Rocky Brands, Inc. (NASDAQ: RCKY) is a manufacturer of boots, footwear, and apparel under a portfolio of brands including Rocky, Durango, Muck Boot Co., and Ranger. The company significantly expanded its brand portfolio with the Honeywell acquisition in 2021 for $230 million, transforming Rocky into its current larger entity.
The majority of Rocky’s sales are derived from wholesale channels, but the company also generates revenue through retail sales and contract manufacturing.
Historical Performance and Recent Developments
Over the past decade, Rocky’s stock has appreciated at a compound annual growth rate (CAGR) of 9.6%, and the company pays a dividend with a current yield of 1.78%. Despite facing industry challenges in recent quarters, Rocky’s stock has rallied significantly from its 2023 bottom.
Historically, Rocky’s growth has been modest, with a 1.7% revenue CAGR from 2009 to 2019 before the pandemic and the Honeywell acquisition. The company’s core brands have maintained stable demand but have not experienced notable growth, with nominal growth nearly in line with inflation.
The Honeywell acquisition nearly doubled Rocky’s revenues in 2021 and contributed to growth in 2022. However, revenues have now stabilized at a lower level due to macroeconomic pressures affecting the footwear industry. The divestitures of the NEOS Overshoe brand in October 2022 and the Servus brand in April 2023 contributed to a dramatic revenue decline of 25.0% in 2023.
Rocky received approximately $17.3 million from these divestitures, which was used to pay down debt. Despite this, Rocky’s balance sheet remains highly leveraged with $156.0 million in interest-bearing debt.
Q1 Performance and Industry Context
The footwear industry has struggled recently, with retailers dealing with excess inventories from the pandemic period and weak retail sell-through coupled with high inventories. Despite these challenges, Rocky reported a 7.6% increase in revenues (excluding divested Servus sales) in Q1 2024, totaling $112.9 million.
This growth was driven by increased marketing spend, resulting in double-digit sales growth for the Durango and XTRATUF brands. Operating income nearly doubled to $8.0 million.
This performance stands out in an industry facing weak demand. For comparison, Designer Brands (DBI) reported a 13.7% decline in external wholesale revenues, Dr. Martens (OTCPK: DOCMF) saw a 21.9% decline in US sales, and Allbirds (BIRD) experienced a 27.6% decline in Q1 sales.
Nearly half of Rocky’s sales come from work footwear, with additional revenue from military contract sales, which tend to be more stable. Despite this, the work footwear segment saw a 22.7% decline in 2023.
Margin Expansion and Financial Health
Despite modest long-term sales growth, Rocky has achieved significant margin expansion over the past decade. The gross margin increased from 29.5% in 2016 to a current trailing 38.9%. The company identified $3-4 million in cost savings from the Honeywell acquisitions in 2022, further improving margins.
Continued cost-saving initiatives have helped mitigate downward margin pressure from lower sales, resulting in an operating margin increase from 0.4% in 2016 to the current 9.4%.
Valuation Analysis
Following the recent share rally, Rocky’s stock appears to be fairly valued. A discounted cash flow (DCF) model was used to estimate the company’s fair value:
- Revenue decline of 0.5% in 2024 due to ongoing macroeconomic pressures.
- Subsequent years of elevated growth due to increased marketing and industry recovery, with long-term growth slowing to 1.7%.
- EBIT margin estimated to leverage to 9.5% after 2024 from higher sales.
- Historical good cash flow conversion due to minimal capital expenditure needs.
The model estimates Rocky’s fair value at $34.46, nearly at the current stock price. The weighted average cost of capital (WACC) used is 11.85%, derived from a capital asset pricing model:
- Interest expenses of $4.7 million in Q1, with refinancing expected to save $4.4 million annually.
- Estimated long-term debt-to-equity ratio of 50%.
- Cost of equity derived from a 10-year bond yield of 4.45%, an equity risk premium of 4.60%, a beta of 2.10, and a liquidity premium of 0.4%, resulting in a cost of equity of 14.36% and a WACC of 11.85%.
Conclusion
Rocky Brands has shown remarkable margin expansion despite modest long-term sales growth. The company’s recent Q1 performance indicates strong momentum, although the overall footwear industry remains challenged. The recent share rally suggests that the market has already priced in the impressive recent performance, with the stock now appearing to be fairly valued.
