Rocky Brands, Inc.reported net income improved to $500,000, or 7 cents per diluted share for its first quarter ended March 31, 2011 despite a 7.3% decline in sales. The profit compares to a net loss of $600,000, or 10 cents, per diluted share in the year ago period.


The improvement came despite an increase of 33.5% shares outstanding as a result of the company's follow-on common stock offering in May 2010. Gross margin improved 340 basis points to 36.8% compared to 33.4% last year. Net sales were $52.3 million for the first quarter versus net sales of $56.1 million in the first quarter of 2010, due to reduced sales under military contracts.


“Our sales and marketing strategies continued to drive solid gains for our company owned brands in the wholesale channel,” said Mike Brooks, chairman and CEO. “Consumer demand for our new product lines has been very positive and helped to partially offset the expected sales decline in our military segment and replace the Dickies licensed business which, as previously announced last year, ceased as of the end of 2010.


“At the same time,” Brooks continued, “our retail segment delivered an improved operating performance as a result of the ongoing migration to more web based transactions. The combination of higher margin sales, our improved operating platform, and significantly lower interest expense, which is the result of our May 2010 stock offering and our October 2010 new credit facility, allowed us to report our first profitable first quarter in three years. We expect these trends will continue to fuel improved year over year earnings during the remaining quarters of 2011.”

First Quarter Review


Net sales for the first quarter were $52.3 million compared to $56.1 million a year ago. Wholesale sales for the first quarter increased 5.0% to $39.8 million compared to $37.9 million for the same period in 2010. The increase in wholesale sales was primarily driven by growth in our company-owned Work and Hunting brands which more than offset the $1.7 million decline of our Dickies licensed business.


Retail sales for the first quarter were $11.7 million compared to $12.9 million for the same period last year. The modest decline in retail sales was the result of the ongoing transition to more Internet driven transactions and the decision to remove a portion of our Lehigh mobile stores from operations to help lower costs. Military segment sales for the first quarter decreased $4.4 million to $800,000 compared to $5.2 million in the same period in 2010.

Gross margin in the first quarter of 2011 improved to $19.3 million, or 36.8% of sales, compared to $18.8 million, or 33.4% of sales, for the same period last year. The 340 basis point improvement in gross margin as a percentage of sales was primarily attributable to the decrease in sales in our military segment which carry lower gross margins than our retail and wholesale segments coupled with higher average selling prices. In addition, we benefited from the higher sales mix of company owned brands, which carry higher gross margins than licensed brands.


Selling, general and administrative (SG&A) expenses were $18.2 million or 34.8% of sales for the first quarter of 2011 compared to $18.0 million, or 32.1% of sales a year ago. The increase as a percentage of sales was attributable to the decrease in military segment sales which carry little to no SG&A expense.


Income from operations increased to $1.0 million, or 2.0% of net sales for the period compared to $700,000, or 1.3% of net sales, in the prior year.


Interest expense decreased 87.0% to $0.2 million for the first quarter of 2011 versus $1.6 million for the same period last year. The decrease is attributable to reduced borrowings versus a year ago combined with lower interest rates as the result of the new $70 million revolving credit facility signed in October 2010.


The company's funded debt decreased 40.6% or $19.0 million to $27.8 million at March 31, 2011 versus $46.7 million at March 31, 2010. Funded debt was reduced using proceeds from our equity offering in May 2010 and cash generated from operations.


Inventory increased 16.1% to $61.7 million at March 31, 2011 compared with $53.1 million on the same date a year ago. The increase in inventory is primarily the result of lower than desired levels a year ago due to supply chain constraints.