Prepared remarks
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter 2026 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. If anyone has technical difficulties during the conference, I would like to remind everyone that this conference is being recorded. And I will now turn the conference over to Brendon Frey of ICR.
Thanks, everyone, for joining us. 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. 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 12/31/2025. 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. I will now turn the conference over to Mr. Jason S. Brooks, President and Chief Executive Officer of Rocky Brands. Jason?
Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we will take questions. After two consecutive quarters of high single-digit sales growth, our momentum accelerated in the second quarter with a sales increase of 12% on top of a 7.5% gain in the year-ago period. We are encouraged by the broad-based strength across our portfolio with several brands delivering solid double-digit growth, led by XTRATUF, followed by Georgia, Rocky, and our Lehigh B2B safety-shoe business. Direct-to-consumer sales were particularly strong, while increased sell-through in our wholesale channel during the second quarter fueled strong bookings for the second half of the year. Tom will walk through the financials in detail shortly. As you saw from our earnings release, we recorded a tariff refund receivable in Q2. We are very pleased to start receiving these funds after the amount of work and costs we incurred following the implementation of last year's IEEPA tariffs.
The actual and expected refund had a very positive impact on gross margins and profitability this quarter. We plan to reinvest a portion into the business while also paying down debt. Now let me walk you through our second quarter brand performance. XTRATUF delivered another outstanding quarter, extending its position as the fastest-growing brand in the portfolio. Wholesale posted a large increase over last year, eCommerce bested last year's already strong results, and marketplace continued to grow at a healthy clip—combining to push the brand total up significantly across all channels. Account momentum remained broad-based. Top performers included our authorized Amazon partner, a major outdoor retailer, and our fastest-growing western market account. A major sporting goods retailer that brought XTRATUF in-store this year has quickly become one of our largest key accounts and is looking to add doors and styles going forward.
We are also continuing to see the brand extend well beyond its marine roots as consumers adopt XTRATUF for everyday use. Our product lineup continued to perform well, led by the 15-inch legacy boot alongside strong sales of our ankle deck boot styles in olive and duck camo. The new spring/summer line also delivered, highlighted by new ADB colorways and the kids Tusk Cruiser collection, along with new Guy Harvey collaboration styles for both women and girls. Looking ahead, Q3 and Q4 hold the largest set of prebook orders in the brand's history. With a substantial new fall line and winter bookings ahead of last year, XTRATUF is positioned for a strong back half of 2026 across both wholesale and eCommerce. Muck's U.S. business maintained good momentum across both our branded e-commerce site and wholesale partners, with both field and key accounts up year-over-year. Our new Rainscape collection, along with the brand's Chicken Boot and original ankle boot styles, performed well, helping offset some softness in the Arctic products due to the milder, drier spring versus the extended cold weather we saw last year.
Hardware and sporting goods channels grew nicely; we continue to expand shelf space and land new partnerships. We are encouraged by the continued strength in the farm and ranch channel despite drought conditions weighing on two of our largest customers in that channel. In total, Muck sales were down modestly compared to the year-ago period, driven by a shift in the timing of sell-in to the brand's international distributor. Georgia Boot delivered an outstanding quarter with broad-based growth across e-commerce and key and field accounts. Within key accounts, one of our largest farm and ranch customers expanded our best-selling wedge into more than 500 additional doors, and a large work and western retailer significantly expanded its Georgia Boot assortment behind the success of the BOA Carbon Flex wedge. Our largest online retail partner also delivered exceptional growth after prebooking ahead of the season and replenishing steadily throughout the quarter.
Field accounts grew nicely despite ongoing macro uncertainty and cautious retailer inventory management, with growth widespread across territories and healthy carryover business in work-focused accounts supported by employer voucher programs. The Carbon Flex wedge has quickly become the second highest-selling franchise behind only the Romeo, and we will continue to expand BOA technology into women's products and warmer-climate non-waterproof options. Early response to our spring '27 line has also been encouraging, led by new safety versions of the Romeo Superlight and a refreshed Eagle Light collection. Rocky Work, Outdoor, and Western posted growth across all three categories. Wholesale was a particular strength as independent retailers continue to report strong sell-through, and we also grew at a key national retailer level as new product drove great brand exposure. New fall '26 product also arrived early, allowing us to ship several new fall styles during Q2 and setting up early retail sell-in and replenishment opportunities.
