Earnings Call Transcript - JOUT Q2 2024

Operator, Operator

Hello, and welcome to the Johnson Outdoors Second Quarter 2024 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 and Chief Financial Officer. 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 line. I would now like to turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Pat Penman, Investor Relations

Thank you. Good morning, and thank you for joining us for our discussion of Johnson Outdoors' results for the 2024 fiscal second 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 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 any 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, CEO

Thanks, Pat. Good morning, everyone, and thank you for joining us. I'll begin by addressing our results and giving perspective on the performance, and then I'll share the outlook for the business. Dave will provide a more detailed financial review, and then we will take your questions. Sales in our second fiscal quarter ending March 2024 declined 15% to $175.9 million compared to $202.1 million in the prior year's second quarter. Year-to-date, company sales decreased 17% over last year's fiscal six-month period. The company reported an operating loss of $250,000 for the second quarter compared to an operating profit of $11.4 million in the prior year's second quarter. For the year-to-date period, total company operating loss declined to $200,000 compared to an operating profit of $16.9 million for the prior year-to-date period. Net income for the second quarter was $2.2 million or $0.21 per diluted share versus $14.9 million or $1.45 per diluted share in the previous year's second quarter. Net income during the first fiscal six months was $6.1 million or $0.59 per diluted share versus $20.7 million or $2.02 per diluted share in the prior fiscal year-to-date period. Continued tough marketplace conditions significantly impacted our second quarter results. While inventory levels at retail are starting to improve, we have been facing increased competitive activity across our categories requiring additional promotion and pricing actions. At the same time, economic uncertainty continues to impact consumer buying behavior, and we expect these challenges to continue in the season ahead. In the midst of this tough environment, we are prioritizing critical investments in our businesses to navigate challenges in the short term and position us for marketplace success in the long term. We have strong brands that are leaders in our categories. We believe in the potential of these categories, and we are looking for opportunities to accelerate growth. Innovation is, and always has been, key to our success in the marketplace and it remains a strategic priority to create consumer-focused products and technology that delivers the best outdoor experience possible. We are investing in marketing and promotions and supporting our new product launches like the new Minn Kota Quest Trolling Motor line, which is seeing positive response from the trade. Strengthening our business operations and improving profitability are also critical focuses. We put a cost savings program in place, and we are evaluating our cost structure for additional efficiency opportunities. We have been working hard to reduce inventory to more normal levels. We have a lot more work to do, but we are starting to see progress from these efforts. This is a tough time, and we are not satisfied with where we are, but we are taking actions to improve our position in the market, and we will continue to invest in the long-term profitable growth of our brands. Now I'll turn the call over to Dave for more details on financing.

David Johnson, CFO

Thank you, Helen, and good morning, everyone. I want to highlight a few items from the quarter. Profits in the second quarter were impacted by reduced overhead absorption from lower volume as well as increases in promotional activity and pricing actions. We continue to take steps to improve our operating margins with an active cost savings program. We are gaining efficiency benefits in our factories and have driven reductions in our logistics costs. We will expand our efforts to reduce our cost and expense structure. Operating expenses decreased 4% or $2.3 million versus the prior year quarter due primarily to lower sales volumes between quarters, lower incentive compensation, and professional services expense and was partially offset by increased promotional spending. As Helen mentioned, we've been working hard to reduce our inventory back to more normal levels. Our inventory balance as of March was $249.2 million, up about $12.5 million from last year's March quarter, but down $18.1 million from December. We expect additional inventory reductions throughout the balance of the fiscal year. 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

Certainly. One moment for our first question. And our first question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your question, please.

Anthony Lebiedzinski, Analyst

Good morning, and thank you for taking the questions. So first, can you guys give us at least maybe some directional comment on how the quarter progressed from January through March? And maybe perhaps give us an early indication of how your third quarter is trending so far?

