Johnson Outdoors Inc

NASDAQ:JOUT

Earnings Call Analysis

Johnson Outdoors Faces Tough Market but Focuses on Innovation and Cost Management

In the face of challenging market conditions, Johnson Outdoors reported a difficult fiscal 2024, with soft consumer demand impacting performance across all segments. Despite a gross margin decline of 2.9 points for the year, operational cost savings provided a 2-point improvement. The company achieved a significant inventory reduction, down $51.7 million year-over-year, maintaining a debt-free balance sheet. Looking ahead, they plan to invest in innovation and enhance their market presence, foreseeing potential sales growth from new product launches, particularly in fishing and watercraft categories.

Challenging Marketplace Yet Resilient Strategies

In the fourth quarter of fiscal 2024, Johnson Outdoors faced a difficult operating environment marked by a decline in consumer demand for outdoor recreation products. This negative market situation has led to a comprehensive reassessment of the company’s strategies, focusing on critical priorities such as innovation, operational efficiencies, and a refined go-to-market strategy. The management is aware that these challenging conditions might persist, but they remain committed to investing in measures designed to drive long-term growth.

Innovation: A Core Focus for Future Growth

Innovation is at the heart of Johnson Outdoors' response to market challenges. They are enhancing their innovation strategy by investing significantly in talent and advanced technologies. By adopting a consumer-centric approach to innovation, they aim to improve their product offerings. Future launches include key products in fishing and watercraft categories, such as the XPLORE and MEGA Live 2. Johnson Outdoors recognizes that the market is becoming increasingly competitive and is determined to elevate the quality of their new launches to secure market share.

Financial Health and Operational Efficiencies

Despite the operational hurdles, Johnson Outdoors maintains a debt-free balance sheet, which positions the company favorably amid economic pressures. Their commitment to operational efficiency is illustrated by a significant reduction in inventory levels, down to $209.8 million, a decline of $51.7 million from the previous year. This effective inventory management has allowed the company to generate positive cash flow from operations throughout fiscal 2024. Additionally, the management has implemented a rigorous cost-saving program aimed at improving margins.

Understanding Margins: Recent Declines and Future Outlook

The company's gross margin was impacted significantly, declining by about 2.9 points year-over-year. Factors such as increased promotional pricing (which affected margins by approximately 2.5 points) and a shift in product mix towards lower-margin offerings were pivotal in this decline. While operational cost savings contributed approximately 2 points positively to the gross margin, they were not enough to offset the overall negative effects. Looking ahead, the company is committed to managing their cost structure effectively while safeguarding investments vital to strengthening the business.

Cost Management and Future Strategies

Johnson Outdoors has identified operational cost reductions, especially within their factories, which have been prioritized in their strategies. This deliberate cost-saving initiative has generated an approximately 2-point benefit to gross margin for fiscal 2024. The company plans to expand upon these efficiencies, focusing on sourcing and further reducing product costs while maintaining their product quality. This focus on operational excellence positions them well for potential recovery and future profitability.

Dividends and Shareholder Value

Despite the challenging fiscal year, Johnson Outdoors continues to pay a meaningful dividend to its shareholders, showcasing its commitment to returning value. The recent dividend approval reflects management's confidence in the company's long-term plans to create shareholder value, even in the face of current marketplace difficulties.

Earnings Call Transcript 2024-Q4

[Operator]

Hello, everyone, and welcome to the Johnson Outdoors' Fourth Quarter 2024 Earnings Conference Call. Today's call will be led by Helen Johnson-Leipold, Johnson Outdoor Chairman and Chief Executive Officer. Also on the call is David Johnson, Vice President and Chief Financial Officer. [Operator Instructions]. This call is being recorded. Your participation implies consent to our recording of this call. If you do not agree to these terms, simply drop off the line.

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

[Patricia Penman, executive]

Thank you. Good morning, and thank you for joining us for our discussion of Johnson Outdoors' results for the 2024 fiscal fourth 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, executive]

Thanks, Pat. Good morning, everyone. Thank you for joining us. I'll begin by addressing our fiscal 2024 performance, and then I'll share our plan to address future challenges. Dave will cover some key financials, and then we'll take your questions. I won't rehash the numbers in our fourth quarter and year-end earnings announcement. Obviously, it was a tough year. Continued challenging marketplace conditions and competitive pressures significantly impacted our fiscal 2024 performance.