Account growth was well balanced between national multistore chains and strong regional independents, including a sizable new rugged-casual program with a large southern sporting goods retailer and a Southeastern family shoe chain. Hunting and outdoor sales were also strong at several Midwest farm and ranch retailers that brought in product early for the fall season. We continue to gain shelf space in industrial safety toe, including a test program with a major national boot retailer and expanded regional programs in the Southeast and Texas. E-commerce remains strong with our two largest online retail partners. Product highlights include continuing strong sell-through on our Ride LTE collection, with a new duck camo colorway generating strong fall bookings and reaching market early in Q2. BOA-equipped safety toe styles continue to gain strength, and our Outback and Ridge Top Gore-Tex collection posted healthy growth.
Retail partners are also stocking up ahead of hunting season on our snake boots and insulated Wildcat collection. Durango sales were in line with our expectations, down year-over-year and driven entirely by the key account channel, which lapped significant bulk buy orders placed by two major chains last year ahead of 2025 price increases. Excluding that dynamic, the remainder of the key account business posted solid growth. The Farm and Ranch channel was led by our Rebel and Westward collections and our e-commerce partner accounts, with sporting goods and outdoor channels also having a good quarter. Deal performance trended positively as well, with several regions showing strong increases. During the quarter, we also opened a new 80- to 82-door Midwest Farm and Ranch account with encouraging early sell-through, and demand remains strong within our Hispanic retail base. New Workhorse and Shiloh product delivered in Q2 continues to perform well at retail, and early sentiment and bookings for spring '27—including our Rebel USA-made boots, Workhorse Light, and the new women's Crush styles—are solid, giving us confidence heading into the back half of the year.
Commercial, military, and public service exceeded our Q2 expectations—up mid-single digits versus last year—continuing the positive momentum from strong Q1. Public service outperformed expectations, while commercial military finished roughly flat to last year but with positive underlying momentum; given the current geopolitical environment, we expect commercial military demand to remain strong. Lehigh delivered another strong quarter of growth driven by continued success in new customer acquisitions; we added a substantial number of new accounts. We also expanded our product portfolio with the addition of new brands, further strengthening our ability to meet customers' needs across a broader range of industries and applications. Customer spending remained resilient despite ongoing cost pressure, with subsidy utilization and average subsidy dollars continuing to trend upward as employers remain committed to providing employees with PPE.
While tariff uncertainty and inflationary pressure continued to influence the operating environment, Lehigh has successfully offset these headwinds through strong new customer growth, expanded product offerings, and continued execution of our strategic initiatives. As I just detailed, we have good momentum across our business heading into the second half. While we feel confident in the strength of our brands and our product offering, we think it is prudent to balance this optimism with some level of conservatism given the shifting tariff landscape and uncertainty regarding the near-term health of the consumer. Tom will discuss our outlook in detail, but from a high level, we are taking up our full-year guidance to reflect our Q2 top-line outperformance, and we are modestly raising our sales projections for the third and fourth quarters. I want to thank our teams for their hard work driving the business forward while navigating the shifting tariff landscape. I am confident we are well positioned to continue capitalizing on the opportunities to expand sales and profitability over the remainder of 2026 and beyond. With that, I will turn it over to Tom.
Thanks, Jason. There were several highlights from the second quarter, led by 12% sales growth—our highest growth rate since 2022. On top of this, gross margins reached a record level driven by an IEEPA refund receivable we recorded in the quarter, which in turn fueled a significant year-over-year increase in profitability. As I go through the Q2 financials and outlook, I will, at times, discuss results excluding the net impact of the tariffs to provide a clearer look at the underlying performance of the business. Reported net sales for the second quarter increased 12% year-over-year to $118.4 million, which exceeded our expectations. By segment, wholesale sales increased 7.9% to $78.8 million; retail sales increased 21.8% to $36.2 million; and contract manufacturing sales were up 17.2% to $3.3 million. Turning to gross profit, for the second quarter gross profit was $60.8 million or 51.4% of sales, compared to $43.3 million or 41.0% of sales in the same period last year.
Excluding the net tariff impact of $15 million, which includes $18 million of actual and expected IEEPA tariff refunds partially offset by approximately $3 million in IEEPA tariff costs versus a year ago, second quarter 2026 gross margins were approximately 38.7%. Included in this year's gross margins are incremental costs incurred as a result of adjusting our initial manufacturing, sourcing, and shipping plans and higher expedited freight in order to meet customer demand. We also had select incentives to capture additional shelf space with key customers and opportunistic selling of more discontinued styles in the second quarter of this year. Gross margins by segment excluding the net benefit from tariffs were as follows: wholesale margins declined 34 basis points to 36.3% versus 40.5%, with the decline driven by the multiple headwinds I just outlined; retail margins were up 120 basis points to 46.6%; and contract manufacturing margins were down 23 basis points to 9.3%.