Helen Johnson-Leipold, CEO

This quarter, as we discussed, isn’t as strong as last year, but we're pleased that our new products are gaining traction in the market. As mentioned, there is uncertainly with consumer behavior, reflecting early season activity, and we’re optimistic for a better season ahead. I can’t provide much insight into what lies ahead, but as I mentioned, this is a challenging time that is likely to persist. We are facing tough marketplace conditions and significant competition, which I expect will continue.

Anthony Lebiedzinski, Analyst

Got you. And just a follow-up on the last part about the challenges that you're seeing in your business. What is your view as far as is this more driven by the pull forward that we had during the pandemic? Or is it perhaps more because of just macroeconomic uncertainty?

Helen Johnson-Leipold, CEO

There are numerous factors at play, so it’s difficult to attribute the situation to a single cause. Across all outdoor categories, we are observing a decline in demand. Some of this can be traced back to the advance in purchases that occurred during the pandemic. Additionally, we are noticing that many competitors are engaging in pricing strategies that are exerting pressure on the market. The trade seems to be somewhat hesitant about placing large orders, as they navigate the inventory challenges, which are improving but still vary by business. Ultimately, it appears to be a mix of several issues, and we hope that as time goes on, these will begin to resolve as volatility decreases.

Anthony Lebiedzinski, Analyst

Understood. Okay. Got it. And then just as far as the quarter that you reported, can you give us a sense as about unit volumes versus pricing or ASPs?

David Johnson, CFO

So with the discounting and promotional activity we've had, that really affected the top line more than unit volume. But having said that, depending on the category, unit volume was down versus last year. I don't have precise numbers for you. But certainly, the discounting affected that top line more than anything else.

Anthony Lebiedzinski, Analyst

Understood. Okay. Thanks, Dave. And then, Helen, I think you said that the inventory levels at retail are starting to improve. Is that across the board? Or are you seeing certain pockets of your business get better than others as far as the inventory levels that you're seeing from retailers?

Helen Johnson-Leipold, CEO

I think it depends on the business for sure. And so I think in general, the inventory levels will get better. I mean everybody has recognized that they were too high and they're working their way through it. But depending on the category, some are moving faster than others. I think our diving business is a little lagged. We've got some buildup in the dealers. So again, it depends. But in general, I think there isn't an issue with the inventory that people have stock and are ready to go over the season.

Anthony Lebiedzinski, Analyst

You mentioned a positive response to the Minn Kota Quest Trolling Motors, which is encouraging. With that in mind, do you think this will add to your current product line, or is there a possibility of it taking sales away from your other products? How should we consider that?

Helen Johnson-Leipold, CEO

The positive response has been largely focused on trade. I believe that innovation will play a crucial role this season, as it often helps to address some of the lower demand. We have completely restaged our Minn Kota line. While we generally expect some cannibalization of existing products when we restage, this new motor targets a different audience. Therefore, I am optimistic that it will lead to additional sales.

Anthony Lebiedzinski, Analyst

That's great to hear. That's what I was looking for. So, considering the promotional programs and your efforts to reduce inventory, how should we view that in relation to your short-term and long-term profitability?

Helen Johnson-Leipold, CEO

I believe we are committed to driving volume in the market. We are addressing the situation with significant competition. When demand is weaker and the market growth slows, we tend to increase our promotional spending. However, in normal conditions, innovation should drive sales, allowing us to rely less on promotions. We are demonstrating our willingness to stimulate retail movement, though it has required more effort this year given the current circumstances.

Anthony Lebiedzinski, Analyst

It's encouraging to see the inventory decline on a sequential basis, and I hope you can make further progress there. Regarding your cost savings program, it seems to have helped offset some pressures in the last quarter and even in the quarter before that. As you evaluate that program, you've mentioned improving efficiencies at your factories and with logistics. In baseball terms, what inning are you in with that initiative, and what else are you planning to do to achieve further cost savings?

David Johnson, CFO

Yes, I believe we're in the midst of it. To use a football analogy, we are at halftime. We initiated this effort quite vigorously six to eight months ago, and we are still exploring ways to enhance our profit profile. That will be an ongoing focus.

