Johnson Outdoors - Q2 2024

Transcript

Operator (participant)

Hello and welcome to the Johnson Outdoors Q2 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. 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. If you'd like to ask a question at that time, please press star 11 on your telephone keypad. 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 Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Patricia Penman (CMO)

Thank you. Good morning, and thank you for joining us for our discussion of Johnson Outdoors' results for the 2024 fiscal Q2. 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 included 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 (Chairman and CEO)

Thanks, Patricia . 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 more detailed financial review, and then we will take your questions. Sales in our second fiscal quarter ending March 2024 declined 13% to $175.9 million compared to $202.1 million in the prior year's Q2. 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 Q2 compared to an operating profit of $11.4 million in the prior year's Q2. 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 Q2 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 Q2. 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 prior fiscal year-to-date period. Continued tough marketplace conditions significantly impacted our Q2 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. 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 remains a strategic priority to create consumer-focused products and technology that deliver the best outdoor experiences 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 a critical focus. 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 financials.

David Johnson (VP and CFO)

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter. Profits in the Q2 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 is 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 (participant)

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

Anthony Lebiedzinski (Senior Equity Analyst)

Good morning, and thank you for taking the questions. So first, can you guys give us at least maybe some directional comment? How did the quarter progress from January through March, and maybe perhaps give us an early indication of how your Q3 is trending so far?

Helen Johnson-Leipold (Chairman and CEO)

Well, this quarter, as we talked about, I think it's not as good as last year, but we feel good that at least our new products are being accepted by the trade. I think there's, as we said, a challenging uncertainty with the consumer, but it's still reflecting early season activity, and we're hoping for a better season going forward. I can't give you much of an indication of what's going to happen going forward, but as I said, I think this is a challenging time, and it's going to continue to be challenging. We've got both marketplace conditions and a lot of competitive activity, so I think that's going to continue.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. Just to 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 (Chairman and CEO)

Well, I think you've got a lot of variables in the mix, so there's not one specific reason. But across all outdoor categories, we are seeing that the demand is depressed. And some of it is due to the pull forward that happened during the pandemic. But I think we're also seeing a lot of competitors with pricing activity that are putting pressure on. And the trade, I think, is a little bit cautious about overordering. They've been through the inventory situation. I think that's clearing up. It's still an issue depending on the business you're talking about, but I think it's a combination of a lot of things, which hopefully they will start to clear up as we get into the future state when the volatility hopefully gets stabilized.

Anthony Lebiedzinski (Senior Equity Analyst)

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

David Johnson (VP and CFO)

Yeah. I mean, 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 (Senior Equity Analyst)

Understood. Okay. Thanks, Dave. Okay. 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 (Chairman and CEO)

I think it depends on the business, for sure, and so. But I think, in general, the inventory levels will get better. I mean, everybody's 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 inventory that people have stock and are ready to go for the season.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. And then you talked about seeing good response from Minn Kota Quest trolling motors, which is great to hear. So that being said, I mean, do you think this will be incremental to your existing line of products, or could we perhaps see some cannibalization from your other product lines? How should we think about that?

Helen Johnson-Leipold (Chairman and CEO)

Well, the good response, it's really trade-oriented. I think innovation, in general, was a key for this coming season because innovation tends to drive through some of the depressed demand. But this is we did restage our whole Minn Kota line, and we always assume that as you restage product, that you've got some cannibalization of the existing. But this is a different motor for a different target, so feel good that it should drive some incremental sales.

Anthony Lebiedzinski (Senior Equity Analyst)

That's great to hear. Okay. That's what I was looking for. And then thinking about the promotional programs and your efforts to reduce inventory, how should we think about that as it relates to your near-term and longer-term profitability?

