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Johnson Outdoors Inc  (NASDAQ:JOUT)
Q1 2019 Earnings Conference Call
Feb. 04, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Johnson Outdoors First Quarter 2019 Earnings Conference Call. Helen Johnson-Leipold, Johnson Outdoors' Chairman and Chief Executive Officer will lead today's call. 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 Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Patricia G. Penman -- Vice President of Global Marketing Services & Communication

Thank you. Good morning, and welcome to our discussion of Johnson Outdoors' fiscal 2019 first quarter results. 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 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 releases and filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact either Dave Johnson or me.

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

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Good morning. Thank you for joining us. I'll begin with comments on performance this quarter and outline key priorities for the year ahead. Dave will review key financials and then we'll take your questions. During our fiscal first quarter the warm weather outdoor recreational industry is increases in ramp-up mode, preparing for the primary selling period during the second and third quarters. Consequently, first quarter results alone are not necessarily indicative of full year performance. As the season kicks into gear, we'll start to see consumer sell-through, which we believe is the truest measure of new product success.

This year first quarter sales were $104.4 million, and operating profit was $6 million, both fell short of last year's record high first quarter performance. On the upside, net income was $3 million -- $3.5 million or $0.35 per diluted share, a nice improvement over last year at this time. Dave will provide more details on what factored into the quarter's results in his remarks. This year's exciting new product line-up particularly in fishing is building strong favorable momentum heading into the major selling season for warm weather outdoor products. We said that the past two years of tremendous growth in fishing was unprecedented, and that we expected this business would continue to grow at a more moderate pace going forward, and based on everything we're seeing at this time, we still expect year-over-year sales growth in fiscal 2019.

And as we take the longer-term view beyond 2019, the future looks great. Our new 2021 strategic plan builds on the foundation for growth we've built to take all our businesses to the next level. First, we're playing in the right outdoor rec markets on land, on water, and in the water. Participation in fishing, camping and hiking, paddling and diving continues to be strong. Second, we have formidable combination of unsurpassed knowledge, proven expertise and passion for delivering the best outdoor rec experience possible. Third and most importantly, when combined with our deep understanding of and focus on our target consumers, we have a distinct unique competitive advantage. In the years ahead, we'll build on our strengths, grow our capacity and expand our capability.

There are five key drivers to future growth. Number one, a sustained and more intense focus on the high potential outdoor recreational consumer segments in everything we do from product ideation to new product innovation, from distribution to marketing to consumer services, and so much more. More than ever, our goal is to be at one with the consumers, knowing who they are, where they are, and what makes them tick. It's all about uncovering the key insights that will lead to bigger, better, new product success and deeper relationships between our consumers and our brands year-after-year. Importantly, these insights enable us to better target the right consumer with the right product in the right place and in the right way, that's a winning combination in every marketplace.

Two, accelerated digital sophistication, more and more people go online to learn about outdoor recreational activities and plan their trips, it's where they shop for gear, buy equipment's and share their outdoor experiences. We've built the infrastructure and framework necessary to ensure our consumers have a great online experience in today's rapidly changing digital age. Now, we're focused on strengthening our marketing and e-commerce resources to maximize these investments to drive growth across our distribution channel.

Three, sustained innovation leadership. We have iconic brands and the legacy of pioneering innovation in our space. We continue to refine and improve on robust innovation process to ensure a continuous pipeline of new products that provide distinct, meaningful added value for our target outdoor rec consumers. Products with value that extend beyond just single new product cycle.

We're very pleased by the positive momentum that's been building behind our Johnson Outdoors 2019 new product line-up. For example, we're getting great response to our new One-Boat Network platform in fishing, which enhances the ease and fun for anglers by enabling Minn Kota and Humminbird products to work together in unison. Also on deck this year is the integration of Humminbird MEGA Down Imaging into select Minn Kota fishing motors, another first from Johnson Outdoors.

In Camping, our new generation Flash Cooking Stove has the fastest boil and cooking time ever and is heating up that market. And in Watercraft Recreation, the new Old Town Topwater offers large fishing kayak for performance in a compact and a nimble package, which is making waves in that segment. Net-net, innovation is key to our sustained marketplace success. So we're not resting on past laurels, we're doubling down in investing for sustained innovation leadership.

The fourth key driver of our new plan is identifying new sources of growth in our market. We're looking at new organic growth, new applications of technology, and of course, new brands and technologies. We've got an active radar screen always giving us a view to the company's, the brands and the technologies that are out there. Importantly, our strong cash position provides us the opportunity to move when the right opportunity at the right price comes along.

