Business Overview and History
Rocky Brands, Inc. (RCKY) is a leading designer, manufacturer, and marketer of premium quality footwear and apparel, boasting a portfolio of well-recognized brand names such as Rocky, Georgia Boot, Durango, and the licensed brand Michelin. With a history spanning over four decades, the company has solidified its position as a trusted name in the outdoor, work, duty, commercial military, military, and western footwear markets.
Rocky Brands was founded in 1932 as the Rocky Shoe & Boot Company in Nelsonville, Ohio, where it is still headquartered today. Initially focusing on the production of work boots for the logging and mining industries, the company has undergone significant transformation and expansion over the years. Rocky Brands has built a portfolio of well-recognized brand names including Rocky, Georgia Boot, Durango, XTRATUF, Lehigh, Ranger, and the licensed brand Michelin. These brands serve target markets such as outdoor, work, duty, commercial military, military, and western. In addition to footwear, Rocky Brands also markets complementary branded apparel and accessories.
The company's growth has been achieved both organically and through strategic acquisitions. In 1993, Rocky Brands made its first major acquisition by purchasing Georgia Boot, a well-known work boot brand. This move diversified Rocky's product portfolio and strengthened its presence in the work boot market. In the early 2000s, Rocky Brands continued to expand its brand portfolio, acquiring Durango in 2003 and XTRATUF in 2007, further solidifying its position in the western and outdoor footwear segments, respectively.
In 2021, Rocky Brands completed a major acquisition, adding several new brands to its portfolio. This expanded the company's reach and capabilities but also presented integration challenges that had to be navigated. In March 2023, Rocky Brands divested its Servus brand, allowing it to focus resources on its core, higher-margin brands.
Throughout its history, Rocky Brands has faced its share of headwinds, including fluctuations in consumer demand, changes in distribution channels, and input cost pressures. The company has demonstrated resilience by adapting its product mix, go-to-market strategies, and operational footprint to overcome these obstacles. For example, Rocky Brands has worked to diversify its manufacturing beyond China in response to rising tariffs.
Today, Rocky Brands operates through three primary business segments: Wholesale, Retail, and Contract Manufacturing. The Wholesale segment distributes the company's products through a wide range of channels, including sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers, and online retailers. The Retail segment focuses on direct-to-consumer sales through the company's business-to-business web platform, e-commerce websites, third-party marketplaces, and its Rocky Outdoor Gear Store. The Contract Manufacturing segment includes sales to the U.S. Military, private label sales, and any sales to customers for whom Rocky Brands is contracted to manufacture or source a specific footwear product.
Financial Performance and Ratios
Over the past three years, Rocky Brands has demonstrated a strong financial performance, despite navigating various industry challenges. In 2021, the company reported annual revenue of $514.23 million and net income of $20.56 million. In 2022, revenue increased to $615.48 million, and net income rose to $20.46 million. For the fiscal year 2023, the company reported revenue of $461.83 million and net income of $10.43 million. Operating cash flow for 2023 was $73.58 million, with free cash flow of $69.66 million.
In the most recent quarter (Q3 2024), Rocky Brands reported revenue of $114.55 million, a decrease of 8.8% year-over-year, or 2.4% excluding certain non-recurring sales from the prior year quarter. Net income for the quarter was $5.28 million. Gross margin increased 110 basis points to 38.1% compared to 37.0% in the year-ago quarter.
The company's financial ratios also showcase its overall financial health. As of September 30, 2024, Rocky Brands' current ratio stood at 2.79, indicating a strong ability to meet short-term obligations. The debt-to-equity ratio was 0.69, suggesting a moderate level of leverage. Additionally, the company's quick ratio was 0.93, further demonstrating its liquidity position.
Segment Performance
Wholesale Segment: The Wholesale segment is Rocky Brands' largest, accounting for the majority of its net sales. During the third quarter of 2024, Wholesale net sales were $84.03 million, compared to $99.72 million in the same period of 2023, a decrease of 15.7%. This decline was attributed to non-recurring sales following the change to a distributor model in Canada in November 2023 and temporarily elevated commercial military footwear sales to a single customer throughout 2023. Wholesale gross margin for the quarter increased to 37.5% from 34.7% in the prior year period.
For the nine months ended September 30, 2024, Wholesale net sales were $232.08 million, down 7.6% from $251.23 million in the same period of 2023. The decrease was primarily due to the sale of the Servus brand in March 2023, the change to the distributor model in Canada, and the previously mentioned elevated commercial military footwear sales. Wholesale gross margin for the nine-month period improved to 37.0% from 35.5% in the prior year.
Retail Segment: Retail net sales for the third quarter of 2024 were $26.77 million, up 9.2% from $24.52 million in the same period of 2023. The increase was driven by growth in the Lehigh CustomFit platform as the company expanded its customer base and offerings. Retail gross margin for the quarter was 43.6%, compared to 48.0% in the prior year period.
For the nine months ended September 30, 2024, Retail net sales increased 5.3% to $83.29 million from $79.11 million in the same period of 2023. The growth was attributed to continued expansion of the Lehigh CustomFit platform and increased sales through the company's branded e-commerce websites. Retail gross margin for the nine-month period was 46.5%, down from 48.5% in the prior year.
