Johnson Outdoors Inc

NASDAQ:JOUT

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Hello, everyone, and welcome to the Johnson Outdoors Third Quarter 2023 Earnings Conference Call.

Today's call will be led by Helen Johnson-Leipold, Johnson Outdoors Chairman and Chief Executive Officer. Also on the call is David Johnson, Vice President Chief Financial Officer. Prior to the question-and-answer session all participants will be placed in a listen-only mode. After the prepared remarks, the question-and-answer session will begin. [Operator Instructions] This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms simply drop off the call.

I would now like to turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

[Pat Penman]

Thank you. Good morning,, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2023 fiscal third quarter. If you need a copy of today's news release, it is available on our website at johnsonoutdoors.com under Investor Relations. I also need to remind you that, this conference call may contain forward-looking statements. These statements are made on the basis of our current views and assumptions and are not guarantees of future performance. Actual events may differ materially from those statements due to a number of factors many beyond Johnson Outdoors' control.

These risks and uncertainties include those listed in our press release and filings with the Securities and Exchange Commission. If you have additional questions following the call please contact Dave Johnson or myself.

It is now my pleasure to turn the call over to Helen Johnson-Leipold.

[Helen Johnson-Leipold, Chairman and Chief Executive Officer]

Thanks, Pat. Good morning, everyone, and thank you for joining us. I just want to excuse my voice. I've got a little bit of a hoarse voice today, but I'll do my best. I'll begin with an overview on the quarter and the year, and then I'll share perspective on performance and outlook for our businesses. Dave will review financial highlights, and then we'll take your questions.

Sales in our third fiscal quarter ending June 30, 2023 declined 8% to $187 million compared to $203.8 million in the prior year third quarter. Total company year-to-date sales were up 4% over last year's fiscal nine-month period.

Profit before income taxes for the third quarter slightly increased to $19.8 million versus $19.2 million in the prior year quarter. For the year-to-date period profit before income taxes was $47.9 million versus $47 million in the prior year-to-date period.

We're seeing consumer demand continue to moderate from the strong pandemic-fueled levels of the past few years. At the same time, the marketplace continues to be competitive reinforcing the critical importance of innovation for the continued growth and success of our brand.

In Fishing, we remain committed to being innovative leaders. We recently announced a broad line of exciting new products at this year's ICAST and largest supporting trade show in the world Minn Kota announced the QUEST series the all-new brushless trolling motor technology giving anglers ultimate control in tough fishing environment.

Minn Kota also launched the restage of all of its bow-mount trolling motors with an updated technology suite angler enhancement and more seamless integration in the Humminbird products. We're always looking for ways to unify our products to enhance the fishing experience.

Also launched at ICAST, was the One-Boat Network App bring together both Humminbird and Minn Kota devices into one dashboard to give anglers unprecedented command of their fishing boat.

Sustaining our innovation leadership position and a competitive fishing market remains a top priority. We are excited about the breadth of new innovation we've just announced and we will continue to work on a pipeline of new products to give anglers the best fishing experience as possible.

In our Diving business, sales were flat this quarter. However, year-to-date period showed positive growth especially from our European and Asian markets. We will continue to leverage our innovation and brand-building efforts to ensure SCUBAPRO remains the world's most trusted dive brands.

Our Camping and Watercraft Recreation business is continuing to face softening markets due to the post-pandemic slowdown. Retailers still have product on shelf to work through and at the same time consumer spending has slowed. We're committed to the long-term opportunity in these two businesses and our consumer-focused innovation plays a critical role in that.

I'm excited to announce that Old Town received the Best of Boats and Watercraft honor at this year's ICAST or to a revolutionary Old Town ePDL+ drive. This is cutting its technology and contains power-assisted pedal drive that combines pedal and power to propel the fishing experience to the next level. This technology is new to the world and the word to shipping Old Town ePDL+ early next year.

While the near-term continues to be challenged across all of our brands, we're working hard to position them for continued success in the evolving marketplace, ongoing investments to understand our consumers, sustained innovation leadership and identify new sources and paths of growth in our markets. Our key to ensuring progress toward our goal of delivering sustained profitable long-term growth.

