Rocky Brands said the challenging marketing conditions they experienced during the first quarter continued to pressure our top-line results, particularly within their Wholesale segment. Company CEO Jason Brooks said on a conference call with analysts that the difficult macroeconomic backdrop, coupled with the overall elevated inventory levels from many of their retail partners led to lower-than-expected sell-in during the quarter despite the fact that sell-through for their brands remained solid.

“Notwithstanding the slow start, at-once orders improved month-over-month as the quarter progressed and this trend continued in July, providing a good start to Q3 and leaving us cautiously optimistic that channel inventories are getting properly aligned with demand,” Brooks explained.

He said while the retail inventory situation weighed on reported results, consumer demand for their brand portfolio has provided resilience contributing to the progress many of their key partners have made working down their total on-hand inventory.

“While the first half of 2023 was more challenging than we expected, we believe the business is positioned for sequential improvements in both the third quarter and fourth quarter based on sustained consumer demand, we continue to experience for our products combined with the recent conversations with key wholesale partners,” Brooks suggested.

Consolidated second quarter net sales decreased 38.4 percent to $99.8 million, compared with $162.0 million in the second quarter of 2022.

Wholesale segment sales for the second quarter decreased 45.5 percent to $71.5 million compared to $131.2 million in the year-ago period.

Retail segment sales for the second quarter decreased 3.6 percent to $25.1 million compared to $26.0 million for the same period last year.

Contract Manufacturing segment sales, which include contract military sales and private label programs, were $3.3 million in the second quarter of 2023 compared to $4.9 million in the prior year period. The decrease in Contract Manufacturing segment sales was said to be due to the expiration of certain contracts with the U.S. Military.

Adjusted net sales, excluding returns associated with a supplier-related dispute, decreased 37.4 percent to $101.4 million from Q2 last year.

“Importantly, the combination of strong full price selling and the price actions we took in the second half of 2022 helped drive a 440-basis-point increase in gross margin year-over-year,” Brooks said.

Gross margin in the second quarter of 2023 was 37.6 percent of net sales, compared to 33.2 percent of net sales in Q2 last year. The margin increase was said to be 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 inbound logistics costs, and a higher mix of Retail segment sales which carry higher gross margins than the Wholesale and Contract Manufacturing segments.

The four brands that represent the company’s Work segment, Georgia, Rocky, Muck and Xtratuf, were collectively impacted by slower reorder frequency as retailers work to correct their inventory levels, according to Brooks. “While the group was down during the period, we saw the situation improve as the quarter progressed and also observed areas of strength beneath the challenging operating environment,” he shared.

Brooks said the Georgia brand exited the quarter in a much better position than it started. He said June was much improved from April and May as they saw mid-single-digit growth with their field accounts, along with the best month of the year with some of their key account base.

“The majority of the upside in June came from new product orders as the new season of product was well received by retailers. With some of our legacy product, the price decreases we were able to pass-through from our efforts to lowering manufacturing costs with our factory partners has driven an immediate uptick in sales for the selected amount of styles included in this program,” he said.

In the Rocky Work segment, the company reportedly saw a similar story playing out as excess inventory levels continued to stall replenishment orders.

“Overall, the second quarter didn’t unfold as we had hoped,” Brooks added. “We are optimistic about the remainder of the year as our retail partners continue to work through their inventory and consumer demand remains strong for our Georgia and Rocky Work brands.”

For Xtratuf and Muck, which make up the company’s rubber-based Work product, both brands reportedly had “very challenging quarters,” particularly Xtratuf due to the order irregularities in the year-ago period.

“As you will recall, distribution challenges in 2021 resulted in late delivery of fall 2021 inventory into Q1 and Q2 of 2022, causing a spike in orders in the first half of the year,” Brooks detailed. “Additionally, record warm weather and elevated retail inventory levels slowed reordering levels from our partners this quarter.”

Although inventory positions remain high, the Muck brand reportedly continues to provide steady sales for most retailers, according to Brooks. “In June, we saw significant upticks in our Southeast, Southwest and Rocky Mountain territories and early indication points to success with new products in our spring 2023 collections,” he said.

Brooks said they also made “significant headway” with securing shelf space for Muck in one of the largest co-op hardware store retailers with “an opportunity to open 500 new doors by the end of the year.”

With Xtratuf, they are seeing improvements in partner inventory levels and some regular orders starting to flow. “The positive brand sales we are seeing from partners are coming from their on-hand inventory,” said Brooks. “While the second quarter was difficult, we ended with our best month of the year in June and are focused on maintaining our positive brand momentum into Q3 and Q4 as sales continue to improve.”

In the Western business, the inventory situation that impacted the Work business was also said to be a factor.
This reportedly led to another “sluggish” quarter for the Durango brand, but Brooks said they saw steady improvement as the quarter progressed with at-once sales trending above the 2022 period for the last eight weeks of the quarter.

“As we mentioned in Q1, the Durango team has been focused on cost efficiencies to help offset some of the intermediate demand pressure and these efficiencies helped us lower MAP prices on some products, resulting in a boost in sales late in the quarter,” he commented.

The Durango brand reportedly added over 80 new doors through the first six months of 2023. “These new doors have been immediately impactful from the sales perspective and position us well for re-acceleration when market-wide inventory positions moderate,” Brooks added. “This ongoing door expansion, along with sharper pricing and fresh fall product hitting shelves in the coming months has us optimistic for our flagship Western brand as the year progresses.”

The Rocky-branded Western products reportedly saw similar wholesale pressures in the quarter, though demand for some new product styles apparently helped mitigate a portion of the headwinds.

The Outdoor segment, which includes styles under the Rocky, Muck and Xtratuf brands, was the most impacted segment in this quarter. Brooks said a poor 2022 outdoor season for the industry has created greater carryover inventories and lower new product bookings as they head into the more popular fall outdoor season.

“On top of this, Muck and Xtratuf also faced difficult year-over-year comparisons from the shipping delays in late 2021,” he said. “While overall, it was a difficult quarter, we saw some positive results with select outlets along with a modest gain in the Outdoor e-commerce sales.”

Within the Wholesale segment, Commercial Military was said to be a bright spot as orders from the U.S. Army and U.S. Marine Corps drove a strong double-digit sales increase year-over-year.

The company reported a second-quarter 2023 net loss of $2.7 million, or a loss of 37 cents per diluted share, compared to net income of $0.9 million, or EPS of 12 cents per diluted share in the second quarter of 2022. Adjusted net income for the second quarter of 2023 was $0.0 million, or $0.00 per diluted share, compared to adjusted net income of $2.5 million, or 34 cents per diluted share in the year-ago period.

Photo courtesy Rocky Brands/Durango