ROCKY BRANDS, INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. BUSINESS OVERVIEW We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Muck, Rocky, Georgia Boot, Durango, Lehigh, XTRATUF, Ranger and the licensed brand Michelin. Our portfolio of brands is organized into three reportable segments in which our product is distributed: Wholesale, Retail and Contract Manufacturing. The reportable segments are targeted around six distinct product lines: work, outdoor, western, duty, commercial military and military. We frequently experience significant seasonal fluctuations in our business as many of our footwear products and product lines are used by consumers in adverse weather conditions. Accordingly, average inventory levels have been highest during the second and third quarters of each year and sales been highest in the last two quarters of the year. Our Lehigh CustomFit business, which falls under our Retail reporting segment, has had a steady increase in net sales over the past twelve months. Additionally, as spending among consumers continues to shift to online retailers, we have seen an uptick in our Retail sales through our owned e-Commerce websites and third-party marketplace platforms over the past twelve months as we have increased our online presence. As such, we have seen a shift in our total sales mix as the growth of our Retail segment outpaces the growth in our Wholesale and Contract Manufacturing segments. During the first quarter of 2025, we experienced an increase in net sales over the first quarter of 2024. This increase was attributable to an increase in Retail net sales, partially offset by a decrease in Wholesale net sales. Overall gross margin improved over the past year, driven by the continued acceleration of growth in our Retail segment, which grew at a faster rate than our Wholesale and Contract Manufacturing segments. Additionally, for the three months ended March 31, 2025, Wholesale gross margin as a percentage of net sales increased compared to the prior year period, largely due to favorable shifts in product mix, manufacturing efficiencies and strategic sourcing shifts. Our operating expenses as a percentage of net sales increased in the first quarter of 2025 compared to the first quarter of 2024 due to the increase in Retail sales. Sales under our Retail segment are generally subject to higher selling and outbound logistics costs relative to those costs incurred under our Wholesale and Contract Manufacturing segments. In addition to the increased costs associated with Retail sales, we made incremental investments in digital marketing during the three months ended March 31, 2025 to drive sales growth. Interest expense declined for the three months ending March 31, 2025 compared to the same period in 2024, due to lower interest rates following the refinancing of our debt in April 2024. Additionally, continued debt repayments over the past twelve months have reduced the outstanding principal balances, further contributing to the decrease in interest expense. Our inventory increase as of March 31, 2025 compared to March 31, 2024 was a strategic move to place ourselves in a better inventory position for the latter half of 2025 and to accelerate inventory purchases before new tariffs were put in place. FIRST QUARTER 2025 FINANCIAL HIGHLIGHTS COMPARED TO FIRST QUARTER 2024 ● Net sales increased 1.1% to $114.1 million ● Gross margin increased 210-basis points to 41.2% ● Inventory increased 6.3% to $175.5 million ● Total debt decreased 17.5% to $128.6 million. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our Annual Report on Form 10-K for the year ended December 31, 2024. Three Months Ended March 31, ($ in thousands) 2025 2024 Net Sales $ 114,073 $ 112,906 Cost of goods sold 67,065 68,757 Gross margin 47,008 44,149 Operating expenses 38,302 36,166 Income from operations $ 8,706 $ 7,983 Net sales increased 1.1% to $114.1 million in the first quarter of 2025 compared to $112.9 million in the first quarter of 2024. The increase in net sales in the current year quarter compared to the prior year quarter was due to an increase in our Retail reporting segment which was attributable to an increase in both our Lehigh CustomFit business and our director-to-consumer online business. This increase was offset by a decrease in our Wholesale reporting segment. Gross margin in the first quarter of 2025 was $47.0 million, or 41.2% of net sales, compared to $44.1 million, or 39.1% of net sales, in the first quarter of 2024. The increase in gross margin as a percentage of net sales was attributed to an increase in Wholesale gross margins resulting from strategic sourcing shifts, a favorable shift in product mix, as well as a higher percentage of Retail net sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments. Operating expenses for the first quarter of 2025 were $38.3 million, or 33.6% of net sales, compared to $36.2 million, or 32.0% of net sales, for the first quarter of 2024. The increase in operating expenses as a percentage of net sales, was due to higher selling and outbound logistics costs associated with the increase in Retail sales as well as incremental investments in digital marketing. Income from operations for the first quarter of 2025 was $8.7 million, or 7.6% of net sales, compared to $8.0 million, or 7.1% of net sales, in the year ago period. The increase in income from operations was primarily driven by the increase in gross margin for the three months ended March 31, 2025, compared to the year ago period. 