Rocky Brands, Inc. Stock

Thank you. 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, please press star zero for operator assistance at any time. I would like to remind everyone that this conference is being recorded, and I will now turn the conference over to Brendan 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 of 1995. Such statements are based on information assumptions available at this time and are subject to 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, our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31st, 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'll now turn the conference over to Mr. Jason Brooks, President and Chief Executive Officer of Rocky Brands.

Jason?.

Thank you, Brendan. 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 a year-ago period. We are encouraged by the broad-based strength across our portfolio with several brands delivering solid double-digit growth, led by Extra Tough, 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, but as you saw from our earnings release, we recorded a tariff-free fund 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 IEPA tariffs.

The actual and expected refund had a very positive impact on gross margins and profitability this quarter, and 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. Extra Tough delivered another outstanding quarter, extending its position as the fastest-growing brand in the portfolio. Wholesale posted a large increase over last year. E-commerce bested last year's already strong results, and Marketplace continued to grow at a healthy clip. Binding 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. sporting goods retailer that brought extra tough in store this year has quickly become one of our largest key accounts and is looking to add doors and styles going forward.

We're also continuing to see the brand extend well beyond its marine roots as consumers adopt ExtraTuff 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 ADV colorways and the kids' cruiser collection, along with new Guy Harvey collaboration styles for both women and girls. Looking ahead, Q3 and Q4 hold the largest set of pre-book orders in the brand's history. with a substantial new fall line and a winter bookings ahead of last year, positioning Extra Tough for a strong back half of 2026 across both wholesale and e-commerce. MUX 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 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 as we continued to expand shelf space and land new partnerships, and we're encouraged by the continued strength in the farm and ranch despite the drought conditions weighing on two of our largest customers in the channel.

In total, muck sales were down modestly compared to a year-ago period, driven by a shift in 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 Buddha sourcement behind the success of the BOA Carbon Flex Wedge. Our largest online retail partner also delivered exceptional growth after pre-booking 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 the territories and healthy carryover business in work-focused accounts supported by employer voucher programs. The CarbonFlex wedge has quickly become the second highest selling franchise behind only the Romeo, and will continue to expand BOA technology into women's products and warmer climate, non-waterproof options. Early response to our Spring 2027 line has also been encouraging, led by new safety versions of the Romeo Superlite and a refreshed Eagle-like collection.

Rocky Work Outdoor and Western posted growth across all three categories. Wholesale was a particular strength as independent retailers continued to report strong sell-through, and we also grew at a key national retailer level as new product drove great brand exposure. New Fall 2026 product also arrived early, allowing us to ship several new fall styles during Q2 and setting up early retail sell-in and replenishment opportunities. The account growth was well balanced between national multi-store chains and strong regional independence, including a sizable new rugged casual program with a large southern sporting goods retailer and a southeastern family shoe chain. and outdoor sales were also strong as several Midwest farm and ranch retailers brought in product early for the fall season. continue to gain shelf space and industrial safety tow, including a test program with a major national boot retailer and expanded regional programs in the southeast and Texas. And 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 tow styles continued to gain strength and our Outback and Ridgetop 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 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. This farm and ranch channel was led by a rebel in Westward Collections, and our e-commerce partner accounts, along with sporting goods and outdoor channels, also had a good quarter. Field performance trended positively as well with several region strong increases. During the quarter, We also opened a new 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.

In early sentiment and bookings for spring 27, including our Rebel USA made boots, Workhorse Light, and the new women's Shiloh and 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 LY, but with positive momentum. positively underlying momentum. And given the current geopolitical environment, we expect commercial military demand to remain strong. B2B Lehigh delivered another strong quarter of growth driven by continued success in new customer acquisitions as 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 customer needs. diverse 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 continue 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 are modestly raising our sales projections for the third and fourth quarter. 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'll 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 a EPIT tariff refund receivable we recorded in the quarter, which in turn fueled a significant year-over-year increase in profits. 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. 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 IEPA tariff refunds, partially offset by approximately $3 million in IEPA 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 and 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 430 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% from 45.3%. Contract manufacturing margins were down 320 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 $0.7 million 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 given 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 54,000 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. pleased with the quantity and quality of our inventory as we're 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 IPA 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 from adjusting our manufacturing and sourcing plans to meet demand with expedited shipping to continue during the second half of this year. We also are continuing to see higher inbound freight rates, along with increased component costs due to higher oil prices. This is putting some additional pressure on gross margins, which are now forecasted to be approximately 40 percent, excluding the actual unexpected tariff refund. Q3 and Q4 gross margins improving sequentially into the low 40% range. Since our last earnings call, we incurred $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 the momentum in the future. fast-growing D2C business.

Based on these factors, we are now expecting SG&A as a percentage of sales to increase slightly from 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 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 and finally on a net basis which excludes the $20 million refund and the $10 million incremental IEPA tariffs that flow through the E&L, EPS would be around $4 a share. With that, that concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Jonathan Komp with Baird.

Yes, hi, thanks. Good afternoon. Tom, I want to start off. You mentioned, you know, this the strongest growth since 2022. Could you maybe share a little bit more detail on where you've 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. Could you just share more, as you look into the second half, maybe what's shaping up better than you were thinking previous.

please. Yes. Yes, you know, I'll start off, John, I think the really exciting thing here was that we're really seeing success across all of our brands. You know, we walked into the quarter, we knew We knew Durango had a very tough comparison to last year. And so we knew we were going to be down from out wide because of some pre-buys before the price increase last year. And then we know that, you know, MUC, which was just down slightly for the quarter, is really just a timing issue with an international distributor. Outside of that, all of our brands grew significantly. you know, greater than our expectations. As Jason pointed out, we saw our strongest growth with Extra Tough for the quarter. You know, wholesale and e-commerce both outperformed expectations there.

I would tell you the other thing that has been really great to see is the success that we're having in our own DDC on our branded websites. So we're able to see that these investments that we're making are driving more volume and more traffic to our websites. And so that's been a bigger surprise for us than we originally anticipated with those investments.

Yes, and then just to talk a little bit more about Q3 and Q4, I think John, we've seen some pretty significant bookings for pretty much all the brands. And so I think we're pretty excited about where that's at. We talked a little bit or I talked a little bit about how we have been able to gain some new shelf space. And we've seen those styles checkout. at retail and so we're seeing continued fill-ins on those. And then, as Tom just kind of mentioned, right, our e-commerce business for all the brands is performing very well, and we don't see any reason why that won't continue through time. through Q3 and Q4, which is really a little bit better, stronger quarters for us because of the type of product that we have. Yes, just to add on there, John, you know, the bookings,.

The bookings are really exciting because our bookings are up really across all brands. And so, you know, I think our guidance there of the 8.5% sales growth is straightforward. trying to bake in a little conservatism for how much of our at once business, which is historically our largest part of the business, You know, what that will be in fall, given the order book that we're looking at for the next two quarters.

And maybe just one follow up there, is there a meaningful benefit from new doors or new customers or are you seeing the strength really across your organization?.

your existing base of accounts? Yes, I mean, I can start with this one. For us, when we look at our key accounts, right, it's really easy for us to just retain if we've gained shelf space or not. And so we have certainly executed on that with our larger key accounts. whether it be in Western or farm ranch or even sporting goods. And so we're very excited about that because we know that that's all incremental. As you look at the independent retailers, the smaller independent retailers, it's hard to disertain exactly shelf space gains there, but the bright side of that is that our bookings are up meaningfully, even for our field or independent retail accounts as well. time will tell in Q3 and Q4 as we see what happens with that once. But we're very excited about the second half of the year. Yes, and I just would add on, like I mentioned in my script about.

about the Boa Boot and it was tested in, I don't know, 200 doors, I believe it was, and it did so well, it's being expanded into all doors, right? And so when we see that happen, we're really confident about the sell-through and therefore more at once business that style should be coming in Q3 and Q4 because we're expanding it into more doors. And then I talked a little bit about that with Extra Tough and a large retailer. They did basically the same thing, tested it out last year. And it saw really good sell through. And it continues to add styles, but even adds doors. And so that's where I know we're picking up some shelf space.

