Earnings Call Transcript - JOUT Q2 2023

Operator, Operator

Hello, everyone, and welcome to the Johnson Outdoors Second 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. 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.

Patricia Penman, Investor Relations

Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors' results for the 2023 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 call may contain forward-looking statements. These statements are made based on 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, Chairman and CEO

Thanks, Pat. Good morning, everyone. I'll begin with an overview on the quarter and the year, and then I'll share a perspective 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 March 31, 2023, rose 7% to $202.1 million compared to $189.6 million in the prior year's second quarter. At the halfway mark of the fiscal year, total company year-to-date sales increased 11% over last year's first fiscal 6-month period. Profit before income taxes for the quarter increased to $19.9 million versus $13.2 million in the prior year's quarter. For the year-to-date period, profit before income taxes was $28.1 million versus $27.8 million in the prior year-to-date period. Dave will give some more insight into the profit drivers. Over the past few years, we've seen higher participation in outdoor activities and have benefited from the pandemic-fueled demand. Now coming out of the pandemic, we're facing more challenging markets and uncertainties affecting our customers and our consumers. I'll delve into the markets further in my discussion of each business. In Fishing, supply and component availability significantly improved, allowing us to fill more customer orders. Near-term customer demand continues to be solid, and we're continuing to monitor consumer takeaway. During the quarter, the team showcased our Fishing brands at the annual Bassmaster Classic tournament, a consumer show in Tennessee. This year, Bassmaster had a record attendance with consumers passionate about fishing. And I'm pleased to share that Minn Kota and Humminbird-sponsored angler, Jeff Gustafson, won the tournament. In our Diving business, momentum continues as the market rebounds from depressed pandemic levels and increased global travel. We continue to benefit from our SCUBAPRO equity as the most trusted dive brand in the world. In Camping and Watercraft Recreation, both markets are impacted by a post-pandemic slowdown. Retailers have built up inventory and now have a lot of products on the shelf to work through. Meanwhile, consumer spending has slowed. Consumer-focused innovation is critical for both the new and existing participants in these activities. In the higher end, both of our innovative Old Town and Sportsman line continued to do well. In all of our businesses, sustained innovation leadership is critically important to our growth and the success of our brands. We remain focused on investing in understanding both new and existing consumers' evolving needs and translating that into new product success. We continue to work on an exciting pipeline of new products across all of our brands. Looking ahead, we continue to stay on top of marketplace conditions and monitoring consumer buying behavior. And as always, we take the long-term view at Johnson Outdoors, positioning our brands and businesses for long-term growth. Now I'll turn the call over to Dave for a review of the financial highlights.

David Johnson, CFO

Thank you, Helen, and good morning, everyone. I want to highlight a few items from the quarter and the year. As Helen mentioned, supply availability has markedly improved, allowing us to fill more customer orders, especially in Fishing. Raw material inventory is down 25% as we continue to convert those components to finished goods available to ship as we enter our primary selling season. With the right market conditions, we plan to see a measurable reduction in total inventory by the end of the fiscal year. The quarter's gross margin of 37.3% slightly improved from 36.2% in last year's second quarter, due primarily to price increases and efficiencies from increased sales volumes. We expect margins to continue to be challenged in the coming months as we work through higher-cost inventory. Inflation remains a concern, and we continue to evaluate our expense structure. Operating expenses in the second quarter increased $10.8 million versus the prior year's second quarter. The primary drivers of the increase between the quarters were higher sales volume-driven expenses as well as higher warranty costs, compensation costs, deferred compensation expenses, and increased professional services. This fiscal year, we've made an investment in reviewing and assessing our operational model in order to maximize operating efficiencies. Resulting operating profit for the quarter decreased 26% to $11.4 million versus $15.4 million in the prior fiscal year's second quarter. A $10.1 million improvement in other income for the quarter more than offset the operating profit decline, however. That increase was due to a $6.6 million gain on the sale of the Military and Commercial Tent product lines that we announced in March. Additionally, $3.3 million of higher earnings on the assets and deferred compensation plan in the current year further contributed to the increase and entirely offset the increased deferred compensation expense I noted earlier. Net income for the second quarter was $14.9 million, up 50.1% from the prior fiscal year second quarter. The quarter's effective tax rate was 25.5% and was 26.2% for the 6-month period. Looking ahead, we foresee the consumer markets to continue to be challenging. We remain focused on evaluating the expense structure and delivering products on time. Our balance sheet continues to have no debt, and our cash position enables us to invest in opportunities to strengthen our business. We remain confident in our ability to navigate challenging market conditions and deliver long-term value to 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

The first question is from Anthony Lebiedzinski of Sidoti & Company.

