Why Rocky Brands shares fell on Wednesday

What happened

Investors in rock marks (NASDAQ: RCKY) lost ground to a rising market on Wednesday. The stock fell 22% at 12:45 a.m. ET, compared to a 1.3% jump in the broader market. The decline has sent shares of the footwear and apparel specialist 23% so far in 2022, below the S&P500rhythm of the year.

It was triggered by management’s cautious comments on near-term earnings prospects.

So what

Rocky Brands said in an earnings report on Tuesday that sales rose 23%, reflecting strong demand across its portfolio. “We have not experienced a noticeable slowdown in sales” related to inflation or slowing economic growth, CEO Jason Brooks said in a press release.

Demand was strong at retail stores and in Rocky Brands’ warehouse division, executives said.

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

Now what

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

The risk is that these increases will hurt demand, so investors will want to monitor the balance between operating margin and sales growth through 2022. Rocky Brands inventory levels are also high and management is hoping reduce this risk over the coming quarters.

The weaker earnings picture is no reason to ditch Rocky Brands stock, especially as sales are up more than 20%. But due to 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.

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

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