Johnson Outdoors (JOUT) Q2 2022 Earnings Call Transcript

Johnson Outdoors (JOUT 0.43%)
Q2 2022 Earnings Call
May 09, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Johnson Outdoors second quarter 2022 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. [Operator instructions] The 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.

Pat Penman -- Vice President, Marketing Services and Global Communication

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 & 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 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 analyst share perspective 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-year's 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 and 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, angler continue to look to Johnson Outdoors so 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 components, so we're positioned to finish the 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 both businesses continue to benefit from surge in 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 sports be line that has shown continued strength in the market.

And in camping demand for Eureka! tents and stoves continues to be strong and in Jetboil, consumers remain excited about the super light Stash Stove that is in its second year on the market. Finally, in diving, our most global business, diving 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 this 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 Johnson -- Vice President, 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 9 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-20s. 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 in 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 & Answers:

Operator

Certainoly. [Operator instructions] And our first question comes from Anthony Lebiedzinski of Sidoti & Company.

Anthony Lebiedzinski -- Sidoti and Company -- 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 Johnson-Leipold -- Chairman and Chief Executive Officer

This quarter is -- 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 Lebiedzinski -- Sidoti and Company -- Analyst

OK, 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 on to these orders? Or just wanted to get a better sense whether these could be lost 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 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 product. And so at this point, it's about getting supply and hopefully, we'll hang on to these orders while we get the supply in.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

OK. So it sounds like you haven't seen any order cancellations because of the supply chain issues that you're having, is that fair?

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

No, we haven't. No.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

OK. OK. 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 Johnson -- Vice President, Chief Financial Officer

Yeah. I mean we took pricing at the beginning of our fiscal year in 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 Lebiedzinski -- Sidoti and Company -- Analyst

OK. Got it. 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 Johnson -- Vice President, Chief Financial Officer

Yeah, I mean 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. Yes.

And the elasticity of demand, I mean, that's the great question. It's just about what the consumer is willing to pay, and those dynamics are definitely what we take into consideration as we...

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got you. OK. And then so far this quarter, are you still seeing solid demand? And I guess also, are you seeing as far as inventory levels or retail? How would you describe that?

David Johnson -- Vice President, Chief Financial Officer

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

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Yeah, sure. I didn't hear you for a couple of seconds either. So yeah. So as far -- so how would you describe the 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 wanted if you could just reiterate whether that's continuing into this quarter and then as far as your sense about inventory levels at retail now.

Helen 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 Lebiedzinski -- Sidoti and Company -- Analyst

OK, that's good to hear. And then in terms of the gross margin pressures, obviously, it was a rather sizable 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 detail as the magnitude of how much -- maybe not exact numbers, but a little bit better understanding because the gross margin was down certainly more than what we've seen in the past.

David Johnson -- Vice President, 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 Lebiedzinski -- Sidoti and Company -- Analyst

OK. Got it. OK. And then I know in the past, you have used more air freight, was that the case post this quarter as well?

David Johnson -- Vice President, 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 Lebiedzinski -- Sidoti and Company -- Analyst

OK. Got you. OK. And then can you comment on your exposure to China and impact of the lockdowns in China?

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

Obviously, they've had affecting 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 this lodging is going to be difficult until things kind of even out. So it's a tough situation.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got you. OK. And -- OK, so as far as the inventory, I think you mentioned, Dave, that it's mostly raw material 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, is that kind of fair to say?

David Johnson -- Vice President, Chief Financial Officer

Yes. 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 Lebiedzinski -- Sidoti and Company -- Analyst

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

David Johnson -- Vice President, 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 would be hard for me to predict six months, what could happen with that inventory.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

OK. 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 would be very helpful.

David Johnson -- Vice President, Chief Financial Officer

Yes. 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 is 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 yes, 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 Lebiedzinski -- Sidoti and Company -- Analyst

OK, all right. Thank you and best of luck.

David Johnson -- Vice President, Chief Financial Officer

Thank you.

Pat Penman -- Vice President, Marketing Services and Global Communication

Thank you.

Operator

[Operator instructions] And I'm showing no further questions. I would now like to hand the call back to Helen Johnson-Leipold for closing remarks.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 19 minutes

Call participants:

Pat Penman -- Vice President, Marketing Services and Global Communication

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

David Johnson -- Vice President, Chief Financial Officer

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

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