Helen Johnson-Leipold, CEO

We are exploring various options for additional cost savings. Our primary focus is on becoming more efficient and effective in our operations. We are examining all areas of the business, especially since competition is intensifying and putting pressure on us. We are actively working on this.

Anthony Lebiedzinski, Analyst

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

Helen Johnson-Leipold, CEO

Thank you.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from the line of Anna Glaessgen from B. Riley. Your question, please.

Anna Glaessgen, Analyst

Hi, good morning. Thanks for taking my question. I'd like to go back to some of the questions around margin and understanding you have to respond to competitive activity when thinking about pricing. But what's your outlook for promotionality as we think longer term? Is this kind of a new normal as you have to respond to these competitors? Do you see a reversion back to historical levels? Just any more color there would be super helpful.

Helen Johnson-Leipold, CEO

I believe this situation is here to stay. We are facing significant competition. Moving forward, we depend heavily on innovation to create value in pricing so that promotions do not become a burden for us. Nonetheless, it is essential to engage during the key promotional periods, especially since our competitors are also active in promotions. However, the dynamics have changed. We need to enhance our innovation efforts to ensure that promotions remain a vital aspect for us.

Anna Glaessgen, Analyst

Got it. As inventory positions are improving at retail, do you expect a better balance between sell-in and sell-through? How do you envision that progressing through the year?

David Johnson, CFO

Yes, I think that would become more balanced over the seasons. Just remember, we are seasonal. So quarter-by-quarter, it does change. But yes, I would definitely expect to see that balance out as inventories improve.

Anna Glaessgen, Analyst

Got it. And just one last question for me. Is the inventory on your balance sheet that you're trying to reduce concentrated in any specific segment, or is it more widespread?

David Johnson, CFO

It's across the board based on the sales of the business unit. So obviously, Fishing is our biggest business. It has the most inventory. And every business has been able to reduce their inventory sequentially over the quarter.

Anna Glaessgen, Analyst

Great. Thanks.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from the line of Doug Asiello from Crawford. Your question, please.

Doug Asiello, Analyst

Good morning. Thank you for taking my call. I wanted to follow up on the topic of competitive intensity. The recent press release contains a lot of information about pricing strategies and promotional efforts, and you mentioned the success of the Minn Kota Quest Trolling Motor. My question is whether you believe the competitive landscape is becoming more intense in this crucial third quarter compared to last year and also in relation to the previous quarter.

Helen Johnson-Leipold, CEO

Well, it depends on the specific business you're referring to. However, overall, there's significantly more promotional activity taking place. This typically occurs in markets where demand is somewhat weaker, which often leads to increased competition. Given the growing popularity of outdoor products, we have attracted more competitors and competitive activity. During periods of economic uncertainty, we are noticing a shift in consumer preferences, with lower-priced products gaining traction compared to premium offerings. Nonetheless, outdoor products are currently a strong market, and it’s clear that competition, along with pricing and promotional strategies, will continue to play a significant role moving forward.

Doug Asiello, Analyst

Great. Thank you. I meant fishing specifically, but I think you know that. And then my last question is just on capital allocation. So I wonder, first if you think about it this way, but what do you think is the most return on invested capital accretive use of the $84 million in cash that you have on the balance sheet and the free cash that you'll generate over the next handful of years? Is it dividends, special dividends, share repo, M&A, or perhaps investing more aggressively in R&D and innovation such that you can offset some of this competitive threat?

David Johnson, CFO

Yes. I mean, our preference is to invest that capital to grow the business and grow it profitably and return that's much better than our cost of capital. And that's the plan. Obviously, as you know, there's a risk profile to everything that we look at. So it just depends on what the project is and what we're going to look at. Yes, we want to take that capital and invest it back into the business either through organic growth or perhaps acquisitions.

Doug Asiello, Analyst

Great. Thank you.

Operator, Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Helen Johnson-Leipold for any further remarks.

Helen Johnson-Leipold, CEO

Thank you all for joining us today. I hope everybody has a great weekend. Thank you.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.