Rocky Ventures into Emerging New Categories

Entrenched in the hunting, work and military markets, David Sharp, CEO of Rocky Brands, discusses the company’s ventures into emerging new categories and the significant growth opportunities they now present.
Some markets are mature, like hunting and western. Others have taken a heavy hit from a lingering recession, like work boots. And the demand for military footwear can often ride the level of our country’s engagements around the world, which is never predictable and, of late, have been winding down. Taking all these factors into consideration, one can plainly see that Rocky Brands has been faced with challenges for growth the past several years. The fact that the Nelsonville, OH-based company has largely been able to maintain sales overall—while reducing operating expenses significantly—is nothing short of impressive. Nonetheless, CEO David Sharp knew the company’s position did not present long-term growth prospects so, beginning a couple years ago, it embarked on several new initiatives that are beginning to pay dividends this year.

“It’s been tough for us to move the needle, because we’re in markets that have been contracting the last few years,” Sharp confirms. “But that made us become very introspective about how we could grow the business organically.” The cornerstones of that organic growth plan are this year’s debuts of the Rocky S2V outdoor performance brand and Rocky 4EurSole that targets nursing professionals. The push also includes the company’s ongoing makeover of Durango from a western staple into a lifestyle-driven women’s fashion brand.

So far so good, Sharp reports, on all three fronts. S2V, which first hit stores in December, is not just another me-too collection of earth-toned trail runners and hikers. For starters, it’s climate-mitigating footwear and apparel designed to keep people dry and warm, or cool, depending on conditions. Even bigger news, thanks to an exclusive partnership with Ultimate Survival Technologies, is the lifesaving tools integrated into S2V designs. How about a fire starter built into the heel of S2V’s Substratum hiking boot? Or fuchsia colored insoles for signaling, military-grade paracord laces and outsoles that are crampon and snowshoe compatible. S2V apparel includes a compass, signal mirror, whistle, emergency blanket, medical kit and even a saw built into the items. It’s the type of survival gear desperately needed by James Franco’s character in the movie 127 Hours—products that enable the wearer to not only enjoy the great outdoors but also survive them if conditions suddenly take a turn for the worse.

In fact, Franco’s character, based on real-life canyoneer Aron Ralston, fits S2V’s target consumer to a tee—people that are into such outdoor sports as climbing, adventure racing, mountain biking and paddling. “It’s really aimed at millennials,” Sharp says, citing what is now the nation’s largest demographic group. “These consumers really push themselves and go out every weekend looking for new conquests and things to brag about. They’re into apparel and equipment that helps them and mitigates the risks that they are taking.”

S2V is receiving a solid response from its targeted outdoor specialty space, Sharp reports. “That’s where we want to be right now, these mom-and-pop-type expert stores,” he explains. “The person on the selling floor is often the owner and is looked to for advice on products by this consumer. It will drive credibility for our brand.” Sharp adds it’s how a lot of millennials like to shop and discover brands. “This customer wants authenticity and integrity. They don’t really respond to national advertising,” he says. “They want to know from their buds whether this item really performs.” As such, S2V is also embarking on an extensive product placement program, getting it on experts so they can become evangelists.

Similar to S2V, Rocky 4EurSole targets another rapidly emerging market in nursing and, once again, does so by going beyond the ordinary clog that’s worn by many healthcare professionals. The design features a unique three-shoes-in-one concept. Built on a PU unit sole, a strap atop the clog’s vamp can swivel and turn it into a slingback. And while Sharp admits that there’s nothing very special about that, it also comes with two removable inserts, one of which features a heel extension that turns it into a full shoe. “A woman can wear it as either a clog, a slingback or a full shoe,” Sharp says, noting the shoe, straps and inserts all come in a wide array of colors and patterns. This variety allows consumers to further customize their shoes—a fact, Sharp notes, appeals to a lot of nurses whose shoes are the only way to make a fashion statement in their uniforms.

