Johnson Outdoors Inc.

Hello, everyone, and welcome to the Johnson Outdoors fourth quarter 2024 earnings conference call. Today's call will be led by Helen Johnson Leofold, 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 listen-only mode. After the prepared remarks, the question and answer session will begin. If you'd like to ask a question during that time, please press star 1-1 on your telephone keypad. This call is being recorded. No participant invites consent to our recording of this call. If you do not agree to these terms, simply drop off the line. I'll now turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you. Good morning, and thank you for joining us for our discussion of Johnson Outdoors results for the 2024 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 myself. It is now my pleasure to turn the call over to Helen Johnson-Leopold.

Thanks, Beth. Good morning, everyone. Thank you for joining us. I'll begin by addressing our fiscal 2024 performance, and then I'll share a 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 pressure significantly impacted our fiscal 2024 performance. Consumer demand for outdoor recreation products across all of our businesses remained soft. While we're not seeing indicators that these challenging conditions are going away anytime soon, we've 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 talents 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 brand from product research to purchase to post-purchase support. We've been making investments in structuring 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're 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 will turn the call over to Dave for more details on financials.

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. It 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 5th. 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 two 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 and expense as a result of marking plant 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.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Again, as a reminder to ask a question, you'll need to press star 11 on your telephone. Our first question comes from the line of Anthony Lipidinsky from Sedoti. Your line is now open.

Good morning. Good morning, and thank you for taking the questions. 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?

Yeah, I mean, in terms of the fourth quarter, you know, we did see some, you know, 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, you know, for the year, we're seeing growth from ASP as well as unit volume, it's both. And in terms of the retail inventory, it's really – 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. And there's still a very cautious perspective from our trade partners.

Gotcha. Yeah, thanks, Dave. So as far as the gross margin, that did come in lower than what we were 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 just wanted to get more specifics as to how impactful some of these things were as far as promotional pricing, the makeshift to lower margin items, their inventory reserves. Is there any way you can provide more details about that?

Sure. Yeah, I mean, the promotional pricing, the decrease in pricing for the fourth quarter was about, you know, a two and a half point roughly impact versus last year's fourth quarter. So, we were down six points for the quarter. You know, so the 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 then inventory reserves were about a point.

That's very helpful. And then, you know, in terms of your strategy, so the focus on innovation has been certainly 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 can touch on the upcoming pipeline of new products?

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, you know, 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 are Explore and our Megalod 2 products, which are critical to this year for us for that business. We've got launches in watercraft entering the water rec category. We've got Jeff Boyle. I would say solid new product launches. But, you know, the market gets competitive. We've got more competition, and that's why we are re-looking at our process to make sure that we're approaching it in a way that can, you know, make us better and increase the success of our launches.

Got you. Yeah, thanks, Helen. So, for you guys to execute this 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?

Well, you know, 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 You know, innovation is critical, and it's always changing.

Understood. Okay. And then, you know, in terms of the operational efficiencies, can you share more details about the cost savings program? What's been the benefits on recent results, and how should we think about the future cost savings opportunities?

Yeah. You know, we had a very deliberate strategy. operational cost savings program we launched, you know, over a year ago. And that bore fruit for us in fiscal 24. You know, we really focused on the factories, increasing our efficiencies, reducing our scrap rates, driving down costs of the materials that come into the factory, logistics savings. Those are the four big areas that we really worked on. And it drove about two 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 and expand that effort.

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

Yeah. Most, yeah. It's basically all in the fourth quarter.

Okay. Gotcha. And I guess lastly for me, I mean, so obviously you guys are predominantly a manufacturer in the U.S. here, but you guys do use a 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.

Yeah, I mean, we've definitely got our ear to the ground on that, and we've had discussions preliminary on, you know, ways that could mitigate what could happen. So, you know, obviously we've been through this before, and we had some mitigation strategies before. But, yeah, more to come on that.

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

Thanks. Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Helen Johnson-Leopold for closing remarks.

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

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