Operating expenses were $41.1 million or 34.7% of net sales in the second quarter of 2026 compared to $36.1 million or 34.2% of net sales last year. Excluding $700 thousand of acquisition-related amortization in the second quarter of this year and last year, adjusted operating expenses were $40.4 million and $35.4 million respectively. As a percentage of net sales, adjusted operating expenses were 34.2% this year and 33.5% in Q2 last year. The increase in operating expenses as a percentage of net sales was driven primarily by a $1.1 million write-off of accounts receivable associated with a customer bankruptcy, increased outbound freight rates from fuel surcharges implemented in the second quarter, and higher logistics costs associated with the increase in retail sales. Income from operations was $19.7 million, or 16.6% of net sales, compared to $7.2 million or 6.8% of net sales in the year-ago period.
Adjusted operating income improved to $20.4 million or 17.2% of net sales compared to adjusted operating income of $7.8 million or 7.4% of net sales a year ago, driven by the recognition of the aforementioned net tariff impact this year. For the second quarter of this year, interest expense was $2.1 million compared with $2.5 million in the year-ago period, reflecting the decrease in debt levels year-over-year. On a GAAP basis, we reported net income of $13.9 million or $1.83 per diluted share compared to net income of $3.6 million or $0.48 per diluted share in the second quarter of 2025. Adjusted net income for the second quarter of 2026 was $14.4 million or $1.90 per share compared with adjusted net income of $4.1 million or $0.55 per diluted share a year ago. Turning to our balance sheet, at the end of the second quarter cash and cash equivalents stood at $2.6 million and our debt net of unamortized debt issuance costs totaled $122.4 million, a decrease of 7.6% since June 30th last year.
During the second quarter, we repurchased approximately 54 thousand shares at an average price of $37.09 for a total of $2 million. We also announced that the Board approved an increase in our quarterly dividend to $0.17 which was paid out to shareholders in June. Inventories at the end of the second quarter were $173.5 million, down 7.1% compared to $186.8 million a year ago, and down 4.2% compared to $181 million at the end of 2025. We are pleased with the quantity and quality of our inventory as we were able to successfully move through some discontinued styles in the second quarter of this year. Now to our outlook. Based on our second quarter performance and updated bookings for the second half, as well as the net impact of tariffs, we are raising our guidance for 2026. We now expect revenue to increase approximately 8.5% over 2025 with the fourth quarter growing modestly faster than the third quarter.
With respect to margins, our prior guidance was for gross margins to be down modestly from the 40.9% we reported in 2025 inclusive of roughly $10 million in IEEPA tariffs that hit our P&L in the first half. As I mentioned when discussing our Q2 performance, we have experienced some additional cost headwinds; adjusting our manufacturing and sourcing plans to meet demand with expedited shipping will continue during the second half of this year. We are also continuing to see higher inbound freight rates along with increased component costs due to higher oil prices, which is putting some additional pressure on gross margins. Gross margins are now forecasted to be approximately 40% excluding the actual and expected tariff refund, with Q3 and Q4 gross margins improving sequentially into the low-40% range. Since our last earnings call, we incurred a $1.1 million write-off in accounts receivable due to a customer bankruptcy and we are experiencing higher outbound freight costs due to fuel surcharges as well as a higher mix of retail segment sales.
We are also stepping up our investment in digital advertising to capitalize on momentum in the fast-growing DTC business. Based on these factors, we are expecting SG&A as a percentage of sales to increase slightly from the prior year, with an additional benefit of roughly $2 million expected in Q3 from the tariff benefit. The full-year gross benefit will be approximately $20 million or $10 million on a net basis. Our plan is to invest a portion of these proceeds back into the business, such as investing in and expanding our distribution center, as well as paying down debt. This all translates into EPS excluding the actual and expected tariff refund similar to last year's $3.26, and EPS on a reported basis to be in the neighborhood of $5. On a net basis, which excludes the $20 million refund and the $10 million incremental IEEPA tariffs that flow through the P&L, EPS would be around $4 a share. With that, that concludes our prepared remarks. Operator, we are now ready for questions.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A final reminder to press the star keys. Our first question is from Jonathan Komp with Baird.
Yes. Hi, thanks. Good afternoon. Tom, I want to start off. You mentioned this has been the strongest growth since 2022. Could you share a little more detail on where you have seen acceleration across your business? And then I know, Jason, you mentioned part of the raised full-year outlook includes a higher plan for Q3 and Q4. Can you share more as you look into the second half—what is shaping up better than you were thinking previously?