Now I'll turn the call over to Dave for more details on the financial.

[David Johnson, Vice President and Chief Financial Officer]

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter and the year. The quarter's gross margin of 41.5% improved from 36.1% in last year's third quarter, due primarily to price increases and lower freight and materials costs. We're pleased that our gross margins have started to recover and we'll continue to look for ways to improve efficiencies to maintain strong gross margins going.

Operating expenses in the third quarter increased $10.4 million versus the prior year third quarter, due primarily to a $5.1 million increase in deferred compensation expense related to marketing plan assets to market, which is entirely offset in other income. Additionally higher warranty expense and advertising and promotion costs also contributed to the increase between quarters. Resulting operating profit for the quarter decreased to $17.4 million versus $23.8 million in the prior fiscal year third quarter. Earnings before taxes up slightly versus the prior quarter.

Net income for the third quarter was $14.8 million versus the prior fiscal year third quarter of $14.1 million. The quarter's effective tax rate was 25.3% and was 25.9% for the nine-month period. While we have generated strong cash flow from operations through June, we're still working through high inventory levels as we wind down the season. We'll continue to proactively manage our inventory position and working capital levels appropriately.

Looking ahead, we remain focused on continuing to improve operational efficiency and strengthen our operating margins. Our balance sheet continues to have no debt and our cash position enables us to invest in opportunities to strengthen the business. We remain confident in our ability to deliver long-term value and consistently pay out cash dividends to our shareholders.

Now I'll turn the call over to the operator for the Q&A session. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open.

[Anthony Lebiedzinski, Sidoti]

Hi, guys. Good morning, everyone. Yes, so first – and thanks for taking the question. So first I guess a housekeeping type of question here. I know you guys talked about the pricing, especially I think in your Fishing segment. But just overall as you look at the quarter, can you just broadly speak to pricing versus unit volumes?

[David Johnson, Vice President and Chief Financial Officer]

Yes. Anthony for the quarter it's – I would say in general unit volumes are flattish. And so the increases we're seeing in revenue and gross profit is pricing related.

[Anthony Lebiedzinski, Sidoti]

Got it. Okay. Thanks, Dave. Okay. And then your gross margin was up nicely ahead of our expectations. So – do you think you can sequentially build here now that ocean freight costs have normalized I think you've seen decreases in your raw material costs. So – just wondering as to how we should think about the gross margin trajectory from here?

[David Johnson, Vice President and Chief Financial Officer]

Yes. It's a good question. I mean there are a lot of factors at play going forward. I think cost easing is good for us going forward. I do expect probably promotional activity to be going forward too. So being above 40% is definitely our intention going forward. But again there's a lot of factors at play.

[Anthony Lebiedzinski, Sidoti]

Right. Understood. There's a lot of puts and takes there. Okay. But certainly good to see that moving in the right direction. Now as far as your operating expenses, I know you called out higher advertising promotion and warranty expenses. Can you talk about how much that was as far as an increase and whether you expect that going forward those types of increases, or do you think some of those maybe costs will moderate going forward?

[David Johnson, Vice President and Chief Financial Officer]

Yes. I mean, if you exclude the deferred comp expense there's about a $5 million increase in operating expense for the quarter, that's about half of that is warranty about half of that is advertising promotion of the increase. I think advertising promotion will continue to be robust for us going forward. Again, as we compete in the marketplace and make sure our products are front and center for everybody. I would think warranty would start to moderate some going forward. But again, there's I guess no crystal ball on that, but I would expect that to moderate.

[Anthony Lebiedzinski, Sidoti]

Got it. Okay. And then as far as just the inventory levels at retail, I assume that they're probably the fullest in the Camping and Watercraft. But just a word if you could talk about what you're seeing from retailers as far as replenishments, how do you see that? I mean Camping and Watercraft has been certainly the most hardest hit here as of late. So I guess as a follow-up to that where do you think that will kind of bottom out?

[Helen Johnson-Leipold, Chairman and Chief Executive Officer]

Well, even Watercraft, you're right, Watercraft and Camping are the ones that have been dealing with the most inventory of retail, I think, we are seeing some light at the end of the tunnel for the Camping business. And hopefully, Watercraft will get better as we go forward. But we do have some exciting new products coming into the market. So we'll keep an eye on that.

