Rocky Brands Sees Q3 Sales and Earnings Fall

Rocky Brands, Inc. third quarter net sales were $78.1 million compared to $94.1 million for the corresponding period a year ago. Net income was $4.2 million versus net income of $6.5 million and diluted earnings per share was 76 cents versus $1.15 last year.

Net income for the third quarter of fiscal 2006 includes approximately $0.1 million in stock compensation expense required by current accounting standards compared with no stock compensation expense in the third quarter of fiscal 2005.

Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands, stated, “Our year-over-year comparisons reflect the ongoing challenges in our outdoor segment and a slowdown in our fashion-oriented western footwear business, coupled with minimal footwear sales to the military. While we are clearly disappointed with our overall performance in 2006, we continue to be optimistic about the future prospects for our entire portfolio of brands. We are committed to enhancing our operating platform in order to reinvigorate our top-line results and drive long-term profitable growth. Our entire organization is focused on improving our position in the marketplace and returning increased value to our shareholders.”

Third Quarter Results

Net sales for the third quarter decreased 17.0% to $78.1 million compared to $94.1 million a year ago. The decrease in sales is attributable to weaker than expected results in outdoor footwear and apparel, a slowdown in sales of our western footwear, and a decline in footwear sales to the military, which were $0.2 million in the third quarter compared to $9.4 million in the third quarter of 2005.

Gross profit in the third quarter of 2006 was $32.1 million, or 41.1% of sales, compared to $34.1 million or 36.2% of sales, for the same period last year. The 490 basis point increase in gross margin was primarily due to the decrease in shipments to the U.S. military in the third quarter of 2006 compared to the third quarter of 2005. Military boots are sold at lower gross margins than branded products.

Selling, general and administrative (SG&A) expenses were $22.6 million, or 28.9% of sales for the third quarter of 2006 compared to $21.8 million, or 23.2% of sales, a year ago. The increase of $0.8 million is the result of a shift in the timing of certain advertising and professional expenses.

Income from operations was $9.5 million or 12.2% of net sales, compared to income from operations of $12.3 million or 13.0% of net sales in the prior year.

Funded Debt and Interest Expense

Funded debt at September 30, 2006 was $127.3 million versus $127.5 million at September 30, 2005. Interest expense increased to $2.9 million for the third quarter of 2006, versus $2.5 million for same period last year, primarily due to higher interest rates than a year ago.

Inventory

Inventory increased to $87.7 million at September 30, 2006 compared with $77.3 million on the same date a year ago.

Outlook

Rocky Brands remains comfortable with its previously issued guidance for net sales of approximately $265 million for the year ended December 31, 2006. If the Company achieves net sales of at least $265 million for fiscal 2006, then net earnings are anticipated to be approximately $1.25 per diluted share for the year ended December 31, 2006, including a non-cash charge of approximately 7 cents per share related to stock options expensing.

                 Rocky Brands, Inc. and Subsidiaries
           Condensed Consolidated Statements of Operations
                             (Unaudited)

                      Three Months Ended        Nine Months Ended
                        September 30,             September 30,
                   ------------------------ --------------------------
                          2006        2005          2006         2005
                   ------------------------ --------------------------
NET SALES          $78,114,725 $94,087,786  $192,937,394 $221,105,507

COST OF GOODS SOLD  45,998,535  60,014,309   111,831,955  137,100,919
                   ------------------------ --------------------------

GROSS MARGIN        32,116,190  34,073,477    81,105,439   84,004,588

SELLING, GENERAL
 AND ADMINISTRATIVE
 EXPENSES           22,606,038  21,820,251    65,166,515   61,966,723
                   ------------------------ --------------------------

INCOME FROM
 OPERATIONS          9,510,152  12,253,226    15,938,924   22,037,865

OTHER INCOME AND
 (EXPENSES):
Interest expense    (2,883,656) (2,523,143)   (8,295,285)  (6,517,313)
Other - net             73,056     130,958       131,518      248,597
                   ------------------------ --------------------------
Total other - net   (2,810,600) (2,392,185)   (8,163,767)  (6,268,716)

INCOME BEFORE
 INCOME TAXES        6,699,552   9,861,041     7,775,157   15,769,149

INCOME TAX EXPENSE   2,480,000   3,352,605     2,878,000    5,361,364
                   ------------------------ --------------------------

NET INCOME          $4,219,552  $6,508,436    $4,897,157  $10,407,785
                   ======================== ==========================

NET INCOME PER
 SHARE
Basic                    $0.78       $1.23         $0.91        $1.99
Diluted                  $0.76       $1.15         $0.88        $1.86

WEIGHTED AVERAGE
 NUMBER OF COMMON
 SHARES OUTSTANDING
Basic                5,400,647   5,289,736     5,386,254    5,232,964
                   ======================== ==========================
Diluted              5,553,028   5,646,161     5,588,616    5,585,224
                   ======================== ==========================