EXEC: Escalade’s Q2 Sales Dragged Down on Fitness and Outdoor Weakness

Escalade, Inc. reported that second-quarter revenue declined 13 percent, excluding acquisitions, as a result of lower demand in the fitness category and a decline in sales in the outdoor category, including archery and water sports.

Sales were also affected by the timing of the sale of in-ground basketball goal systems. During the first quarter, Escalade officials had warned that basketball revenues would rise from the second quarter to the first quarter of 2022.

Net sales, including acquisitions, declined 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.

Other Escalade 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 for 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 decrease was attributed to lower sales volume and costs related to the acquisition and integration of Brunswick Billiards.

Speaking with analysts, Walter Glazer, Jr., president and CEO, noted that Escalade managed to keep gross margins stable at 25.2 percent year-over-year, despite ongoing challenges related to the global supply chain, commodity cost inflation and labor restrictions. .

Glazer said, “We have successfully navigated rising material, logistics and labor costs using pricing, product and productivity initiatives.”

SG&A expenses increased to 15.5 percent of sales, compared to 13.9 percent a year ago due to lower sales volume and costs related to the acquisition and integration of Brunswick Billiards. SG&A expenses for the legacy business units decreased year-over-year on an absolute basis.

Glazer noted that Escalade managed to grow 4.9 percent and discussed the company’s steps to reduce cost pressures to offset “significantly higher inflation” and preserve margins.

“We, like many of our colleagues, are struggling with the rising costs of labour, transportation and raw materials, including wood, steel, aluminum, plastic resin and packaging,” said Glazer. “In response to this cost pressure, we are accelerating our cost-saving initiatives across our organization.”

Escalade also introduces innovation to “deliver great value to our consumers while increasing 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 implemented.

Glazer also noted that Escalade continues to invest in its brands to position them for growth, including the signing of Onix Pickleball as a sponsor of the PPA Tour, which includes the Skechers Invitational Summer Championship and the recently held APP Open.

Escalade is also making progress in reducing pressure in the supply chain. Glazer said deliveries still take months for products to arrive, as opposed to the weeks it traditionally took due to longer factory and shipping lead times. On the upside, ocean freight rates have fallen from recent highs, the stronger US dollar is contributing to purchasing cost pressures, and some commodity prices are moderating.

He added that Escalade continues to take advantage of its hybrid sourcing model that uses domestic manufacturing and international sourcing to offset disruptions and also continues to diversify its international sourcing.

In terms of consumer mindsets, Glazer said Escalade’s typical consumer profile is generally skewed toward a middle- to higher-income household. He said: “While these households are better positioned, they are not immune to the economic challenges consumers face.”

He noted that higher food and fuel costs often affect low- to middle-income households. Coupled with reduced government stimulus, declining demand is observed, especially for open-priced products

Higher income households are impacted by significantly lower asset prices, including equities, as a result of the recent stock market declines. Meanwhile, rapidly rising interest rates are impacting many consumers’ ability to finance larger ticket items such as new homes and cars, while household savings are below pre-pandemic levels.

“The US Consumer Sentiment Index is down nearly 40 percent year-over-year, reaching its lowest level since 2011, impacting consumer buying behavior,” Glazer said.

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 store inventories and lower orders are seen as retailers want to manage their inventory levels appropriately.

“We believe that longer-term behavioral changes, such as the increased trend towards hybrid work arrangements and healthy active lifestyles, will remain intact. We expect these trends, coupled with higher participation rates in many of our categories, to benefit us over time,” said Glazer. “That’s why we continue to benefit from our leadership positions in niche product categories where our customers are generally 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 on cost containment,” as evidenced by the company’s lower absolute SG&A costs in its legacy business during the second quarter.

Glazer added: “We also continue to optimize our promotional planning and product range to respond to changing consumer preferences. We are confident that we will get through this market cycle as well as we have in the past.”

Regarding Brunswick Billiards, Glazer said the integration has progressed ahead of schedule and is expected to contribute to earnings in the second half of 2022. Brunswick has transitioned to Escalade’s IT platform and terminated its transition services agreement ahead of schedule in the second quarter. Glazer said, “We believe this acquisition will enable meaningful cross-selling synergies between our billiards and indoor recreation categories, which have also outperformed in the recent market environment.”

Total inventories increased 51.2 percent to $130 million at the end of the quarter, up from $86 million in the same period last year due to the addition of Brunswick Billiards inventory and previous purchases of long-term items. lead time in 2020 and 2021, exacerbated by slowing demand and retail order cancellations in recent months.

In early 2022, Escalade implemented a company-wide program to reduce inventory in anticipation of normalization of consumer demand and supply chain conditions. As a result, the inbound order flow has decreased. Improved inventory turnover is expected towards the end of the year with further improvements towards the historical turnover rate of 2.5 to 3x in 2023, which will improve the cash conversion cycle.

Glazer concluded: “Looking ahead, we focus our short-term capital allocation priorities on a targeted reduction in net leverage to a range of 1.5 to 2x 12-month EBITDA, followed by continued investment in organic growth initiatives and a consistent payment of a quarterly cash dividend.”

Photo courtesy of Escalade

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