ROCKY SHOES & BOOTS, INC.
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
July 15, 2005
VIA EDGAR AND OVERNIGHT COURIER
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Michael Moran, Esq.
Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
Mail Stop 3-8
100 F. Street, N.E.
Washington, D.C. 20549
Re: Rocky Shoes & Boots, Inc.
File No. 0-21026
Form 10-K for the fiscal year ended December 31, 2004
Form 10-Q for the fiscal year ended March 31, 2005
Dear Mr. Moran:
We have received your additional comments to the annual report on Form
10-K for the fiscal year ended December 31, 2004, filed by Rocky Shoes & Boots,
Inc. (the "Company"), as set forth in your letter to the Company dated as of
June 15, 2005. For your convenience, we have repeated the text of your comments,
followed by our response.
We respectfully respond to your comments as follows:
Form 10-K for the Year Ended December 31, 2004
1. WE NOTE YOUR RESPONSE TO COMMENT 4 OF OUR LETTER DATED MAY 13, 2005.
PLEASE PROVIDE TO US YOUR ANALYSIS WITH RESPECT TO THE INCOME STATEMENT
CLASSIFICATION REGARDING YOUR CO-OPERATIVE ADVERTISING PROGRAMS. PLEASE
BE SPECIFIC REGARDING EACH PROGRAM YOU HAVE WITH EVERY CUSTOMER. SEE
PARAGRAPH 9, AND THE EXAMPLES INCLUDED WITHIN APPENDIX A OF EITF ISSUE
01-9.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company recognizes co-operative advertising as a
cost because it meets both of the conditions required, as outlined in
paragraph 9 of EITF 01-9, to be characterized as a cost and not as a
reduction of revenue.
Letter to Michael Moran
July 15, 2005
Page -2-
Paragraph 9 of EITF 01-9 states:
That presumption is overcome and the consideration should be
characterized as a cost incurred if, and to the extent that,
both of the following conditions are met:
a. The vendor receives, or will receive, an identifiable
benefit (goods or services) in exchange for the consideration.
In order to meet this condition, the identified benefit must
be sufficiently separable from the recipient's purchase of the
vendor's products such that the vendor could have entered into
an exchange transaction with a party other than a purchaser of
its products or services in order to receive that benefit.
b. The vendor can reasonably estimate the fair value of the
benefit identified under condition (a). If the amount of
consideration paid by the vendor exceeds the estimated fair
value of the benefit received, that excess amount should be
characterized as a reduction of revenue when recognized in the
vendor's income statement.
The Company's co-operative advertising programs fall into two
classifications:
o Larger customers receive a co-operative allowance of 2% of
annual sales, plus allowances for special events, as approved
in advance by the Company. To qualify for the allowance,
advertising must be "brand building", in the judgment of the
Company, and is subject to the final approval of the Company.
Approximately, 10 customers participate in this program, and
agreements are oral.
o Smaller customers, referred to as Rocky Gear Outfitters,
receive a co-operative allowance of 2% of annual sales. To
qualify for the allowance, advertising must be "brand
building", in the judgment of the Company, and is subject to
the final approval of the Company. Approximately, 150
customers participate in this program, and agreements are
oral.
In order to qualify for co-operative advertising programs, the customer
is required to provide proof of valid advertising that evidences the
brands advertised, and information regarding the actual advertising
costs paid by the customer.
The Company believes its co-operative adverting programs overcome the
presumption that co-operative advertising costs should be reported as a
reduction of revenue. The Company receives an identifiable benefit
because the customer is required to advertise a branded product of the
Company. The fair value is reasonably estimated because the Company
requires proof of the amount of adverting costs incurred by the
customer. Therefore, the Company believes that it is appropriate to
record co-operative advertising costs as an expense.
The Company records the actual amount of advertising costs as
advertising expense included in selling, general and administrative
expenses in the statement of income. Accrued co-operative advertising
due to customers at the end of any reporting period is reported as a
current liability. Estimated co-operative advertising costs for volume
related programs are accrued as the related sales occur.
