Earnings Call Transcript - JOUT Q2 2022

Operator, Operator

Hello and welcome to the Johnson Outdoors Second Quarter 2022 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. I would now like to turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Patricia Penman, Investor Relations

Thank you. Good morning everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2022 fiscal second quarter. If you need a copy of today's news release, it is available on our website at www.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 David 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 and thank you for joining us. I'll begin with an overview on the quarter and the year, and then I'll share perspectives on the performance and outlook for our businesses. Dave will review financial highlights and then we'll take your questions. Sales in our second fiscal quarter ending April 01, 2022 declined 8% compared to the prior year's unprecedented second quarter. At the halfway mark of the fiscal year, total company year-to-date sales declined 8% over last year's fiscal six month period. Total company operating profits of $15.4 million for the second quarter was down versus $36 million in the prior year quarter and year-to-date operating profit also declined compared to the prior fiscal six month period. The great news is that people continue to want to recreate outdoors, and we're seeing continued robust demand for our products across the businesses. At the same time, global supply chain disruptions continue to persist in the inflationary environment and geopolitical issues create many uncertainties. We're prioritizing product build, and we expect our margins to be challenged this fiscal year with the current supply chain dynamics. In the midst of these challenges, we remain focused on working hard to manage these supply chain issues and continue to fill orders. In Fishing, anglers continue to look to Johnson Outdoors for the best fishing experience possible, and demand across all product lines remains strong. Ongoing supply issues and component delays are slowing our ability to complete and ship finished products. We have invested in available components, so we're positioned to finish products as we receive remaining parts. This is a very difficult and challenging environment. I'm very proud of the hard work the team is doing to help us get our products to market. In Watercraft Recreation and Camping, we're building on momentum as both businesses continue to benefit from surging participation in the activities. Both businesses continue to see double-digit sales growth and are outperforming the market. In Watercraft Recreation, growth in our Fishing Kayak segment continues with high demand for the innovative sports line that has shown continued strength in the market, and in Camping, demand for Eureka and Stoves continues to be strong, and in jet oil, consumers remain excited about the Super Light Stash stove that is in its second year on the market. Finally, in Diving, our most global business, Dive markets are showing signs of recovery. Our work to promote and support local diving and to enhance our global digital presence, including e-commerce, have helped this positive growth. We remain focused on these efforts, along with sustained innovation to ensure SCUBAPRO's position as the most trusted dive brand in the world. In summary, the great news is that more people want to get outdoors, and we're seeing continued strong demand for our products. At Johnson Outdoors, we take the long-term view, working to position our brands and businesses for this future growth. In the meantime, navigating the challenging conditions and uncertainties is our priority and the team remains focused on working hard to maximize product build and shipments to customers. Now I'll turn the call over to Dave for a review of the financial highlights.

David Johnson, CFO

Thank you, Helen. Good morning, everyone. I wanted to highlight a few items from the quarter and the year. As Helen mentioned, demand remains strong across the business, and we're continuing to face disruptions in our supply chain. As a result, our ability to meet demand for our products is being impacted, especially in the fishing business. As a result of these supply shortages, we're experiencing increases in costs, which are impacting our gross margins. While we've taken pricing increases across all of our businesses, these actions have not entirely offset the increases of cost inputs. We expect margins to be pressured through the balance of the fiscal year as we prioritize meeting the strong demand. Additionally, we've been strategically building higher-than-normal inventory levels, primarily in raw materials. We continue to work closely with all of our vendors and plan for alternative sources of supply for critical components where feasible. For the quarter, operating profit was down versus the prior year's record-setting quarter due to lower sales volumes and a decrease in gross margin. The quarter's gross margin of 36.2% is down nine points from last year's second quarter due primarily to increased material costs, higher inbound freight, and lower absorption from decreased volume. Operating expenses in the quarter decreased $4 million versus the prior year second quarter, primarily due to lower sales volume-driven expenses as well as lower variable and deferred compensation expenses. The quarter's effective tax rate year-to-date is 25.1%, comparable to last year's quarter, and we expect the full year tax rate to be in the mid-20s. Net income for the quarter was $9.9 million, down from the prior year's quarter of $27.8 million. We continue to have no debt on the balance sheet, 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 dividends to shareholders. Now I'll turn the call over to the operator for the Q&A session.

Operator, Operator

And our first question comes from Anthony Lebiedzinski of Sidoti & Company.

Anthony Lebiedzinski, Analyst

Thank you. And good morning. I do have a few questions, so thanks for the opportunity here. So I guess first, in terms of the fishing segment sales decline, was this entirely due to supply chain issues? Or do you think perhaps there were any competitive issues in the quarter?

Helen Johnson-Leipold, CEO

This quarter is entirely focused on the supply chain. Demand is high, and we have back orders. It all revolves around supply.

Anthony Lebiedzinski, Analyst

Okay. Given that you were unable to fulfill many of the orders, how confident are you in your ability to retain these orders? I'm looking to understand if these could be lost sales, or do you believe it will just take time to fulfill the orders and turn them into revenue?

Helen Johnson-Leipold, CEO

Well, all we can say is we've seen orders actually come in incrementally. So the demand is still high. The customers are still needing product. And so at this point, it's about getting supply, and hopefully, we'll hang on to these orders while we get the supply in.

