Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Escalade Inc (ESCA, Financial) demonstrated strong operational discipline by reducing fixed overhead costs and improving manufacturing efficiency.
- Cash flow from operations increased nearly 60% year-over-year in Q2, allowing the company to repay $8.6 million of high-interest variable-rate debt.
- Net leverage was reduced to 1.7 times trailing 12 months EBITDA, nearing the low end of their long-term target range.
- Continued consumer demand for leading brands such as Steve table tennis, archery, and Brunswick billiards.
- Owned DTC e-commerce volumes increased by 28% year-over-year during the quarter, reflecting strong consumer loyalty to their brands.
Negative Points
- Net sales declined by 7.7% compared to the prior year, indicating a softer consumer spending environment.
- Gross margin declined modestly to 24.2% from 24.6% in the prior year period, impacted by higher promotional activity and nonrecurring manufacturing rationalization costs.
- Selling, general, and administrative expenses increased by 30% year-over-year, driven by additional selling and marketing spending.
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) decreased by $1.8 million to $5.8 million compared to the prior year period.
- The company anticipates seasonally softer cash generation in the third quarter, followed by stronger cash flow in the fourth quarter amid holiday demand.
Q & A Highlights
Q: Could you give us a more granular walk on how you might deploy capital going forward, considering your leverage ratios are now towards the lower end of your target?
A: Good morning, David. We believe we'll be below the 1.5 leverage ratio by the end of the year if we don't make any significant changes. Our priorities are first internal investment in our business, maintaining the dividend, share repurchase, and lastly, acquisitions. We are currently focused on debt repayments, especially the higher cost variable rate debt. We feel good about our current portfolio but remain open to selective and cautious acquisitions.
Q: Could you talk about the pickleball opportunity and whether you need to bolt on other brands or equipment types?
A: We've been in the pickleball business for about 10 years with our Onyx brand, which is strong in paddles and balls. The market has seen a lot of new entrants, but we focus on technology and quality. We also offer eye protection and nets but are unlikely to venture into apparel. We believe our current offerings are well-positioned.
Q: Can you provide more granularity on the rise in competitive promotions and how you are positioned for the holiday season?
A: We are investing more in advertising and promotion, aligning with our inventory management and the competitive environment. We expect this promotional environment to continue into the holiday season. Our inventories are in good shape, and if consumer demand surprises us positively, there could be significant opportunities for higher factory sales.
Q: Could you provide more detail on the international sales growth, which was up 15% in the quarter?
A: International sales are coming off a low base but are a focus area for us. Basketball and pickleball have been strong, particularly in Europe, Australia, and New Zealand. We are also making efforts in China through a partnership to sell our branded products. We see a long runway for growth in international markets.
Q: What are your thoughts on maintaining the dividend and share repurchase programs?
A: Maintaining the dividend is a priority for us, and we have used share repurchase effectively in the past. We continue to focus on debt repayment but will evaluate opportunities for share repurchase and maintaining the dividend as part of our long-term capital allocation strategy.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
