Johnson Outdoors (JOUT) Earnings Call Transcript

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Date

Tuesday, December 10, 2024 at 11 a.m. ET

Call participants

• Chairman and Chief Executive Officer — Helen Johnson-Leipold
• Vice President and Chief Financial Officer — David W. Johnson

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Risks

• Chairman and CEO Johnson-Leipold stated, "Consumer demands for outdoor recreation products across all of our businesses remain soft," indicating continued market weakness.
• Gross margin deterioration substantially due to "increased promotional pricing," "changes in product mix toward lower-margin products," and higher inventory reserves, according to David Johnson.
• CFO Johnson said, "increased severance costs of $1.5 million" and a "bad debt reserves" increase point to higher operating burdens during the year.
• CFO Johnson acknowledged persistent retail inventory caution, stating, "there's a little bit of increased inventory there. So and they're still a very cautious perspective from our trade partners."

Takeaways

• Inventory Balance -- $209.8 million at quarter-end, a $51.7 million reduction from the prior year, attributed to focused inventory management efforts.
• Gross Margin Decline -- Gross margin fell by 2.9 percentage points for the full year, driven by promotional pricing, product mix shift toward lower-margin items, and increased inventory reserves.
• Promotional Pricing Impact -- Fourth-quarter gross margin was reduced by approximately 2.5 percentage points from increased promotional activities compared to the prior year's fourth quarter.
• Operating Expense Increase -- Operating expenses were up $12.2 million year over year, mostly due to a $11.2 million goodwill impairment, a $2.5 million rise in bad debt reserves, $1.5 million in severance, and $3.8 million higher deferred compensation expense, partially offset by lower incentive compensation and professional service expense.
• Operational Cost Savings -- Identified cost-saving initiatives contributed around 2 percentage points of gross margin benefit for the year, especially from factory efficiencies, scrap reduction, lower material and logistics costs, and job eliminations in the fourth quarter.
• Debt-Free Balance Sheet -- The company continues to operate without debt, providing flexibility to invest in strategic priorities.
• Dividend -- The Board recently approved a dividend, as announced on December 5, reflecting ongoing shareholder returns.
• New Product Launches -- 2024 includes significant launches such as Xplore and MEGA Live 2 in Fishing, as well as new entries in Watercraft and Jetboil products, with a strategic focus on quality rather than quantity.

Summary

Johnson Outdoors (NASDAQ:JOUT) emphasized disciplined inventory management, resulting in a substantial inventory reduction and positive cash flow from operations. Management confirmed a continued debt-free balance sheet, aligning with their intent to fund investments in innovation and operational efficiency. New product launches, including Xplore and MEGA Live 2, aim to address intensified category competition, with leadership asserting consumer insights are at the center of their drive for differentiated offerings. Shareholder returns remain a focus, with the Board reaffirming its commitment to dividends. Ongoing cost containment strategies include expanded sourcing and job eliminations, while management signaled vigilance amid uncertain external pressures.

• CFO Johnson indicated operational cost savings were "masked by the results," yet future expansion of these programs is planned based on sourcing and production efficiencies.
• CEO Johnson-Leipold noted a shift in consumer behavior as a key opportunity, positioning deeper consumer understanding as a cornerstone of future strategy.
• CFO Johnson stated discussions are underway about potential tariff impacts and related mitigation strategies, but no specific guidance was provided on financial effects.
• Management's commentary suggests that while market recovery is not evident, efforts are underway to adapt product development and go-to-market approaches to the digital environment.

Industry glossary

• Promotional Pricing: Temporary reduction in selling price intended to increase product demand and clear inventory, often at the expense of gross margin.
• Goodwill Impairment: A non-cash charge indicating the carrying value of acquired intangible assets exceeds fair value, often due to underperformance or deteriorating market conditions.
• ASP (Average Selling Price): The mean revenue earned per unit sold, commonly monitored for pricing trends and mix effects in manufacturing and retail.