The 4EurSole market research also revealed that nurses often wear sneakers, which aren’t durable enough, or clogs, with complaints of twisted ankles and the shoe’s weight and inflexibility. “We observed them using their feet as tools—kicking doors open and putting on gurney brakes,” Sharp says. “And they are often working on hard tile floors and around a lot of fluids.” As such, Rocky incorporated its Lehigh safety footwear brand’s non-slip outsole into the 4EurSole design as well as addressed durability and comfort in a lightweight, flexible construction that offers good arch support for people who are generally on their feet all day. Not to be overlooked is 4EurSole’s attractive demographics. “The healthcare industry is going to rocket over the next few years in terms of jobs,” Sharp reports, citing one forecast of 3 million more jobs created by 2018. “Those jobs are 80 percent women and many of them have a nice discretionary income,” he adds. Moreover, many women admire nurses, which Sharp believes should help foster 4EurSole’s extension into the women’s casual market in the coming seasons.

For Rocky Brands, successful expansion into the women’s market is arguably its Holy Grail. Which brings us to Durango’s ongoing transformation into a women’s lifestyle brand. For some reason the brand’s former owners, EJ Footwear, had shed its biker boot collections, which were particularly popular along the I-95 corridor, in favor of a more western focus. The company’s research discovered that a lot of consumers still had those boots in their closets and the trade still respected the brand’s potential in that segment. Thus Durango’s new positioning, dubbed “Outlaw Fun,” was launched a couple of seasons ago. Aimed at a younger, self-confident woman who wants to make a fashion statement, the initial results have been highly encouraging. “Durango experienced a 52 percent increase in sales last year overall, which was split 60 percent fashion to 40 percent core western,” Sharp reports. “That’s phenomenal when you take into account the overall economic climate.” The growth includes new channels of distribution, which should expand further when the brand introduces leather jackets and accessories this fall.

Durango, S2V and 4EurSole all present significant organic growth opportunities for Rocky Brands going forward. The company’s period of introspection looks to have been well worth the effort. “All three growth vehicles are not weather-dependent or focused on males, yet they are just baby steps from our core competencies,” Sharp explains. “We didn’t want to go down a road that our brands might not be welcome in or that we didn’t have the competencies internally.” Not to be overlooked in all of this is the fact that 2013 is off to a heady start in Rocky Brands’ core businesses as well. It was recently awarded a military contract that could mean as much as $15 million to its top line and a private label program in hunting could add another $10 million. “That’s 10 percent growth on a business that’s overall around $250 million,” Sharp says. What’s more, the housing market is showing signs of life that should have a positive impact on work boot sales. “As the economy improves—and we believe that it’s going to this year more than last—it’s highly likely that we’ll do more work boot business than last year,” Sharp says. Add it all up and one can see why Sharp is very optimistic about 2013 and beyond for Rocky Brands: “I believe we are now in a position to where we are going to see solid growth.”

Would you say Rocky Brands has officially entered into a new phase?
Yes. We are embarking on the next phase of our growth, both organically and, once we find the right brand, through acquisition. Looking back on the EJ acquisition, the first couple of years of any merger are the toughest, particularly since EJ was bigger than us. And then 2008 hit, so that didn’t help. But over the past five years we’ve taken out 27 percent of our SG&A expenses and our inventories are down 17 percent. We also improved our margin percentages and net profits nicely—all while holding our top line sales steady. We also converted our Lehigh safety footwear retail trucks platform into a web-based model that is now very profitable. Lastly, we borrowed $100 million to do the transaction and in 2006 and 2007 our interest payments were north of $10 million annually. In 2012 it was less than $1 million and, by the end of this year, we should be out of debt.

It must be more fun working in this type of environment, right?
This is a lot of fun right now, and not just for me but for everyone involved. People see the opportunities we now have.

Even in work boots and hunting?
Despite all of the pessimism regarding the economy and how it’s growing in fits and starts, it is growing. Certainly, the housing market is improving and there has been very favorable news in the real estate market during the last 60 days. So we believe there is potential for improvement in the work boots market. But it should be noted that on top of the lingering unemployment of the past few years, the fact is that 75 percent of our business is currently in work boots and hunting, where a lot of our constituency is blue collar and the unemployment rate is actually much higher. So that’s what made us become very introspective and to think about ways we could grow the business organically.