Anthony Lebiedzinski, Analyst

So Fishing had a great quarter as you were able to fulfill more orders as supply certainly improved. So I guess, first, I have a 2-part question. So first, how much remaining backlog is there left to fulfill given the previous supply chain constraints? And then secondly, more recently, are you seeing incoming orders during the last few weeks? Just curious to hear your thoughts on that.

Helen Johnson-Leipold, Chairman and CEO

We are continuing to fulfill our fishing orders, making it a bit challenging to distinguish between backlog and new orders. However, we are experiencing a strong flow of product. We want to ensure that we have sufficient inventory at the store level for the season. We are currently in a transitional period, and while it might be too soon to assess consumer demand, the immediate demand from our customers is quite positive. Dave, do you have anything to add?

David Johnson, CFO

Right, yes.

Anthony Lebiedzinski, Analyst

Okay. Got you. And then specifically to the Fishing segment, as far as inventory levels at the retail level, how would you describe that now?

David Johnson, CFO

Yes. I mean, from what we can tell, they look to be in pretty good shape right now. So it's still kind of preseason, but we feel like we've got the shelves in pretty good shape, and it's kind of up to the consumer now as we head into the season.

Anthony Lebiedzinski, Analyst

Got it. And then as far as adjusted revenue for the quarter, can you just comment broadly as far as pricing versus unit volumes as far as that overall sales increase?

David Johnson, CFO

Yes. I mean in general, we've got really healthy unit volume. Probably 1/3 of the increase that we're seeing in our revenue is due to pricing, and the rest would be due to unit volume and mix.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then as far as the operating expenses, those came in higher than what we had expected. I know you called out the higher warranty compensation, professional services, and some other costs as well. So just wondering how meaningful of an increase was that. And do you expect those components of costs to continue near term? Or how should we think about that?

David Johnson, CFO

There are various factors to consider here. We are definitely monitoring our warranty expense, which I believe was lower than it should have been for the past 18 months. I expect that expense to stabilize at its current level, and you might see some increases compared to last year. The deferred compensation expense balances out in other income, so it is what it is. We also have some increases in headcount and merit increases that will persist. The professional services expenses are mostly one-time costs, so they won't represent a significant ongoing burden, but they are part of the overall picture.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then in terms of the smaller segments, Watercraft Recreation and Camping, when do you think that weakness bottoms out?

Helen Johnson-Leipold, Chairman and CEO

Well, that's very hard to tell. We've seen weakness across a number of categories in the outdoor space, given the pandemic was such a great and significant season for those kind of businesses. We hope that when the season kicks in that we'll start seeing the movement, and then we'll get some of the new orders. But at this point, it's hard to tell.

Anthony Lebiedzinski, Analyst

I understand. Dave, regarding your comment about gross margins, I'm curious about this quarter's performance. This marks the first year-over-year increase in gross margins since late fiscal '21, indicating we've likely moved off the bottom. Do you expect to maintain a high 30% range for gross margins in the near term, or do you believe it's possible to return to above 40% at some point?

David Johnson, CFO

I believe that if everything stays the same, we will begin to clear our high-cost inventory, leading to an increase in the gross margin. However, I can't specify when we will reach our desired level. We should expect to see continued improvement throughout the year, assuming no other issues arise.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then last question for me. What is your appetite for acquisitions? And overall, are you seeing any sort of moderation in terms of valuation multiples?

Helen Johnson-Leipold, Chairman and CEO

As we've said, we are always looking at what's in the market, and I think we are seeing some moderation in the multiples. But again, I think it's about being on target and having strategic acquisitions, and we're actively looking. I think our hope is that we will get the right companies that come to the surface. And when they do, we'll go after them.

Operator, Operator

At this time, I'm not showing questions in the queue. I'd like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Helen Johnson-Leipold, Chairman and CEO

Okay. Well, thank you, everybody, for joining us today, and I hope you have a great day. Thank you.

Operator, Operator

Thank you all for joining today's conference call. This concludes today's event. You all may disconnect, and everyone, have a great day.