Full Conference Call Transcript

Helen Johnson-Leipold: Thanks, Pat. Good morning, everyone. Thank you for joining us. I'll begin by addressing our fiscal 2024 performance, and then I'll share our plan to address future challenges. Dave will cover some key financials and then we'll take your questions. I won't rehash the numbers in our fourth quarter and year-end earnings announcement. Obviously, it was a tough year. Continued challenging marketplace conditions and competitive pressures significantly impacted our fiscal 2024 performance. Consumer demands for outdoor recreation products across all of our businesses remain soft.

While we're not seeing indicators that these challenging conditions are going away anytime soon, we have been aggressively leaning into our critical strategic priorities, innovation, our go-to-market strategy and operational efficiencies to enable future growth for our brands and businesses. In this highly competitive outdoor recreation marketplace, our focus on strong innovation cannot be more critical. As a result, we are taking our innovation approach to the next level and investing in the critical elements, including key talent and technologies as well as strengthening our consumer centric innovation approach. Our focus remains on delivering the best outdoor experiences possible across all of our categories.

The ever-evolving digital landscape requires us to do things differently to engage and stay in front of our consumers. Our online presence provides key consumer touch points for our brands from product research to purchase to post-purchase support. We've been making investments in restructuring the way we go-to-market to enhance our capabilities and drive growth and we're confident this will be a meaningful contributor to accelerating our sales and profitability. Lastly, as I mentioned in previous quarters, improving profitability and strengthening our business operations continue to be important focus areas. We've worked hard to drive operational cost savings and redeploy resources against our strategic priorities.

The cost savings efforts were masked by our results and we recognize there is more work to do. Fiscal 2024 is tough, but we've been through tough times before. We are committed to investing in the strategic priorities that will position our brands for long-term growth, while also working hard to improve our financial performance. We know we have a lot of work to do, but we're confident that we'll see benefits from these investments in the future. Now I'll turn the call over to Dave for more details on financials.

David Johnson: Thank you, Helen. Good morning, everyone. In the midst of our challenging results for fiscal 2024, I wanted to start by highlighting three important areas. First of all, our balance sheet remains debt-free, which is a strong competitive advantage in today's marketplace and enables us to invest in mission-critical strategic priorities Helen just discussed. Second, as I've mentioned previously on quarterly calls, we've been working hard to manage our higher-than-normal inventory levels. Our inventory balance as of September was $209.8 million, down about $51.7 million from last year's fourth quarter. Through prudent inventory management, we were able to generate positive cash flow from operations in fiscal '24.

Lastly, we continue to pay a meaningful dividend to our shareholders with the Board approving our most recent dividend, which we announced on December 5. We remain confident in our ability and plan to create long-term value for shareholders. Now let's get into some of the numbers from the quarter and fiscal year. Gross margin in the fourth quarter was negatively impacted by increased promotional pricing, changes in product mix toward lower-margin products and increased inventory reserves. For the fiscal year, gross margin declined by about 2.9 points. Operational cost savings positively impacted gross margin by about 2 points but did not offset the impact of unfavorable absorption of fixed overhead costs and unfavorable product mix.

For the fiscal year, operating expenses increased $12.2 million versus the prior fiscal year, due primarily to a non-cash goodwill impairment charge of $11.2 million, a $2.5 million increase in bad debt reserves, increased severance costs of $1.5 million and $3.8 million of higher deferred compensation expense as a result of marketing plan assets to market value. The increase was partially offset by lower incentive compensation and professional service expenses between the years. Looking forward, we'll continue to strategically manage our cost structure while protecting investments to strengthen the business. Now I'll turn the call over to the operator for the Q&A session. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski from Sidoti.

Anthony Lebiedzinski: So first, in the fourth quarter, your sales were up in three out of the four segments. Can you talk about unit volumes versus ASP? And what you see as far as inventory levels at the retail level?

David Johnson: Yes. I mean in terms of the fourth quarter, we did see some a bit of lift in unit volume kind of across the board in the fourth quarter because last year's fourth quarter was obviously a challenging quarter. Overall, for the year, we're seeing growth from ASP as well as unit environments, both. And in terms of the retail inventory, it's really -- it's -- we're seeing a mixed bag right now. I mean we're seeing pockets of inventory that's in good shape, but other retailers in trade, there's a little bit of increased inventory there. So and they're still a very cautious perspective from our trade partners.

