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Johnson Outdoors Inc  (NASDAQ:JOUT)
Q2 2019 Earnings Call
Aug. 02, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello everyone and welcome to the Johnson Outdoors Third 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.

[Operator Instructions]

I would now like to turn the call over to Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Patricia Penman -- Vice President-Marketing Services & Global Communication

Thank you. Good morning and welcome to our discussion of Johnson Outdoors fiscal 2019 third 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. I will start-off by reviewing quarter and year-to-date results and then provide perspective on our markets and business performance, Dave will review key financials and then we'll take your questions.

The warm weather, outdoor recreation season is in high gear during the fiscal third quarter, giving us valuable insights into consumer response to our products and programs. Continued success of new products in Fishing, during the quarter powered a 3% increase in sales to $176.3 million. The unfavorable comparison in operating profit quarter-to-quarter, reflects our continuing strategic investment in digital capability and the ongoing impact of tariffs on Chinese components.

Net income in the quarter was $22.1 million or $2.19 per diluted share. Year-to-date, net sales were $458.4 million, a 1% increase over the same fiscal nine-month period last year. Total Company operating profit for the nine-month period was $61.9 million and net income advanced 4% to $47.5 million or $4.72 per diluted share.

Dave will provide more detail on the financial drivers behind the results. This quarter's performance, reinforces the critical importance of innovation to continued growth and success of our brands. Johnson Outdoors' legacy is built on pioneering category-creating innovation that inspires adventures, spurs growth in our markets and fuels sustained market leadership by our brands.

Successful innovation begins with inspired consumer insight and spans the whole experience, from researching online to shopping and purchasing to actually using the product. Being the best of what we do is a constantly moving target and in recent years, the pace of change everywhere for everyone has accelerated significantly, continuously raising the bar on what defines the best. One of the most important shifts in outdoor consumer demographics is the rapid rise of millennial engagement in outdoor recreation.

Today, Millennials comprise the second largest outdoor consumer segment, while baby boomers remain the largest consumer segment as of now. Future success is dependent on our ability to compete and win with this emerging younger consumer base.

Our ongoing investment in understanding consumers' evolving needs and expectations and translating unique consumer insights into bigger, better new product success; gives us a key advantage in our increasingly competitive outdoor markets just as it has for nearly 50 years.

The success of our Fishing brands is a great example. A continuous stream of technology, first from Minn Kota and Humminbird have led to an unprecedented growth in our brands. Beginning with the first clean, quiet electric fishing motor to remote hands-free steering, as well as Spot-Lock on-the-boat networking and side-imaging technologies and more, our innovation leadership is unmatched, sustaining our market leadership against competitors, large and small.

Our most recent innovation, the new MEGA 360 Imaging from Humminbird captured Best in Electronics at ICAST, the World's most prestigious fishing show, marking our 8th award in this category in the past 10 years.

MEGA 360 Imaging, is the only sonar option that sweeps 125 feet around the boat, providing a high-resolution 360 degree view with unmatched detail and coverage. With MEGA 360, anglers don't have to move their boat over a spot to know, what's under water. They can make every cast count by targeting directly in front of the boat, the fish don't even know what's coming.

We are always looking for new ways that our products can seamlessly integrate and communicate, and advancements in GPS and wireless technologies, coupled with our deep consumer insights and technological expertise enable us to constantly reimagine and redefine, what will anglers catch more -- what will help anglers to catch more fish.

MEGA 360 Imaging does just that, enhancing the performance of both the trolling motor and the fish finder, so anglers have an effortless command of their boat. Humminbird also leads the industry in ice fishing technology, our newest ICE HELIX launch with our proven Dual Spectrum CHIRP sonar, brings the exciting new feature of AutoChart Live Ice, which allows ice anglers to quickly map the terrain of remote or unmapped lakes and more easily locate productive fishing holes. And the all-new ICE HELIX won, the Best of Ice Fishing award at ICAST this year.

Sustaining our innovation and technological leadership position in fishing market is our top priority, and we have an exciting pipeline of new products on the horizon. Innovation is also critically important in our watercraft recreation business, where there has been a dramatic shift in the traditional pedal market dynamics. Importantly, engagement in watercraft recreation remains steady and the emerging participation of Millennials provides new opportunity in the future.

Our greatest success in the marketplace has always been embedded in our ability to deliver best price value going forward, a key focus will be on transitioning product lines to capitalize on the evolution of this market.

At the same time, we'll continue working to accelerate growth in both Fishing and propulsion segments, both of which remain on a positive growth trajectory. Camping is the largest outdoor recreation activity, in all-important gateway marketplace that touches more outdoor recreation consumers than any other. Participation in this outdoor activity is strong and growing among Millennials, which sets the stage for new innovations tailored to their needs and expectations.

