Is Rocky Brands Overpriced After a Strong 2024 Stock Rally?

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Written By Nathan Goldstein

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

Credits: DepositPhotos

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%.


Credits: DepositPhotos

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.


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