Letter to Michael Moran
July 15, 2005
Page -3-
2. WE NOTE YOUR RESPONSE TO COMMENT 14 OF OUR LETTER DATED MAY 13, 2005.
IT APPEARS THAT YOU ARE REVIEWING PERFORMANCE BASED ON BRANDED
FOOTWEAR, BRANDED ACCESSORIES, AND MILITARY SALES. ALSO, YOU ARE
REVIEWING PERFORMANCE SEPARATELY FOR SOURCED AND MANUFACTURED FOOTWEAR.
FURTHERMORE, YOU ARE ASSESSING PERFORMANCE OF THESE BUSINESS ACTIVITIES
SEPARATELY AGAINST THE PRIOR YEAR PERFORMANCE, AND BUDGET. PROVIDE TO
US YOUR ANALYSIS WITH RESPECT TO OPERATING SEGMENTS REGARDING THESE
BUSINESS ACTIVITIES. THE FACT THAT YOU REVIEW OPERATING EXPENSES IN
TOTAL SHOULD NOT PRECLUDE YOU FROM CONSIDERING WHETHER YOU HAVE
SEPARATE OPERATING SEGMENTS. ALSO, DESCRIBE HOW YOUR GENERAL LEDGER
SYSTEM IS CODED, FOR EXAMPLE, EXPLAIN IN DETAIL IF YOU MAINTAIN
SEPARATE ACCOUNTS TO TRACK OPERATING EXPENSES FOR THE BUSINESS
ACTIVITIES MENTIONED ABOVE. SEE PARAGRAPH 10 OF SFAS NO. 131. WE MAY
HAVE FURTHER COMMENT.
RESPONSE:
The Company acknowledges the Staff's comment and respectfully advises
the Staff that it has given further consideration and performed
additional analysis of the information provided to the chief operating
decision maker. The Company has also further reviewed and considered
the provisions of FAS 131, paragraph 10. Based on this analysis, the
Company has concluded that it has eight operating segments. As
discussed more fully below, the Company proposes to disclose three
reportable segments. Each segment meets the requirements of FAS 131,
paragraph 10, in that:
o the business activity earns revenues and incurs expenses,
o the operating results are reviewed regularly by the chief
operating decision maker, and
o discrete financial information is available.
The eight operating segments are as follows:
o Branded footwear - Rocky manufactured
o Includes all footwear, except the Wildwolf branded
footwear that is manufactured by the Company.
Customers consist of several classifications of
retailers including sporting goods stores, outdoor
specialty stores, mail order catalogs, independent
retailers, mass merchants, retail uniform stores, and
specialty safety shoe stores. Note that certain
manufactured products are also included in the
military and the retail operating segments.
o Branded footwear - Rocky sourced
o Includes all footwear, except the Wildwolf branded
footwear that is sourced to unrelated manufacturers.
Customers consist of several classifications of
retailers including sporting goods stores, outdoor
specialty stores, mail order catalogs, independent
retailers, mass merchants, retail uniform stores, and
specialty safety shoe stores. Note that certain
sourced products are also included in the retail
operating segment.
o Branded footwear - Wildwolf
o Includes footwear, which may be sourced or
manufactured, of the Wildwolf brand and sold
principally to one retail customer (Wal-Mart).
However, Wal-Mart also purchases branded accessories,
and the Wildwolf brand is offered to all retail
customers.