Helen Johnson-Leipold (Chairman and CEO)

Well, I think we do what it takes to drive volume in the market, and I think this is, we're addressing this situation, which has a lot of competition. When there's softer demand and the market's not growing as fast, I think you end up increasing your promotional spend. But, as innovation, innovation should, in normal times, be what drives sales and don't have to rely heavily on promotion. So I think we show that we will do what it takes to drive movement at retail. It's just been a little heavier this year given the circumstances.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. Okay. But it is encouraging to see the inventory decline on a sequential basis, so hope you guys can further make progress there. And then lastly, for me, just switching gears to your cost-savings program. So it sounds like it helped to offset some of the pressure points in this last quarter, and I think even the quarter before that. But I guess as you look at that cost-savings program, I guess you talked about improving efficiencies at factories and with your logistics. But I guess maybe in baseball terms, what inning are you in with that initiative, and what else are you looking to do to gain further cost savings?

David Johnson (VP and CFO)

Yeah. I think we're in the middle of it, so I'll use football. We're at halftime. So I think, yeah, I mean, we started this pretty robustly 6-8 months ago, and we continue to look at how we can improve our profit profile. So that will continue.

Helen Johnson-Leipold (Chairman and CEO)

I do think also we are evaluating all options to look at other cost savings, but it's really about being more efficient and doing things in a more effective and efficient way. I think that's a heavy focus. We're looking at all aspects of the business. I think the marketplace, obviously, the competition is continuing to increase pressure, so we've got to look at this, and we're in the process of doing that.

Anthony Lebiedzinski (Senior Equity Analyst)

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

Helen Johnson-Leipold (Chairman and CEO)

Thank you.

Operator (participant)

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

Anna Glaessgen (Senior Equity Research 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 (Chairman and CEO)

I think it's not going to go away. I think we've got some intense competition. It will be going forward, but we really rely on innovation to drive the price value so that promotion doesn't become a crutch for us. But it certainly is necessary to be right in there during the key promotional timeframes as our competitors are promoting as well. But it's a different ballgame, and we've got to up our game in innovation so promotion doesn't become as critical a factor for us, so.

Anna Glaessgen (Senior Equity Research Analyst)

Got it. As inventory positions are seemingly improving at retail, do you expect a greater balance between sell-in and sell-through, or how do you expect that progressing through the year?

David Johnson (VP and CFO)

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

Anna Glaessgen (Senior Equity Research Analyst)

Got it. And just last one for me. The inventory on your balance sheet, that you're trying to work down, is that concentrated to any one segment, or is it kind of across the board?

David Johnson (VP and CFO)

It's across the board based on the sales of the business unit. Obviously, Fishing's our biggest business. It's got the most inventory. Every business has been able to reduce their inventory sequentially over the quarter.

Anna Glaessgen (Senior Equity Research Analyst)

Great. Thanks.

Operator (participant)

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

Doug Asiello (CFA)

Good morning. Thanks for taking my call. At the risk of beating a dead horse, I just wanted to double-click on the competitive intensity question a bit. So the press release is chock-full of commentary on pricing actions and promotional activity, and you called out the Minn Kota Quest trolling motor success. So my question is, and I think I know the answer, but I want to ask it explicitly. Do you think the competitive environment is accelerating in terms of its intensity in this important seasonal Q3 that you're in now versus a year ago and also relative to the quarter you just closed?

Helen Johnson-Leipold (Chairman and CEO)

Well, it depends on which business you're talking about, but I think across the board, we've got a lot more activity going on from a promotional standpoint, and that usually happens when you're in the market where the demand is a little soft and it just increases. I think because of the, I think, popularity of the outdoor space, we've obviously attracted more competitive players and more competitive activity. And during this kind of timeframe where you've got economic uncertainty, there's also, and we're seeing, depending on the business, but the mix changing a little bit that some of the lower price point products are gaining a little more traction than some of the premium price.

But I would say, in general, outdoor has become a good space to be in, and I think the reality is that we are going to have competition going forward, and pricing and promotions is part of the game.

Doug Asiello (CFA)

Great. Thank you. I'm in Fishing specifically, but I think you knew 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? Thank you.

David Johnson (VP and CFO)

Yeah. I mean, our preference is to invest that capital to grow the business and grow it profitably and put it in a 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. But yeah, we want to take that capital, invest it back into the business either through organic growth or perhaps acquisitions.

Doug Asiello (CFA)

Great. Thank you.

Operator (participant)

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 (Chairman and CEO)

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

Operator (participant)

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