Earnings Call Transcript - JOUT Q4 2024

Operator, Operator

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, CEO

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 demands for outdoor recreation products across all of our businesses remain 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, CFO

Thank you, Helen. Good morning, everyone. In the midst of our challenging results for fiscal 2024, I wanted to start by highlighting three 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 plan 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 non-cash 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.

Anthony Lebiedzinski, Analyst

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

David Johnson, CFO

Yes. I mean in terms of the fourth quarter, we did see a bit of lift in unit volume 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 environments, both. And in terms of the retail inventory, we're seeing a mixed bag right now. I mean we're seeing pockets of inventory that are 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

The gross margin came in lower than we anticipated. Can you provide more details or quantify the impact of certain factors? You mentioned several items, but I would like to understand more about how promotional pricing, the shift to lower-margin items, and inventory reserves affected the results. Is there any additional information you can share?

David Johnson, CFO

Sure. Yes. I mean the promotional pricing, the decrease in pricing for the fourth quarter was about a 2.5-point impact versus last year's fourth quarter. So you 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. The mix was comparable to that. So we just had a lower mix out there, and that was most of the rest of the decrease. The inventory reserves had about a 1-point impact.

Anthony Lebiedzinski, Analyst

That's very helpful. And then in terms of your strategy, 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, CEO

We are closely examining our approach to innovation and allocating more resources towards it, including the types of research we pursue and the dedicated personnel involved. A significant part of this involves gathering consumer insights and implementing them effectively. We are optimistic about several promising product launches this year. Our focus is on quality rather than quantity. In the fishing category, we anticipate key launches such as our Xplore and MEGA Live 2 products, which are essential for our business this year. We are also entering the water recreation category with new Watercraft products and Jetboil, among other strong product launches. However, the market is becoming more competitive, which is why we are reviewing our processes to enhance our effectiveness and improve the success rate of our new launches.

Anthony Lebiedzinski, Analyst

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, CEO

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

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 recent results? And how should we think about the future cost savings opportunities?

David Johnson, CFO

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, and logistics savings. Those are the four 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. As for 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.

Anthony Lebiedzinski, Analyst

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, CFO

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

Anthony Lebiedzinski, Analyst

Okay. And I guess lastly for me. So obviously, you guys are predominantly a manufacturer in the U.S. here, but you do use a 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, CFO

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, 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, CEO

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

Operator, Operator

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