Rocky Brands, Inc.’s second quarter net sales decreased 12.5% to $57.3 million compared to $65.5 million for the corresponding period a year ago. The majority of the decline was due to approximately $5.8 million of footwear sales to the military compared to zero footwear sales to the military in the second quarter of 2006. Without the military sales benefit last year, sales would have declined roughly 4%.

Management said that sales of outdoor footwear and apparel were “disappointing,” while sales of Western footwear were showing positive trends due to cross-selling opportunities created by the integration of the company’s sales forces.

Gross margins increased 279 basis points to 42.0% of sales, compared to 39.3% of sales last year. This was due to the fact that there were no shipments to the U.S. military in the second quarter of 2006. SG&A expenses increased 770 basis points to 37.4% of sales compared to last year when Rocky reported SG&A expenses of 29.7% of sales. The company said that the increase was primarily a result of higher heath care costs, trade show expenses, and other professional fees.

This brought income from operations to $2.6 million or 4.6% of net sales, compared to income from operations of $6.2 million or 9.5% of net sales in the prior year, however increased interest expenses brought the company to a net loss for the quarter. Rocky’s net loss was $200,000, or four cents per diluted share versus net income of $2.8 million, or 50 cents per diluted share a year ago. The net loss for the second quarter includes approximately $100,000, or two cents per diluted share, in stock compensation expense.

During a conference call with analysts and the media, Rocky CEO Mike Brooks said that the company is beginning to see increased competition from private label brands, which are now using features like Gore-Tex and Vibram in their hunting boots. These branded components were key points of differentiation for Rocky in the past. In addition, he stated that these private label brands “resemble Rocky now more than ever,” and “are available a significantly lower price points.”

Rocky also recently signed a license to sell Michelin footwear, which it will market to the non-hunting outdoor market, primarily “the casual adventure market.” This includes light hiking, trail running, and rock climbing.

Previously Rocky had anticipated net sales of $287 million to $292 million and diluted earnings per share in the range of $2.28 to $2.38, but due to the trends observed in the second quarter, the company is reducing this guidance. Net sales are now expected to be approximately $265 million for the year with net earnings of $1.25 per diluted share.