Johnson Outdoors: Still Not The Best Time To Go Long

Introduction

Johnson Outdoors (NASDAQ:JOUT) shares have fallen 14% YTD. Despite the fact that the company posted strong 3Q 2023 (fiscal) results and the company's shares are not expensively priced according to multiples, I believe that now is not the best time to go long.

Investment thesis

I believe that the purchase of the company's shares was an excellent bet on tightening COVID restrictions and increasing consumer spending on hobbies, however, at the moment the trading trends do not look positive. While the company was able to post a solid gross margin in Q3 2023 (fiscal), I believe we may see renewed pressure on margins going forward. In addition, the company is facing declining consumer demand, while the potential for cutting operating costs is limited.

Company overview

Johnson Outdoors develops, designs and manufactures outdoor products. The main business segments are fishing, camping, watercraft recreation and diving. The main brands are Old Town, Minn Kota, Humminbird and SCUBAPRO.

3Q 2023 (fiscal) Earnings Review

The company reported better than investors expected. The company's revenue decreased by 8.2% YoY. The largest contribution to the decline in revenue was made by the ""camping" and "watercraft recreation" segments, where revenue decreased by 50% YoY and 28% YoY, respectively, while in the main segment ""fishing" revenue increased by 0.7% YoY.

Gross profit margin increased significantly from 36.1% in Q3 2022 (fiscal) to 41.5% in Q3 2023 (fiscal). The main growth factors are the increase in prices for the company's products and the reduction in freight costs.

Operating expenses (% of revenue) increased from 24.4% in Q3 2022 (fiscal) to 32.2% in Q3 2023 (fiscal) due to an increase in advertising costs. Thus, operating margin decreased from 11.7% in Q3 2022 (fiscal) to 9.3% in Q3 2023 (fiscal).

The operating margin in the fishing segment increased from 12.1% in Q3 2022 (fiscal) to 13.6% in Q3 2023 (fiscal) due to rising prices (as I wrote above), while in the segments capming and watercraft recreation operating margins continue to be under pressure. You can see the details in the chart below.

My expectations

I believe that in the coming quarters the company's financial performance will continue to be under pressure. On the one hand, I don't expect support from the demand side, as the company is facing a decline in consumer interest in hobby spending due to both the lifting of restrictions and pressure on consumer spending from macro headwinds. I would like to emphasize that the company has increased the prices of its products, while the volume of sales in terms of numbers continues to be under pressure.

We're seeing consumer demand continue to moderate from the strong pandemic-fueled levels of the past few years.

I would like to note that I was very impressed by the improvement in the gross margin level for the quarter, however, one of the key issues for me is the sustainability of the current gross margin level. At the moment, I see more downside risks than upside drivers. Firstly, the company operates in a highly competitive segment, where the price of products is one of the main competitive advantages. Secondly, the share of the most profitable camping segment continues to decline.

Also, I don't expect the company to be able to demonstrate efficiency gains by cutting operating costs. If we look at management's comments during the Earnings Call, we can see that both advertising and R&D spending will continue to be stable as they are critical to maintaining the company's demand and market share.

Again as we said, I think innovation even becomes more important during times of -- when there's a lot of competition it's a challenging market. So I think we would expect that to be most likely growing from that point.

Risks

Margin: additional marketing costs due to increased competition, limited upside potential for prices, rising raw materials costs and an unfavorable shift in the revenue mix could have a negative impact on operating margin dynamics.

Revenue: a decrease in consumer spending on leisure goods could lead to a slowdown in business revenue growth.

Valuation

Valuation Grade B-. Under P/E (FWD) and EV/Sales (FWD) multiples, the company trades at 13.2x and 0.7x, which implies a premium to the sector median of about 1% and a discount to the sector median of about 44%, respectively. On the one hand, I do not consider the current level of valuation to be high, on the other hand, I do not see any growth drivers/catalysts for the stock that could lead to a revaluation in the coming quarters.

Conclusion

I like the company and its business model, however, I expect the pressure on financial performance to continue in the coming quarters. Thus, at the moment my recommendation is hold. I will continue to monitor the company's financials and will gladly change my recommendation if I see signs of a normalization in consumer demand or catalysts for an increase in business margins.