Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAlester of ICR.

Thank you, and thanks to 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, 2024. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we'll take your questions. Overall, we are pleased with our third quarter results in light of what remains a difficult and dynamic operating environment. Sales for the quarter increased 7%. Gross margins were up 210 basis points, and we delivered adjusted diluted EPS of $1.03, a 34% increases versus our Q3 last year. Our teams have done a great job at navigating higher tariffs imposed by the U.S. on most trade partners, especially countries that account for the majority of global footwear production. We've moved quickly to diversify our sourcing base, including adding new Asian-based manufacturing partners outside of China and Vietnam as well as leveraging our own facilities in the Dominican Republic and Puerto Rico. These actions, along with price increases and strong demand for our brands should help mitigate the impact of the higher tariffs as they start to hit our P&L more meaningfully in the fourth quarter and next year. We are still ramping up production with our new partners, which has resulted in some delayed shipments. However, we are confident that we'll start 2026 with our supply chain in a position of full capture demand. Tom will share more about our sourcing structure later in the call, but at first, I'll review the drivers of our third quarter performance by brand. Starting with XTRATUF. The brand continued its exceptional momentum, delivering strong growth that significantly outpaced last year. U.S. wholesale stood out in the quarter, increasing double digits, while xtratuf.com also posted double-digit growth compared with Q3 last year. From a product standpoint, our legacy 6-inch ankle deck boot, particularly the duck camo version was once again the top performer and within the category,…

Thank you, Jason. We are pleased with the improvement in results we delivered year-over-year, especially given the changes in our sourcing structure we've undertaken recently to help mitigate the impact of higher tariffs combined with what continues to be a choppy consumer environment. For the third quarter, reported net sales increased 7% to $122.5 million. By segment, wholesale net sales increased 6.1% to $89.1 million. Retail net sales increased 10.3% to $29.5 million and contract manufacturing net sales increased 4.1% to $3.9 million. Turning to gross profit. For the third quarter, gross profit was $49.3 million or 40.2% of net sales compared to $43.6 million or 38.1% of net sales in the same period last year. The 210 basis point improvement in gross margin was driven by higher wholesale and retail margins, which were fueled by brand mix and select price increases and higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. These gains were partially offset by 160 basis points of pressure from higher tariffs as product brought into the U.S. post Liberation Day in April has begun flowing through the P&L. Reported gross margins by segment were as follows: wholesale, up 200 basis points to 39.5%. Retail, up 320 basis points to 46.8% and contract manufacturing margins were 6.9%. Operating expenses were $37.6 million or 30.6% of net sales compared to $33.6 million or 29.3% of net sales last year. Excluding $700,000 of acquisition-related amortization in both periods, adjusted operating expenses were $36.8 million and $32.9 million for the third quarter of 2025 and 2024, respectively. As a percentage of net sales, adjusted operating expenses were 30.1% in the third quarter of 2025 compared with 28.7% in the year ago period. The increase in operating expenses was driven primarily by…

[Operator Instructions] Our first question is from Janine Stichter with BTIG.

I just want to start out with the consumer. You continue to mention a challenging environment and a dynamic environment. I'm just wondering if you could just offer your thoughts on how you're thinking about the consumer now maybe versus 3 months ago and what that -- how that's embedded into your forecast?

Yes. Thanks, Janine. Great question. This has been probably one of the most dynamic years in my career with trying to understand the consumer. We get reports back from many of our retail partners and our products are still selling well. But I think there is still some cautious -- people being cautious about when and where they're going to spend those dollars and what they're going to spend those dollars on. So I think we are just trying to navigate it the best we can, try to provide the best inventory positions we can without being too crazy to support our retail partners and our own websites. But I think there's just -- it's just a little unsettling out there. And if we could have a consistent consumer report, I think it would be better, but it just -- it kind of goes up and down right now. So we're just being a little bit cautious.

Totally fair. All right. And then a couple more for me. Just you mentioned some delayed sales due to supply chain. Is there any way to quantify how much that was? And then as you think about tariffs and offsetting, it sounds like all of it from a gross margin rate perspective in the back half of next year. Maybe just walk us through what that embeds. Is there any additional pricing that you feel like you need to take to get there? Or is that all just diversification of sourcing?

Yes. I'll take this one, Janine. I think, look, at the end of every quarter, we always have a little bit of missing inventory and a little bit we left on the table, as we're chasing certain styles. This quarter, with all the sourcing changes, particularly with moving products to India, Cambodia and Vietnam, we saw anywhere from a 3-week to 30-day delay getting those products. And so that number was a little bit larger than usual, probably a few million dollars being transparent. And then I think as we look to next year, I think the second part of the question from a margin perspective, diversifying is certainly going to help. But I think the biggest driver in helping margins next year is going to be us bringing more and more product in-house. And so that will help leverage our margins as we go into 2026.

Our next question is from Jonathan Komp with Baird.

Can I just ask when you look at the third quarter results, how things played out generally versus what you expected since I know you don't guide quarterly, necessarily. And when you look at the indicators you watch for your business, could you maybe remind us what visibility you have on sell-throughs in the marketplace, either your or your partners' business? And just what you've observed more recently in terms of some of the trends you've seen?

Yes, I can start here, and then Jason can certainly weigh in. I mean we have visibility into some of our larger national accounts. And there's been nothing that's been real concerning from a sell-through and retail perspective. I think Jason was touching on a little bit of just retailer behavior maybe earlier. But to that point, our marketplace business continues to be very strong compared to last year, up strong double digits. Our e-commerce business, which I kind of use as our closest pulse, was a little sluggish in the end of July and early August when we were transitioning over to our new platform. But we saw that recover nicely at the end of August and then September was the strongest month for the quarter from an e-commerce perspective. So we're not seeing anything too troubling out there from a consumer standpoint.