14 Table of Contents Three Months Ended March 31, ($ in thousands) 2025 2024 Inc./ (Dec.) Inc./ (Dec.) NET SALES: Wholesale $ 74,784 $ 79,791 $ (5,007 ) (6.3 )% Retail 36,641 30,408 6,233 20.5 Contract Manufacturing 2,648 2,707 (59 ) (2.2 ) Total Net Sales $ 114,073 $ 112,906 $ 1,167 1.0 % Wholesale net sales for the three months ended March 31, 2025 were $74.8 million compared to $79.8 million for the three months ended March 31, 2024. The decrease in Wholesale net sales, as anticipated, was due to a blanket commercial military order that elevated sales in the first quarter of 2024. Additionally, we experienced softness with some of our key Wholesale partners as they reset and repositioned their inventory assortment. Retail net sales for the three months ended March 31, 2025 were $36.6 million compared to $30.4 million for the three months ended March 31, 2024. The increase in Retail net sales for the first quarter of 2025 was partially due to increased sales in our Lehigh CustomFit platform. In the first quarter of 2024, Lehigh completed a realignment of our sales organization, which allowed us to expand our customer base and increase offerings to current customers, positioning Lehigh for long-term term growth starting in the latter half of 2024. Customer spending has also increased with improved subsidy utilization and increases in average subsidy dollars among Lehigh CustomFit customers in the first quarter of 2025 compared to the first quarter of 2024. We also experienced an increase in sales through third-party marketplace platforms in the first quarter of 2025 compared to the year ago period due to increased promotions and more competitive pricing on certain products as we continue to optimize our inventory position. Contract Manufacturing net sales for the three months ended March 31, 2025 and 2024 were $2.7 million. The consistent sales year-over-year were due to the steady stream of income from the U.S. Military that was awarded in late 2023. 15 Table of Contents Three Months Ended March 31, ($ in thousands) 2025 2024 Inc./ (Dec.) GROSS MARGIN: Wholesale Margin $'s $ 30,110 $ 29,031 $ 1,079 Margin % 40.3 % 36.4 % 3.9 % Retail Margin $'s $ 16,745 $ 14,802 $ 1,943 Margin % 45.7 % 48.7 % (3.0 )% Contract Manufacturing Margin $'s $ 153 $ 316 $ (163 ) Margin % 5.8 % 11.7 % (6.0 )% Total Margin $'s $ 47,008 $ 44,149 $ 2,859 Margin % 41.2 % 39.1 % 2.1 % Wholesale gross margin for the three months ended March 31, 2025 was $30.1 m illion, or 40.3% of net sales, compared to $29.0 million, or 36.4% of net sales, for the three months ended March 31, 2024. The higher Wholesale gross margin in the first quarter of 2025 compared to the first quarter 2024 was attributable to strategic sourcing shifts, a more favorable product mix in the first quarter of 2025 compared to the prior year period as well as the blanket commercial military order in the prior year period that elevated sales but carried a lower gross margin compared to other Wholesale sales. Retail gross margin for the three months ended March 31, 2025 was $16.7 million, or 45.7% of net sales, compared to $14.8 million, or 48.7% of net sales, for the three months ended March 31, 2024 . The decrease in gross margin as a percent of net sales was attri butable to a decrease in margin on our e-Commerce and third-party marketplace platforms, driven by increased promotional activity and more competitive pricing as we continued to optimize our inventory position. Contract Manufacturing gross margin for the three months ended March 31, 2025 was $0.2 million, or 5.8% of net sales, compared to $0.3 million, or 11.7% of net sales, for the three months ended March 31, 2024 . The decrease in gross margin was driven by reduced economies of scale at our Puerto Rico manufacturing facility. Three Months Ended March 31, ($ in thousands) 2025 2024 Inc./ (Dec.) Inc./ (Dec.) OPERATING EXPENSES: General and administrative $ 28,993 $ 27,172 $ 1,821 6.7 % Sales and marketing 7,708 7,312 396 5.4 Depreciation and amortization 1,601 1,682 (81 ) (4.8 ) Operating Expenses $ 38,302 $ 36,166 $ 2,136 5.9 % % of Net Sales 33.6 % 32.0 % 1.5 % Operating expenses for the three months ended March 31, 2025 were $38.3 million, or 33.6% of net sales compared to $36.2 million, or 32.0% of net sales. The increase in operating expenses as a percentage of net sales was due to increases in selling and outbound logistics costs associated with a higher volume of Retail sales in the current year period. Three Months Ended March 31, ($ in thousands) 2025 2024 Inc./ (Dec.) Inc./ (Dec.) INTEREST EXPENSE AND OTHER: Interest expense $ 2,401 $ 4,514 $ (2,113 ) (46.8 )% Other (income) expense, net (45 ) 140 185 132.1 Total Interest Expense and Other $ 2,356 $ 4,654 $ 2,298 49.4 % Interest Expense and Other - net for the three months ended March 31, 2025 was $2.4 million compared to $4.7 million in the year ago period. The decrease in the first quarter of 2025 compared to the prior year period was due to a decrease in interest expense resulting from our debt refinance that occurred April 2024 as well as lower debt levels. Three Months Ended March 31, ($ in thousands) 2025 2024 Inc./ (Dec.) Inc./ (Dec.) INCOME TAXES: Income Tax Expense $ 1,409 $ 779 $ 630 80.9 % Effective Tax Rate 22.2 % 23.4 % (1.2 )% The decrease in our effective tax rate in the first quarter of 2025 compared to the same year ago period was due to changes in our projected income generated from our international business. 16 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of liquidity are our income from operations, as well as access to the borrowing capacity under our ABL Facility. We believe that we have sufficient liquidity to support our ongoing operations and to re-invest in our business to drive future growth. As of March 31, 2025, we maintained cash and cash equivalen ts of $2.6 million and had $53.0 million of availability under our ABL Facility. Our primary ongoing operating cash flow requirements are for inventory purchases and other working capital needs, capital expenditures and payments on our credit facilities. Our working capital consists primarily of trade receivables and inventory, offset by short-term debt and accounts payable. