Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter Fiscal 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And we'll now turn the conference over to Brendon Frey of ICR.

Thank you, and thanks everyone joining us today. Before we begin, please note that today’s session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today’s press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2019. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. And I’ll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Thank you, Brendon. With me on Today's call is Tom Robertson, our Chief Financial Officer. I hope everyone on the call and listening via the webcast is staying safe and healthy. Our thoughts continue to be with everyone affected by this devastating pandemic. Like it has for so many, COVID-19 has created new challenges in our organization despite being up against the most difficult operating conditions we've ever experienced our business exhibited increasing strength as the quarter progress. Thanks to the work we've done over the past few years, improving the desirability of our brands through impactful marketing programs, enhancing our product lines through innovation and building out our direct-to-consumer channels, we were able to capitalized on acceleration in online spending that occurred as a result of the stay-at-home orders. Under the circumstances our business performed relatively well in our wholesale channel with sell-through on our partners' website up over last year early in the quarter and then picking up at brick-and-mortar later in the quarter as more stores reopened or resumed to more normalized hours in operations. Overall, sales decline approximately 9% with wholesale. Our largest segment down 16%, somewhat offset by a 16% increase in retail sales. Retail responded -- retail represented approximately 29% of our Q2 sales, up from 23% a year ago. The increase in retail sales helped fuel a 180 basis point improvement in adjusted gross margins. This allowed us to deliver a slight year-over-year improvement in adjusted EPS despite the overall sales decline. With our better and expected performance, we made the decision to repay the $20 million we drew down on our credit facility in March as a precautionary measure in response to the COVID-19. After the repayment, we still ended the quarter with nearly $26 million in cash and cash equivalents, a…

Thanks, Jason. As Jason said, under the circumstances, we are pleased with our second quarter performance, which included sales and earnings coming in ahead of our most recent expectation. Net sales for the second quarter ended up declining 9.3% to $56.2 million, with a difficult start to the quarter due to COVID-19, somewhat offset by improving trends in May and even more so in June. By segment, wholesale sales decreased 15.6% to $34.3 million. Retail sales increased 15.8% to $16.3 million and military sales decreased to $5.6 million from $7.2 million. Gross profit in the second quarter was $19.5 million or 34.6% of sales, compared to $21.4 million or 34.6% of sales the same period last year. This quarters gross margin includes approximately $1 million and expenses related to the temporary closure of our manufacturing facilities due to COVID-19. Including these expenses or excluding these expenses, gross margin for the second quarter of 2020 was 36.4%. The 180 basis point increase in adjusted gross margin over last year was driven primarily by a higher percentage of retail sales, which carry higher gross margins in our wholesale and military segments, as well as higher retail margins year-over-year due to the higher proportion of e-commerce sales within our retail segment. This was partially offset by lower wholesale and military margins year-over-year. Gross margins by segment were as follows; wholesale 31.4%, retail 48.1% and military 14.9%. Adjusted gross margins were as follows; wholesale 33.3%, and military 20.9%. Selling, general and administrative expenses were $16.4 million, or 29.1% of sales in the second quarter, compared to $17.5 million, or 28.2% of net sales last year. Including the decrease we saw in variable expenses tied to sales in the second quarter, we've taken steps to reduce our expense structure, and we have eliminated approximately $1.7…

Thank you. We will now have our question and answer session. [Operator Instructions] Our first question comes from Jonathan Komp with Baird. Please proceed with your question.

Yes. Thanks, guys. I want to ask a couple questions about the wholesale business. I know you mentioned that the indications you get at sell-through from some partners. Can you maybe just give a sense what portion of the wholesale business you see the sell-through figures for, maybe as a starting point, just to get a sense of what you're seeing?

Hey, Jon. Thanks for being on. Yes. So it's a pretty small group of accounts that we get that from, but it's a bigger representative of the sales number, right? So, so our mom-and-pop customers don't have the ability to give us this kind of information. But the larger accounts that are giving us do pretty good volume with us. So we feel pretty good about those numbers. But it's not a huge representation from an account base.

Yes. And Jon, just add on there to it. I think where we do have some visibility is certainly in the work category. We see -- we've seen those results. We can see those results in the work category, and also in the outdoor space is where we saw some of the stronger trends from a sell-through perspective.