But as we said the demand is softening, but we feel good that we'll move some products, and be in better shape by the end of the year. Fishing I think is healthy that retail is healthy, I have -- and certainly healthier than it has been, but there's been more activity in Fishing category versus others. It's still softening, but we think that inventory is in a good place and is there to fuel the market.

Diving is a different story altogether. But it's in good shape. So it is different by category. But again, our job is to put activity out there to pull it through. And bringing new innovation to get the retailers excited about what's next. So it depends on which market you're talking about. But hopefully, by the end of the season, we'll be in good shape.

[Anthony Lebiedzinski, Sidoti]

All right. Sounds good. My last question in the press release, you guys talked about investing in strategic opportunities to strengthen the business. So I was wondering, if you could expand on that as far as what you're seeing, as far as maybe possible M&A? I know you guys have talked about that for a while, but just wondering if you could expand on some of the opportunities that you see in the future.

[Helen Johnson-Leipold, Chairman and Chief Executive Officer]

Well, I think there's two things. I mean, strengthening the business and looking for opportunity, we are focused on improving our supply chain situation so that we can benefit from efficiency. So I think strengthening the business in that respect, we are always looking externally for opportunities in the marketplace. And again they have to do very strategic and fit with our strategy long-term. And again it's -- there's less activity going on out there. But again we're not letting up on our research and our visibility to opportunities.

[Anthony Lebiedzinski, Sidoti]

Got you. Okay. And then I guess as a quick follow-up to that, I guess as far as your R&D expenses, I mean typically they've been around 4% of revenue? I mean, do you think that will continue, or do you think you need to step up that spending? How should we think about that?

[Helen Johnson-Leipold, Chairman and Chief Executive Officer]

Again as we said, I think innovation even becomes more important during times of -- when there's a lot of competition it's a challenging market. So I think we would expect that to be most likely growing from that point.

[Anthony Lebiedzinski, Sidoti]

Understood. Okay. Well, thank you very much, and best of luck.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Anna Glaessgen with B. Riley. Your line is open.

[Anna Glaessgen, B. Riley]

Hi, good morning. Thanks for taking my question. First, I'd like -- if you could provide some perspective on sell-in versus sell-through, or any color on POS as we're trying to understand end market demand in light of how distorted retailer inventories are to get a real sense of what's going on in the field?

[Helen Johnson-Leipold, Chairman and Chief Executive Officer]

Well, we -- it reflects our comments on the softening of demand that we are seeing across the board. But -- and again I think the Watercraft business is the one that -- the consumer demand piece has been challenged, but we are seeing pull-through and Fishing again at a level that is lower than it has been during the pandemic, and actually the Fishing business has been pretty resilient from a demand standpoint more so than the other categories.

So it's starting to normalize now, which is a little later than the most. But I do think we're seeing that the consumer demand is normalizing from the swing of the pandemic. And either our Watercraft business, we're going to work on pulling that through, helping that through because that a little bit tighter than the rest of them.

[Anna Glaessgen, B. Riley]

Got it. And more of a clarification. Did you come into the quarter with a backlog? Was there any benefit from that?

[David Johnson, Vice President and Chief Financial Officer]

We had a bit of backlog coming into the quarter, but that -- we're down to like normal levels now of orders. So, yeah, I think we're in a normal level of order activity at this point.

[Anna Glaessgen, B. Riley]

Got it. So basically as we move forward thinking about the coming quarters, it should be a relatively balanced sell-in, sell-through. Expiring like Watercraft or places where there's excess inventory or you still normalizing inventory?

[David Johnson, Vice President and Chief Financial Officer]

Right. Yeah, yeah.

[Anna Glaessgen, B. Riley]

Got it. Super helpful. That’s all from me. Thank you.

[Operator]

Thank you. [Operator Instructions] I'm showing no further questions in the queue. I would now like to turn the call back to Helen for closing remarks.

[Helen Johnson-Leipold, Chairman and Chief Executive Officer]

Okay. Well, thanks to everybody for joining us, and I hope you have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.