Yes. I will start off, Jonathan. The really exciting thing here is that we are seeing success across all of our brands. We entered the quarter knowing Durango had a very tough comparison to last year, so we expected it to be down year-over-year because of some pre-buys before the price increase last year. Muck being down slightly for the quarter is really just a timing issue with an international distributor. Outside of that, all of our brands grew greater than our expectations. As Jason pointed out, we saw our strongest growth with XTRATUF for the quarter—both wholesale and eCommerce outperformed expectations. Another encouraging development is success in our own DTC on our branded websites. We are seeing that investments we are making are driving more volume and more traffic to our websites, which was a bigger positive surprise than we originally anticipated with those investments.
And then just to talk a little more about Q3 and Q4, Jonathan—we have seen significant bookings for pretty much all the brands. We are pretty excited about where that is. We talked about gaining new shelf space, and we have seen those styles check at retail, so we are seeing continued fill-ins on those. As Tom mentioned, our ecommerce business for all the brands is performing very well, and we do not see any reason why that will not continue through Q3 and Q4, which are typically stronger quarters for the type of product we have.
Just to add on, the bookings are really exciting because bookings are up across all brands. Our guidance of roughly 8.5% sales growth is trying to bake in some conservatism for how much of our at-once business, historically our largest part of the business, will be ordered for fall given the order book we are looking at for the next two quarters. Regarding whether benefit is from new doors or existing accounts: when we look at our key accounts, it is easy to see whether we have gained space, and we have certainly executed on that with our larger key accounts across Western, Farm and Ranch, and Sporting Goods. That is incremental. For independent retailers, it is harder to ascertain exact shelf space gains, but our bookings are up meaningfully even for field or independent retail accounts as well. Time will tell in Q3 and Q4 as we see what happens with at-once buys, but we are very excited about the second half of the year.
I would add that the BOA boot was tested in about 200 doors and did very well, and it is being expanded into all doors. When we see that happen, we are confident about the sell-through and therefore expect more at-once business for that style in Q3 and Q4 because we are expanding it into more doors. Similarly with XTRATUF and a large retailer: they tested it out last year, saw really good sell-through, and continue to add styles and doors, which is how we are picking up shelf space.
Okay. Great. And then the outlook for SG&A for the year—could you give more detail on the individual drivers or some of the investments you are choosing to pull forward? And more broadly, as you think about operating margin potential for this business, retail and some of your fastest-growing brands seem like higher-margin segments. What does that imply longer term about the profitability of Rocky and where operating margin can go?
Certainly. If you look at Q2 by itself, the $1.1 million accounts receivable write-off for a large account was unexpected. If you strip that out of the quarter, we would have had slight operating leverage. We were optimistic that fuel surcharges and fuel prices would come back down to more normal levels; right now, freight is running up about 80 basis points as a percent of sales, and we are baking that into guidance for the rest of the year. From an operating margin perspective, we have short-term challenges with gross margin—oil prices are driving up raw material and component costs, and given our order book, we are sourcing from the fastest source possible, not necessarily the most cost-effective. We walked into 2026 with a plan to make a meaningful amount of our products in the Dominican Republic, but given demand and higher-than-anticipated sales, we have had to bypass the Dominican in some cases.
Shipping from Asia to the Dominican adds about 65 days of transit time, and then additional finishing time, so we have had to source more products out of Asia than originally intended, which impacts our margins. As we build raw material inventories in the Dominican Republic, we expect operating margins to increase over current-year guidance. The difficult part of gaining shelf space is we have executed on that, and now we need to optimize by sourcing from the right countries or our own in-house manufacturing facilities. We will provide more guidance on operating margins at the next call.
Our intention remains to move more production to the Dominican Republic, and we will continue to do that. It is still the right decision, but because of demand we have had to make decisions to get inventory here and on shelves. I believe it was the right decision for right now, and going forward we will capitalize on our Dominican facility.
Okay. Great. Appreciate all the color. Thank you.
Our next question is from Janine Hoffman Stichter with BTIG.
A few more questions digging into some of the input costs. To make sure I understand: tariffs right now flip to a positive, but there are also new tariffs recently put in place. When will those start to take hold and flip to a year-over-year headwind? Based on what you are seeing right now on raw materials and freight, do you expect input costs to continue to rise? And tying that together, how are you feeling about pricing—any plans for further pricing action?