Continued margin expansion could make the stock attractive, but the need for increased marketing spend to fuel growth may limit operating leverage benefits from higher sales.
DISCLAIMER
You should read and understand this disclaimer in its entirety before joining or viewing the website or email/blog list of SmallCapStocks.com (the “Publisher”). The information (collectively the “Advertisement”) disseminated by email, text or other method by the Publisher including this publication is a paid commercial advertisement and should not be relied upon for making an investment decision or any other purpose. The Publisher is engaged in the business of marketing and advertising the securities of publicly traded companies in exchange for compensation. The track record, gains, upside, and/or losses mentioned in the Advertisement, if any, should not be considered as true or accurate or be the basis for an investment. The Publisher does not verify the accuracy or completeness of any information included in the Advertisement. While the Publisher does not charge for the SMS service, standard carrier message and data rates may apply. To unsubscribe from receiving promotional text messages to your phone sent via an autodialer, using your phone reply to the sender’s phone number with the word STOP or HELP for help.
The Advertisement is not a solicitation or recommendation to buy securities of the advertised company. An offer to buy or sell securities can be made only by a disclosure document that complies with applicable securities laws and only in the states or other jurisdictions in which the security is eligible for sale. The Advertisement is not a disclosure document. The Advertisement is only a favorable snapshot of unverified information about the advertised company. An investor considering purchasing the securities, should always do so only with the assistance of his legal, tax and investment advisors. Investors should review with his or her investment advisor, tax advisor or attorney, if and to the extent available, any information concerning a potential investment at the web sites of the U.S. Securities and Exchange Commission (the "SEC") at www.sec.gov; the Financial Industry Regulatory Authority (the "FINRA") at www.FINRA.org, and relevant State Securities Administrator website and the OTC Markets website at www.otcmarkets.com. The Publisher cautions investors to read the SEC advisory to investors concerning Internet Stock Fraud at www.sec.gov/consumer/cyberfr.htm, as well as related information published by the FINRA on how to invest carefully. Investors are responsible for verifying all information in the Advertisement. As an advertiser, we do not verify any information we publish. The Advertisement should not be considered true or complete.
The Publisher does not offer investment advice or analysis, and the Publisher further urges you to consult your own independent tax, business, financial and investment advisors concerning any investment you make in securities particularly those quoted on the OTC Markets. Investing in securities is highly speculative and carries an extremely high degree of risk. You could lose your entire investment if you invest in any company mentioned in the Advertisement. You acknowledge that we are not an investment advisory service, a broker-dealer or an investment adviser and we are not qualified to act as such. You acknowledge that you will consult with your own independent, tax, financial and/or legal advisers regarding any decisions as to any company mentioned here. We have not determined if the Advertisement is accurate, correct or truthful. The Advertisement is compiled from publicly available information, which include, but are not limited to, no cost online research, magazines, newspapers, reports filed with the SEC or information furnished by way of press releases. Because all information relied upon by us in preparing an advertisement about an issuer comes from a public source, it is not reliable, and you should not assume it is accurate or complete.
By your subscription to our profiles, the viewing of this profile and/or use of our website, you have agreed and acknowledged the terms of our full disclaimer and privacy policy which can be viewed at the following link: www.SmallCapStocks.com/Disclaimer and www.SmallCapStocks.com/Privacy-Policy
By accepting the Advertisement, you agree and acknowledge that any hyperlinks to the website of (1) a client company, (2) the party issuing or preparing the information for the company, or (3) other information contained in the Advertisement is provided only for your reference and convenience. The advertiser is not responsible for the accuracy or reliability of these external sites, nor is it responsible for the content, opinions, products or other materials on external sites or information sources. If you use, act upon or make decisions in reliance on information contained in any disseminated report/release or any hyperlink, you do so at your own risk and agree to hold us, our officers, directors, shareholders, affiliates and agents harmless. You acknowledge that you are not relying on the Publisher, and we are not liable for, any actions taken by you based on any information contained in any disseminated email or hyperlink.
I’m Nathan Goldstein, a writer and political analyst focused on simplifying complex social and political issues. My writing breaks down the intricacies of today’s society and politics to make them more understandable for you. I’m committed to providing clear and well-informed insights.