Letter to Michael Moran
July 15, 2005
Page -4-
o Branded accessories - Rocky apparel
o Includes all apparel sold by the Company, without
regard to brand, all of which is sourced. Customers
consist of several classifications of retailers
including sporting goods stores, outdoor specialty
stores, mail order catalogs, independent retailers,
and mass merchants.
o Branded accessories - Gates Gloves
o Includes all gloves of the "Gates" brand name, all of
which is sourced. Customers consist of several
classifications of retailers including sporting goods
stores, outdoor specialty stores, mail order
catalogs, independent retailers, and mass merchants.
o Branded accessories - Other
o Includes other miscellaneous accessories such as foot
warmers and laces, all of which is sourced. Customers
consist of several classifications of retailers
including sporting goods stores, outdoor specialty
stores, mail order catalogs, independent retailers,
mass merchants, retail uniform stores, and specialty
safety shoe stores.
o Retail
o Includes all sales from the Company's two retail
stores, without regard to brand or as to origin
(i.e., manufactured or sourced).
o Military
o Includes all sales to the U.S. military, all of which
is manufactured.
Branded products (including footwear and accessories)
Based on the above operating segments, the Company has considered the
aggregation guidance in FAS 131, paragraph 17. As to the operating
segments of branded footwear and branded accessories, the aggregation
criteria are as follows:
Nature of the products
All the operating segments for branded products consist of
individual wearing apparel. These products include footwear,
gloves and articles of clothing worn by individuals such as
hats, shirts, pants, socks, jackets and similar products.
Nature of the production processes
The Company's development staff oversees the development and
testing of all branded products, whether manufactured by the
Company or sourced to third parties for manufacture. The
production processes used to produce all branded products are
substantially the same. The principal raw materials, leather
and cloth, are cut and sewn based on patterns developed by the
Company. A substantial number of products in all categories
use GORE-TEX waterproof material. Machinery used to produce
the products is typical for the type of product produced.
While certain products are manufactured and other products are
sourced to other manufacturers, the same production processes
are used by both. In addition, certain products may be
manufactured on some occasions, and sourced on other
occasions, depending on customer requirements, costs and other
factors. The Company has quality control personnel at all
plants that produce its products, whether its own
manufacturing or sourced.
Letter to Michael Moran
July 15, 2005
Page -5-
Type or class of customer for their products
Branded products are sold to retailers who sell the products
to the end user. The Company offers its various branded
products to various retailers, including sporting goods
stores, outdoor specialty stores, mail order catalogs,
independent retailers, mass merchants, retail uniform stores,
and specialty safety shoe stores. In most cases the retailer
purchases products that are included in more than one of the
Company's branded operating segments. Branded products are
also sold in the Company's two retail stores and in some cases
have been sold to the military as well.
Methods used to distribute their products or provide their
services
For all the branded products, the Company uses either Company
employees who sell the Company's branded products exclusively,
or independent representatives who sell the Company's branded
products as well as other non-competing products. In almost
all cases, the Company's sales force sells the full branded
product line of the Company. All branded products are either
distributed through the Company's one distribution center, or
direct shipped from the manufacturing location to the
retailer's distribution center.
Nature of the regulatory environment
The Company's products and the related manufacturing and
distribution processes are not subject to significant
regulations that affect the financial performance of any
operating segment.
Economic characteristics
The following chart depicts the average gross margin for the
last three years of the eight branded product operating
segments, and the military reporting segment and the retail
reporting segment.
--------------------------------------------
AVERAGE GROSS MARGIN 2002-2004*
--------------------------------------------
-------------------
* This information has been redacted pursuant to a
confidentiality treatment request filed with the
Securities and Exchange Commission on the same date
as this letter.
Letter to Michael Moran
July 15, 2005
Page -6-
Although the Company has not prepared profitability budgets
for future periods, it believes that average gross margin
future trends will be consistent with the historical averages
shown above.
The economic characteristics of each of the branded product
operating segments are the same. Gross margins are comparable
for each operating segment. Margin fluctuations are
principally affected by the need to discount products because
of market conditions related to the specific stock keeping
units (SKUs), and because of price concessions made to
customers. The need to discount products is affected by the
seasonality (e.g., a warm hunting season will have lower sales
of cold weather product) and, to a lesser extent, product
styles. Gross margin also varies based on the various
individual SKUs sold in a particular period, i.e., product
mix. Higher price-point products in each operating segment
generally have a higher margin than lower price-point
products.