Anthony Lebiedzinski, Analyst

Okay. So it sounds like you haven't seen any order cancellations because of the supply chain issues that you're having? Is that fair?

Helen Johnson-Leipold, CEO

No, we haven't. No.

Anthony Lebiedzinski, Analyst

Okay. And then in terms of the price increases that you took, how much were the price increases on average? And can you just remind us what the timing of that was? And what are your plans for further increases?

David Johnson, CFO

Yes. We took pricing at the beginning of our fiscal year in some of our businesses and some of our brands, and then we took some incremental pricing at the beginning of April. I'd rather not get into the percentage that we got into, but it's been incremental, I would say, in terms of the pricing and obviously not enough to offset the cost increases that we've seen.

Anthony Lebiedzinski, Analyst

Okay. Got it. Thanks, Dave. And then, so as far as the price increases, would you say they are generally in line with competition and how would you describe the elasticity of demand?

David Johnson, CFO

Yes. We've seen competitive price increases kind of across the board, and we've got many competitors. So there's... it's a mixed bag in terms of how we compare to what they're doing. So I would say, in general, it looks like we've seen incremental price increases in the industry. Yes. And the elasticity of demand, that's a great question. It's just about what the consumer is willing to pay, and those dynamics are definitely what we take into consideration as we...

Anthony Lebiedzinski, Analyst

Got you. Okay. And then so far this quarter, are you still seeing solid demand? And I guess also, are you seeing as far as inventory levels or retail, how would you describe that?

Helen Johnson-Leipold, CEO

The demand remains strong and consistent as we enter the peak season. Products are selling quickly and don’t stay on the shelves for long. Additionally, inventory levels in stores are quite low, indicating that items are moving well.

Anthony Lebiedzinski, Analyst

That's good to hear. Regarding the pressures on gross margin, there was a significant decrease. Can you break down the various factors contributing to the gross margin decline, such as materials, air freight, and the impact of fixed cost absorption? It would be helpful if you could provide a bit more detail on the extent of these factors, not necessarily exact numbers, but a clearer understanding, as the decline in gross margin was certainly more pronounced than in the past.

David Johnson, CFO

Yes. Sure. Both for the quarter and year-to-date, most of the variance versus last year is due to higher material costs. I'd say 60% to 70% of the variance is due to that. The biggest chunk of that after that is just the volume decrease in unabsorbed overhead. We have seen inbound freight impacted. It's not as big of an impact on the quarter versus year-to-date. So really, the two big buckets are materials and then unabsorbed overhead.

Anthony Lebiedzinski, Analyst

Okay. Got it. Okay. And then I know in the past, you have used more air freight, was that the case post this quarter as well?

David Johnson, CFO

I would say it's been comparable to last year when we had to do a lot of that. So it's been wherever we can find the ability to get the product in. So it hasn't been a big delta versus what we've done in the past.

Anthony Lebiedzinski, Analyst

Okay. Got you. Okay. And then can you comment on your exposure to China and the impact of the lockdowns in China?

Helen Johnson-Leipold, CEO

Obviously, they've had a second wave of lockdowns and that certainly impacts supply. I think we have to wait and see what this latest one has in terms of impact. But I think this lodging is going to be difficult until things kind of even out. So it's a tough situation.

Anthony Lebiedzinski, Analyst

Got you. Okay. So as far as the inventory, I think you mentioned, Dave, that it's mostly raw material as far as that increase because overall, inventory is up almost double from a year ago. I assume that there are no issues there with any obsolescence or anything like that. Is that kind of fair to say?

David Johnson, CFO

Yes. That's totally fair to say at this point, because demand is so strong, we feel good about the inventory we have right now.

Anthony Lebiedzinski, Analyst

Okay. So given what you know today, where would you say inventories could be by the end of the fiscal year?

David Johnson, CFO

Well, that's difficult to say, Anthony, just because of the demand profile that we're seeing right now. I think if the season is strong, we can start to work that down. And we'll see what the pipeline fill is at the retail level kind of as we end the season. So there's a couple of dynamics there that we just need to work through. So it would be hard for me to predict six months, what could happen with that inventory.

Anthony Lebiedzinski, Analyst

Okay. Understood. I know it's still a fluid and dynamic environment for sure. And then I guess lastly, if you could just comment on capital allocation priorities. If you could just rank where do you see dividends versus M&A versus share buybacks? If you could just kind of rank them one, two, three, four in that kind of order, that would be very helpful.

David Johnson, CFO

Yes. It's the same for us where we do have capital that we have available to us, and we want to grow the company with that capital. So that's the primary focus is to grow the company with the capital that we have. Beyond that, we want to make sure that the shareholder has a good return. And a big vehicle that is the dividend that we pay. We want to make sure that's robust. But yes, I and we'll look at other things as we need to with buybacks or other things that could be alternative uses of the cash, but that kind of remains the same strategy.

Anthony Lebiedzinski, Analyst

Okay. Well thank you and best of luck.

David Johnson, CFO

Thank you.

Operator, Operator

And I'm showing no further questions. I would now like to hand the call back to Helen Johnson-Leipold for closing remarks.

Helen Johnson-Leipold, CEO

Just want to thank everybody for joining us, and have a great day.

Operator, Operator

Ladies and gentlemen, that concludes today's conference. You may now disconnect.