Consumer demand for outdoor recreation products across all of our businesses remained soft. While we're not seeing indicators that these challenging conditions are going away anytime soon, we have been aggressively leaning into our critical strategic priorities, innovation, our go-to-market strategy and operational efficiencies to enable future growth for our brands and businesses.

In this highly competitive outdoor recreation marketplace, our focus on strong innovation cannot be more critical. As a result, we are taking our innovation approach to the next level and investing in the critical elements, including key talent and technologies as well as strengthening our consumer-centric innovation approach. Our focus remains on delivering the best outdoor experiences possible across all of our categories. The ever-evolving digital landscape requires us to do things differently to engage and stay in front of our consumers.

Our online presence provides key consumer touch points for our brands from product research to purchase to post-purchase support. We've been making investments in restructuring the way we go to market to enhance our capabilities and drive growth, and we're confident this will be a meaningful contributor to accelerating our sales and profitability.

Lastly, as I mentioned in previous quarters, improving profitability and strengthening our business operations continue to be important focus areas. We've worked hard to drive operational cost savings and redeploy resources against our strategic priorities. The cost savings efforts were masked by our results, and we recognize there is more work to do.

Fiscal 2024 is tough, but we've been through tough times before. We are committed to investing in the strategic priorities that will position our brands for long-term growth while also working hard to improve our financial performance. We know we have a lot of work to do, but we're confident that we'll see benefits from these investments in the future.

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

[David Johnson, executive]

Thank you, Helen. Good morning, everyone. In the midst of our challenging results for fiscal 2024, I wanted to start by highlighting 3 important areas. First of all, our balance sheet remains debt-free, which is a strong competitive advantage in today's marketplace and enables us to invest in mission-critical strategic priorities Helen just discussed. Second, as I've mentioned previously on quarterly calls, we've been working hard to manage our higher-than-normal inventory levels.

Our inventory balance as of September was $209.8 million, down about $51.7 million from last year's fourth quarter. Through prudent inventory management, we were able to generate positive cash flow from operations in fiscal '24. Lastly, we continue to pay a meaningful dividend to our shareholders with the Board approving our most recent dividend, which we announced on December 5. We remain confident in our ability and plans to create long-term value for shareholders.

Now let's get into some of the numbers from the quarter and fiscal year. Gross margin in the fourth quarter was negatively impacted by increased promotional pricing, changes in product mix toward lower-margin products and increased inventory reserves. For the fiscal year, gross margin declined by about 2.9 points. Operational cost savings positively impacted gross margin by about 2 points but did not offset the impact of unfavorable absorption of fixed overhead costs and unfavorable product mix.

For the fiscal year, operating expenses increased $12.2 million versus the prior fiscal year, due primarily to a noncash goodwill impairment charge of $11.2 million, a $2.5 million increase in bad debt reserves, increased severance costs of $1.5 million and $3.8 million of higher deferred compensation expense as a result of marketing plan assets to market value. The increase was partially offset by lower incentive compensation and professional service expenses between the years.

Looking forward, we'll continue to strategically manage our cost structure while protecting investments to strengthen the business.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski from Sidoti.

[Anthony Lebiedzinski, analyst]

So first, in the fourth quarter, your sales were up in 3 out of the 4 segments. Can you talk about unit volumes versus ASP? And what you see as far as inventory levels at the retail level?

[David Johnson, executive]

Yes. I mean in terms of the fourth quarter, we did see some a bit of lift in unit volume kind of across the board in the fourth quarter because last year's fourth quarter was obviously a challenging quarter. Overall, for the year, we're seeing growth from ASP as well as unit volumes, both. And in terms of the retail inventory, it's really -- it's -- we're seeing a mixed bag right now. I mean we're seeing pockets of inventory that's in good shape, but other retailers in trade, there's a little bit of increased inventory there. So -- and they're still a very cautious perspective from our trade partners.

