Is it Too Late to Step in on Rocky Brands?

In true Rocky Balboa fashion, Rocky Brands (NASDAQ:RCKY) has picked itself off the mat and staged a remarkable comeback. Since the pandemic landed an uppercut and sent the stock below $20 for the first time since 2018, Rocky Brands has more than tripled.

The Ohio-based footwear company has been kicking butt over the past 12 months thanks to a string of knockout earnings reports and prospects for continued growth. After a strong start to fiscal 2021, Rocky Brands is now trading at an all-time high above $60. Is it too late to try on for size? 

What Does Rocky Brands Do?

Rocky Brands is a lesser-known consumer discretionary company, yet it has been making premium footwear, apparel, and accessories for almost 90 years. Its history on the public stock exchange dates back to 1993.

Its portfolio of in-house brands caters to a range of blue-collar customers from construction workers and outdoorsmen to military personnel and country-western types. In addition to its popular Rocky, Durango, Lehigh, and Georgia Boot products, it sells Michelin footwear through a licensing agreement. Yes, this is the same Michelin makes tires—and, in fact, the technology used to make the tires is the same used to make Michelin shoe soles.

Over the years, Rocky Brands has added to its brand lineup by reaching into unexpected corners of the corporate world. Earlier this year, it acquired Honeywell International's footwear business for $230 million. It is best known for The Original Muck Boot Company brand and owns a leading outfitter for the commercial fishing market called XTRATUF that Alaskan fishermen have been sporting for decades. The deal will significantly boost to Rocky's performance footwear lineup, sales, and is expected to be immediately accretive to earnings.  

How Did Rocky Brands Do in 2021 Q1?

On the heels of three consecutive big earnings beats, Rocky Brands was at it again to kickoff fiscal 2021. The company reported record first-quarter numbers that included 57% year-over-year revenue growth to $87.7 million. The wholesale business did particularly well growing sales 69% while the recovering retail business notched 42% growth. Sales in the much smaller third segment, Military, were up 16% to $4.4 million.

Adjusted net income was soared 344% to $8.7 million and adjusted earnings per share (EPS) came in at $1.19. This was the result of an impressive 5.4% gross margin expansion to 40.1%. It was also encouraging that Rocky Brands' largest segment, Wholesale, experienced the largest margin expansion.

To be fair, however, Rocky Brands faced an easy comparison in Q1 given the impact of COVID-19 on the first quarter of 2020. The pandemic forced the temporary closure of the company's manufacturing facilities and led to a $1 million operating expense.

Nevertheless, both the top and bottom-line results trounced analysts' forecast of $71.3 million in revenue and adjusted EPS of $0.59. This along with management's upbeat tone drove the stock up 15% as of midday Cinco de Mayo trading.

 Is Rocky Brands Stock a Buy?

Its hard not to like Rocky Brands. Not only does it have a strong, growing portfolio of high-quality footwear brands, but the company is shareholder-friendly. It pays a 2% dividend, an uncommon yield for a company its size (~$380 million). Management also recently announced a new $7.5 million stock buyback program that will take the place of the one that just expired.

With this said, Rocky Brands is getting a bit overheated. The stock is up more than 120% year-to-date compared to 21% for the S&P 600 small-cap index. It has also stretched outside the upper Bollinger band, an area that has historically been followed by a correction. Investors should therefore look for a better entry point on this one. Another low volume pullback like what we saw prior to this week's earnings would be an ideal time to jump in.

But there isn't a need to be too picky with the entry point here. That's because Rocky Brands is still inexpensive at roughly15x forward earnings. This is considerably below the footwear and apparel industry average of 23x.

The two sell-side analysts that cover Rocky Brands both reiterated their ratings post-earnings, one being a buy, the other a hold. Their $65 and $68 price targets, however, suggest limited upside from here and confirms what the technical picture says about finding a better entry.

Rocky Brands in the low to mid $50's would be a good time to step into the ring and ride a comeback Sylvester Stallone would be proud of.