Okay, great. And then the outlook for SG&A for the year, I just want to understand, it looks like, you know, the full year growth, more than a few percentage points higher than you were thinking previously. Could you maybe just give a little more airtime to the, you know, individual drivers or some of the investments you're choosing maybe to pull forward. And then just more broadly, as you think about the operating margin you know potential for this business uh retail your your some of your fastest growing brands seem like high margin you know segments of your business overall. So just what do you think that means longer term about the profitability of where, where operating margin can go for Rocky?.

Yes, certainly. So if you were just to look at Q2 by itself, right, the accounts receivable write-off for a large account of ours of $1.1 million was certainly unexpected. And so if you were to strip that out of this quarter alone, we would have had slight operating leverage. That coupled with, you know, we were optimistic that we would see fuel surcharges and fuel prices come back down to more, normal levels. Um, and so right now we're running freight up about 80, 80 basis points as a percent of sales. Um, and so we're baking that into our guidance the rest of the year. Hopefully we can see some relief there. Um, but we're baking that into, to, uh, the guidance for the rest of the year.

Um, The other, from an operating margin perspective, I think we've got some challenges with, short term challenges with our gross margin, right? As we talked about, oil prices prices driving up our raw material and component costs. But then also, given our order book, we are essentially sourcing boots from the fastest source possible, not necessarily the most cost effective, right? And so we walked into the year for 2026, we had a plan of making a meaningful amount of our products in the Dominican Republic. The reality of it is given demand and sales, coming in higher than we anticipated. We're having to kind of bypass the Dominican Republic in some cases. You know, it adds about 65 days of transit time just from Asia to the Dominican and then add a few more weeks in the Dominican to finish the product. So we've had to source more products out of Asia than we originally intended. And so that's impacting our margins.

But as you look to the future and we're able to build raw material inventories in the Dominican Republic. We definitely see our operating margins increasing over the current year guidance. you know the difficult part of getting the shelf space is is you know we've executed on that and now we just have to um you know optimize it by getting the product sourced from whether the right countries or our own in-house manufacturing facilities. And so we'll give more guidance at the next call probably on the future applications.

outlook for operating margins. Yes, I just want to add, like, our intention is still the plan we talked about in moving more production to the Dominican. we are going to continue to do that. It's still the right decision. But like Tom said, because of the demand that we've had, we've had to make decisions to get the inventory here to get on the shelves. And so I believe it was the right decision for right now, but the idea going forward is to capitalize on our Dominican facility for sure.

Okay, great. I appreciate all the color. Thank you.

Thank you. Our next question is from Janine Stichter with BTIG.

Good afternoon. A few more just digging into some of the input costs. So make sure I understand tariffs right now flip to a negative, but we also have new tariffs that are recently put in place. When will we see those start to take hold and flip to a year over year headwind? And then you alluded to it a bit, but based on what you're seeing right now on raw materials and freight, would your expectation be for input costs to continue to rise? And then maybe just tying that all together.

How are you feeling about pricing? Are there any plans for further pricing action? Yes, no, good question, Janine. You know, so, you know, let's start with the component cost, right? So we're seeing about, on average, a mid single digit 5, 6% cost increase on first cost of the product, right? When that would be for oil based components typically, that are driving that. The other thing is container prices have crept up over, you know, since our last call. Again, really driven by oil. It was, you know, further exacerbated by the fact that we were having to use expedited, you know, shipping carriers to get product here faster. And so we are continuing to evaluate that. As it relates to tariffs, right, so we've kind of guided the rest of the year at this 10%. So the new tariffs that went in place, the 301s that went in place on Friday, most of that, the incremental piece, will not hit us until the very end of 2026. or the beginning of 2027, as those tariffs will have to flow through our inventory and through the P&L.

We are expecting that we will see the next round of 301s at some point this year. There's been a lot of conversation around those happening kind of after the midterms, and And so we are kind of waiting to see what happens with those to determine pricing for you know pricing changes for 2027. If those happen as expected, the good news for us is that the forced labor 301s impacted the Dominican Republic. It's a net 2.5% bad guy from where we were a week ago. but they are not on the ballot for any more 301s. So our whole plan of leveraging our Dominican facility will likely still make a ton of sense coming into this year. Okay, great. And then on pricing? Yes, I think I'm pricing, you know, we're monitoring it. You know, if we were to take out the noise, from this quarter with the sourcing challenges, the expedited freight, all those things, our margins would have been just slightly up compared to LY.

And so we're continuing to evaluate it, but we would be really interested to see where we land on these other 301s to determine if and how big a price increase would need to be for 2027.

Okay, great. And this is shifting gears a little bit. On Extra Tough, really nice growth, seeing the benefit from some new distribution. Can you just give us perspective first on how big that brand is right now, and then if you have a view on how big it could ultimately be as it gets more lifestyle distribution?.

Yes, I mean, the interesting thing for the second quarter was Extra Tough was our largest brand. the quarter and we're anticipating continued growth for the brand in the third and fourth quarter over LY. So we think that brand will be just north of $100 million this year by the end of the would represent 30% growth for the brand over LY.

And as far as how big can it be, I think, you know, We're going to ride it as big as we can make it. I think the brand has a lot of legs. I think we can get into some different categories. try to find different seasons that make sense. I know we shared a little bit about how last year we got into more fleece lined for more skiing areas in winter and that went really well. We're excited about what that's going to do this fall. And then if we can look at maybe more sandals or more just casual kind of shoes. But I think there's a long runway for this brand.

Great, thanks so much. Thank you. Thank you. Our last question will be from Bill DeZellum with Titan Capital Management.

Thank you. A couple of questions. First of all, with your inventories down 7% year over year, how are you going to manage you feeling about that level, particularly given that you're experiencing this sales strength? And maybe you already touched on this, just given that you're expediting, but more perspective would be helpful.

Yes, so I think big picture, Bill, I don't think we really missed sales in the quarter. We were able to react fast enough. We just weren't able to optimize the country of origin, if you will. And so we are baking into our guidance probably about a $3 million headwind for continued sourcing changes, whether it be sourcing from different countries of origin from the originally planned or continuing to use expedited freight to get product here given the order book we have for fall.

I would also add some of the inventory reduction came from us being able to move these discontinued items that Tom referenced, where we were able to find some homes for those. So it not necessarily is it, it's actually a good thing, right? We were able to move that inventory.

and get our inventory that we do need in the right place. Yes, just to say it one other way, Bill, our discontinued inventory is down about a little over 30% this quarter, which is really exciting how clean the inventory is. Really the cleanest it's been since the acquisition. I don't anticipate a significant increase in payers to hit this volume. It's more about the timing of when we can get them. Where I do think we will have some meaningful investments. is going to be in raw materials in the Dominican Republic. That number is low seven figures, though. once we get it built up we'll be able to flow that you know with the appropriate amount of time.

Great, thank you. And then relative to your comments and your opening remarks that you brought some fall product in early. To what degree is that pulling from the third quarter and Maybe this is unfair, but enhancing the second quarter number, but we'll put some downward pressure on the third quarter number. Is that a reality, or are we not understanding what you were saying there correctly?.

I think just to touch on this a little bit, you know, that was really the case for our Rocky brand that Jason talked about. And so it's not a meaningful pull ahead to the overall business. And really, if you think about where we've been chasing inventory, it's not been in leather product for the most part. It's been more in our rubber product. So, we've updated the full year guidance, taking all that into consideration, but we're still increasing that guidance.

you know, from the last call. So I don't think it's something you will see or feel in the third quarter. And I think because we've been able to get it on the shelves and we're hearing it's checking pretty good, I anticipate some fill-in business. It won't be the same as the bookings, but it will definitely, you know, turn a little bit more in Q3 and Q4. So we should see some fill-in business there as well. So like Tom said, I don't think it will impact Q3 much at all.