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. Our cash generated from operations throughout the year is typically sufficient to fund our seasonal working capital requirements; however, we have the ability to borrow on our ABL Facility as needed and, as such, its balance may fluctuate significantly throughout any given year. In addition to our ABL Facility with outstanding borrowings of $97.7 million as of March 31, 2025, we also have a Term Facility with outstanding borrowings of $33.0 million as of March 31, 2025. Our ABL Facility and Term Facility require us to maintain a minimum fixed charge coverage ratio, as defined in the agreement. Additionally, the ABL Facility and Term Facility contain restrictions on the amount of dividend payments and the amount of share repurchases of common stock. As of March 31, 2025, we were in compliance with such covenants and restrictions under the ABL Facility and Term Facility. We may utilize portions of our excess cash to prepay certain amounts of long-term debt prior to maturity. Our capital expenditures relate primarily to investments in information technology, molds and equipment associated with our manufacturing and distribution operations, merchandising fixtures and projects related to our corporate offices. We lease certain machinery, equipment, and manufacturing facilities under operating leases that generally provide for renewal options. As of March 31, 2025, our material cash requirements from known contractual obligations and commitments relate primarily to our long-term debt and operating leases commitments. See Note 9 - Long-Term Debt to the Unaudited Condensed Consolidated Financial Statement for more information. Based on our current expectations and forecasts of future earnings, we believe our cash generated from operations will provide sufficient liquidity to fund our operations and debt and lease obligations for the next twelve months and beyond. Cash Flows Three Months Ended March 31, ($ in millions) 2025 2024 Operating activities $ 1.2 $ 17.4 Investing activities (0.7 ) (0.3 ) Financing activities (1.7 ) (18.5 ) Net change in cash and cash equivalents $ (1.2 ) $ (1.4 ) Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2025 and 2024 was $1.2 million and $17.4 million, respectively. Adjusting for non-cash items, net income provided a cash in-flow of $8.8 million and $6.7 million for the three months ended March 31, 2025 and 2024 , respectively. The net change in working capital and other assets and liabilities resulted in cash used by operating activities of $7.6 million for the three months ended March 31, 2025 , compared to an increase in cash provided by operating activities of $10.7 million for the three months ended March 31, 2024 . 17 Table of Contents An increase in inventory resulted in a use of cash of $8.8 million for the three months ended March 31, 2025 and a source of cash of $4.1 million for the three months ended March 31, 2024. The increase in inventory for the three months ended March 31, 2025 resulted from inventory purchases during the quarter as a strategic move to accelerate inventory receipts in March to avoid higher tariffs that did not go into effect until April 2025. The decrease in inventory for the three months ended March 31, 2024 was a result of efforts to optimize inventory levels. An increase in accounts receivable resulted in the use of cash of $1.9 million for the three months ended March 31, 2025 compared to a decrease in accounts receivable resulting in a source of cash of $6.0 million for the three months ended March 31, 2024. The increase in accounts receivable for the three months ended March 31, 2025 was a result of timing of payments from customers. The decrease in accounts receivable for the year ago period resulted from lower sales in the fourth quarter of 2023 and subsequently, lower collections in the period year period. Investing Activities. Net cash used in investing activities for the three months ended March 31, 2025 and 2024 was $0.7 million and $0.3 million, respectively. The use of cash in both periods was a result of capital expenditures for our manufacturing operations and information technology. Financing Activities. Net cash used in financing activities for the three months ended March 31, 2025 and 2024 was $1.7 million and $18.5 million, respectively. The net use of cash primarily related to the payment of dividends for $1.2 million for the three months ended March 31, 2025. The net use of cash for the three months ended March 31, 2024 related to payments on our revolving facility and term loan. On February 25, 2025, we announced a share repurchase program of up to $7,500,000 of the Company's outstanding common stock, no par value per share. We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. See Note 14 - Commitments and Contingencies of our Unaudited Condensed Consolidated Financial Statements for further discussion of legal matters. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities, also known as "Variable Interest Entities." Additionally, we do not have any related party transactions that materially affect the results of operations, cash flow or financial condition. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions. We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2024. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995 This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely,” “would,” “could” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that forward-looking statements involve risk and uncertainties including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cybersecurity breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, economic changes, as well as other factors set forth under the caption “Item 1A, Risk Factors” in our Annual Report on Form 10- K for the year ended December 31, 2024 (filed March 17, 2025), and other factors detailed from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We assume no obligation to update any forward-looking statements. 18 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There have been no material changes to our market risk as disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2024.