Anthony Lebiedzinski: So as far as the gross margin, that did come in lower than what we were we're expecting. Can you provide -- I don't know if there's any way you can quantify or maybe share more details. I mean you called out a few items, but I just wanted to get more specifics as to how impactful some of these things were as far as promotional pricing, the mix shift to lower-margin items, their inventory reserves. Is there any way you can provide more details about that?

David Johnson: Sure. Yes. I mean the promotional pricing, the decrease in pricing for the fourth quarter was about a 2.5 point roughly impact versus last year's fourth quarter. So you were down 6 points for the quarter. So a big chunk of that was just the reduced pricing and promotional pricing for the fourth quarter. Mix was comparable to that. So we just had a lower mix out there, and that was most of the rest of the decrease. And the inventory reserves of about 1 point.

Anthony Lebiedzinski: That's very helpful. And then in terms of your strategy, so the focus on innovation has been sort of a key factor for Johnson Outdoors as long as I can remember. But can you talk about what, if anything, you're doing differently and maybe you could touch on the upcoming pipeline of new products?

Helen Johnson-Leipold: Well, we are taking a hard look at our approach to innovation and we are putting more resources behind it in terms of types of research we do and actual dedicated people helping in that area. But a lot of it is about getting consumer insights and driving those through. We've got -- we feel good. We've got some good launches that are happening this year. And it's not about quantity, it's really about quality. So we've got some launches in fishing that our Xplore and our MEGA Live 2 product, which are critical to this year for us -- for that business. We've got launches in Watercraft entering the water wreck category. We've got Jetboil.

We've got I would say, solid new product launches. But the market gets competitive. It's -- we've got more competition and that's why we are really looking at our process to make sure that we're approaching it in a way that can make us better and increase success of our launches.

Anthony Lebiedzinski: So for you guys to execute the strategy, do you think you have the appropriate internal resources for that? Or do you think you need to make an acquisition to improve your capabilities to execute this strategy?

Helen Johnson-Leipold: Well, we're always looking to get better, and we don't have a problem leveraging external resources as well as internal. I do think that we can and plan to win in the categories we have today, and it's a matter of really understanding the consumer and the consumer has changed, which is, I think, a great opportunity for us. But we are looking for the resources we need to do the job we have to do. But innovation is critical to us and it's always changing.

Anthony Lebiedzinski: Okay. And then in terms of the operational efficiencies, can you share more details about the cost savings program? What's been the benefit from -- on recent results? And how should we think about the future cost savings opportunities?

David Johnson: Yes. We had a very deliberate operational cost savings program we launched over a year ago, and that bore fruit for us in fiscal '24. We've really focused on the factories, increasing our efficiencies, reducing our scrap rates, driving down cost of goods, the materials come into the factory, logistics savings, those are the four big areas that we really worked on. And it drove about 2 points of benefit on the gross margin for us for fiscal '24. So, we're pleased with that. Unfortunately, it was masked by the results. We also did a job elimination in the fourth quarter, which will help us going forward on the operational expense side of things.

And just back to the operational cost savings program, we expect to expand that. I mean, we want to keep working on opportunities with sourcing and driving down product costs. So, we've got plans in place to continue that effort to expand that effort.

Anthony Lebiedzinski: Okay. So as far as the severance cost that you guys cited in the press release, was that all in the fourth quarter?

David Johnson: Yes, it's basically all in the fourth quarter.

Anthony Lebiedzinski: Okay. And I guess lastly for me. So obviously, you guys are predominantly a manufacturer in the U.S. here, but you guys do use lot of imported components. Just wanted to get a sense from you as far as what you think about the impact from potential tariffs coming next year?

David Johnson: Yes. I mean we've definitely got our ear to the ground on that, and we've had discussions preliminary on ways that we could mitigate what could happen. So obviously, we've been through this before and we had some mitigation strategies before, but yes, more to come on that.

Operator: I'm showing no further questions at this time. I'd now like to turn it back to Helen Johnson-Leipold for closing remarks.

Helen Johnson-Leipold: I just want to thank everybody for joining us today, and I hope everyone has a happy holiday. Thank you.

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

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