Right, that's helpful. And then one additional question, please. Relative to your comments about experiencing some extra cost to gain shelf space. Would you discuss kind of that more holistically please?.

What I would tell you is where we have relationships with retailers, to manage getting our boots on those shelves, we might have given them a little bit additional discount on the initial order. to secure that shelf space. But we still feel very comfortable about the margins that we're making on that. And the success that's happening there is allowing us, again, to get more fill-in business. So it's just a way.

to convince the retailer to give us a little more shelf space. Was that something that was widespread? throughout a number of different retailers, or was it rather isolated to only a couple of retailers?.

isolated to just a couple retailers, but significant retailers because of the door count they have.

Great. Thank you both. Yes, thank you. Thanks Bill.

Thank you. 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 very much. I just wanted to say thank you to our entire team here at Rocky Brands. We have been working really diligently through all the craziness going on. Thank you to our investors. Thank you to our board. And particularly, thank you to all our customers. And we really appreciate it. 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.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter 2026 Earnings Conference Call. [Operator Instructions].

I would like to remind everyone that this conference is being recorded. I will now turn the conference over to Brendon Frey 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, 2025.

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 Operating and Chief Financial Officer. After our prepared remarks, we will take your questions.

We are pleased to report a solid start to 2026 as we sustained a strong sales momentum we experienced in the back half of last year. Q1 sales increased 9%, following the 9% increase we achieved in the fourth quarter of 2025. Our performance was driven by legacy styles and compelling new product introductions in key categories that fuel robust D2C growth and improving wholesale trends.

The extended winter weather across much of the Eastern United States provided a favorable backdrop for our cold weather offerings while our spring collections gained traction as the quarter progressed. What's particularly encouraging is the quality of our growth. We are seeing consistent full price selling with key brick-and-mortar accounts as well as a digital partners and especially on our own branded websites. Our strategic focus on expanding distribution, introducing compelling new products at key price points, and leveraging technology platforms like the BOA, continues to resonate with our retailers and our consumers. Tom will go through the financials in detail shortly.

But from a profit standpoint, Q1 was in line with our expectations. The year-over-year change in gross and operating margins was driven primarily by higher tariffs which was expected and included in our outlook for this year. The good news is that the headwind from higher tariff starts to lessen in the second quarter, which, along with our current top line momentum, gives us a clear line of sight for returning gross margins to 40% range and delivering meaningful earnings growth in the second half of the year.

Let me walk you through our first quarter brand performances. XTRATUF started 2026 with exceptional momentum, delivering high-teen growth over last year as all channels contributed to the brand's strong performance. U.S. wholesale was up low double digits, while our e-commerce business continued its impressive trajectory from Q4, posting substantial growth. Marketplace sales also gained momentum throughout the quarter.

Our product mix reflected both the strength of our core offerings and successful new introductions, the 15-inch Legacy Boot, our Ankle Deck Boot and the Ankle Deck Boot Sport in key colors like Duck Camo and Olive remain top sellers. We're particularly pleased with the reception of our spring 2026 line which was highlighted by the brown ADB Sport and the men's Black Deep Storm ADB and our highly anticipated Kids' TUFS Cruisers collection. Distribution gains were broad-based across big-box sporting goods retailers, outdoor-focused key accounts, specialty lifestyle independents and Western focused partners.

Our well-established marine channel also delivered solid results to the start of the year. This diverse channel strength, combined with the compelling product innovation positions XTRATUF for continued success through 2026.

Muck delivered its best first quarter in over 3 years, posting high-teens growth versus last year. This outstanding performance reflected strength across all channels. Wholesale, e-commerce, marketplace and international as the brand capitalized on favorable weather conditions and strong product availability, extended winter weather across most of the United States drove exceptional demand for our Arctic collections, which became the biggest contributor to the brand's growth in both men's and women's collections. Our marketing team effectively leveraged social media and digital advertising to capitalize on these favorable weather patterns through February and early March.

Equally important was our focus on maintaining strong inventory positions on our core Chore and Chore Steel styles, which continue to perform well across multiple channels. The major highlight was early delivery and reception of our new Rainscape spring collection, which contributed meaningfully to the brand's growth in the quarter.

From a channel perspective, our hardware business grew significantly, driven by continued partnership expenses with a national hardware retailer. Also of note, the sporting goods channel showed meaningful improvements after several challenging quarters as Muck regains shelf space from competitors for our Legacy Arctic styles.

Durango delivered a solid start to the year with single-digit growth driven by consistent yield account momentum throughout the quarter. We saw particularly strong performance in Texas where the Hispanic market segment showed meaningful improvement over last year with double-digit increases. Florida and Georgia also posted strong double-digit gains fueled by demand for our Rebel, Rebel work and our new Shyloh collection. A highlight in our key account business was exceptional growth with a major Western retailer, which increased over 30% for the quarter. This was driven by exclusive styles and successful expansion into new categories, including the Shyloh and our women's crush fashion series.

The March delivery of exciting spring products, including category extensions in the Shyloh and crush updates and our new Workhorse Work collection provided additional momentum heading into the second quarter.

Georgia Boot faced a challenging January, but rebounded strongly in February and March, both of which exceeded prior year sales. While the quarter finished with a slight single-digit decline versus last year, this was primarily timing driven as several meaningful wholesale orders booked in late March carried into April. Positioning us well for the current quarter. Adding to our optimism for Georgia is the continued strength of the brand's digital channels as both e-commerce and marketplace were both up healthy double digits in Q1, and that momentum has carried into early part of Q2.

Product innovation continues to drive Georgia Boot success. Our Carbon Flex Wedge collection remains one of the brand's most successful launches, performing exceptionally well across both field and key accounts.

Notably, the BOA equipped version has quickly become a top-performing item in the overall line, and we will continue to expand the BOA technology across future assortments. Additionally, our new Core 37 farm-and-ranch assortment was among the top-performing introductions for fall 2026 and begin shipping this quarter, delivering strong value at a key price point across multiple categories.

Rocky Work, Outdoor & Western started 2026 with a positive result as wholesale sales continue to strengthening through greater in-line product sales versus last year's off-price focus. The Outdoor segment's growth was highlighted by increased programs with key Upper Midwest retailers and a prominent Midwest online retailer who began featuring Rocky again after several years. We also saw solid sales with independent retailers carrying our deep line of insulated and waterproof footwear.

New spring deliveries and replenishment orders for our new Western collection were pivotal in reviving category that have been challenged in recent periods. Our new Ride LTE series of Western Work goods introduced late in Q4 has been a hit with retailers. We are already receiving significant replenishment orders from partners who bought the product in before the end of the year.

In Work, we continue to gain strength with key industry footwear suppliers across Texas and the Northeast, along with prominent mid-tier footwear retailers. Technology leadership remains a key differentiator our premium Rams Horn BOA composition-toe product showed mid-teen growth and has quickly become 1 of the leading boots in the industry safety toe market.

Commercial military and public service delivered a solid start to 2026, posting low single-digit growth over the prior period. This performance represents continued positive momentum from our strong Q4 2025 finish and marks a significant improvement in trajectory compared to the beginning of last year. The commercial military segment led the way with high single-digit growth, driven by the exceptional performance with Army and Air Force Exchange services, which posted strong double-digit increases.

The Navy Exchange also had a phenomenal quarter with significant growth fueled by our S2V Steel Toe boots. Our S2V collection continues to be a growth driver for the division, with the Predator S2V and related styles performing exceptionally well across both yield and key accounts.

Turning to our B2B Lehigh business. It continued its strong momentum from Q4, growing high single digits versus the first quarter of last year. This performance was driven by continued success in new customer acquisition, a direct result of a strategic structural changes we've made to our sales force. We are also seeing positive trends in subsidy utilization and average subsidy dollars as companies work to provide consistent product assortments for their employees despite rising costs.

