Earnings Call Transcript - JOUT Q4 2023

Operator, Operator

Hello, everyone, and welcome to the Johnson Outdoors Fourth 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 and 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. 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, Corporate Executive

Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2023 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 filing with the Securities and Exchange Commission. If you have additional questions following the call, please contact Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Helen Johnson-Leipold, Chairman and CEO

Thanks, Pat. Good morning, everyone, and thank you for joining us. I'll begin with an overview of the fiscal year and fourth quarter results and then I'll share perspective on the performance and outlook for our businesses. Dave will review financial highlights and then we'll take your questions. During fiscal year 2023, we saw the end of the elevated pandemic-driven demand of the past few years. That combined with higher inventory levels at retail led to challenging results for the year. Total company sales declined 11% to $663.8 million, compared to $743.4 million in the prior fiscal year. Net income for the year was $19.5 million, or $1.90 per diluted share, a 56% decline from the prior fiscal year. Operating profit decreased 82% to $11.7 million versus $66.3 million in the prior fiscal year, with a decrease in sales volumes and a 13% increase in operating expenses significantly impacting profitability. Our fourth quarter was particularly impacted by a significant slowdown in demand. Sales in the fourth quarter ending September 2023 were $96.3 million compared to $196.4 million in the prior year fourth quarter. The fourth quarter results also reflect a challenging comparison between quarters. The last quarter of fiscal 2022 was when supply chain restrictions eased and when we filled a significant number of backlogged customer orders. So, it was a tough quarter and a tough year as demand in the outdoor recreation marketplace moderated and we also began to see a return to the pre-pandemic traditional seasonality of order patterns. In the challenging marketplace, competitive dynamics continue to be aggressive, affecting pricing. Looking forward, we anticipate these dynamics will continue and we are committed to innovation to help our brands grow and succeed. In fishing, innovation is key to sustaining our leadership position. We are excited by the broad line of new products we announced during the third quarter of the fiscal year. Minn Kota announced the QUEST series, the all-new brushless trolling motor technology, giving anglers ultimate control in a tough fishing environment. Minn Kota also launched a restaging of all its bow mount trolling motors with a brand new look and updated technology suite full of angler-friendly enhancements and a more seamless integration with Hummingbird technology. We are fishing industry leaders; we have great brands, and we're committed to retaining that position in this marketplace. We are excited about the momentum for the breadth of the innovation we announced, and we will continue to work hard to give anglers the best fishing experience possible. In our diving business, we saw positive growth as global dive markets, especially European markets, continued to recover. We will leverage our innovation and brand building efforts to ensure SCUBAPRO remains one of the world's most trusted dive brands. Our Camping and Watercraft Recreation business faced a significant decline from strong pandemic-driven demand of the past few years. Retailers still have high inventory on their shelves and consumer spending has slowed in camping. We recently announced that we made the tough decision to exit our Eureka product line to increase our focus on the Jetboil franchise. Jetboil has experienced tremendous growth over the past five years and we're working on leveraging the brand equity into expansive growth opportunities. In Watercraft Recreation, we're excited about Old Town's award-winning revolutionary ePedal Plus drive. This cutting-edge technology is a 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 we're looking forward to shipping Old Town ePedal Plus soon. While we're disappointed in our fiscal year results, we're laser-focused on working hard to outperform the challenging marketplace and to improve our profitability. Despite current economic headwinds and marketplace softness, we will continue to invest in our key strategic drivers: understanding our consumers, sustaining innovation leadership, identifying new sources and paths of growth in our markets, and continually optimizing our digital consumer experience. Our ongoing hard work on these priorities ensures that our portfolio of market-leading brands is well-positioned for success and that we will continue to deliver long-term growth for Johnson Outdoors. Now, I'll turn the call over to Dave for more details on the financials.

David Johnson, CFO

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter of the year. As Helen mentioned, fourth quarter results were significantly impacted by the slower demand, as well as high inventory at retail and customers managing inventory more tightly, with fishing's new bow mount motor transition. For fiscal 2023, operating profit margin was 1.8% compared to 8.9% in the previous fiscal year. Gross margin for the year was 36.8%, slightly improved from last fiscal year. While we experienced improved materials and freight costs versus last year, those gains were nearly offset by increases in inventory reserves and unfavorable absorption due to reduced sales volumes. Operating expenses increased 13% or $27.3 million versus the prior year. The third compensation expense increased $9.3 million as a result of marking plan assets to market and was entirely offset in other income. We also recognized $2.4 million in expense related to the exit of the Eureka brand. Additionally, we experienced higher warranty expense of approximately $7 million. Research and development costs increased $3.7 million, and higher marketing and professional services costs further drove the operating expense increase versus fiscal 2022. Net income for the year was $19.5 million versus the prior fiscal year of $44.5 million. The effective tax rate was flat to the prior year at 24.4%. Inventory remains elevated and is higher than last year by about $12.8 million. We're focused on carefully managing inventory levels as we navigate a challenging marketplace. I expect we'll see inventory levels decline by the end of the fiscal year. Looking ahead, we remain focused on strengthening our operating margins with an active cost savings program and prudent expense management. 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 to the operator for the Q&A session.

Operator, Operator

Thank you. At this time, we'll conduct the question-and-answer session. Our first question comes from Anthony with Sidoti. Anthony, your line is open.