Johnson Outdoors - Q4 2023

Transcript

Operator (participant)

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. If you would like to ask a question during that time, please press star one, one 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 Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Pat Penman (VP of Marketing Services and Global Communication)

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 filings 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%, $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 the decrease in sales volumes and the 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 backlog 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 continued 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 restage 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 Humminbird 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 new 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 the world's most trusted dive brand.

Our camping and watercraft recreation businesses faced a significant decline from strong pandemic-fueled 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 have experienced tremendous growth over the past five years, and we're working on leveraging the brand equity to into expansive growth opportunities. In watercraft recreation, we're excited about Old Town's award-winning revolutionary ePDL+ 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 ePDL+ 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 (VP and CFO)

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter and 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.

Deferred 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 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, and 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 (participant)

Thank you. At this time, we'll conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. One moment for our first question.

Anthony Lebiedzinski (Senior Equity Analyst)

Just, you know, first, just in terms of the...

Operator (participant)

Sorry, our first question comes from Anthony with Sidoti. Anthony, your line is open.

Anthony Lebiedzinski (Senior Equity Analyst)

Oh, thank you. Okay, awesome. Okay, so, so again, yeah, thank you for taking the questions. I guess first, just in terms of the inventory at retail, are you seeing this across all your brands, or is it more isolated to fishing? Just wanted to get a better understanding of what's going on in the marketplace.

Helen Johnson-Leipold (Chairman and CEO)

You know, we do see it varies by business, but there is inventory at retail that, you know, is slowing down demand, making our buyers a little bit, you know, questionable about the orders they place. So I think it really is in the outdoor industry, pretty much across the board.

Anthony Lebiedzinski (Senior Equity Analyst)

Okay, got it. Sure. Okay, and then, can you comment on the monthly progression of sales throughout the quarter? And you know, given that you're more than two months into your current first fiscal quarter, what can you share with us in regard to demand so far? Is it similar to the fourth quarter, or better or worse? Just yeah, ballpark kind of estimate, if you could share that, that'd be great.

David Johnson (VP and CFO)

Yeah, I mean, you know, the quarter kind of progressed, it declined kind of as the season wound down. So we've really seen it go back to kind of traditional seasonal marketplace, if you will. But it is depressed versus, you know, where it probably should be. So, you know, as we kind of look into the next quarter, you know, we're still seeing a challenging marketplace. So, you know, we're hopeful for a good season, but right now it looks pretty challenging.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm. Gotcha. Okay...

Helen Johnson-Leipold (Chairman and CEO)

Yeah, I mean, it truly is.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm.

Helen Johnson-Leipold (Chairman and CEO)

It's a swing. It's really a swing in the post-pandemic. You know, we had such great performance, and now it's getting back to more of a stable market, which I think, you know, everybody thought was coming. It's always hard to predict the level of it, but, you know, we've got to work through that period, but hopefully the season does, you know, have the energy we need.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm. So should we kind of go back and look at our models and, like, basically see, so now that, you know, we're past the pandemic, like you said, you know, the demand, it has dropped off. I mean, are we getting back to the seasonality that you had, let's say, in fiscal 2018 or fiscal 2019, where you saw really, you know, March and June quarters with big revenue numbers and then the, I guess, the shoulder season, like the December and September quarters? Is that what you're seeing now? Is that a fair assessment of how things will look like in fiscal 2024 and beyond?

David Johnson (VP and CFO)

Yeah. I believe we'll get back to traditional seasonality of the business. Yeah. And, you know, as we pointed out, last year's fourth quarter was really high due to just refilling the shelves. So, you know, we'll get back to, you know, more of a traditional apportionment of the season.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm. Okay. Thanks, Dave. So, you know, you mentioned the new product lines, you know, from Minn Kota and from Old Town. Have you guys already seen purchase orders come in for those, or, you know, how should we think about that?

Helen Johnson-Leipold (Chairman and CEO)

Yeah. I mean, we traditionally get, you know, the orders preseason, but as we said, you know, we do have the Our customers have inventory on shelves, and that's a key. We've got, you know, they've got to move through that. So I would say, you know, that the uncertainty is due to the inventory they've got, and we're hoping that it moves through, and we will see those orders come in. But we are seeing them. They're coming in now.