While we are monitoring potential impacts from the tariff uncertainty and fuel costs later in the year, the effect on Q1 was minimal, and the overall health of the business remains very strong. Finally, our partnership with Bollé eyewear continues to strengthen and deliver results, with accounts that committed in Q4 2025, now onboarding and resending their subsidies for 2026. The response to this prescription safety eyewear program remains very positive and is generating meaningful incremental sales as an extension of our managed PPE programs.

To reiterate, we are pleased with our first quarter performance, and we are encouraged by the sell-in and sell-out trends we are seeing across the brand portfolio. We look forward to getting past these tough tariff comparisons, so our bottom line results better reflect the strength of our business and the benefits of our operating model.

With that, I will turn -- with that, I will turn it over to Tom to review the financials. Tom?

Thank you. Echoing Jason's sentiment, I am very pleased with the start of our 2026. The momentum we experienced in our business last year carried over into the new year, driving strong top line growth despite the challenging tariff environment we anticipated.

Reported net sales for the first quarter increased 9.1% year-over-year to $124.4 million, which was in line with our expectations. By segment, wholesale sales increased $3.6 million or 4.8% to $78.4 million. Retail sales increased 16.5% and to $42.7 million, and contract manufacturing sales were $3.3 million. Turning to gross profit. For the first quarter, gross profit was $45.4 million or 36.5% of sales compared to $47 million or 41.2% of sales in the same period last year. The 470 basis point decrease was driven by a little over $7 million in higher tariffs compared with the year ago period. and to a much lesser extent, an increase in sales of discontinued styles. This was partly offset by strong full-price selling, favorable channel mix with higher retail sales and the benefit of price increases implemented in Q2 of 2025. Reported gross margins by segment were as follows: Wholesale margins were 34.4% versus 40.3% with the change driven by significant impact of tariffs, Retail margins were 42.6% versus 45.7% also reflecting higher tariffs compared with a year ago. And contract manufacturing margins improved to 9.2% from 5.8%. Operating expenses were $41.8 million or 33.6% of net sales in the first quarter of 2026 compared to $38.3 million or 33.6% and of net sales last year. Excluding the $700,000 of acquisition-related amortization in the first quarter of this year and last year, adjusted operating expenses were million and $37.6 million, respectively, in Q1 of 2026 in Q1 of 2025.

As a percentage of net sales, adjusted operating expenses were 33.0% in both periods. The increase in operating expenses was driven primarily by higher logistics costs associated with the increase in retail sales. Income from operations was $3.6 million or 2.9% of net sales compared to $8.7 million or 7.6% of net sales in the year ago period. Adjusted operating income was $4.3 million or 3.5% of net sales compared to adjusted operating income of $9.4 million or 8.2% of net sales a year ago. reflecting the impact of higher tariffs in the first quarter of 2026. For the first quarter of this year, interest expense was $2.1 million compared with $2.4 million in the year ago period. This decrease reflects lower debt less. On a GAAP basis, we reported net income of $1.3 million or $0.17 per diluted share compared to net income of $4.9 million or $0.66 per diluted share in the first quarter of 2025.

Adjusted net income for the first quarter of 2026 was $1.8 million or $0.24 per diluted share compared to adjusted net income of $5.5 million or $0.73 per diluted share a year ago. Turning to our balance sheet. At the end of the first quarter, cash and cash equivalents stood at $1.7 million, and our debt net of unamortized debt issuance costs totaled $122.2 million, a decrease of 5% since March 31 last year. Inventories at the end of the first quarter were $172.6 million, down 1.6% compared to $175.5 million a year ago and down 4.7% compared to $181.1 million at the end of 2025. We are pleased with our inventory management as we successfully navigated the tariff environment while maintaining appropriate stock levels to support our growth.

With respect to our outlook, based on our first quarter performance, we are reiterating our full year 2026 guidance provided on our fourth quarter call. For 2026, we continue to expect revenue to increase approximately 6% over 2025 with our Retail segment growing faster than wholesale. We are still -- while we are still forecasting gross margins to be down modestly, from the 40.9% we reported in 2025. This includes roughly $10 million in higher tariffs that will hit our P&L in the first half of the year, but split roughly 70-30 between Q1 and Q2 versus our prior view of 80-20. SG&A is expected to be up in dollars as we've increased our marketing spend to support our growth. However, as a percentage of revenue, we expect to lever by approximately 80 basis points. Interest expense will take another step down this year based on year-end debt levels. The decrease will be more modest than what we realized in 2025. This translates into EPS growth in the low-teen range.

For modeling purposes, we still expect Q2 gross margins to improve from Q1 levels, but to a lesser degree than initially thought as approximately $1 million more and higher tariffs -- are expected to flow through the P&L in Q1 shift -- I'm sorry, from Q1 shifted into Q2 due to the timing of certain product sales. Therefore, while we're still forecasting year-over-year decline in profitability to lessen in Q2 versus Q1, and the improvement will not be as meaningful as we anticipated at the start of the year. due to the shifts and now expect -- due to this shift, we now expect Q2 EPS to be down somewhere in the neighborhood of $0.20 versus Q2 last year. We look forward to having the current tariff headwinds largely behind us as we exit Q2, which will drive gross margins back above 40%. And allow us to translate our top line momentum into strong earnings growth for the second half of the year.

That concludes our prepared remarks. Operator, we are now ready for questions.

[Operator Instructions]. Our first question comes from the line of Jonathan Komp with Baird.

I want to start by asking just what you're observing in the environment, if you've seen any major shifts across your brand or your major partners given some of the uncertainty in the environment, just overall, your sense of health of the consumer demand and the orders that you're seeing?

Yes. Jon, thanks. I would tell you that we feel pretty positive. As I talked about the brands, right, XTRATUF is still seeing really nice momentum. We've seen Muck kind of make a little bit of a turn here and Rocky and Durango. So I think we're feeling pretty positive about it. The hardware business has been pretty positive as we talked about, Western business seems to be going pretty good for us. So the one area that we still aren't seeing a huge uptick is in commercial military, where we haven't seen any contracts from our U.S. government, but that's something that we'll continue to focus on and work. I don't know if you have anything to add, Tom.

Yes. And I would tell you, really throughout the first quarter and even in April, we saw general at-once trends being up compared to LY. And then also looking out into the future, our order book looks very strong for the rest of the year. So we have not seen a big change in behavior from any of our consumers. I think one of the things we're trying to dissect a little bit is around with the success of particularly the Muck brand in Q4 and in Q1 of this year, the order book is very strong. And so we believe that retailers are going to be stocking back up on inventory that they sold through over the last 6 months.

And maybe to follow up, but more related to the cost environment. Can you talk about any surcharges you're seeing come through or any expectations do you think about freight and down the road product costs of higher costs that you might see?

Yes, certainly. So we definitely experienced higher freight fuel surcharges at the end of the first quarter, that's continued, obviously, into the first month period of the second quarter. It's something we're monitoring closely that also drove a little bit of the increase in our logistics cost that we called out in the prepared remarks.

The thing that we're really trying to keep our eye on, quite frankly, is there's a lot of oil-based products that are in our household of our shoes and in some of the rubber compounds that go into our rubber boot products. So we're keeping a close eye on that. We've seen some slight price increases. We're being warned of larger ones. If this doesn't settle in here or get resolved relatively soon. And so we're keeping a very close eye on that.

And then when you look at the back half, Tom, could you maybe just walk through some of the pieces that are giving you confidence in, I think you said pretty healthy or strong earnings growth year-over-year in the back half.

Yes. So I mean, I think the thing that's given us the most confidence is the order book, right? And we are really up in future orders across all brands. Certain brands, particularly our rubber products are standing out with Muck and XTRATUF, but we're seeing strong orders for Q3 and for Q4. And so just trying to decipher if that means that the retailers are going to be doing more ordering and less at once. And so it's just allowing us to try to make decisions to get inventory here for the last half of the year.

And maybe just last one. Tariffs for the year, what's your current thinking around the impact from the rates that you're paying today? And then anything you might share on the refund front as well?

