Executive Summary / Key Takeaways

• Strategic Resilience Amidst Headwinds: Rocky Brands (RCKY) delivered strong Q2 2025 results, significantly outperforming expectations with 7.5% revenue growth and a more than threefold increase in adjusted EPS, driven by a diversified brand portfolio, strategic sourcing shifts, and disciplined cost management.
• Manufacturing and Digital as Core Moats: The company's owned manufacturing facilities in the Dominican Republic and Puerto Rico, coupled with an aggressive digital marketing and e-commerce strategy, provide a crucial competitive advantage in mitigating tariff impacts and capitalizing on evolving consumer purchasing habits.
• High-Growth Brands and Retail Momentum: XTRATUF, Durango, and the Lehigh B2B business are key growth engines, with the Retail segment's sales surging 13.9% in Q2 2025, outpacing Wholesale and Contract Manufacturing.
• Proactive Tariff Mitigation: RCKY is rapidly reducing China-sourced volume (aiming for <20% by year-end 2025) and implementing strategic price increases to preserve gross profit dollars, with an inventory buffer providing flexibility.
• Upgraded 2025 Outlook: Management raised its full-year 2025 guidance, now expecting 4-5% revenue growth and approximately 10% EPS increase, signaling confidence in its strategic responses despite anticipated Q4 tariff impacts.

The Foundation of Footwear: Rocky Brands' Enduring Strategy

Rocky Brands, Inc. (RCKY) has evolved from its 1932 origins as William Brooks Shoe Co. into a diversified leader in premium footwear and apparel. Initially rooted in rugged Rocky Hunting Boots, the company's strategic journey has been marked by a relentless pursuit of diversification across work, outdoor, western, commercial military, duty, and military markets. A pivotal moment arrived in 2021 with the acquisition of The Original Muck Boot Company (Muck) and XTRATUF brands, igniting an "Outdoor transformation" that broadened RCKY's appeal beyond its traditional core. This multi-brand, multi-channel operating model has proven instrumental in navigating macroeconomic headwinds and dynamic market conditions, allowing the company to offset challenges in one segment with strength in another.

The competitive landscape for RCKY is populated by established players such as Wolverine World Wide (WWW), VF Corporation (VFC), Deckers Outdoor (DECK), and Columbia Sportswear (COLM). RCKY carves out its niche by emphasizing specialized, functional products designed for demanding environments, fostering deep brand loyalty among its target consumers. While larger competitors like Deckers Outdoor may exhibit more robust revenue growth and higher overall margins, RCKY's strength lies in its targeted market approach and operational agility, particularly in its response to supply chain pressures.

Operational Technology and Strategic Sourcing: RCKY's Competitive Edge

Rocky Brands' competitive moat is significantly reinforced by its operational technology and strategic sourcing capabilities, which stand as crucial differentiators in a volatile global trade environment. Unlike many peers heavily reliant on external third-party manufacturers, RCKY benefits from its owned manufacturing facilities in the Dominican Republic and Puerto Rico. These facilities, particularly the Dominican Republic plant with over 40 years of boot-making expertise, provide unparalleled flexibility and cost control.

This in-house capacity enables RCKY to rapidly shift production away from high-tariff regions, such as China, where approximately 50% of its footwear was sourced in 2024. Management aims to reduce China-sourced volume to less than 20% by the end of 2025, with some Chinese production redirected to international markets to avoid U.S. tariffs. This strategic pivot allows RCKY to maintain competitive pricing and ensure product availability, a tangible benefit that directly counters competitors facing higher sourcing costs and supply chain rigidities. The company anticipates doubling its rubber boot production volume from the Dominican Republic compared to 2024 levels, a significant advantage given the long lead times for such products.

Furthermore, RCKY's emphasis on digital marketing and its robust e-commerce platforms (including owned websites like rockyboots.com and georgiaboot.com, and third-party marketplaces) represents another key technological differentiator. This digital infrastructure facilitates direct-to-consumer engagement, targeted promotional strategies, and efficient inventory optimization. The ability to consolidate digital media buying, as demonstrated with the Muck brand, allows for nimble allocation of marketing spend to capitalize on the best return on investment, contributing to the higher gross margins observed in the Retail segment. These capabilities enhance RCKY's market positioning, allowing it to adapt swiftly to consumer trends and maintain a direct line to its customer base, a critical asset in today's evolving retail landscape.

Financial Performance: Resilience in Action

Rocky Brands' recent financial performance underscores the effectiveness of its strategic initiatives and operational agility. In the second quarter of 2025, the company delivered a compelling performance, with net sales increasing 7.5% to $105.6 million compared to $98.3 million in the prior-year quarter. This growth was broad-based, leading to a significant 230-basis point expansion in gross margin to 41.0% of net sales. Operating income surged 58.7% to $7.2 million, translating to adjusted diluted EPS of $0.55, more than tripling the $0.17 reported in Q2 2024.

