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Rocky Brands: Business As Usual (NASDAQ:RCKY)

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Even before we got the one-two punch of the collapsing oil price, along with the coronavirus ramifications, shares of Rocky Brands (NASDAQ:RCKY) were making lower lows. In fact, shares topped out in October of last year at north of $33 a share. Due to massive stimulus measures to prop everything up, shares finally bottomed on the 16th of March at just over $16 a share. As I write (April 9th), shares are now trading at just over $20 a share.

Rocky Brands both designs and makes footwear and apparel items under multiple brands which it then markets internationally. Its three divisions are Wholesale (products sold into its retail partners), Retail (online ecommerce sales of its products) and Military (sales of footwear to the US military).

The vast majority of stocks have behaved in the same way over the past month or so. Some industries (such as energy and the airlines for example) have had their valuations absolutely hammered of late. In fact, when we run our screeners (where we look for quality value plays), the names that come up on these screeners are totally different to what appeared just a short month ago.

The most important thing long-term investors should be looking at present is the story behind the stock in question. Heck, many firms (which had been losing money hand over fist coming into this pandemic) have seen significant gains in their share prices over the past while.

Rocky Brands, on the other hand, had solid fundamentals coming into this situation. Let’s have a look at those encouraging trends

Rocky Brands finished 2019 with key trends which point to higher prices over the long term.

  • Sales rose to $270.4 million from $252.7 million in 2019 (7% growth rate)
  • Gross margins in 2019 rose to 36.1% (Up from 34.4% in 2018)
  • Earnings per share rose to $2.36, which was a 21% increase over the EPS number in 2018
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Furthermore, if we just take the recent fourth quarter, we can see that the company had clear momentum on its side. Net sales in Q4 2019 grew by 12.1% where retail sales drove the company forward (26% growth rate over the same quarter of 12 months prior). Significant online gains resulted in gross margins rising by 160 basis points in Q4. This obviously was a big reason why net income increased by 41% in the fourth quarter as opposed to around 20% for the full fiscal year.

Therefore, it is clear as day that Rocky Brands had clear momentum coming into March of this year. On the recent fourth quarter earnings call, management cited the adverse impacts of inventory which was bought at the higher tariff percentage (15%). This will obviously affect margins in the near term until this product gets moved through the system. It should not be an issue, though, at the back-end of the year.

What investors should note here is that earnings still are expected to come in flat in 2020 despite this near-term headwind. That is a pretty good result considering how earnings prospects for many businesses have been destroyed due to what has happened over the past month.

From a cash flow perspective, Rocky continues to generate ample operating cash flow in order to pay the dividend, undergo share buybacks and capital expenditure. The dividend of approximately $4 million a year is being well covered by free cash flow, which came in at $10 million in 2019.

The driver of cash flow over the past few years has been the rise in net profit at the firm. Since 2010, net profit has increased from $7.7 million to $17.5 million last year. This type of growth gives Rocky much more flexibility with its receivables and inventories. In any given year (in a manufacturing company like Rocky), these line items can affect cash flow significantly especially in times when the firm is holding too much stock and when the firm has not been paid for outstanding invoices. However, because net profit has risen substantially in recent times, Rocky has been able to continue to increase its capex spend, which came in at $7.7 million in 2019. This is a good sign.

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In 2019, the company bought back $1.5 million worth of stock (approximately 54,000 shares). The amount of shares outstanding comes in at 7.3 million at present. Management recently announced that sustained share buybacks will continue as $7.5 million has been earmarked for this very purpose. Therefore, at the moment, there has been no freeze on buybacks, but we will remain watchful.

Excess cash is obviously helping the balance sheet. Shareholder equity rose by almost $13 million in 2019 to hit $164.7 million. Rocky had no debt to speak of on its balance sheet since 2017. This changed recently when management (because of the uncertainty due to COVID-19), decided to draw down $20 million from its credit facility to bolster its cash position.

In terms of ongoing operations, Rocky Brands has been deemed an essential business, which means it can continue to ship product to its customers. This will help all three of its divisions and may even prop us Military sales, given the current climate.

The Military segment has been the worst performing division of the company for some time now. Net sales for this segment came in at $26.1 million, which was a 1.1% decline over the previous year. However, this segment grew by 10% in the fourth quarter having been buoyed by the new United States Navy contract delivered in May of last year. Investors need to remember that this segment makes up only about 10% of the company’s sales per year. As mentioned, given the current climate, it will be interesting to see first quarter sales number which will be announced next month.

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Therefore, to sum up, Rocky Brands came into 2020 on the back of some really good numbers and trends, and from current research, we do not believe these trends are going to subside any time soon. Current trends form future events, and this fact is no different in investing. Because of the recent slide in the share price, shares are now trading at 8.5 times earnings (20 is the five-year average). Let’s see if shares can form a solid bottom here.


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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RCKY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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