Yes. So let's start with the refund. So obviously, the ACE portal opened up a little week or so ago, on the 20th. So we have started that refund process, requesting our refunds. The guidance that we provided assumes no refunds are captured, right? So that would be all upside. The total requests that we're seeking is about $20.5 million. And so TBD on when that gets paid, and we're going to continue to work through the process of getting all of our refunds submitted. The system is not working perfectly for us, but we've heard that from a lot of other peers of ours. So we'll continue to push through that.

In the guidance that we've given, we've kind of forecasted the future tariff impact of these 122 at this 10%. I know we're kind of waiting to see what happens with the Section 301 investigations later this summer. And so we'll update guidance as we have more clarity on what the future of tariffs look like. But hopefully, we're able to capture these refunds in the next Q2 or Q3.

Our next question comes from the line of Janine Stichter with BTIG.

Congratulations on the momentum. I wanted to ask a bit more about the sell-in and sell-through trends you're seeing. I think you mentioned that you're really pleased with both the sell-in and the sell-through. Can you help us understand where those fit? Are you currently at a point where broadly across all brands, the sell-through is outpacing the sell-in? And would you expect that to kind of catch up with the year progresses? Just want to understand what you're seeing from both to sell-in and sell-through perspective.

Yes. Thank you, Janine. I appreciate it. So I think if we look back into Q4, we had tremendous success there, 9% growth in Q4 from 2024 to 2025. And we saw that sell-through at retail. And so I think that's really allowed the retailer to continue to fill in, not only at once, which we continue to see in Q1, but it also has allowed them to deal with -- what we believe to be is just more comfortable in their bookings for Q3 and Q4. And our products typically is a little bit more heavily weighted to waterproof and insulated type product. XTRATUF is a little unique in that. That's still a good fall product, but we're seeing some pretty good bookings from them in the Q2, Q3, Q4 as well.

So I think we're just feeling comfortable as the at-once business continues to happen. And then we're seeing the prebooks for fall. Not all the brands at the same level, but we are seeing it in pretty good across all the brands as we move into the second -- in the third and fourth quarter.

Yes. Just to add on there. I think Jason had it in his prepared remarks, but it's really important to call out that we had the inventory to execute and capture sales when weather came in Q4 and Q1, right? And so that investment in inventory is paying dividends. We think we've -- particularly with the Muck brand that we've gained some shelf space back. And that's exciting to hear given that we think 4 or 5 years ago, when we acquired the brands we lost a little but we think we've gained a lot of that back and our numbers would prove that out.

The other thing I think that I'm probably most excited about, and it's really across all brands, our new product for the 2026 and fall '26, arguably the best booking season we've ever had. So we're excited to see how this plays out at retail. We haven't seen a check through retail yet. We're starting to see it certainly on the spring product, but we'll continue to monitor that. And that's probably the thing I'm most positive about.

Great. That's helpful. And then maybe just -- you mentioned that the Hispanic consumer had improved think you called out Texas. Can you unpack that a little bit more of what's been going on there?

Yes. I think there was just some areas in 2025 where that market was slowed a little bit and particularly in the Western areas. And so we have just seen that some of those retail partners are seeing better sell-through in that area and particularly the Hispanic market. So just seeing some better sell-through in those retail stores.

[Operator Instructions]. Our next question comes from the line of Bruce Geller with Geller Ventures.

I'm trying to get a better sense of the overall tariff impact. It seems based on what you said today that it cost you in the first quarter roughly $0.70 a share on an after-tax basis. So ex the tariffs, you would have earned close to $1 a share. Is that a fair statement?

I think that's a fair statement.

And so if you get this $20 million refund, that's over $2 a share after tax. Is it fair to say that -- the earnings power of the company is approximately $2 per share higher than you've earned in the last 12 months because of these tariffs? Or is that offset somewhat by the new tariffs that have been put on?

Yes, I guess you were -- in 2025, we had just -- I'm going off of memory here, just over $10 million of tariff impact. And then the $10 million we're calling out for 2026. So if it was like a rolling 12 months, that's, I think, the math that you're doing there. And so, yes. I mean, I think that math works. I think we're...

There's variables. There's other variables in there. Bruce, that are -- that complicate things, right?

Sure.

Yes. And so we recognize that we have the 10% tariffs in place right now that we know are already being challenged in court. And then we know the Section 301s are coming at us. And so we're monitoring that closely. I think last I read, the goal of the 301 were to get the 301 tariffs back to what the reciprocal rates were pre the Supreme Court ruling. So we'll continue to monitor that closely.

Okay. But with the tariffs that are in place right now, just the 10%, excluding the potential for the 301s. How much of a year-over-year or how much of a hit on a 12-month basis, would you say that the tariffs that have now been eliminated cost you? Again, I'm trying to get a sense of the earnings power because you last year reported -- or in the last 12 months, you reported roughly $2.50 a share in earnings, but it sounds to me like the earnings power could be $2 more than that. And that's on a base that now seems to be growing on a nice trajectory.

Yes. So I think your logic is correct. And maybe this will help articulate it. If we were to take out the AIPA impact in the first quarter of 2026, we would have shown a slight margin improvement over 2025 results. We took pricing, obviously, when the tariffs came out. And the pricing we took was based on the tariffs at the time was also planned mitigation strategies, which we've been working through. And so if we look at the current broad landscape today, we would see some slight improvements partially driven by all the sourcing changes that the team has made, including making more of our products in the Dominican Republic which has had a more favorable tariff rate up until the Supreme Court ruling, but we anticipate hopefully that's recovering or getting back to normal here in the future.

Okay. And just one other question. I know you don't really like to talk about specific customers. But I personally have noticed I've been getting a lot of digital ads lately from Boot Barn regarding the XTRATUF brand. And to my knowledge, historically, you guys had not sold XTRATUF at Boot Barn. So I'm just curious if this is something that has recently come to fruition and if so, is it just online? Or are these boots now going into the stores as well? Because that seems to me like it could be pretty material, if that's accurate?

Yes. So in my prepared remarks, I talked a little bit about the Western retail category for XTRATUF. So there's been a little bit of expansion into that area. It's slow right now in all that area, but we do see a really positive potential opportunity there and maybe more than just that retailer that you talked about, but there is definitely a little bit of opportunity there.

Great. Thank you very much, gentlemen.

There are no further questions at this time. I'd like to pass the call back over to management for any closing remarks.

Great. Thank you very much. First, I'd like to thank the entire Rocky Brands team and the efforts that they have put in here in Q1, helping Rocky be the best company it can be. I'd also like to thank our Board of Directors and our shareholders for their support, and we look forward to our continued success in 2026. Thank you all very much for your time today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded, and we will now turn the conference over to Brendon Frey of ICR. Please go ahead, sir.

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. 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 your questions. We concluded 2025 with our highest quarterly growth rate of the year in the fourth quarter delivering strong results that reflect the momentum that has been building in our business. Net sales increased 9%, marking an excellent finish to what has been a very good year for the Rocky Brands, especially considering the industry headwinds we've navigated from the higher tariffs and deteriorating consumer sentiment.

Our performance during the key holiday season was particularly encouraging, highlighted by exceptional demand in our direct-to-consumer channel, demonstrating the power of our brand portfolio and the strong consumer response to our merchandise offerings. For the full year, net sales grew 6% and gross margins expanded by 150 basis points even as we faced increased pressures from higher tariffs. I am incredibly proud of how our organization responded to the challenges over the past 12 months. Our teams executed exceptionally well, leveraging our manufacturing facilities to diversify our sourcing structure, which helped offset a meaningful portion of the impact from the higher tariffs and positioned us for margin tailwinds over the long term.

The agility we demonstrated in adapting our supply chain while maintaining product quality and availability has been a key differentiation for us. The accomplishments for this past year have us well positioned to capitalize on the growth opportunities we believe exist in 2026 and beyond. Our diversified brand portfolio, operational flexibility and strong balance sheet provide us with multiple avenues for continued growth and value creation. Before I hand over to -- before I had over to Tom for detailed looking at the financials, I will walk through our fourth quarter brand and channel performance.

