Johnson Outdoors Inc. (JOUT) Q2 2022 Earnings Call Transcript

Johnson Outdoors Inc.  (NASDAQ: JOUT) Q2 2022 earnings call dated May. 09, 2022

Corporate Participants:

Patricia Penman — VP, Marketing Services & Global Communications

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

David W. Johnson — VP & Chief Financial Officer

Analysts:

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Presentation:

Operator

Hello, and welcome to the Johnson Outdoors Second Quarter 2022 Earning 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. [Operator Instructions] The call is being recorded. [Operator Instructions] I would now like to turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Miss Penman.

Patricia Penman — VP, Marketing Services & Global Communications

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 P. Johnson-Leipold — Chairman and Chief Executive Officer

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 1, 2022 declined 8% compared to the prior years’ 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 profit of $15.4 million for the second quarter was down versus $36 million in 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 as possible and demand across all product lines remain strong. Ongoing supply issues and component delays are slowing our ability to complete and ship finished products. We have invested in available component. So we’re positioned to finished 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 post businesses continue to benefit from surge and 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 Sportsman line that has shown continued strength in the market. And in Camping demand for Eureka cans and stove continues to be strong. And in Jetboil, consumers remain excited about the superlight 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 the 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 W. Johnson — VP & Chief Financial Officer

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 planning 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 expense.

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-20%s. 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 remain — 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?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Anthony Lebiedzinski of Sidoti & Company. Your line is open.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — 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 P. Johnson-Leipold — Chairman and Chief Executive Officer

This quarter is a — the whole story is about supply chain. Demand is high and we’ve got back orders. So it was — it’s all about supply.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay, thank you for that. And then so I mean, so obviously, you were unable to fulfill a lot of the orders here. So do you think, what’s your degree of confidence as far as being able to hold onto these orders? Or just want to get a set of — better sense whether these could be any loss sales? Or do you think it’ll be just a matter of time before you can fulfill these orders and produce them and convert them into revenue?

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

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 products, and so, at this point, it’s about getting supply and hopefully, we’ll hang onto these orders while we get the supply in.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay. So it sounds like you haven’t seen any order cancellation because of the supply chain issue that you’re having. Is that fair to say?

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

No, we — no.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay. Thanks. Thanks for that. 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 W. Johnson — VP & Chief Financial Officer

Yeah, I mean, we took pricing at the beginning of our fiscal year and 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 C. Lebiedzinski — Sidoti & Company, LLC — Analyst

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

David W. Johnson — VP & Chief Financial Officer

Yeah, I mean, it’s — 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 that we’ve seen incremental price increases in the industry. Yeah, and the elasticity of demand, I mean, that’s the great question. It’s just about what the consumer’s willing to pay and those dynamics are definitely what we’ve taken into consideration as we [Technical Issues]

Anthony C. Lebiedzinski — Sidoti & Company, LLC — 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 of retail, how would you describe that?

David W. Johnson — VP & Chief Financial Officer

Hey, Anthony, sorry. We broke up there for a second. Could you repeat your question?

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Yeah, sure. Yeah. I didn’t hear you for a couple of seconds either. So yeah, so as far — so how would you describe overall demand that you’re seeing so far this quarter, obviously this is a big seasonal quarter for you guys. So while on that topic, I know you said demand is strong. So I just want to — if you could just reiterate whether that’s continuing into this quarter and then as far as your sense about inventory at retail now?

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

The demand continues. It’s a pretty steady and this is — we’re getting right into the heart of the season. What goes on the shelf doesn’t stay long, it just moves off. So I would say, also the inventory levels that we see at store level are very light. So things are moving.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay. That’s good to hear. And then in terms of the gross margin pressure, so obviously, it was a rather sizeable decrease. Can you help us deconstruct the different buckets of the gross margin decline materials versus air freight versus lack of absorption of given the fixed cost? I mean, if you could just give us, Dave, maybe a little bit more details as to — as the magnitude of how much — maybe not exact numbers, but a little bit better understanding that because the gross margin was down certainly more than what we’ve seen in the past?

David W. Johnson — VP & Chief Financial Officer

Yeah, sure. Both for the quarter and year-to-date, most of the variance versus last year is due to higher material cost. 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 C. Lebiedzinski — Sidoti & Company, LLC — Analyst

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

David W. Johnson — VP & Chief Financial Officer

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 C. Lebiedzinski — Sidoti & Company, LLC — Analyst

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

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

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, if lodging is going to be difficult until things kind of even out. So it’s a tough situation.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Got you. Okay. And then — okay so as far as the inventory, I think you mentioned Dave that it’s mostly raw materials 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. I mean that’s kind of fair to say.

David W. Johnson — VP & Chief Financial Officer

Yeah, 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 C. Lebiedzinski — Sidoti & Company, LLC — Analyst

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

David W. Johnson — VP & Chief Financial Officer

Well, that’s difficult to say, Anthony, just because of the demand profile that we’re seeing right now. I mean, 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’d be hard for me to predict — six months, what could happen with that inventory.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — 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’d be very helpful.

David W. Johnson — VP & Chief Financial Officer

Yeah. I mean, 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 as 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 yeah, I mean — 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 C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay, all right. Well, thank you and best of luck.

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

Thank you.

David W. Johnson — VP & Chief Financial Officer

Thank you.

Operator

[Operator Instructions] And I am showing no further questions. I would now like to hand a call back to Helen Johnson-Leipold for closing remarks.

Helen P. Johnson-Leipold — Chairman and Chief Executive Officer

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

Operator

[Operator Closing Remarks]