The Retail segment emerged as a significant growth driver, with net sales climbing 13.9% to $29.7 million in Q2 2025 and 17.5% year-to-date. This robust performance was fueled by the Lehigh CustomFit business, which benefited from a Q1 2024 sales organization realignment, expanding its customer base and seeing improved subsidy utilization. Lehigh added 190 new accounts in Q1 2025 and over 200 in Q3 2024, demonstrating strong customer acquisition. E-commerce and third-party marketplace sales also saw an uptick, driven by increased digital marketing and competitive pricing strategies aimed at optimizing inventory. The Retail segment's higher gross margins, at 45.2% in Q2 2025, significantly contributed to overall profitability.

The Wholesale segment also showed strength, with net sales increasing 7.1% to $73.1 million in Q2 2025, driven by increased demand across key styles, favorable weather, and a stronger inventory position. Wholesale gross margin improved to 40.3% in Q2 2025, largely due to a favorable product mix, manufacturing efficiencies, and strategic sourcing shifts, particularly benefiting the rubber-boot brands. While Contract Manufacturing net sales decreased by 27.8% in Q2 2025 due to a lack of new U.S. Military contracts, the company secured three substantial U.S. Navy orders and earned a USMC hot weather boot certification, signaling potential for future growth.

Liquidity remains sound, with cash and cash equivalents at $2.8 million as of June 30, 2025. Total debt, net of unamortized debt issuance costs, decreased 13.1% year-over-year to $132.5 million, reflecting the benefits of the April 2024 debt refinancing and ongoing repayments. This reduced debt burden has significantly lowered interest expense, contributing to improved net income. The company also initiated a $7.5 million share repurchase program in February 2025, underscoring confidence in its financial health.

Strategic Outlook and Risk Management

Rocky Brands' forward-looking strategy is firmly centered on mitigating external pressures while capitalizing on internal strengths. The most significant challenge remains the U.S. government's additional tariffs on imported products, particularly from China, which is expected to impose an $11 million headwind on gross margins for the remainder of 2025. RCKY's response is multi-pronged: accelerating the shift of production to its owned facilities in the Dominican Republic and Puerto Rico, diversifying sourcing to Vietnam, Cambodia, and India, and implementing strategic price increases in early June 2025. An accelerated inventory build in H1 2025 provides a 6-7 month buffer, allowing time for these sourcing transitions to fully materialize, with the largest margin benefits anticipated in 2026.

Management has updated its full-year 2025 guidance, reflecting confidence in these mitigation efforts and recent performance. Revenue is now expected to increase between 4% and 5% over 2024 levels, an upgrade from the prior low single-digit forecast. Gross margins are projected to be down roughly 70 basis points from 39.4% in 2024, inclusive of the tariff headwinds but partially offset by pricing actions. SG&A is expected to increase in dollars due to marketing investments and higher logistics costs from growing retail sales, but modest expense leverage is now anticipated on higher sales. Crucially, 2025 EPS is now expected to increase approximately 10% over 2024's adjusted $2.54 per share, a significant improvement from the prior forecast of a slight year-over-year decline.

The second half of 2025 is expected to see stronger gross margins in Q3 compared to Q4, as management adopts a conservative view on Q4, anticipating the bulk of tariff impacts on pricing and costs to hit consumers and the P&L. This period will also include a sequential step-up in marketing spend to drive demand during the key holiday season. Risks include the unpredictability of future tariffs, potential consumer sensitivity to price increases, and the ongoing variability of weather conditions impacting demand for seasonal products. However, RCKY's diversified portfolio, operational flexibility, and strong brand momentum position it to navigate these challenges effectively.

Conclusion

Rocky Brands has demonstrated remarkable resilience and strategic foresight, transforming from a specialized bootmaker into a diversified footwear and apparel powerhouse. The company's core investment thesis is underpinned by its unique competitive advantages: a robust multi-brand portfolio, a rapidly expanding direct-to-consumer channel, and critically, its manufacturing flexibility through owned facilities in the Dominican Republic and Puerto Rico. These operational differentiators provide a significant moat, enabling RCKY to proactively counter global trade uncertainties and manage costs more effectively than many peers.

The upgraded 2025 guidance, projecting 4-5% revenue growth and a 10% increase in EPS, signals management's confidence in its ability to execute tariff mitigation strategies and sustain momentum in high-growth brands like XTRATUF and Durango. While challenges such as tariff unpredictability and consumer demand sensitivity persist, RCKY's strategic sourcing shifts, digital marketing prowess, and disciplined financial management position it for continued profitable growth. The company's ability to leverage its operational technology and diversified market approach will be paramount in solidifying its competitive standing and delivering long-term shareholder value.