Jon, I would just add, I think at the beginning of the question, you asked about our expectations about how Q3 came in. And I think we are pretty pleased with where we're at. I obviously would have loved to hit that top line number, but I think because of the transitions of the factories and what we had to do there, it made things a little bit more complicated for us. But I think we're really pleased with what Q3 was, and we're looking forward to Q4 and think it can be a good quarter as well. But just want to be cautious about it. Like I said, it seems to be an ever-ending story. One week, it's really positive in the consumers' mind and then the next week, it seems to change. So we're just trying to take it kind of one week at a time and navigate that.

Understood. And maybe as a follow-up, are there any pockets of weakness that you're seeing that you're paying close attention to across your business? And when we think about the fourth quarter, you're reiterating the guidance for the year. It implies a wider range for the fourth quarter by nature. So any color on what might cause you to be closer to the high end or the low end as you think about the implied fourth quarter?

Yes. So from a branding standpoint, the only brand that is kind of funky right now is Durango. But as I said in the script, we had quite a few key accounts pull some business ahead there before the price increase. So our fill-in business wasn't quite as good in Q3. So I would say Western Durango is maybe the only brand that we're just maybe watching a little bit closer. Muck and XTRATUF, like I said, are doing really well. I was really pleased to see Rocky in a better place in Q3 and then also Georgia really had a nice quarter. So I think that's kind of where we're at. And then obviously, Lehigh is still doing very well for us.

Yes. Just to touch on the Durango piece a little bit. I think in the middle of the summer and dragging into a little bit of fall here, we've seen a little bit of softness in kind of our independent Hispanic retail accounts. And so we've been keeping an eye on that. That appears to have recovered a little bit here in September. So we'll continue to monitor that. And then to the sourcing comment and the missing inventory from a minute ago, Durango was detrimented the most here as the vast majority of that product historically was made in China. And so that's where you've seen a lot of the sourcing changes, particularly in Cambodia and India. And so there was a couple of million dollars there that just didn't get here as we had originally hoped.

Great. One follow-up then, if I could, Tom, on the implied profit guidance in the fourth quarter. I know you still are expecting earnings growth around 10% for the year after a good third quarter, that implies a pretty steep decline in the fourth quarter and some pretty steep falloff in gross margins. So I guess, are you assuming that pricing doesn't offset the tariff impact as it looks like it has started to? Or just any further color on what you're embedding there?

Yes. So the pricing certainly will be an effect. And every month that's gone by since the price increase, we've realized more and more of that. And so we'll continue to recognize that. The reason the margins will be more depressed in the fourth quarter is, one, because of the $10 million that I noted before. But if you think about how the timing of all this played out, when the tariffs came out, they were initially really higher, particularly out of China. And so as inventory was still flowing to us, we're paying kind of larger than -- higher reciprocal tariffs than we're currently paying today. And we weren't able to make all those sourcing changes that we've been able to execute on. Those will continue -- those sourcing changes are getting better every day, but that will -- the results of those changes will lag into the P&L. And so Q4, in my opinion, Q4 of '25 will be the worst quarter from a tariff perspective and will only start improving from there. It certainly will be a headwind in Q1 and in Q2 of 2026.

Okay. Great. And then last one for me, just bigger picture as we look forward into 2026. Any thoughts that you have just knowing your business and your brands whether or not stimulus could be something you can take advantage of or that might benefit? Any thoughts there? And then when you think of the momentum for XTRATUF, could you maybe just frame up what you're planning for that business? And any updated thoughts on what the potential might be as we look forward?

Jon, can you elaborate more on the stimulus? I'm not sure what the question is.

Yes. I just -- I wonder if early 2026 stimulus to the consumer from the tax bill is something you're looking forward to as a potential driver or not for the consumer or for businesses on the tax side, if that's something that you've considered for your business?

Got you. Yes, I'm sorry. Yes, I think any time the consumer is going to get any kind of stimulus, I think we all saw this during COVID. And then obviously, this is a very different tax bill and stuff. But I think any time our consumer gets a little kick, they are willing to spend some more. So I think we will be prepared if it happens, we'll have the inventory, and we'll be able to take advantage of it. But it's not something that is a huge focus of ours, but we'll be prepared if it does come for sure.

Yes. And then as we look to 2026, Jon, we can look at our order book and our bookings are up year-over-year, which is positive. It's up in dollars and in pairs, which shows you it's not just the price increase. And if you look at our spring 2026 product, it is -- it looks exceptionally well and very -- kudos to our product development team for everything they've done there. As it relates to the XTRATUF comment, it feels like XTRATUF is starting to accelerate a little bit. It's been running up low mid-double digits throughout the year, and it's accelerated a little bit in the third quarter here. We're very, very interested to see how this new cold weather line that we've really invested in, how that plays out as inventory is starting to arrive every day now here at the warehouse. And so we'll see how that plays out in 2026 as well.

And we're continuing to see that product come more inland, Jon. So obviously, the coastlines, the fishing, the boating was really where that product was killing it, and we're starting to see that come a little bit more inland rather -- not real fast, but we're definitely seeing it happen. So we're pretty excited about that. I would tell you that 2026 is going to be a fun ride with XTRATUF.

There are no further questions at this time. I'd like to hand the floor back over to Jason Brooks for any closing comments.

Great. Thank you. I'd like to thank the entire Rocky team for all their efforts this year. It has been a real challenge, particularly in our sourcing department, and that team has just done an amazing job to try to navigate what we've had to do. So thank you, Rocky team, and thank you to our investors, and thank you to the Board. We look forward to finishing 2025 and kicking some b*** in 2026. Thank you.

This concludes today's conference. We thank you again for your participation. You may disconnect your lines at this time.