Well, if that guy finds a job, perhaps he can more afford to take a hunting trip. Is there reason for optimism in that segment as well?
The hunting market is tough. When I joined Rocky in 2000 there were only a few dominant players in that space at retail. Cabela’s had one store and a catalog and Bass Pro Shops probably had three or four stores and a catalog. Today, they both have many superstores. As a result a lot of mom-and-pop stores have fallen by the wayside around those locations. And the aspect that is most dominant in those stores is private label. So, in effect, our largest customers in that space have become our largest competitors. And I say that affectionately because those outlets need Rocky to validate their price points because ours is the premier brand. That’s why we continue to innovate in that space to maintain our premium position. And while consumers are responding to our efforts, compounding the difficulties in hunting the last couple of years has been the weather. We need it to be cold and wet when the hunting season starts in late September and early October, and we haven’t had that. In fact, this past season it didn’t really get cold and wet in most of the country until mid-December, which is too late.

Has the climate changed to a point that you have to change your approach to how product is designed?

That’s exactly what we are doing. For example, we are focused on building the lightest, most flexible product that is warm but without all the bulk that you would normally see in previous models. We are also introducing features that make the boots really quiet so the wearer can be stealth on dry leaves. Those types of design initiatives help maintain Rocky’s leadership role in hunting.

Along those lines of innovation, exactly how did the S2V concept come about?
We have a long history of working with the U.S. military and we are particularly proud of a boot (the S2V) that was developed especially for the Navy SEALs. They had requested a boot for amphibious landings and their charge to us was one that would go completely dry after being drenched in water in one hour, which this boot achieves. Last year we sold $20 million in that style to the U.S. military after market. But, frankly, we were never successful in connecting Rocky with the guy who doesn’t hunt but likes the outdoors. That’s why we believe incorporating S2V’s survival components and connecting the brand on the level of what we have done for the U.S. military will resonate far better.

It’s a target customer who is younger and most likely more white collar, and it’s a much bigger demographic than hunting. What’s not to like?
You are absolutely right. It’s an overall market that is many, many times larger than hunting. And participation in activities like adventure racing, orienteering, mountain biking, paddling and climbing are all growing significantly. Climbing, in particular, grew almost 25 percent between 2008 and 2010. If we get S2V in the right outlets and get a buzz going, I believe we could be a major player. It’s right in our wheelhouse in terms of what we’ve done for the hunting and U.S. military markets. We are in it for the long haul, because if we can get cache in this market it should give us license to extend the Rocky S2V brand into casual outdoor footwear as well.

Is that a similar strategy for Rocky 4EurSole?
Yes. I’m very optimistic this business will expand our presence with female nurses initially as well as going forward, with the introduction of casual styles. We will begin shipping shoes in early May and the initial reaction from retailers has been very strong. We’ve been visiting with key accounts for the last six months and allowing some of their buyers to suggest a few design enhancements, which we’ve incorporated. The fact is, on average, women buy eight pairs a year while men buy only two pairs.

Hence, the Durango brand transformation into women’s lifestyle. 
Absolutely. And, right now, with no dominant trend in women’s, it presents opportunities for new brands and styles. I think the eclectic nature of fashion right now speaks to how confident this consumer has become in wanting to make her own fashion statement.

Is eclectic being the new black, so to speak, a good thing for the industry overall?
I believe this multi-faceted array that you are seeing right now is great for the business overall because it gets people in stores and buying more footwear. As long as you can discern what is going to be meaningful, you can be very successful as a wholesaler or a retailer. You just have to pick the trends that you can exploit. You can’t exploit every trend. If you do that, you’ll probably just dilute everything and you won’t have a place on the wall. But if you are really good at exploiting two or three trends, then you have more of a chance to be successful.

Perhaps the variety is a factor behind department stores and their launch of shoe meccas inside their flagships?
It’s a chicken or the egg scenario. They wouldn’t be building these shoe meccas if there wasn’t a demand. And a lot of the demand comes from our less-than-stellar economy, where it’s about men and women and their need for self-gratification. Footwear is a simple pleasure in a lot of respects. It’s an affordable accessory that can make a statement. Certainly, a lot of the women’s footwear is exactly that in terms of materials, colors and silhouettes. I think that’s the reason why footwear is trending so well right now. On that note, we introduced a new collection under the Durango brand called Rebelicious that combines a colorful sneaker-type bottom with a western upper. They have been booking really strong.