In addition, the avid wilderness camper continues to be strong and our acquisition of Jetboil, the technology leader in portable outdoor cooking systems, gave us a foothold with this avid Camping consumer. And the sales for the brand have nearly doubled since joining our portfolio.

Looking ahead, we'll continue to invest in enhanced digital marketing and e-commerce to engage even more with our Camping consumer segment. In Diving, positive momentum in our North American business has been driven by our enhanced digital footprint, resulting in positive trends in e-commerce and retail sales.

We will continue to work with -- work to strengthen our Diving business in other markets by expanding our digital presence globally, as well as continuing to simplify our business model. These efforts along with sustained innovation will enhance growth and profitability in Diving and strengthen SCUBAPRO's position, as the World's most trusted dive equipment brand.

In summary, the rapid pace of change we're experiencing is the new normal for the outdoor recreation industry. Our ability to anticipate and address changes will be critical to our ongoing success. At Johnson Outdoors, we take the long view, working to position our brands and businesses for growth well beyond the next quarter or next year to being a thriving enterprise that's built to last and deliver long-term value creation.

Our continued focus on our five key strategic drivers, consumer understanding, sustained innovation leadership, new sources and paths of growth in our markets, accelerated digital sophistication and e-commerce, helps enable success in the constantly evolving marketplace.

Going forward, we'll continue to make smart, strategic investments to sustain technology and market leadership positions, in an increasingly competitive outdoor recreation industry.

Now I will turn the call over to Dave for more details on financials. Dave?

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

Thank you Helen. Good morning, everyone. I wanted to highlight a few items from the quarter. As Helen mentioned, sales for the third quarter improved 3% over the prior year and improved 1% on a year-to-date basis, driven by growth in Fishing.

Gross margin for the quarter was 45.2%, down from the prior year third quarter, due primarily to tariffs on Chinese components. We continue to estimate a potential impact of $5 million to $7 million on profits this fiscal year, net of the exclusion we were granted last quarter. While we wait to hear on tariff exclusions for other affected components, we are continuing to pursue other opportunities to help mitigate the effects of tariffs going forward.

Total company operating profit was $28 million for the third quarter compared with $32 million during the prior year's third quarter. Operating expenses during the quarter rose $4.3 million versus the prior year, driven by an increase in bad debt expense, higher sales volume related -- and higher sales volume-related expenses.

In addition, we continue to strengthen our brands and position them for future success, with increased strategic investments on our digital capability. Net income during the quarter was down 7% and on a year-to-date basis, net income improved 4% benefiting from an effective tax rate of 24.9%.

This was significantly lower than last year's nine-months tax rate of 34.4%, which reflected the charges associated with the initial implementation of the new US tax reform act. For the full year, we are expecting the tax rate to be consistent with the current year-to-date tax rate.

In closing, the debt-free to balance sheet remains strong, our growing cash position is healthy, providing us with financial capacity and flexibility to strategically invest to drive future growth, while continuing to pay-out a cash dividend to our shareholders.

Now I will turn things back over to the operator for the Q&A session. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Your line is now open.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Good morning and thank you for taking the questions. So just -- Dave, I just wanted to clarify, as far as the tariff impact. So was the exclusion that was granted by the Government, was that actually included in the just reported quarter? Or will that be in the next quarter?

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

That was included in the quarter, yeah.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. All right. And then as far as the just-announced tariffs yesterday that 10%, will you guys be impacted by that?

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

We will, I can tell you that tranche is less impactful to us than the first 3 that are out there right now. So more to come on that, but it will impact us, but just not to the extent that the other three did.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, got it. Okay. That's helpful. And Helen, you mentioned that you have an exciting pipeline of new products. Could you provide us with some -- with a sneak preview without sharing too much of the secret sauce?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well, I probably can't give you too much of a sneak preview. But all I can say, is that, historically, our Fishing business has been great at planning ahead and having a full pipeline of new products, and it's gotten more competitive, and we are planning ahead. So all I can say, is that's been one of our strongest weapons that we have. But you have to -- you will have to see it when it comes out.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. And as far as, the competitive landscape, obviously has changed over the past few weeks here. So other than new products, is there anything else that you plan to do in light of the competitive landscape now?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well, certainly, when we get new competitors in any one of our segments, we pay attention and work very closely, and we try to anticipate, as much as possible. But we are very aware of it and our biggest tool in our toolbox is the strong innovation. But obviously, we look to provide whatever support is needed to at least launch those products and address the competitive threat.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. And lastly, Dave, as far as the higher bad debt expense, is this just isolated to one customer or more? And do you think this was just isolated for the quarter, or could that possibly continue?

