Insights

Why Rocky Brands Stock Slumped on Wednesday

What happened

Investors in Rocky Brands (NASDAQ: RCKY) lost ground to a rising market on Wednesday. The stock dropped 22% by 12:45 p.m. ET, compared to a 1.3% jump in the wider market. The drop put the footwear and apparel specialist’s shares down 23% so far in 2022, back below the S&P 500‘s pace for the year.

It was sparked by management’s cautious comments about the short-term earnings outlook.

So what

Rocky Brands said in an earnings report on Tuesday that sales rose 23%, reflecting solid demand across its portfolio. “We didn’t experience any noticeable sales slowdown” tied to inflation or slowing economic growth, CEO Jason Brooks said in a press release.

Demand was strong in retail stores and in Rocky Brands’ warehouse division, according to executives.

Yet the earnings picture darkened. Gross profit margin fell to 33% of sales from 37% a year ago, and operating income landed at 3.5% of sales compared to 6.4%. Executives blamed higher costs, especially for freight and product transportation. Net income fell below $1 million compared to nearly $4 million a year ago.

Now what

Executives implied that the earnings pressure will ease over the coming quarters, in part thanks to another round of planned price increases.

The risk is that these hikes will hurt demand, and so investors will want to watch the balance between operating margin and sales growth through the rest of 2022. Rocky Brands’ inventory levels are elevated, too, and management is hoping to reduce that risk over the next few quarters.

The weaker earnings picture is no reason to abandon Rocky Brands’ stock, especially as sales are growing at over 20%. But due its small market capitalization, investors should expect to see large price moves like these, even around relatively small changes in the company’s growth expectations.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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