It’s no secret that utilitarian fashion, a.k.a. ugly chic, sells. 
It goes all the way back to the first Rockport shoes, which were butt-ugly but wildly successful. If something is so unusual or a little ugly, a real “shoe dog” believes it’s either going to be really bad or a breakthrough item.

Well, the world doesn’t need just another pump or wingtip.
Right. Fortunately for us, the last three years have seen a nice increase in boot sales overall, and we don’t see that slowing for this year. I think that while Ugg sales may be slowing, women are largely replacing it with a variety of other boot styles and not a pump or a sandal. That gives me more confidence that we can continue to grow Durango further this year.

How are you trying to make Durango stand out in what is the most highly competitive and crowded field?
Durango’s positioning as a head to toe story is helping us in that regard. The brand should penetrate on different levels and in different kinds of outlets, which should get the product exposed to more consumers overall. We have also launched an aggressive print and social media campaign around our new positioning. And we’ve participated in a couple of fashion events in New York. We were also one of the participants in Project Runway. In fact, the woman who won last season’s series used Durango harness boots in her final collection.

Where are you at with regards to adding an outside brand to the portfolio?
Now that the EJ acquisition has been fully integrated, our board just approved us to get into the hunt for another acquisition. But this time around we’re not looking for anything to double our size, rather something in the $20 million to $40 million range. And maybe it’s in the women’s market to complement what we are doing now with Durango and 4EurSole. Specifically, it’ might be something in women’s casual. Another criteria could be something that might help with our international footprint. Maybe it has a small business in the U.S. but is larger elsewhere. We don’t want anymore of the same. We have enough work boots, western and hunting space.

Is it slim-pickings?
We just started to look around. It’s a big universe and I believe there are plenty of interesting companies out there. Although, once you get into that $20 million to $40 million range the pie gets a little smaller. Hopefully, we’ll find one that makes a lot of sense for us. It’s not that easy of a process, but some companies have managed to do it very successfully like Wolverine and VF Corp.

Speaking of looking elsewhere, what’s your take on your current sourcing situation?
We just celebrated our 25th year of making shoes in the Dominican Republic. Three years ago, we were making 350,000 pairs a year there and this year we will make more than 1 million pairs, which is largely in our Rocky and Georgia businesses. We are very bullish on sourcing in the Dominican Republic as we are learning a lot of our competitors are. I think it helps mitigate issues we have with regards to sourcing in China. The other place we are looking at is India, not only as a sourcing partner but also a consumer market. We are getting some very good pricing from there right now. But we want to go slowly to make sure that we align with the right partners.

Aside from your military production, do you envision any U.S. manufacturing for Rocky Brands?
I get asked that question many times by people in the trade as well as by friends and relatives. It’s a wonderful feel-good story, but the fact is there are one-and-a-half man hours involved in making a pair of waterproof boots. So if we were to make that here that would be $18, whereas in China it’s more like $3. So is a U.S. consumer now paying $100 for a waterproof work boot willing to pay $150 for one made in the U.S.A.?

If it cost less than $25 there might be a customer base that believes employing Americans is a worthy tradeoff. Nevertheless, it’s interesting to see how, only a few years ago, people thought the industry would never leave China and that is surely not the case now.

The cut and sew industries are always going to seek out the lowest cost labor. And as long as the American consumer is focused on acquiring a lot of things versus fewer, more quality things, then country of origin is going to be important from a labor standpoint. I think it works when a smaller part of the total value of the item is in labor—like in automobiles and heavy equipment. But in footwear and apparel, where pennies and dimes have always been so important for competitiveness, country of origin remains key. Right now, frankly, I’m more concerned about the price of leather. There’s been another upward trend during the last 60 days where hides are more than $100. The meat consumption in developing counties like China and India isn’t accounting for the overall demand in leather for luxury items like cars, bags and shoes.

You’d think that being able to afford a pricey leather bag or a fancy car, they’d also enjoy a nice T-bone steak. They just don’t consume beef the way Americans do.

Where do you envision Rocky Brands in five years?
We are optimistic. We are around $250 million in sales today and we need to be much larger to remain competitive, so that’s our goal: to be a much larger company.

What do you love most about your job?
Working with the folks here, providing leadership and making this workplace the greatest place that it can be. It’s all good stuff.

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