Lastly, the fifth key driver of our new plan recognizes what has always been and always will be the secret sauce behind our 50-year legacy of continuous growth and success. Very simply at our core, Johnson Outdoors is a family of adventures, people with a passion to fish, camp, hike, scuba dive and paddle. Our love for the outdoor recreation is a unique common bond we share with outdoor adventurers everywhere.

We know what makes a great outdoor experience in job, number one, every day for everyone here is to stay on the cutting edge of design and technology to deliver just that. Our ability to continue to grow our family of talented inspired adventurers is key to long-term success. Looking ahead, we are very excited by the future we see for Johnson Outdoors and believe we are on the right path to maximize our growth potential.

In summary, we believe our brands are well positioned for long-term marketplace success and confident Johnson Outdoors sustained industry leadership will continue.

Now, I'll turn the call over to Dave for more details on the financials.

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Thank you, Helen. As Helen said prior year comps were unprecedented and growth from such a high base was a challenge. Now, a shift in pacing of new product releases was a key driver behind the revenue comparison, and we do expect sales to grow for the full year.

Gross margin improved a 0.5 point to 42.4% in the quarter, despite the pressure from recently enacted tariffs, which had a negative impact of about $700,000 during the quarter. While we continue working on various tariff mitigation efforts at this time, we're still projecting tariffs to have a potential $6 million to $9 million impact on the fiscal '19 profits.

Year-over-year operating expense dollars declined $3.4 million due in part to lower sales volume, and also due to unfavorable market conditions, which lowered the assets of the company's deferred compensation plan and cause an offsetting loss in other expenses. Net income benefited from a significantly lower effective tax rate of 18.7% in the quarter. Last year's first quarter tax rate reflected some one-time charges of about $6.8 million related to the 2017 Tax Reform Act. For the full year, we're anticipating the tax rate to be in the mid 20s range.

Lastly, a comment on inventories, which are $24.5 million above last year's quarter, primarily driven by fishing. In anticipation of impending tariffs we purchased some inventory prior to them going into effect, and we're building inventory for the seasonal demand. We expect comparisons to prior year will improve over the next few months.

In summary, we continue to benefit from our ongoing efforts to improve operational efficiency, enabling us to strengthen margins and keep working capital in check. The balance sheet remains strong providing us the financial capacity and flexibility to strategically invest in growing our business, while also paying a cash dividend to our shareholders.

Now, I'll turn things back over to the operator for the Q&A session.

Questions and Answers:

Operator

(Operator Instructions) And our first question is from George Kelly from Imperial Capital. Your line is now open.

George Kelly -- Imperial Capital -- Analyst

Hi. Thanks for taking my questions. First, if we could start just on the fishing side of the business, can you talk about what gives you confidence in your -- the expectation that you will be able to grow revenue for the full year. And then second question on the fishing business is just, can you help sort of frame the new product set that you have this year and specifically the integrated Humminbird and Minn Kota, the trolling motors, how big of a new product launch is that it seems like it's a big new feature, so just trying to understand better if I'm thinking about that right or how big of a deal is it. I guess?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Hi. This is Helen. Let's start with why we feel good about the year. And I think, fishing in general -- the new product launches have -- it's not just a one-year cycle, it's a two-year cycle. And I think some of the differences year-to-year have to do with, is it the second year of a lot of new products or is it the first year, and when it -- when we're in the launch phase, it's all about when we get the product ready, and when we're ready to get it in the market, but again that's the end of the first quarter is really a lead into the -- to the big -- two season -- two quarter season, and so this year, we see the momentum, we know that -- there is that -- customers are excited about the product, but it's really about the consumer takeaway. So we're in more of the first year of some new product launches, and it's -- maybe it's more about pacing than -- than anything. So, the other piece of it is, we talked about the innovation. And again, it's not just one new product, and we mentioned one new product, but you're really at -- you're in the second year of other new products, and consumers are -- these are longer purchase cycle products. So, you've got two to three years' worth of new products having a chance to grow and to find the consumers that are in the right time in the right cycle, I'm certain there's people who get a new motor every year, but the majority of them -- our motors are high-quality, last for a while, and so you've got -- slightly new consumers into the market every year. So, it's not just a clean this year, last year kind of evaluation. So, the momentum is what we see and we -- the excitement about the new products and still we've got other products in the market that we launched already that still have room to grow. So, it's -- again back to the first quarter is not indicative necessarily of the full year, but we do know that there is excitement behind the new products that we've launched. So, Dave, you can add anything, if you think to.

