.3 million, or 27.3 percent of net sales, for the same period a year ago. Adjusted operating expenses were $30.7 million in the current year period compared to adjusted operating expenses of $39.5 million in the year-ago period. The decrease in operating expenses was driven primarily by a decrease in outbound freight expenses and other variable expenses associated with lower sales and improved distribution center efficiencies compared with the year-ago period. As a percentage of adjusted net sales, adjusted operating expenses improved 290 basis points to 24.5 percent in the third quarter of 2023 compared with 27.4 percent in the year-ago period.

Income from operations for the third quarter of 2023 was $14.3 million, or 11.4 percent of net sales, compared to $11.6 million, or 7.9 percent of net sales for the same period a year ago. Adjusted operating income for the third quarter of 2023 was $15.8 million, or 12.6 percent of adjusted net sales, compared to adjusted operating income of $11.3 million, or 7.9 percent of adjusted net sales a year ago.

Interest expense for the third quarter of 2023 was $5.8 million compared with $4.2 million a year ago. The increase reflected increased interest rates on the senior term loan and credit facility.

The company reported third-quarter 2023 net income of $6.8 million, or $0.93 per diluted share, compared to net income of $5.7 million, or $0.77 per diluted share, in the third quarter of 2022. Adjusted net income for the third quarter of 2023 was $8.0 million, or $1.09 per diluted share, compared to adjusted net income of $5.5 million, or $0.74 per diluted share in the year-ago period.

Balance Sheet Review
Cash and cash equivalents were $4.2 million at September 30, 2023 compared to $7.3 million on the same date a year ago.

Total debt at September 30, 2023 was $213.9 million consisting of $88.6 million on our senior term loan and $127.4 million of borrowings under the company’s senior secured asset-backed credit facility. Compared with September 30, 2022 and December 31, 2022, total debt at September 30, 2023 was down 24.9 percent and 16.7 percent, respectively.

Inventories at September 30, 2023 were $194.7 million, down 26.5 percent compared to $265.1 million on the same date a year ago and down 17.3 percent compared with $235.4 million at December 31, 2022.

Photo courtesy Rocky Brands