XTRATUF delivered another exceptional quarter, continuing its position as our fastest-growing brand with strong performance across all channels, led by e-commerce, which was almost triple digits. Wholesale was up nicely, driven by traditional big box, outdoor specialty retailers and regional partners across the Southeast and Pacific Northwest. Product-wise, our most popular styles dominated sales throughout the quarter, including our core ankle deck boots, including our sports and legacy collection.

A standout performer was our new cold weather collection, fleece-lined versions of our classic ankle deck boots for both men and women that sold very well and proved attractive to both new customers and existing XTRATUF fans in colder environments.

The Q4 launch of our new Sesame Street licensed product was also well received, particularly through e-commerce, adding momentum to our rapidly growing kids business. Muck also had a very good quarter with sales increasing in the low 20% range. Growth was driven by our branded website, which was up mid-double digits, while marketplace volumes more than doubled driven in part by 2 successful Good Morning America Deals and Steals events during the quarter. This strong performance reflects our inventory position compared to 2024, successful National Muck Day execution in early October, favorable weather conditions in early December and continued strong brand demand.

Our women's business continues to excel, led by the Arctic Sport II series and continued success with the women's original series. We also saw strength in the men's Arctic collection, particularly in the Midwest, West and the Rocky Mountain regions, while the kids business also experienced strong growth with the added bone collector kids boots contributing to the uptick.

Durango finished the quarter with a good December performance especially in farm and ranch accounts benefiting from increased foot traffic due to the wet and snowy weather conditions. This was offset by softness in our key account base year-over-year due to bulk buy timing and carryover inventory impacts that negatively impacted wholesale sell-in. Durango.com continues to perform well, increasing low double digits in Q4 as legacy collections and new Shyloh's -- and new styles from our Shyloh series were in high demand.

For spring, we're adding new men's and women's Square Toe series at key price points that are being carried by key accounts and large farm and ranch retailers. Like Durango, it was a tale of 2 channels for Georgia Boot in the fourth quarter. [ Lackluster ] wholesale results in part due to timing of certain customer orders were partially offset by a strong double-digit gain in e-commerce, driven by a strong holiday season online for the brand. Our strongest offerings include items with the trending BOA lacing system across categories, including the -- technically Carbon Flex wedge, the LTX Logger and the general work Durablend styles.

We are pleased to share that the BOA Carbon Flex wedge will be prominently featured at one of Georgia Boot's largest customers beginning in Q1 2026. We have also been expanding our Super Light concept, launching a wedge version for the spring '26 that was picked up by a large farm and ranch customer in the Pacific Northwest.

Rocky Work, Outdoor & Western ended Q4 on a positive note as favorable boot weather drove sales of insulated and waterproof products across brick-and-mortar and e-commerce channels. For the full year, the WOW categories ended positively, reversing the trend of recent years with rugged outdoor product leading the way with low double-digit year-over-year increases and work products achieving high single-digit growth over 2024.

Sales were led by solid gains in national e-commerce companies and our own rockyboots.com site, along with diverse brick-and-mortar retailers, including major national sporting goods outlets and safety footwear suppliers. The year was highlighted by new programs with major retailers including an important new work footwear program with a major farm store in the Northwest and renewed programs with key sporting goods chains that reclaim shelf space in the outdoor category.

Commercial military and duty closed out 2025 Q4 sales nearly in line with the year ago period despite battling significant challenges from the 43-day government shutdown that affected military personnel pay periods and defense logistics agency operations. A big highlight in the quarter was our Rocky Code Red Wildlands 77 Fire boot, which delivered another double-digit sales increase. We are encouraged with the momentum for both segments heading into 2026, which we expect to build with positive marketplace response to both spring and fall collections.

Turning to retail. As I touched on in each of the brand discussions, e-commerce, particularly our own branded websites had a fantastic quarter, fueling 30-plus percent growth in our overall retail sales. Also contributing to the segment improvement year-over-year was our B2B Lehigh business, which grew mid-single digit versus Q4 last year. Of particular note, our new partnership with [ Bolle ] Eyewear continues generating positive incremental growth in the prescription safety eyewear as an extension of our management PPE program.

At the same time, new customer acquisitions remain very strong as we continue adding accounts to drive growth. Looking ahead to 2026, we are optimistic about several key developments across our brand portfolio, and we'll be leaning into our highest growth opportunities, which increased marketing spend to drive full price selling this year and into the future. With that, I'll turn over to Tom the review of the financials. Tom?

Thanks, Jason. As Jason shared, we had a good fourth quarter, highlighted by strong gains in our retail segment. Overall, sales increased 9.1% year-over-year to $139.7 million, our highest growth rate of the year and our highest in over 3 years. By segment, retail sales increased 30.8% to $57 million, which comes on top of a 15.1% growth in the year ago quarter. Wholesale sales were $79.6 million, a decrease of 2.1% and contract manufacturing sales were essentially flat at $3.2 million.

Turning to gross profit. For the fourth quarter, gross profit was $57.7 million or 41.3% of net sales compared to $53.2 million or 41.5% of net sales in the same period last year. The 20 basis point decrease in gross margin was attributable to $8.3 million in tariffs and sourcing variances, which mostly impacted wholesale gross margins, although the total amount was modestly below our forecast as a portion of this headwind shifted into 2026 based on the timing of certain product sales. This was nearly offset by higher retail segment gross margins and a higher mix of retail segment sales, which carry higher gross margins than the Wholesale and Contract Manufacturing segments.

Gross margins by segment were as follows: Wholesale, down 220 basis points to 36.3%, retail up 170 basis points to 50.9% and contract manufacturing sales were slightly negative as we experienced reduced economies of scale in our Puerto Rican manufacturing facility early in 2025, which hit our P&L in the fourth quarter. We expect contract manufacturing margins to normalize in 2026. Operating expenses were $48.1 million or 34.5% of net sales in the fourth quarter of 2025 compared to $44.7 million or 34.9% of net sales last year.

On an adjusted basis, which excludes acquisition-related amortization costs on both periods and a noncash trademark impairment charge in Q4 of last year, operating expenses were $47.4 million in the fourth quarter of 2025 versus $40 million in the fourth quarter of 2024. As a percentage of net sales, adjusted operating expenses were down -- I'm sorry, were 34.0% in the fourth quarter of 2025 compared to 31.2% in the year ago period. The increase in operating expenses was driven by higher logistics costs associated with the increase in retail sales as well as higher marketing investments and incentive compensation.

Income from operations was $9.6 million or 6.9% of net sales compared to $8.5 million or 6.6% of net sales in the year ago period. Adjusted operating income was $10.3 million or 7.4% of net sales compared to adjusted operating income of $13.2 million or 10.3% of net sales a year ago. For the fourth quarter of 2025, interest expense was $2.5 million compared with $3 million in the year ago period.

The decrease reflects lower debt levels and lower interest rates in the quarter compared to the fourth quarter of 2024. On a GAAP basis, we reported net income of $6.5 million or $0.86 per diluted share compared to net income of $4.8 million or $0.64 per diluted share in the fourth quarter of 2024. Adjusted net income for the fourth quarter of 2025 was $7.2 million or $0.94 per diluted share compared to adjusted net income of $8.9 million or $1.19 per diluted share in the year ago period.

Our tax rate for the fourth quarter was 6.3%, down from 12.1%, primarily driven by changes in state and local income taxes and other discrete tax benefits recognized in 2025. For the full year, net sales were up 6.2% to $482 million. By segment, wholesale sales increased 1%, retail sales were up 20.5% and contract manufacturing decreased 7.7%.

In terms of profitability, gross margins increased 150 basis points to 40.9%, even as we absorbed approximately $10.9 million in IEEPA tariffs. Adjusted income from operations increased 5.6% to $40.0 million or 8.3% of net sales. Adjusted net income rose 29.4% to $24.5 million and adjusted EPS increased 28.3% to $3.26. For the full year, interest expense was down $10 million from $17 million, inclusive of a $2.6 million onetime loan extinguishment charge in 2024. Our effective tax rate for 2025 was 18.1% compared to 19% in the prior year.

