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<DAILY TROUBLE>
Tuesday, February 9, 1999
Rocky Shoes & Boots
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Phone: 740-753-1951
Price (2/8/99): $6 1/2
HOW DID IT FIND TROUBLE?
One could say it's been a rocky road for this maker of outdoor shoes. But the chart shows the stock of Rocky Shoes and Boots has taken pretty much a smooth path down for more than a year now. The warm weather that crimped sales last winter got even warmer this fall, causing the stock to plunge into the mid-single digits. It's having a hard time climbing out.
On January 19, Rocky indicated that Q4 results would fall shy of expectations because retail customers had cancelled or postponed orders due to sluggish demand. The company will likely report Q4 sales of just $21.7 million, down 26% from the $29.2 million recorded in the year-ago period. For the year, sales will sink to $88 million from $95 million.
That unpleasant forecast just extends the cloudy outlook that has been with the company for a while. Sales for the first half of FY98 were flat, partly because inventories of its rugged outdoor shoes were running high due to mild winter weather. Q2 revenues actually dipped slightly.
Then came the rocky retail environment created by the stock market's collapse and the even warmer fall weather that left Q3 sales flat. While a follow-on stock offering over a year ago cut interest expenses by allowing Rocky to pay down some debt, the sales contraction has really hurt gross margins. With more shares outstanding, the earnings per share line is getting stomped on.
With the "brown shoe" fad fading, and taking recent Daily Trouble Timberland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBL)") else Response.Write("(NYSE: TBL)") end if %> down with it, Rocky has a tough road to recovery. Investors have decided to take another path for now.
BUSINESS DESCRIPTION
Rocky designs and manufactures rugged outdoor, occupational, and handsewn casual footwear for men. It has also recently licensed a kid's line, which should be out this spring.
The rugged line, which accounted for 52% of sales in FY97, appeals to hunters and outdoorsmen and sells for $89 to $239. Dispensing with private label manufacturing of casual shoes, the company has looked to leverage its brand by expanding its presence in the occupational (24% of sales) and handsewn casual (8% of sales) markets. These lines sell at lower price points than the rugged line.
Rocky's footwear is sold by some 2,600 retail and mail order companies, including outdoor stores, sporting goods stores, specialty safety shops, and mass market retailers. Customers include Bass Pro Shops, R & R Uniforms, and J.C. Penney.
Insiders own about 17% of the stock. The company sold 1.73 million shares to the public in a follow-on offering during the fourth quarter of 1997.
FINANCIAL FACTS
Income Statement
12-month sales: $95.5 million
12-month income: $5.2 million
12-month EPS: $0.96
Profit Margin: 5.4%
Market Cap: $35.8 million
Enterprise Value: $60.6 million
Balance Sheet
Cash: $2.3 million
Current Assets: $90.5 million
Current Liabilities: $19.6 million
Long-term Debt: $27.1 million
Ratios
Price-to-earnings: 5.9
Price-to-sales: 0.37
EV-to-sales: 0.63
HOW COULD YOU HAVE SEEN IT COMING?
A year ago, Rocky appeared on solid footing. FY97 sales had risen 30% on a 3% gain in average selling prices. Gross margins had climbed to 27.1% from 24.7%. Yes, selling, general and administrative expenses had increased slightly to 17.3% of sales from 16.9%, but that included costs of new financial and production software designed to enhance operations. Plus, the stock offering had really helped the balance sheet.
Follow-on stock offerings, though, often signal a short-term top in a stock. After all, most companies are reluctant to dilute their shareowners' stake unless they can get top dollar. In this case, the dilution was substantial.
In fact, given that dilution, the company had to beef up sales (and thus margins) to produce positive earnings comparisons. The slowdown first noted in July meant this would be a problem. Then came the weather. As the risk section in the 10-K noted, "Mild or dry weather can have a material adverse effect on sales of the Company's products." It did.
A further sign that business was off came December 22 when William S. Moore, senior VP of sales and marketing, resigned. Of course, by then, the bad news was out.
WHERE TO FROM HERE?
Though Rocky Shoes cut production in the third quarter, the results were mixed. Trade accounts receivables at the end of that quarter were $38.2 million, down from $39 million a year ago.
But inventories rose 22% to $46.8 million from $38.4 million in the year-ago period. So gross margins, which had dropped to 25.1% in Q3 from 27.7% in Q3 1997, will probably look ugly for the fourth quarter as the company works off inventories.
The news is not all bad for Rocky Shoes. For one thing, the weather has gotten nasty lately in many parts of the country, so sales should pick up. Longer term, the company is moving production of its low price-point offerings offshore to improve factory utilization and thus gross margins.
The company has also been buying back stock. By year-end, the board had repurchased nearly all of the 300,000 shares it authorized in August. Sure, with an average cost basis of $6.97 per share, it appears the company overpaid. Yet, that also means you can now buy the stock at a discount to what the company believes is a good price.
But should you? The one analyst in the I/B/E/S survey now projects FY99 earnings of $0.48 per share, with $0.83 in FY00. So there's no quick turnaround on the company's rocky road. Then again, the stock is trading for around half its book value. While betting on the weather isn't a Fool's wager, the weather isn't likely to be quite so bad for Rocky's business next fall as it was in 1998.
Still, Rocky Shoes is a very small company in an out-of-favor sector. While it may stage a recovery over the next two years, there are probably better investment opportunities out there.
-- Louis Corrigan
([email protected])
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