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

No. I think it's spot on. I think we've got some new products coming out that we feel good about. But kind of get to your second question, I mean I think we don't expect these growth rates that we -- that we hit last year, so we do expect growth, but it's going to -- it won't be as much.

George Kelly -- Imperial Capital -- Analyst

Okay. That's really helpful. And then just I guess one follow-up to that is -- and then I do have one other question, but it's just the inventory position at retail. Does it look pretty, pretty clear now?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Yes. From what we can tell, it looks -- it looks pretty good. There is not any pent-up inventory there.

George Kelly -- Imperial Capital -- Analyst

Okay. That's great. And then so I'd like -- two more -- quick questions. One, you talked about as one of your key growth initiatives, you talked about new sources of growth, and it sounded to me like ancillary products, things that you weren't currently doing right now, do you feel that's come up a few times on these calls, do you feel like you're getting close on anything, can you say anything else there. And then the last question is just about tariffs, and have you applied for exemption, so is that still an ongoing process? Thank you.

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

I'll respond to your first point. New sources of growth can come from a lot of different places. And I know where you're going, which is -- are we looking at acquisitions externally, and I can tell you we are always looking and we keep a very comprehensive radar screen. So, we're aware of what's out there. A new sources of growth can come from the application of new technologies, new sources of growth can come from a new consumer segment within your same product array. So, we are very much -- we think having more sources of growth, meaning their true new sales not cannibalistic is very critical to our strategy long-term, but it's not necessarily just buying a new brand or a new company. But again, we are always looking and if there was a strategic bet, certainly we'd be all over it. So, we feel good about innovation across multiple areas and it includes innovation in marketing, it includes picking up new consumers, it includes applying new technologies to existing product. So -- it's more than just one area, but again, we have a lot of things going.

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

And just on the tariff question, we have applied for exclusions with the USTR, and waiting to hear, so I think the shutdown kind of slowed things down for a lot of people and we're just waiting to hear on those exclusion requests.

George Kelly -- Imperial Capital -- Analyst

Thank you.

Operator

Thank you. Our next question is from Anthony Lebiedzinski from Sidoti & Company. Your line is now open.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Hi, guys. Good morning, and thank you for taking the question. So, first just kind of a clarifying or housekeeping item. I don't know if you can quantify this, but obviously you called out the fishing segment being impacted by a shift in pacing in terms of new product introductions, can you perhaps give us a sense as to the dollar amount that you think was affected by this shift?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

It's not a shift in pacing, it's just pacing in general. So, there is no long-term trend or anything here, it's just a matter of when products are available to get out there, but we can't quantify that, and unless Dave, you have any input...

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

No. Yes. We won't quantify it. Yes. So, sorry, we'll just have to leave it at that.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay. That's fair. Okay. And then, Helen, you talked about part of the strategic plan is to sustain innovation, leadership. So, how should we think about R&D spending relative to your revenue. Do you expect to spend more or kind of the same or -- broadly speaking any sense that you can give us in regards to your R&D spending?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well. Specifically R&D, I think, we don't see a significant changes in the spend. And I would say, innovation is not necessarily -- focused in the R&D area, because it's a matter of -- there's a lot of research and understanding the segments and the consumers, and that's an investment -- well, which is we are certainly making that, so we can uncover the insights that then drive the R&D to develop the relevant product. So, hopefully that answers your question.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes. That definitely helps. Yes. Thank you for that. And as far as for the quarter, the gross margin was up even though there were some noise with the tariffs, so what were you able to do to actually improve your gross margins on a year-over-year basis?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Yes. It's pricing and cost containment elsewhere, really, and it's been -- it was kind of across the board. So, we -- and some discounting was down too for the quarter. So, it's kind of a variety of things, but mostly strong pricing in the marketplace.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. And can you also just give us a sense for priorities for your cash flow usage?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Sure. As Helen talked about, we're always looking for opportunities to grow, so that will be priority number one, both internally and externally. We're, again, very active out there in the marketplace to understand the opportunities. The dividend will continue to look to try to enhance and strengthen that dividend, I think that's very important for us to keep that healthy and growing. And then beyond that we always look at other things too, I mean, we look at other ways to get cash back to shareholders, and if any of those are attractive to us, we'll take a closer look and announce that.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. All right. Thank you very much.

Operator

Thank you. Our next question is from Brian Rafn from Morgan Dempsey Capital Management. Your line is now open.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Good morning, everybody.