Good question, Janine. On component costs, we are seeing about a mid-single-digit, roughly 5%–6%, cost increase on first cost of product for oil-based components driving that. Container prices have crept up since our last call, driven by oil and exacerbated by the need for expedited shipping to get product here faster. Regarding tariffs, we have guided the rest of the year at roughly 10%. The new 301 tariffs that went in place recently—the incremental piece will not materially hit us until the very end of 2026 or the beginning of 2027 as those tariffs flow through inventory and the P&L. We expect the next round of 301s at some point this year; there has been a lot of conversation about them occurring after the midterms, so we are waiting to see what happens. On the bright side, the forced labor 301s impacted the Dominican Republic and are a net negative relative to where we were a week ago, but the Dominican is not on the ballot for more 301s, so our plan to leverage our Dominican facility will likely still make a lot of sense coming into next year. On pricing, we are monitoring the situation. If we take out the noise from sourcing challenges and expedited freight, our margins would have been just slightly up compared to last year. We will evaluate the scope of further price increases for 2027 depending on how other 301s land.
Okay. Great. And then shifting gears a little bit on XTRATUF—nice growth there with benefit from new distribution. Can you give perspective on how big that brand is right now and your view on how big it can ultimately be as it gets more lifestyle distribution?
For the second quarter, XTRATUF was our largest brand for the quarter, and we anticipate continued growth for the brand in Q3 and Q4 versus last year. We think that brand will be just north of $100 million this year by year-end, which would represent roughly 30% growth for the brand over last year.
As far as how big it can be, we will grow it as big as we can. The brand has a lot of legs and can expand into different categories and seasons. Last year, we got into more fleece-lined styles for winter and it performed well—we are excited about what that will do this fall. We can look at sandals or more casual shoes; there is a long runway for this brand.
Great. Thanks so much.
Thank you.
Thank you.
Our last question will be from an analyst with Titan Capital Management.
A couple of questions. First, with your inventories down 7% year-over-year, how are you feeling about that level, particularly given that you are experiencing sales strength? And given that you are expediting, can you provide more perspective on inventory levels?
Big picture, I do not think we missed sales in the quarter—we were able to react fast enough, we just were not able to optimize the country of origin. We are baking into our guidance about a $3 million headwind for continued sourcing changes, whether it be sourcing from different countries of origin than originally planned or continuing to use expedited freight to get product here given the order book we have for fall.
I would also add that some of the inventory reduction came from being able to move discontinued items that Tom referenced—we were able to find homes for those. That is a good thing; we moved that inventory and got the inventory we need in the right place.
To say it another way, our discontinued inventory is down a little over 30% this quarter, which is the cleanest the inventory has been since the acquisition. I do not anticipate a significant increase in pairs to hit this volume; it is more about timing of when we can get them. We will have some meaningful investments in raw materials in the Dominican Republic—those are a low seven-figure amount—but once we build that up, we will be able to flow product with the appropriate lead time.
Great. Thank you. Relative to your comments in the opening remarks that you brought some fall product in early: to what degree is that pulling from the third quarter and maybe enhancing the second quarter number, but potentially putting downward pressure on the third quarter? Is that a reality, or are we misunderstanding?
That was really the case for our Rocky brand, and it is not a meaningful pull-ahead to the overall business. If you think about where we've been chasing inventory, it has not been in leather products for the most part, but more in our rubber products. We have updated full-year guidance taking all of that into consideration, and we are still increasing guidance from the last call, so I do not think you will see or feel a material impact in Q3.
Because we have been able to get product on shelves and it is checking well, I anticipate fill-in business. It will not match the initial bookings, but it will contribute more in Q3 and Q4, so I do not think it will materially impact Q3.
That is helpful. One additional question: relative to comments about experiencing some extra cost to gain shelf space, can you discuss that more holistically?
Where we have relationships with retailers to secure shelf space, we might have offered a little additional on the initial order to secure that shelf space. We still feel comfortable about the margins we are making on that business, and the success is allowing us to get more fill-in business. It is essentially a way to convince significant retailers to give us more shelf space.
Was that widespread across many retailers or isolated to a couple of significant retailers?
More isolated to a couple of retailers, but significant ones because of their door counts.
Thank you.
Thank you. There are no further questions at this time. I would like to hand the floor back over to Jason S. Brooks for any closing comments.
Great. Thank you very much. I just wanted to say thank you to our entire team here at Rocky Brands. We have been working diligently through all the craziness. Thank you to our investors, thank you to our board, and particularly thank you to all our customers. We really look forward to finishing 2026 strong. Thank you so much.
This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.