Escalade, Inc. reported sales declined 13 percent, excluding acquisitions, in the second quarter due to lower demand in the fitness category and a reduction in outdoor category sales, including archery and water sports.
Sales were also impacted by the timing of in-ground basketball goal system sales. During its first-quarter call, Escalade officials had warned that basketball revenue would pull forward from the second quarter into the first quarter of 2022.
Net sales, including acquisitions, decreased 5.4 percent to $94.3 million.
On January 21, 2022, Escalade completed the acquisition of Brunswick Billiards from Life Fitness, LLC for $35.8 million.
Escalade’s other brands include Stiga table tennis, Accudart, Rave Sports water recreation, Victory Tailgate custom games, Onix pickleball, Goalrilla basketball, Lifeline fitness, Woodplay playsets, and Bear Archery.
Net income in the quarter declined 29.6 percent to $5.7 million, or 42 cents per share, from $8.1 million, or 58 cents, a year ago. The decline was blamed on lower sales volume and expenses related to the acquisition and integration of Brunswick Billiards.
On a call with analysts, Walter Glazer, Jr., president and CEO, noted that Escalade managed to hold gross margins flat year-over-year at 25.2 percent despite continued challenges related to the global supply chain, raw materials cost inflation and labor constraints.
Glazer said, “We successfully navigated rising material, logistics and labor costs with the help of pricing, product and productivity initiative.”
SG&A expenses increased to 15.5 percent of sales compared with 13.9 percent a year ago due to lower sales volume and expenses related to the acquisition and integration of Brunswick Billiards. SG&A expenses for the legacy business units were down year-over-year on an absolute basis.
Glazer noted that Escalade managed to grow 4.9 percent and elaborated on the company’s steps to mitigate cost pressures to offset “substantially higher inflation” and preserve margins.
“We, like many of our peers, are grappling with the rising cost of labor, transportation and raw materials, including wood, steel, aluminum, plastic resin, and packaging,” said Glazer. “In response to these cost pressures, we are accelerating our cost reduction initiatives throughout our organization.”
Escalade is also introducing innovation to “deliver great value to our consumers while enhancing our margins,” citing the success of the Trophy Ridge Digital React archery site and the Silverback SB60 Ghost basketball system. Selective price increases are also being implemented.
Glazer also noted that Escalade continues to invest in its brands to position them for growth, including signing Onix Pickleball as a sponsor of the PPA Tour, including the Skechers Invitational Summer Championship and the recently-held APP Open.
Escalade is also finding progress in reducing supply chain pressures. Glazer said that delivery is still taking months for products to arrive versus the weeks it traditionally took due to longer factory and shipping lead times. On the positive side, ocean freight rates have declined from recent highs, the stronger U.S. dollar is helping sourcing cost pressures, and some commodity prices are moderating.
He added that Escalade continues to take advantage of its hybrid sourcing model that leverages domestic manufacturing and international sourcing to offset disruption and also continues to diversify its international sourcing.
On the consumer mindset, Glazer said Escalade’s typical consumer profile generally skews toward a mid- to a higher-income household. He said, “While these households are better positioned, they are not immune to the economic challenges facing consumers.”
He noted that higher food and fuel costs tend to impact low- to middle-income households. Coupled with reduced government stimulus, softening demand is being seen, particularly for opening price point products
Higher-income households are impacted by significantly lower asset prices, including equities from the recent stock market declines. Meanwhile, rapidly increasing interest rates are impacting the ability for many consumers to finance larger ticket items such as new homes and autos, while household savings rates are below pre-pandemic levels.
“The U.S. Consumer Sentiment Index is down nearly 40 percent year-over-year, reaching its lowest level since 2011 and impacting consumer buying behavior,” said Glazer.
He said the company is experiencing lower consumer demand in its outdoor categories, including archery and water sports, as well as in its fitness category. As a result, higher retailer inventories and lower orders are being seen as retailers seek to appropriately manage their inventory levels.
“We believe longer-term behavioral shifts, such as the increased trend toward hybrid work arrangements and healthy active lifestyles, remain intact. We expect these trends, coupled with increased participation rates across many of our categories, will benefit us over time,” said Glazer. “To that end, we continue to capitalize on our leadership positions in niche product categories where our customers tend to be brand loyalists who value the quality of a product experience.”
He said Escalade is aware of the potential downside risk should a recession develop and remains “vigilant regarding expense control,” as evidenced by the company’s lower absolute SG&A expenses across its legacy businesses during the second quarter.
Glazer added, “We also continue to optimize our promotional planning and product assortment to address changing consumer preferences. We are confident we will manage through this market cycle well as we have in the past.”
Regarding Brunswick Billiards, Glazer said the integration has progressed ahead of plan and is expected to be accretive to earnings in the second half of 2022. Brunswick has transitioned to Escalade’s IT platform and ended its transition services agreement ahead of schedule in the second quarter. Said Glazer, “We believe this acquisition will allow for meaningful cross-selling synergies across our billiards and indoor recreation categories, which have also outperformed in the recent market environment.”
Total inventories were up 51.2 percent to $130 million at the end of the quarter, up from $86 million in the prior year period due to the addition of the Brunswick Billiards inventory as well as prior purchases of long lead time items in 2020 and 2021, exacerbated by slowing demand and retail order cancellations in recent months.
At the beginning of 2022, Escalade implemented a company-wide program to reduce inventory in anticipation of the normalization of consumer demand and supply chain conditions. As a result, incoming order flow has been reduced improved inventory turns are anticipated by year-end with further improvements towards its historical turns of 2.5 to 3x in 2023, which will improve its cash conversion cycle.
Glazer concluded, “Looking ahead, we are focusing our near-term capital allocation priorities on a targeted reduction in net leverage to a range of 1.5 to 2x trailing 12 months EBITDA, followed by continued investments in organic growth initiatives and a consistent payment of a quarterly cash dividend.”
Photo courtesy Escalade