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Morning.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

What -- when you guys look at your new product launches, and you're talking about a two or three-year cycle, how you price the products off the -- off the launch, are you building pricing, is it a little more of a discount to get the early adopters, how do you take pricing with the new product launch?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well. With our launches -- our main goal is to provide an added value to the consumer, and I would say that is the opportunity to get the pricing, because there's relevant value that they need. So, it's definitely that with new product launches, you should be able to charge for the innovation and that's our approach. We certainly do not take the discount growth.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Okay. And what, Dave, what's CapEx plans for this year?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

It will be down, we expect it to be down last year, we had a big bump up last year, so I'm thinking like mid teens, like $15 million, $16 million versus, I think it was $19 million last year.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. And how is that allocated across the different segments -- then you specifically need to stand out?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Yes. No, it's pretty much the same, which is, continue to drive growth with molds and other types of innovation. There's not a ton of capacity in their -- capacity growth in our CapEx, so it's pretty much the same as we've always done.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. I missed just the first couple of minutes of the call. What are you seeing relative to new spring season trends in order patterns there with big box category superstores or some of the little boutiques?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Yes. We haven't seen any anomalies, I mean, I think it's been pretty much what we expected. The weather needs a hold, but -- and Helen kind of alluded to it, I think for the most part retailers are pretty excited about our line-up that's coming out.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Got you. And then what -- any -- what might you guys be from the standpoint of operating capacity, are you running, obviously, early in the year you're running, how much overtime or three shifts or what are you doing -- specifically in the fishing area, electronics?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Yes. I mean, we're not running -- super heavies at least through December, but we're going to ramp-up here in the season, and we'll really be running hard here in this quarter.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Got you. What -- from the standpoint on the tariffs, are you continuing to order into the early part of 2019, or was that inventory safety stock margin -- safety -- was that really just a one-time deal?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Well. We ordered ahead of the tariffs, so that was kind of a one-time deal, now that with the tariffs are in place, we'll just continue to run the business as we can with that in place. Hopefully that answers your question.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. Okay. And then what -- I didn't see from the standpoint, what are you seeing on the diving side, again, a little softer?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well. Again, it's the first quarter. We're excited about the future for diving, we've got -- there's some things going on in Asia, and Asia has been the key growth for us. We don't necessarily see that as a longer-term trend. It just hit us this quarter, but we've got a good new product pipeline that we're developing, and I feel pretty good about that business for the long-term.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. Dave, did you mentioned what new product sales were in the quarter, whatever your barometers trailing two or three years?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Yes. It's -- we target a third, and I think we're above that target. I don't have the number in front of me, but I think we're at expectation with that for the quarter. And again, it's pretty seasonal, so it's hard to actually give that as a barometer.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Got you. Okay. All right. That's good. Thanks much, guys.

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

Thank you.

Operator

Thank you. (Operator Instructions) And our next question is from Brian Rafn from Morgan Dempsey Capital Management. Your line is now open.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. Hi. Just forgot one, what the -- anything on the camping side relative to military sales?

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

No. It's pretty much steady for us. Nothing has happened so far in good or bad in military, so we're kind of at a flat basis basically.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. Let me ask you on timing, when you're doing new product launches and you're doing the R&D for that, what's kind of the cycle time between maybe design ideation, conceptualization, prototyping, what are some of the maybe the cycle time differences between fishing electronics, maybe camping, diving and then Watercraft? If there are...

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

There is all -- given that higher technology aspects of some of the businesses versus others, I think that put some variability in the time frame, but -- we are trying to get ahead of the game and getting three in our pipeline that's pretty continuous, but the true breakthrough kinds of products that have a longer developing cycle then some of the line extensions, obviously, but there is a significant investment in refining the idea and the concept and doing that prototyping, and again, it varies. So, it's really hard to put any kind of -- it's just depends, but -- we're not short, these are not short development cycles, they are long.

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. And -- if you were to bracket a range between very high technology with a lot of electronics for something that -- just be aluminum paddles or something in the Watercraft, what might be that, I mean, what's a very, very complex maybe new product, what might that be, would that be a period of years or months or quarters?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Yes. Definitely it's not -- it's not months, I mean, we have to -- it ranges between one and three years of development, and that's it. So, I don't think I would say months of any -- across...

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

Yes. Sure. Okay. All right. Hey, thanks much.

Operator

Thank you. At this time I'm showing no further questions, I would like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Thanks, everybody, for joining us, and I hope you have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Duration: 29 minutes

Call participants:

Patricia G. Penman -- Vice President of Global Marketing Services & Communication

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

David W. Johnson -- Chief Financial Officer, Vice President & Treasurer

George Kelly -- Imperial Capital -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Brian Rafn -- Morgan Dempsey Capital Management -- Analyst

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