Contract Manufacturing Segment: Contract Manufacturing net sales for the third quarter of 2024 were $3.75 million, up 172.7% from $1.38 million in the same period of 2023. The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023. Contract Manufacturing gross margin for the quarter improved to 12.0% from 11.5% in the prior year period.
For the nine months ended September 30, 2024, Contract Manufacturing net sales increased 86.8% to $10.35 million from $5.54 million in the same period of 2023, again primarily due to the new U.S. Military contract. Contract Manufacturing gross margin for the nine-month period was 11.0%, up from 7.3% in the prior year.
Operational Highlights and Challenges
Rocky Brands' diverse brand portfolio has been a key driver of its success, with several of its flagship brands, such as Durango and XTRATUF, delivering strong performance in recent years. The Durango brand, for example, has benefited from the company's efforts to clear overstock and discontinued styles, allowing it to better position its inventory to meet the strongest pockets of demand and accelerate turnover rates. Similarly, the XTRATUF brand has seen exceptional growth, with the successful launch of new product lines, including the tailgate collection of ankle deck boots and the new Kids TUF's collection, which have expanded the brand's customer base.
However, the company has also faced some operational challenges. In 2023, the sale of the Servus brand and the transition to a distributor model in Canada resulted in some non-recurring sales that are not expected to continue. Additionally, the company's Rocky and Georgia Boot brands have faced headwinds, with the former impacted by a poor hunting season and the latter experiencing increased competition and the need to reposition its product mix and value propositions.
Geopolitical Tensions and Tariff Impacts
Rocky Brands has also navigated the complexities of global trade and tariff-related challenges. Approximately 50% of the company's footwear was manufactured in China in 2023, either at its own facility in Suzhou or by third-party suppliers. The recent 10% increase in tariffs on products sourced from China has presented a headwind, with the company estimating a 110-basis-point impact on gross margins in 2025. To mitigate these challenges, Rocky Brands is working to reduce its third-party exposure in China and increase manufacturing in other countries, such as Vietnam, Cambodia, and the Dominican Republic.
Outlook and Strategic Initiatives
Despite the various challenges, Rocky Brands remains optimistic about its future prospects. For the year 2025, the company is forecasting revenue to increase in the low single-digit range over 2024, driven by continued strength in its retail segment and steady growth in the wholesale business, partially offset by a decline in contract manufacturing sales. Gross margins are expected to be down modestly from the 39.4% reported in 2024, including the 110 basis point headwind from higher tariffs. SG&A expenses are expected to be up in dollars but similar as a percentage of revenue compared to 2024. Interest expense is expected to decrease in 2025 based on lower debt levels and current interest rates.
The company anticipates 2025 earnings per share to be just below the 2024 adjusted EPS of $2.54, but up approximately 20% excluding the impact of higher tariffs. This guidance reflects some uncertainty around consumer behavior and retailer inventory commitments.
To drive future growth, Rocky Brands is focused on several strategic initiatives, including:
1. Investing in brand-building and marketing efforts to increase awareness and drive traffic to its own e-commerce platforms and wholesale partner doors. 2. Leveraging its diverse brand portfolio to expand into new product categories and customer segments, such as the successful launch of the women's and kids' offerings under the XTRATUF brand. 3. Optimizing its manufacturing and sourcing footprint to mitigate the impact of tariffs and other global trade disruptions, including increasing production in countries outside of China. 4. Strengthening its direct-to-consumer capabilities, particularly through its Lehigh CustomFit platform, which has seen significant growth in recent quarters.
Liquidity and Capital Resources
As of September 30, 2024, Rocky Brands maintained a solid liquidity position. The company reported cash of $3.71 million and had $50.10 million available under its ABL Facility. The current ratio of 2.79 and quick ratio of 0.93 indicate a strong ability to meet short-term obligations. The debt-to-equity ratio of 0.69 suggests a moderate level of leverage, providing the company with financial flexibility to pursue growth opportunities and navigate market challenges.
Geographic Markets and International Presence
While Rocky Brands primarily focuses on the North American market, the company has been expanding its international presence. Net sales to foreign countries represented approximately 3.2% of total net sales for the nine months ended September 30, 2024, compared to 5.5% in the same period of 2023. The decrease in international sales percentage is partly attributed to the change to a distributor model in Canada and the divestiture of the Servus brand, which had a significant international presence.
Conclusion
Rocky Brands' long history, diverse brand portfolio, and strategic initiatives position the company well to navigate the challenges it has faced in recent years. While the company has had to adapt to changes in the global trade environment and manage the impact of non-recurring sales, its focus on brand building, product innovation, and operational efficiency has enabled it to maintain its financial health and deliver value to shareholders. The company's performance in 2024, with adjusted EPS of $2.54, demonstrates its ability to execute on its strategic priorities and drive profitability even in a challenging environment.
As Rocky Brands continues to execute on its strategic priorities, investors will be closely watching the company's ability to capitalize on emerging opportunities and drive sustainable growth in the years ahead. The guidance for 2025, which anticipates low single-digit revenue growth and continued strong profitability despite tariff headwinds, reflects a cautiously optimistic outlook. The company's focus on expanding its direct-to-consumer channels, particularly through the Lehigh CustomFit platform, and its efforts to optimize its manufacturing footprint are key initiatives that could drive long-term value creation for shareholders.