Turning to our balance sheet. At the end of 2025, cash and cash equivalents stood at $2.9 million and our debt net of unamortized debt issuance costs totaled $122.6 million, down 4.7% from the end of 2024. We also returned $4.6 million directly to shareholders through quarterly dividends in 2025. Now to our outlook. We entered 2026 with good momentum and have a solid plan in place to build on the accomplishments from this past year.

Our positive sales outlook is being somewhat offset by continued impact of margins from higher tariffs, especially in the first half of the year. For 2026, we expect revenue to increase approximately 6% over 2025 with our retail segment growing faster than wholesale. We are forecasting gross margins to be similar to that of 2025. This includes roughly $10 million in IEEPA tariffs that will hit our P&L in the first half of the year with 80% occurring in the first quarter. SG&A is expected to be up in dollars as we increase our marketing spend to support growth.

However, as a percentage of revenue, we expect to leverage by approximately 80 basis points. Interest expense will take another step down this year based on our year-end debt levels, but the decrease will be more modest than what we realized in 2025. With our estimated tax rate of 21.5%, this translates into EPS percentage growth in the low teens. In terms of the shape of the year, sales growth should be fairly consistent each quarter. However, with the impact from tariffs being front-loaded, especially in Q1, all of our earnings growth will come in the second half of the year, primarily the fourth quarter. That concludes our prepared remarks. Operator, we are now ready for questions.

[Operator Instructions]. And our first question, we'll hear from Jonathan Komp with Baird.

I want to start just understanding the fourth quarter and the strength, especially in the retail channel. Can you just maybe talk about how things played out versus what you may have expected and where you're seeing sources of upside? And what do you carry forward in terms of learnings from Q4 that apply as we look forward?

Yes. Thanks for being on the call, John. So I think we had gone into Q4 feeling pretty confident with all the brands from a seasonal standpoint and had things heat up from a marketing standpoint and driving the sales. But to be perfectly frank, the sales just came in significantly higher than our anticipation. And really XTRATUF was one of the big ones. But I would tell you that Muck was also another one that we were expecting good growth out of, but it just came in much better than we thought. And I am sure the weather had a lot to do with it.

But I think our product was right this year, and I think our marketing efforts were really good. But again, from all the brand scenarios, we saw a nice uptick in the B2B business, and we'll continue to drive that. And as you indicated, we will definitely be doing some homework in our own [ DCs ] to make sure that we are the most efficient in getting that product out at the end of the year.

That's great. And maybe a broader question when you step back and look at XTRATUF and Muck, could you just remind us the potential size of those brands in 2026? What type of growth rate you're thinking and maybe how you're really fostering the long-term potential for both of those?

Yes, John, I'll take that one. So Muck is our largest brand, just north of $100 million. And XTRATUF experienced exceptional growth this year, and we're anticipating that XTRATUF will have tripled in 2026 when we acquired it. It was $32 million when we acquired it. So it will be north of -- it will be approaching $100 million here in 2026 as well.

And how are you evolving some of the growth drivers or the levers or the investments you're making to support that growth?

Yes. I mean I think there's a couple of things there, right? So when you look at -- I mean just touching on e-commerce again, right? We have completely updated our websites. I think we touched on that in Q3. We've seen a lift just from transitioning to new platform websites. We've seen conversion rates go up.

A big driver in the fourth quarter, along with the product being right, as Jason touched on, was a meaningful investment in our marketing spend, particularly in digital and social media. And so we saw our traffic meaningfully increase.

To Jason's point around product, we made investments in inventory, particularly for XTRATUF to make sure we had it here for this holiday season. And also, as Jason alluded to or spoke to in his prepared remarks, the XTRATUF cold weather, the fleece line ADVs were very successful and very incremental to the quarterly results. And so as we look to 2026, we're going to continue those investments. We're going to continue, as we called out in the guidance, continue to spend more there, but we think we'll be able to leverage that given the margin profile of our branded websites.

And so it will be a continued focus for us. We've made investments in the team. And then to Jason's point, too, we were pleasantly surprised by the results of the websites that put a little pressure on our distribution channels to get all that product out because we also saw a significant increase in drop shipments for our larger national accounts. And so we're going to be making investments this year to handle increased volumes for 2026.

Yes, John, I would just add, as we look at these brands, right, they are all very different and they're all very similar, they're footwear, right? But they're all very different and they're all kind of going after a little bit of different market. And so when we see success, for example, I think I talked about in my script on the Georgia Boot BOA series, we are seeing some serious success with that product.

And so we are being a little more focused on where we are targeting. And so maybe not spending as much time on the whole brand, but more what is being successful within that brand. But when you have something like XTRATUF that it just seems to all be working, then we're definitely spending and focusing a little bit differently there.

Great. Maybe last one for me. Tom, I think I heard you say flat gross margin for 2026 despite the tariff headwinds. Could you just confirm I heard that. And then how are you thinking about the offsets and the timing to tariffs? And any updated thoughts going forward here? Could lower rates be a slight tailwind at some point relative to the higher tariffs in the base here now as we go forward? Just any updates on the tariff situation?

Yes. So you did hear us correctly. So if you think about -- as we -- with all the changes that happened Friday and Saturday, there were a significant amount of tariffs already inventory received, i.e. the tariffs paid, right? And so those expenses are going to continue to flow through our P&L to the tune of about $10 million in the first half of the year.

We have modeled our margin based on this new 15% that the administration announced on Saturday. We haven't seen the executive order for 15%. We've only seen the executive order for 10%. So we'll continue to monitor that. And so we are going through the process, much like we did several times last year of evaluating where product is being sourced from and making sure we're sourcing it in the best location possible. Our overall strategy remains unchanged. We're still going to continue to leverage our own manufacturing facilities.

We still think we have a meaningful competitive advantage compared to our peers because of that. And so we'll be able to be more nimble than most of our peers there. As we continue to monitor what happens with tariffs, we have assumed that these tariffs, this incremental 10% or 15%, however you want to look at it, is staying in place for essentially the rest of the year. We feel like the administration is going to find another method, maybe Section 301 to continue to keep tariffs in place past that 5-month deadline. And so if you think about, too, with us historically carrying about 6 months of inventory on our books, if the tariff rates do change in August, we won't see that benefit until 2027.

Big picture, I think as the administration looks through other levers to implement tariffs, I don't think the focus of the administration will be on the Dominican Republic. So we think that still is a big competitive advantage of ours as we move throughout the year and get past this 150-day window on the Section 122. But we'll continue to update everyone as we move through the year, but there's still some unknown. And obviously, if we've learned anything over the last couple of years is that things change pretty quickly on us. So we'll continue to stay on top of it.

And next, we'll hear from Janine Stichter with BTIG.

You've got Ethan on for Janine. Congrats on the strong results. I was wondering if -- I was just wondering if you could elaborate a little on how the business has been trending year-to-date across your brands? And then anything to call out on the health of the consumer or macro environment in general that's changed over the first couple of months of the year compared to when you last reported?

So I mean, as it relates to 2026, I think we've continued to see this momentum carry forward. We have also benefited from weather in the first part of this year. And so we're anticipating that, obviously, weather will normalize as we get out of winter here, but the same successes that we've seen in 2025 are carrying forward in 2026. And that's both through wholesale and through our retail or e-commerce business, particularly.

If we look at our order book for spring 2026, we are up pretty much across the board with all brands. And so we're feeling good about that. Our feedback that we've heard back from our spring '26 product is extremely positive. And so hopefully, it will get to retail here. It's starting to get to retail now. So we'll check and make sure how that moves through the channel. From a macro perspective, I mean, we have not seen a significant change in our consumer. We are well aware of the increase in tax refunds. I think it's on average about 14% that people are seeing this year. We will certainly hopefully benefit from that as most brands would, but we'll continue to monitor that as well.