Anthony Lebiedzinski (Senior Equity Analyst)

Okay, that's good, good to hear. And then, you know, in terms of the fourth quarter, so the inventory reserve impact on gross margin, can you comment on that?

David Johnson (VP and CFO)

Yeah, you know, part of it was due to the exit of the Eureka business, but also just across the board, we were looking at our inventories and decided to take some reserves due to the levels. So, I mean, I feel good about the inventory level that we have now and that it's salable. But we just took some increased reserves kind of across the board.

Anthony Lebiedzinski (Senior Equity Analyst)

Mm-hmm. Gotcha. Okay. So, overall, you don't think there is much in terms of inventory obsolescence risk?

David Johnson (VP and CFO)

You know, as long as the marketplace and the consumer behaves as we expect, I think we're in okay shape. We obviously have to get those inventory levels down, but if we have a season that we expect, we'll be able to do that.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. Okay. Thanks for that, Dave. And then, so, I looked back. It looks like when you announced the Eureka exit, you talked about a $4 million charge, and it looks like it was $2.4 million instead. Is that correct?

David Johnson (VP and CFO)

No, it was $2.4 million hit the operating expense line.

Anthony Lebiedzinski (Senior Equity Analyst)

Oh, okay.

David Johnson (VP and CFO)

Yeah. Yeah, that was just the operating expense effect, and part of that was actually a contribution of inventory, a donation of inventory. So the rest is in the gross margin.

Anthony Lebiedzinski (Senior Equity Analyst)

Okay. All right. So overall, the gross margin, okay, there was some impact from Eureka. Okay. Got it. Okay. And then, you also called out higher warranty, R&D, marketing, and other costs. Any way you guys can quantify that? And, you know, do you think these higher costs are something that we should also expect in fiscal 2024?

David Johnson (VP and CFO)

You know, I think the warranty expense is getting back to a normalized level, so I would expect that to level off and move with sales going forward. You know, I think that's that was a little bit- that increase was a little bit of a one-time increase, so. I think the marketing expense, the ad promo expense, I think that's something that will continue to... We'll keep investing there to make sure we, you know, maintain our market viability and our share there. So, I think that'll be something that will remain elevated, and we'll continue to invest there.

Helen Johnson-Leipold (Chairman and CEO)

You know, we do. This has been a very competitive marketplace, and we've got to, you know, we're investing in the promotions to make sure that we compete from a pricing standpoint and from a consumer promotion standpoint.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. Okay. Thanks, Helen. And there's just a couple of quick other questions, if I may. And so, as far as the defined cost savings program that you talked about, how should we think about... I guess, you know, first, if you could just expand that a little bit more, give us maybe some details as to what you're trying to do on the cost savings side, and then how should we think about the impact on your profitability as a result of that?

David Johnson (VP and CFO)

Sure. I mean, you know, we've got an intentional and broad cost savings program that we feel good about going into this fiscal year. Most of it is focused on product cost in the supply chain. And, like I said, it's intentional, and I think it's gonna bear some fruit for us, this year and into the future. So, that will help gross margin. And, you know, hopefully, it'll help, you know, in a meaningful way, but, you know, we got to see it play out. We'll also continue to look at, you know, expenses beyond just the product cost and make sure we're prudent there and look throughout the enterprise for efficiencies with our expenses too.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. Okay. And lastly, do you have an estimate for CapEx for FY 2024?

David Johnson (VP and CFO)

I think it will be comparable to 2023.

Anthony Lebiedzinski (Senior Equity Analyst)

Okay. Understood. Okay. All right. Well, thanks very much, and best of luck.

David Johnson (VP and CFO)

Thanks.

Helen Johnson-Leipold (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one, one on your telephone and wait for your name to be announced. I'm showing no further questions at this time. I would like to turn the call back to Helen Johnson-Leipold for closing remarks.

Helen Johnson-Leipold (Chairman and CEO)

Just wanna thank you all for joining, and I hope everybody has a happy holiday. Thank you. Have a great day.

Operator (participant)

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