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

Well, it's interesting because we've, had a really great track record on bad debt throughout all the retail gyrations. And so -- actually, there is a couple things, last year in the quarter, we had a credit, so we took some bad debt expense earlier and then we -- we brought that back. And then there was just one incident here this quarter that drove that. So I would characterize it as isolated. But for retail environment, we're continuing to be very diligent monitoring that.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. All right. Thank you and best of luck.

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

Thank you.

Operator

Thank you. And our next question from the line of George Kelly with Imperial Capital. Your line is now open.

George Kelly -- Imperial Capital -- Analyst

Hi, guys, thanks for taking my questions. So just a few for you. What -- you mentioned that several times in your prepared remarks, the digital investments, and I know, that's been ongoing now for maybe 1.5 years. What are you still -- what's still being done? And how much longer -- what's the time-line with whatever is coming next?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well, I would say, that -- the digital environment is always changing. I think, what you're seeing to-date, I mean, even investing in new tools that allow us to target our consumers, that's ever-changing and ongoing and it will continue to be ongoing. Also, in our capability to use those tools, we -- so I would say digital investment is going to be a continued expense and our investment in making sure that we can use it in the best way possible is also an investment. And I think it's just necessary to compete in today's world. And also, this could be a significant competitive advantage. So we'll do whatever it takes to keep ourself or to get to the leadership position in our categories, as far as digital goes.

George Kelly -- Imperial Capital -- Analyst

Okay. Just to -- maybe wondering a bit more about that. What -- how do you view your digital investments as a competitive advantage? What is the biggest area of opportunity that you see within digital?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well, it goes -- every category we compete in has different levels of digital sophistication. So I think, keeping that in mind, but with the channel shift, certainly we have to have e-commerce capability, we have to have targeting capability, we have to have -- understand our consumers and know what and where they are using the digital network and we have to be as good or better than our competition in doing that.

And I think, the traditional media vehicles have -- are shifting and they are not as strong as they used to be. We have to be good at using this new tool, and our millennial target, as well is -- are more and more in tune with using digital, and all the information is showing that they go first to research products online and then make decisions even for in-store purchases. So it is absolutely a critical area for us.

George Kelly -- Imperial Capital -- Analyst

Okay, OK. That's helpful. And then on your Fishing business, I was impressed to see it grow in the quarter, despite what's been a pretty challenging weather early summer. So how do inventories look at retail? And can you talk at all about weather and what you've seen more recently, maybe, if you could share anything after the quarter?

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

Yeah. The weather was pretty spotty early on, but we've, had a good run here. So I mean, things, at least, for the Fishing business looked good. I think inventories are fine in -- at the retail channel. So I expect us to kind of end the season on a decent note.

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

But also, the fisherman kind of plan ahead as well and so they're not as spontaneous. So they're hoping and planning for weather to be good. So they do kind of do it ahead of -- even though it might be bad weather, they're already planning on when it gets better.

George Kelly -- Imperial Capital -- Analyst

Okay. Okay. And then two last questions. Can you quantify the impact in the quarter from the tariffs?

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

Yeah. It was about $1.9 million.

George Kelly -- Imperial Capital -- Analyst

And that's all in the gross -- in the cost to goods sold-line?

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

Yes.

George Kelly -- Imperial Capital -- Analyst

Okay. And then last question from me, and this has come up before. So $150 million of cash. I was just wondering how you think about that. And I'm not asking about M&A or anything specific, but there's a dividend that's very small, $5 million annually. And so what's -- how should -- there hasn't been much change in it just accumulating. Should I just keep planning on that going forward, or how do you think about the cash?

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

Well, I will let Dave chime in as well, but I would say, we again -- you've heard this from us before, but we are always looking for opportunities for acquisition. And I think, historically, our success has been that we are patient and we are strategic. And I do think, that there will be an opportunity going forward, when we will see more things come on the market and at a price that makes sense, but we are continuing to do strategic research on an ongoing basis and evaluating opportunities.

So that is ongoing. I -- again, we are not growing to be big, we are growing to get the right kind of sales and the right acquisition. And I think we could make big mistakes if we decided that we just have to use the money that's sitting there. I agree with you, it's a lot of cash. It's actually better than being in a different situation, but we are not going to use it, in a way that does not put us in a better position going forward. So Dave, I don't know if you want to add to that.

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

I think, that's perfect -- I think, we will continue to try to grow the dividend. That will be one of the levers we pull. But as Helen said, we continue to look for opportunities to invest that.

George Kelly -- Imperial Capital -- Analyst

Okay. That's all I had. Thank you.

Operator

[Operator Instructions] And at this time, I'm not showing any further questions on the phone line. So that does conclude today's question-and-answer session. I would now like to turn the call back to Helen Johnson-Leipold for any further remarks.

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Patricia Penman -- Vice President-Marketing Services & Global Communication

Helen Johnson-Leipold -- Chairman & Chief Executive Officer

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

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

George Kelly -- Imperial Capital -- Analyst

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