Margins for manufactured products tend to be slightly lower
than the branded average as certain customers require that a
portion of their products be manufactured in the United States
(including its territories). Also, certain "rush" orders must
be manufactured because sourced product, which is virtually
all produced in China, sometimes cannot be obtained in time to
meet the customer's delivery requirements. Please note that
the Company also reports manufactured sales in its military
and retail operating segments.
Margins for Wildwolf are slightly lower because this product
is produced primarily for Wal-Mart, one of the Company's
larger customers for a limited number of SKUs. Price
concessions are made because of the higher volumes.
Other branded products are accessories that are sold to
enhance the Company's product line. These products are all
sourced, and generally enjoy higher margins because of their
association with the Company's footwear and apparel brands.
Based on the foregoing, the Company has determined that its branded
products (footwear and accessories) meet the aggregation criteria of
FAS 131 paragraph 17, and will present branded products as one
reportable segment, in future filings. The Company will refer to this
reportable segment as "Wholesale", as this best describes the
distribution channel used to sell these products to retailers for
resale, and will distinguish the Company's sales of branded and other
products at retail and to the military.
Retail
The Company operates two Company-owned retail stores. This operating
segment represents sales and gross margin for these two stores. The
products sold by the retail segment are the same as those sold by the
branded product operating segments. These products may be either
sourced or manufactured by the Company; no separate accounting
information is maintained for retail sales by the sourced or
manufactured classifications. This operating segment is differentiated
from the branded products segments because of a different customer and
distribution channel. Because of the January 2005 acquisition of EJ
Footwear, the Company expects the retail segment to become a more
significant percentage of total sales in 2005, as EJ Footwear has a
substantial division that sells footwear, including Rocky branded and
other brands, at retail to end users at
Letter to Michael Moran
July 15, 2005
Page -7-
store locations as well as through sales vans at customer work sites.
The Company has determined that "Retail" is a separate reportable
segment, and will present "Retail" as one reportable segment in future
filings.
Military
The military operating segment does not qualify for aggregation because
(1) the products are manufactured by the Company based on
specifications provided by the customer, (2) the customer is not a
retailer, (3) products are not distributed through the typical
distribution channel, and (4) the operating segment has substantially
different economic characteristics. During 2004, the Company was a
subcontractor for such products. Beginning in 2005, the Company will be
the prime contractor under a military contract. Future military sales
are contingent upon the Company being awarded a contract by the
military. The Company has determined that "Military" is a separate
reportable segment, and will present "Military" as one reportable
segment in future filings..
Operating expenses
Accounts in the Company's general ledger are coded by (1) company, (2)
department, and (3) account number. The department codes are
functional, including sales, marketing, human resources, accounting and
warehouse and shipping. The general ledger does not include
classification of these operating expense by the various operating
segments described above. Further, no separate analysis by the
operating segments above is prepared for internal analysis because any
allocation of the operating expenses of each department to an operating
segment would be arbitrary. For example, as the Company had only one
distribution center, an allocation of costs of the distribution center
to the various operating segments would be an arbitrary allocation.
Conclusion
In future filings, the Company will provide reportable segment
information for sales and gross profit related to three reportable
segments: Wholesale, Retail and Military. The gross profit will be
reconciled to income before income taxes as reported in the Company's
consolidated statement of income. Segment information related to
assets, capital expenditures, and interest and depreciation expense is
not prepared by the Company and therefore will not be disclosed in the
future.
* * * * *
Letter to Michael Moran
July 15, 2005
Page -8-
If you have any questions regarding any of the foregoing, please
contact Robert J. Tannous, Porter, Wright, Morris & Arthur LLP at (614)
227-1953.
Thank you for your assistance.
Very truly yours,
/s/ James E. McDonald
James E. McDonald,
Executive Vice President and
Chief Financial Officer
cc: Robert Babula (SEC - Staff Accountant)
Christopher Owings (SEC - Assistant Director)
Robert J. Tannous