[Anthony Lebiedzinski, analyst]

Got you. So as far as the gross margin, that did come in lower than what we're expecting. Can you provide -- I don't know if there's any way you can quantify or maybe share more details. I mean you called out a few items, but I just wanted to get more specifics as to how impactful some of these things were as far as promotional pricing, the mix shift to lower-margin items, their inventory reserves. Is there any way you can provide more details about that?

[David Johnson, executive]

Sure. Yes. I mean the promotional pricing -- the decrease in pricing for the fourth quarter was about a 2.5 point roughly impact versus last year's fourth quarter. So we were down 6 points for the quarter. So a big chunk of that was just the reduced pricing and promotional pricing for the fourth quarter. Mix was comparable to that. So we just had a lower mix out there, and that was most of the rest of the decrease. And the inventory reserves of about 1 point.

[Anthony Lebiedzinski, analyst]

That's very helpful. And then in terms of your strategy, so the focus on innovation has been sort of a key factor for Johnson Outdoors as long as I can remember. But can you talk about what, if anything, you're doing differently and maybe you could touch on the upcoming pipeline of new products?

[Helen Johnson-Leipold, executive]

Well, we are taking a hard look at our approach to innovation, and we are putting more resources behind it in terms of types of research we do and actual dedicated people helping in that area. But a lot of it is about getting consumer insights and driving those through. We've got -- we feel good. We've got some good launches that are happening this year. And it's not about quantity, it's really about quality.

So we've got some launches in Fishing that our XPLORE and our MEGA Live 2 product, which are critical to this year for us for that business. We've got launches in Watercraft entering the Water Rec category. We've got Jetboil. We've got, I would say, solid new product launches. But the market gets competitive. It's -- we've got more competition, and that's why we are really looking at our process to make sure that we're approaching it in a way that can make us better and increase success of our launches.

[Anthony Lebiedzinski, analyst]

Got you. So for you guys to execute the strategy, do you think you have the appropriate internal resources for that? Or do you think you need to make an acquisition to improve your capabilities to execute this strategy?

[Helen Johnson-Leipold, executive]

Well, we're always looking to get better, and we don't have a problem leveraging external resources as well as internal. I do think that we can and plan to win in the categories we have today, and it's a matter of really understanding the consumer and the consumer has changed, which is, I think, a great opportunity for us. But we are looking for the resources we need to do the job we have to do. But innovation is critical to us, and it's always changing. .

[Anthony Lebiedzinski, analyst]

Understood. Okay. And then in terms of the operational efficiencies, can you share more details about the cost savings program? What's been the benefit from -- on recent results? And how should we think about the future cost savings opportunities?

[David Johnson, executive]

Yes. We had a very deliberate operational cost savings program we launched over a year ago, and that bore fruit for us in fiscal '24. We've really focused on the factories, increasing our efficiencies, reducing our scrap rates, driving down cost of goods, the materials to come into the factory, logistics savings, those are the 4 big areas that we really worked on. And it drove about 2 points of benefit on the gross margin for us for fiscal '24. So we're pleased with that. Unfortunately, it was masked by the results.

We also did a job elimination in the fourth quarter, which will help us going forward on the operational expense side of things. And just back to the operational cost savings program, we expect to expand that. I mean, we want to keep working on opportunities with sourcing and driving down product costs. So we've got plans in place to continue that effort to expand that effort.

[Anthony Lebiedzinski, analyst]

Got you. Okay. So as far as the severance cost that you guys cited in the press release, was that all in the fourth quarter?

[David Johnson, executive]

Yes, yes, it's basically all in the fourth quarter.

[Anthony Lebiedzinski, analyst]

Okay. Got you. And I guess lastly for me. So obviously, you guys are predominantly a manufacturer in the U.S. here, but you guys do use lot of imported components. Just wanted to get a sense from you as far as what you think about the impact from potential tariffs coming next year?

[David Johnson, executive]

Yes. I mean we've definitely got our ear to the ground on that, and we've had discussions preliminary on ways that we could mitigate what could happen. So obviously, we've been through this before, and we had some mitigation strategies before, but yes, more to come on that.

[Operator]

I'm showing no further questions at this time. I'd now like to turn it back to Helen Johnson-Leipold for closing remarks.

[Helen Johnson-Leipold, executive]

I just want to thank everybody for joining us today, and I hope everyone has a happy holiday. Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.