Johnson Outdoors Inc (JOUT) Q2 2023 Earnings Call Transcript

Johnson Outdoors Inc (NASDAQ:JOUT) Q2 2023 Earnings Call dated May. 05, 2023.

Corporate Participants:

Patricia Penman — Vice President of Marketing Services & Global Communication

Helen Johnson-Leipold — Chairman & Chief Executive Officer

David Johnson — Vice President and Chief Financial Officer

Analysts:

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Presentation:

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. 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. [Operator Instructions]. 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 — Vice President of Marketing Services & Global Communication

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 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 myself.

It is now my pleasure to turn the call over to Helen Johnson-Leopold.

Helen Johnson-Leipold — Chairman & Chief Executive Officer

Thanks Pat. Good morning, everyone. I’ll begin with an overview on the quarter and the year and then I’ll share perspective on the performance and outlook for our businesses. Dave will review financial highlights and then we will 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 second quarter. At the halfway mark of the fiscal years, total company year-to-date sales increased 11% over last year’s first fiscal six month period. Profit before income taxes for the quarter increased to $19.9 million versus $13.2[Phonetic] million in the prior year quarter. For the year-to-date period, profit before income taxes was $28.1 million versus $27.8 million in prior year-to-date period. Dave will give some more insight into the profit drivers.

Over the last few years we see a higher participation in outdoor activities and have benefited from the pandemic fuel demand. Now coming out-of-the pandemic, we’re facing more challenging markets and uncertainties affecting our customers and our consumers.

Our value in the markets, further in my discussion of 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’ll continuing to monitor, manage the consumer takeaways.

During the quarter, the team showcased our Fishing brands at the Annual Bassmaster Classic Tournaments and consumer selling [Indecipherable] This year Bassmaster had a record new talents with consumers passionate about Fishing and I’m pleased to share that Cannon and Humminbird sponsored anglers 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 brands 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 product selling 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 Sportsman line continues to do well.

In all of our businesses sustaining 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 products and stuff. We continue to work on an exciting [Indecipherable] new products across all of our brands. Looking ahead, we continue to stay on-top of marketplace condition and monitoring consumer buying behavior, and 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 — Vice President and Chief Financial Officer

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 sell 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 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 expense and increased professional services. This fiscal year, we’ve made an investment and 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 second quarter. A $10.1 million increase in 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, a $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 51% from the prior fiscal year second quarter. The quarter’s effective tax rate was 25.5% and was 26.2% for the six month period. Looking ahead, we foresee the consumer markets to continue to be challenging. We remain focused on evaluating the expense structure and delivering product on time. Our balance sheet continues to have no debt and our cash position enabled 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 and consistently payout cash dividends to our shareholders.

Now. I will turn the call over to the operator for the Q&A session. Operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] One moment while we get ready for the Q&A sessions. Please wait for your name to be announced before you proceed with your call — with your question. First question is coming from Anthony Lebiedzinski of Sidoti and Company. Your line is open.

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Yes sir, good morning and thank you for taking the questions. So Fishing had a great quarter as you were able to fulfill more orders and as supply certainly improved. So I guess first, I have a two 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 & Chief Executive Officer

We continue to fill our Fishing orders, so it is a little bit [Indecipherable] tell what is backlog versus new, but it’s still a very valid flow of product. We want to make sure that for the season that we’ve got good inventory at store level and it’s just that transitional time right now and hopefully through early in February, look at the consumer demandties[Phonetic] but near-term demand of our customers is really good. I don’t know, Dave if you have anything [Indecipherable].

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Yeah, okay guys, thanks Helen. And then specifically to the Fishing segment as far as inventory levels at the retail level, how would you describe that now?

David Johnson — Vice President and Chief Financial Officer

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

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it, yes. Thanks, Dave. And then as far as, it’s just the 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 — Vice President and Chief Financial Officer

Yeah. I mean, in general, we’ve got really healthy unit volume, probably a third of the increase that we’re seeing in our revenues due to pricing and the rest would be due to unit volume and mix.

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it, okay. Thanks. 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 cost to continue near-term or how should we think about?

David Johnson — Vice President and Chief Financial Officer

I mean it’s it’s kind of — there’s a lot of different buckets there. I mean, certainly, we’ve got our IRR warranty expense. I mean. I think we were artificially low over the last 18 months or so. So I would expect that rate to kind of be where it is now. So if you’re looking at it versus last year, there could still be some increases there. The deferred comp expense is offset in other income, as you know, so that’s, that is what it is. And then we do have higher — some head count some merits that are in there that will continue. The pro surf styles is more of a one-time thing. So again, that’s not a huge number, but it’s just part of the story.

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

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

Helen Johnson-Leipold — Chairman & Chief Executive Officer

You know as well is, that’s very hard to tell. It seems, we’ve seen this 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 movements and then we’ll get some of the reorders. But at this point, its hard to tell.

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it. Understand. Okay, and then Dave, as far as your comment about the gross margins. I mean, just wondering. I mean, just looking at the — how are you guys did in this quarter. I mean, this was the first actually year-over-year increase of the gross margin since later fiscal ’21, so it looks like we’re kind of off the bottom. So, do you think you’ll be kind of still in that kind of high 30% range here in near-term as far as gross margins or is it do you think it’s reasonable to at some point, you can get back to 40% plus well.

David Johnson — Vice President and Chief Financial Officer

Well, I think, if all else being equal, we’ll start to have the high-cost inventory off our books and so we’ll start to see expansion of the gross margin. I can’t tell you when that’s going to happen to get where we want it to be, but certainly we should expect to see more improvement through the year. Again, all else being equal. There’s no other issues that we see.

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

That’s okay. Thanks. Last question from me, what is your appetite for acquisitions. And overall, are you seeing any sort of moderation in terms of valuation multiples?

David Johnson — Vice President and Chief Financial Officer

No, as we said, we are always looking at what’s the markets and I think we are seeing some moderation in the multiples but again. I think as it’s about being on-target and hampering 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.

Anthony Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay. It sounds good. Thank you and best of luck.

David Johnson — Vice President and Chief Financial Officer

Thanks, Anthony.

Helen Johnson-Leipold — Chairman & Chief Executive Officer

Thank you.

Operator

[Operator Instructions], As it is not showing any further questions in the queue. I’d like to turn the call back over to Helen Johnson-Leipold for any closing remarks.

Helen Johnson-Leipold — Chairman & Chief Executive Officer

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

Operator

[Operator Closing Remarks]