Okay. That's helpful. And maybe on the work category specifically, I'm wondering if you have a view. It sounds like the business is holding up better than you would normally expect given the employment situation. And I know you called out the stimulus. Do you have any views on the sustainability of what you're seeing there?

So I think initially, Jon, our customer base was really not affected terribly. So if you think about how the COVID kind of went across the country and restaurants were closed down and bars were closed down. That's really not our customer base. Those are probably a different kind of footwear. But the construction guy, the guy working on oil rigs, the guy working in farm and ranch, he kept working. And so, we really didn't see any big decrease there. I think we are concerned. If you look at something like -- I think it was United Airlines has announced they're going to lay off some people in October. That is more concerning for me. And I think when we talk about -- look, Q3 looks the way it does, and we are not as comfortable maybe with Q4. I think that's probably why. Until we have more visibility on what's happening there, and we see what the book looks like, it's just kind of -- it's kind of a big question mark.

Okay, great. And then related to that commentary on the second half, so any other specific call out either the magnitude of out-performance you could see third quarter versus fourth quarter? Or any other color you're willing to provide in the order book and what you're seeing?

Yes, Jon. So from a second half of the year perspective, we're seeing -- we're continuing to see the Georgia bookings looking well. We are also think about Rocky Work, and as well as, Durango for the second half of the year from a western perspective is coming in stronger than they did in the second quarter, the second -- the first half of the year. I'm sorry. One of the areas that's got me a little bit, I guess, complex is in the outdoor space. We're not seeing a ton of bookings from the outdoor space, but we did see our outdoor business do very well in the second quarter of just over -- in the mid teens. And so I -- the question we're having is, is the social distancing continues and depending on how the pandemic unfolds for fall, during hunting season, deer season particularly, we're curious to see how outdoor does. And so, I think that we've got some potential upside there.

I think the other thing, Jon is, we -- and I don't have any data around this. But I believe it shut down so quick, right, at the end of Q1 and the beginning of Q2, and I think retailers made decisions that were all the right decisions at the time. And I think things have come back a little quicker than we all expected. So I think Q3 is some pent up demand. And then I think you're going to see that kind of level off. So I think there could be a pretty good bump in Q3, and then maybe a little smooth out in Q4. But if things continue the way they are, who knows what could happen in Q4. But if we get another big shutdown, if different state shutdown, that could change the end of Q3 and then in the Q4 too. So it's a lot of variables right now unfortunately.

That's very helpful perspective. Maybe just last one for me on inventory, like you're in chase mode in a few areas. Could be maybe share more on kind of the state of things, maybe where you're lighter than you'd hope to be. And are you seeing any production or supply chain bottlenecks that would prevent you from catching up here?

So I think for us, again, when the retailers really slammed on the brakes, we took some steps backwards and said, okay, let's be a little careful here. And we've been able to turn that back on a little bit quicker. I think that most people again, as I talked in my report, we're able to affect our factories a little bit quicker than we can our other partner factories maybe in the Far East. We have not seen any real issues with any of our partners. We've been able to get the product. We've been able to place the orders. We've been able to get the raw material. The biggest issue we're having right now is in both really more in the Dominican and Puerto Rico, is as things change with COVID and the spikes come back up, they may put in a new regulation that says, well, your curfew now is back to 7 pm. And so we have to go to the government and say, hey, can we keep working until 9 pm. And in most cases, they've given us the okay to do that. But we feel pretty good about that. And we hope that here in Q3 going into Q4 we're going to be in a better place for inventory. But I mean, the way the orders are coming in, it's hard to keep up with it.

Great. That's encouraging to hear. Thanks for taking all the questions.

Yes, absolutely, Ron [ph], Thank you. Or I'm sorry, Jon.

Thank you. [Operator Instructions] It looks like there are no further questions at this time. I'd like to turn the floor over to Jason Brooks for any closing remarks you may have.

Great. Thank you very much. I just want to reiterate one more time to our team here at Rocky how much I appreciate their efforts and commitment. We have had to go through an amazing time, and everybody has really stepped up and done a wonderful job. And I appreciate everybody's efforts. And I appreciate the support from our customers, consumers and shareholders. And I wish everyone well and stay healthy.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.