Escalade, Inc. is seeing momentum in pickleball and cornhole but said efforts to reduce inventories by mass merchants led to declining earnings and sales in the third quarter.

Headquartered in Evansville, IN, Escalade manufactures a wide range of indoor and outdoor gaming products. Brands include Brunswick Billiards, Stiga table tennis, Accudart, Rave Sports water recreation, Victory Tailgate custom games, Onix pickleball, Goalrilla basketball, Lifeline fitness, Woodplay playsets, and Bear Archery.

On a conference call with analysts, Walt Glazer, president and CEO, said the company expects to use more promotions in the holiday quarter to reduce inventory and is also emphasizing cost controls amid softer consumer spending.

“During a period of broad-based inflationary pressures and rising interest rates, our third quarter results were impacted by lower customer demand across most product categories as our mass merchant channel partners seek to align elevated inventory levels with a near-term deceleration in consumer discretionary spending,” said Glazer.

In the mass channel, Walmart and Target, the two largest players in the channel, have both publicly stated plans to significantly scale back inventory. According to Escalade’s 10Q filing, sales to mass merchants fell to $29.8 million from $41.8 million a year ago.

Said Glazer, “In speaking with our retail partners, we believe the consumer is in a transitional period where households are seeking to recalibrate how much they have to spend on discretionary categories like ours as the cost to maintain their standard of living continues to rise. Importantly, demand hasn’t grown to a halt, but it has slowed.”

He noted that while mass merchants have slowed purchasing in Escalade’s categories to reduce inventory, sales in all other sales channels generated year-over-year sales growth in the third quarter. 

According to Escalade’s annual report for 2021, Amazon is its biggest customer, at 21 percent of sales, followed by Dick’s Sporting Goods, at 11 percent.

Sales Decrease 8 Percent
In the third quarter ended October 1, sales decreased 7.9 percent to $74.9 million. Organic sales, excluding acquisition contributions, declined 17.9 percent. Recent acquisitions included the January 2022 purchase of Brunswick Billiards.

Increases in billiards and pickleball sales, together with the contribution from the Brunswick Billiards acquisition, were more than offset by lower sales in outdoor categories, including archery, games, water sports, and playground.

Net income dropped 21.5 percent to $15.3 million, or $1.12, from $19.5 million, or $1.40, a year ago. The latest period included a charge of 6 cents per share related to a product recall.

Gross margins eroded 432 basis points to 18.2 percent as elevated freight and logistic expenses more than offset some lower material costs. Said Glazer, “We are beginning to see lower ocean freight rates and improved turnaround times, but inland freight remains challenging due to labor and equipment shortages.”

The margin decline also reflects a $1 million accrual related to projected expenses for the recall.

SG&A expense was reduced to 11.7 percent of sales from 12.5 percent in the prior year period due to ongoing expense mitigation initiatives. EBITDA declined 35.3 percent to $5.8 million.

Pickleball And Cornhole In Strong Demand
A bright spot in the quarter was pickleball, a category where demand remains strong as broad-based adoption of the sport continues at an accelerated pace. Glazer said, “We continue to expand our product assortment of paddles, balls and accessories with our leading brands, Onix and Dura. Our selection of pickleball gear is perfect for any level of player, from beginner to professional. Onix is a leading equipment brand in the sport and remains one of the most visible sponsors of the Professional Pickleball Association and top professionals in the sport.”

Outside of pickleball, Escalade sees strength in cornhole, a lawn game popular in North America in which players or teams take turns throwing fabric bean bags at a raised, angled board with a hole in its far end. Last month, Escalade signed a long-term licensing partnership with the American Cornhole League (ACL), the worldwide governing body for cornhole, to make ACL COMP and ACL REC products.

Said Glazer, “With pickleball, cornhole and other categories, we continue to build strong niche lifestyle brands that, in any economic environment, tend to have a loyal following of repeat customers that will continue to benefit us over a longer term.”

Nonetheless, he said that given year-to-date results and the current climate, Escalade is taking steps to “right-size our cost structure and asset base to weather the economic headwinds and positioned our company for continued growth in the years ahead.”

Following the end of the quarter, an additional $15 million accordion feature was exercised under its senior revolving credit facility, enabling nearly $30 million of available liquidity. At the end of the third quarter, debt outstanding was three times trailing 12 months EBITDA. The firm continues to target long-term net leverage of 1.5 to two times EBITDA.

Inventories Surge 48 Percent Year-Over-Year
Total inventories were $135 million at the end of the quarter, up from $130 million at the end of the second quarter and up 47.8 percent from year-ago levels. The sequential increase in inventory was primarily the result of softening consumer demand and some order cancellations by customers due to elevated inventory levels in the marketplace.

Glazer said that while Escalade has had limited promotions over the last two years, selective promotions are planned for the holiday period to rebalance inventories. Inventory levels are expected to decline in the fourth quarter to benefit its cash and liquidity position as the company enters the new year.

Glazer concluded, “While the near-term decline in sales growth is disappointing, we believe that the strength and diversity of our brands, diverse sourcing capabilities and lean operating model position us to successfully navigate the current macroeconomic environment. We also believe that our end consumer, which often includes a higher earning, more affluent demographic is more resilient through economic cycles, which should benefit us. Given the slowing demand environment, we stayed very disciplined in managing controllable expenses and addressing supply chain and logistics challenges while continuing to deliver superior value to our customers. Looking forward, we also believe a potential economic downturn may create additional market share opportunities for the company.”

Photo courtesy Escalade/Onix