On Feb. 6, "global outdoor recreation company" Johnson Outdoors (NASDAQ: NASDAQ:JOUT) came out with its Q1 FY 2015 earnings announcement and 10-q. In the most recent quarter, revenue declined 11% year-over-year and net loss expanded 91%. However, its free cash flow deficit shrank 13% year-over-year due to lower capital expenditures. Johnson Outdoors' balance sheet remains in excellent shape with its $57.5 million in cash and equivalents equating to a whopping 30% of stockholder's equity. Its long-term debt comes in at miniscule 17% of stockholder's equity well below my personal threshold of 50%.
What happened??
Red ink is typical during the winter quarters for recreational companies such as Johnson Outdoors. However, lower relative demand impacted results further than typical. Despite popular belief competition is bad for business from a business (shareholder) perspective. Management highlighted lower demand for its Hummingbird depth finder due to a lack of promotional effort and "competitive pricing actions". Unfavorable terms abroad also impacted demand for the Hummingbird. Johnson Outdoors' outdoor gear sales and diving sales were also impacted by international weakness. Its Watercraft sales also declined due to lower production in New Zealand.
Thoughts on the future
I am encouraged by management's discourse on product innovation and balance sheet focus. They clearly understand that having a strong balance sheet is key to self-financing innovation and making strategic acquisitions. I also realize that a company can't be judged on the basis of one quarter, which management also emphasized.
However, the company needs to come up with some products that can be sold without heavy marketing. What good is selling product X when all of your profitability gets eaten up by marketing dollars? Favorable macro-economic factors should contribute to revenue gains. However, profitability remains unlikely if Johnson Outdoors has to prop up its products with marketing.
What now?
Wall Street analysts are a little more optimistic about Johnson Outdoors than I. They are predicting that earnings per share will come in at $1.58 in FY 2015 and $2.24 for FY 2016. If the P/E ratio of44 holds, and if Johnson Outdoors beats the Wall Street expectations game (which I doubt), this works out to $68.52 and $98.56 per share respectively based on its current share price of roughly $31 and converts into whopping increases of 121% and 218% respectively. I don't look for this to happen though.
On the downside, if the company disappoints Wall Street and/or some overall market correction were to occur causing the company to revert back to its five year average P/E ratio of 15, those predicted EPS figures could translate into share prices of $23.70 and $33.60 further translating into a downside potential of 24% for 2015 and a 8% upside for 2016. The more likely scenario will be somewhere between the extremes and will depend on the price you pay for the company at any given time.
From a business owner's perspective it doesn't make sense to invest in this company at this time. I would like to see more demand for the company's products without heavy promotional spending and pricing. If Johnson Outdoors can't achieve this then the downside scenario is more likely. I think your investing dollars are best served elsewhere.