That will conclude the question-and-answer session. I would now like to turn the floor back to Jason Brooks for closing remarks.

Great. Thank you very much. First, I'd like to just say thank you to the entire organization. Everyone has worked really hard in 2025 to make it the best it could be. And I want to thank you personally for that. I'd also like to give a special thanks out to our sourcing team and our factories.

They had a ton of stuff thrown at them this year, and they really did an exceptional job to make 2025 happen. Thank you to our shareholders and our continued support along with our Board of Directors. And we are excited about 2026 and beyond, and let's go.

Thank you. That will conclude today's call. We thank you for your participation. You may now disconnect your lines.

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, ADB Sports was the best-performing collection.

Camo continues to be in high demand across our men's, women's and kids offerings, demonstrating strong consumer performance for these designs. We were encouraged that the strong sell-through was broad-based with notable gains coming from big box sporting goods stores, traditional coastal retailers, pure-play e-commerce retailers and online marketplace. We are excited about the XTRATUF prospects for the fourth quarter and with the launch of our cold weather collection, a Sesame Street collaboration for holiday at retail and online, plus several exciting xtratuf.com exclusives.

Turning to Muck. Coming off one of the strongest Q2 in years, the brand continued its positive trajectory in Q3 despite less favorable weather compared with the year ago period. Improved inventory positions, particularly in best-selling chore styles, combined with initial deliveries of our successful Bone Collector collaboration in the hunting channel fueled double-digit growth in our U.S. wholesale business and meaningfully higher in our marketplace volumes. Also adding Mucks performance and brand awareness was a highly successful feature on Good Morning America's Deals & Steals event over Labor Day weekend.

Our women's business continues to be strong performance, led by the Muckster II Chicken Print series, while men's also had notable success in several regions. In terms of the channels, new product expansion fueled growth in the hardware stores, while our Farm and Ranch segment saw solid growth with multiple key retailers. As we anticipated, Durango sales were down year-over-year in Q3 as some key accounts pulled forward orders into Q2 ahead of the planned price increase we took to help offset higher tariffs. This was particularly offset by the consistent and steady growth Durango has experienced throughout this year in our Farm and Ranch accounts. Product highlights include Durango Shyloh series, which continues to gain traction with consumers, thanks to the great styling, great quality and attractive price points.

Our Legacy [indiscernible] series continue to sell through well at retail and our on-trend women fashion collection have proven extremely popular leading into increased placement for these series. Georgia Boot delivered solid growth in the quarter, led by double-digit gains with major accounts and strong results in our field account business. This strength was driven by our largest Farm and Ranch accounts and e-commerce-only partners, supporting by successful new product launches and legacy bestsellers. New product launches were led by our Carbon Flex Wedge, a technology wedge with improved flexibility that books so successfully, we are launching a version in November featuring the BOA lace and closure system. Field business followed similar patterns with new products, driving increases across most regions, compensation for mixed retail conditions in some areas.

Rocky Work, Outdoor and Western in total was up versus last year, led by gains in the work and outdoor categories. Work was driven by new or expanding distribution across the country, including a new work program with a large Farm and Ranch retailer across the mountain and Northwest region, led by several styles with the BOA lacing and closure system. Rocky Work also continued to sell well in key national safety footwear distributors plus multiple digital platforms. In Outdoor, it was improved distribution nationwide with new and larger programs at key Farm and Ranch retailers and sporting good partners that fueled the year-over-year improvement.

Within these channels, our new Wildcat series of hunting outdoor boots delivered great value at core price points, while premium BearClaw outdoor boots reinforced Rocky's leadership in performance footwear. While Rocky Western sales declined year-over-year, our heightened focus on Work Western products, particularly our Iron Skull Safety Toe Western pull-on is driving gains with several regional and national brick-and-mortars and online. Rocky commercial military and duty posted its second consecutive quarter of improved results. Commercial military sales were up versus last year and exceeded plan as our strategic inventory management enabled us to maintain higher fill rates throughout the quarter.

Duty also outperformed expectations, driven by strong gains with our largest U.S. Postal Service customer and continued double-digit growth in our Fire Boot program. In retail, our BI B2B business grew high single digits versus Q3 last year. We continue making operational improvements to our custom fit website and launched our new partnership with [indiscernible] Eyewear for prescription safety eyewear through our managed PPE program. Customer spending remained consistent with good subsidy utilization and new customer acquisition remains strong, more than offsetting impacts from supply chain and tariff uncertainty.

Looking ahead, our view in the remainder of the year is based on the momentum we are currently experiencing with our brands, especially XTRATUF, balanced with the operate level of cautious about the broader consumer environment and the anticipated impact on the fourth quarter gross margins from the higher tariffs. While there is still uncertainty with respect to the outcome of certain trade negotiations, we feel good about the changes we've made to our supply chain, in particular, the increased flexibility we have to shift sourcing and production if needed. And therefore, we are anticipating that the headwinds from higher tariffs implemented this year will abate midway through 2026. With that, I will turn the call over to Tom. Tom?

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 higher outbound logistics costs and selling costs associated with the increase in our direct-to-consumer business as well as an increase in our marketing investments compared with the year ago period. Income from operations increased 16.5% to $11.7 million or 9.6% of net sales compared to 10.1% [Technical Difficulty] of sales last year. On an adjusted basis, income from operations was $12.4 million or 10.1% of net sales compared to $10.8 million or 9.4% of net sales a year ago.

For the third quarter of this year, interest expense was $2.6 million compared with $3.3 million last year. The decrease in interest expense was driven by lower debt levels as well as lower interest rates. On a GAAP basis, net income was $7.2 million or $0.96 per diluted share compared to net income of $5.3 million or $0.70 per diluted share in the third quarter of 2024. Adjusted net income was $7.8 million or $1.03 per diluted share compared with $5.8 million or $0.77 per diluted share a year ago.

Turning to our balance sheet. At the end of the third quarter, cash and cash equivalents were $3.3 million and our total debt net of unamortized debt issuance costs totaled $139 million, a decrease of 7.5% since September 30 of last year. Inventories at the end of the third quarter were $193.6 million, up $21.8 million or 12.7% compared to $171.8 million a year ago. Of the approximate $22 million increase in inventories year-over-year, about $17 million or nearly 80% is attributable to higher tariffs, a small increase in pairs on hand and the remainder in raw materials as we are now producing more footwear in-house.

Of the approximate $17 million from incremental tariffs on our balance sheet, roughly $10 million will flow through our P&L in the fourth quarter with the rest hitting in the first half of 2026. As we've touched on, we have taken actions this year to mitigate the impact of higher tariffs that started to pressure margins in Q3 and will intensify for the next few quarters, offset by price increases. We are also -- we also made significant changes to our sourcing model. These include shifting more production to our own facilities in the Dominican Republic and Puerto Rico and diversifying the geographic footprint of our third-party manufacturing to reduce our exposure in China.

For 2026, we project that we'll manufacture approximately 50% of our inventory needs in-house, up from approximately 30% in 2025. Approximately 20% will be produced in China. However, only half of that or 10% of the total will be imported into the United States. The other 30% will be split between partners in Vietnam, Cambodia, Dominican Republic and India. We anticipate our actions will allow us to return gross margins to the recent run rate in the high-30s, low-40s percent range in the second half of next year as we move through the incremental tariffs currently on the balance sheet. With respect to our outlook, based on the third quarter performance and current view of the remainder of this year, we are reiterating our prior guidance for 2025.

We still expect revenue to increase between 4% to 5% compared to 2024 levels with full year gross margins down approximately 70 basis points to between 38% and 39%, consistent with our previous outlook. SG&A is still expected to be up in dollars from an increase in our marketing spend to support growth, especially during the key holiday season and higher logistics costs from the projected increase in retail sales with modest expense leverage versus last year on higher sales. Finally, we still expect 2025 EPS to increase approximately 10% over last year's $2.54. That concludes the prepared remarks. Operator, we are now ready for questions.

[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.