Escalade, Inc. (ESCA) opened its first quarter 2024 results conference call with an optimistic tone, reporting a notable improvement in gross margins and profitability. The company's gross margin reached 25%, marking a 560 basis point increase from the previous year and the highest since Q2 2022. Net sales saw a modest rise of 0.7%, and direct-to-consumer sales jumped by 28% year-over-year. Despite the increase in selling, general, and administrative expenses, Escalade showcased strong operational performance and remains focused on debt repayment and internal control enhancements.
Key Takeaways
- Escalade’s Q1 gross margin improved significantly to 25%, up 560 basis points from the prior year.
- Net sales increased marginally by 0.7%, with direct-to-consumer sales growing 28% year-over-year.
- The company is continuing its efforts to divest its Rosarito assets and reduce fixed costs.
- Escalade generated a modest amount of cash from operations and expects to further reduce inventory levels in 2024.
- Net debt leverage was reported at 2.0x EBITDA, within the target range.
- Remediation of material weaknesses in internal controls is underway with expected completion this year.
Company Outlook
- Escalade anticipates a softening in U.S. consumer spending but remains confident in its brand position among higher-income consumers.
- The company plans to maintain focus on operational excellence and cost discipline.
- Escalade is committed to optimizing its asset base and enhancing long-term profitability.
Bearish Highlights
- Selling, general, and administrative expenses increased by 4% compared to the previous year.
- There was a decrease in cash flow from operations due to seasonal inventory and accounts receivable growth.
Bullish Highlights
- Escalade experienced a more normal seasonal sales mix, with growth in basketball, table tennis, outdoor games, and archery categories.
- The company's online sales and direct-to-consumer performance remain strong areas of opportunity.
Misses
- Total cash provided by operations for Q1 2024 was significantly lower at $7,000 compared to $4.5 million in the prior year period.
Q&A Highlights
- President and CEO Walt Glazer discussed the company's focus on debt repayment, particularly targeting higher-cost variable rate debt.
- Glazer addressed the supply chain improvements, noting lower costs and the successful shift of operations from Mexico to U.S.-based facilities.
- The divestiture of the Rosarito property is in progress, with engagement from potential buyers.
Escalade continues to navigate the challenges of a dynamic market with a strategic focus on cost management and operational efficiency. The company's improved gross margins and profitability, along with a disciplined approach to debt repayment and internal controls, underscore its commitment to long-term shareholder value. As Escalade moves through 2024, it remains poised to capitalize on its diverse product portfolio and strong market positions.
InvestingPro Insights
Escalade, Inc.'s (ESCA) latest earnings report reflects a company that is navigating market challenges with a clear strategy for cost management and operational efficiency. The improvement in gross margins and profitability aligns with several metrics and tips from InvestingPro that can offer additional insights into the company's financial health and investment potential.
InvestingPro Tips for Escalade highlight that the company is trading at a low P/E ratio relative to near-term earnings growth, which suggests that the stock may be undervalued given its earnings trajectory. This is particularly relevant for investors looking for growth at a reasonable price. Additionally, Escalade's valuation implies a strong free cash flow yield, which could be attractive to investors seeking companies with the potential to generate cash.
InvestingPro Data further illuminates Escalade's financial position with key metrics:
- The company's Market Cap stands at $189.49M USD, reflecting its current market valuation.
- Escalade's P/E Ratio as of Q1 2024 is 15.09, which, when combined with a PEG Ratio of 0.74, suggests that the stock could be a compelling choice for value investors.
- The Dividend Yield is noteworthy at 4.39%, indicating that Escalade has maintained its commitment to returning value to shareholders through dividends, a streak that has continued for 15 consecutive years.
These insights, when considered alongside the article's discussion of Escalade's improved gross margins and operational performance, paint a picture of a company that is not only managing its finances well but also offers potential value to investors.
For readers interested in a deeper dive into Escalade's investment profile, InvestingPro provides even more tips and data. Discover additional InvestingPro Tips by visiting https://www.investing.com/pro/ESCA, and don't forget to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 5 additional InvestingPro Tips available, offering a comprehensive view of Escalade's financial landscape.
Full transcript - Escalade (ESCA) Q1 2024:
Operator: Good day and welcome to the Escalade’s First Quarter 2024 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Patrick Griffin, Vice President, Corporate Development and Investor Relations. Please go ahead.
Patrick Griffin: Thank you, operator. On behalf of the entire team at Escalade, I’d like to welcome you to our first quarter 2024 results conference call. Leading the call with me today are President and CEO, Walt Glazer; and Stephen Wawrin, our Chief Financial Officer. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may vary significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law we undertake no obligation to update our forward-looking statements. At the conclusion of our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Walt.
Walt Glazer: Thank you, Patrick and welcome to those joining us on the call today. Our first quarter results represent an encouraging start to the year, highlighted by strong gross margin and profitability improvement, supported by normalized operating leverage and stabilization and demand for our product assortment. Our first quarter gross margin reached 25%, an improvement of 560 basis points compared to the prior year and the highest level since the second quarter of 2022. Our first quarter margin profile reflects a normalization in business conditions as we work through numerous cost headwinds during 2023, including heightened inventory handling costs, shutdown costs in Rosarito, Mexico and the underutilization of our facilities in the U.S. as we slowed production to reduce inventory. We continue to progress with our plans to divest our Rosarito assets and took further steps to reduce fixed cost of that facility during the quarter. We continue to tightly control our expenses there as we work toward divesting the assets. Looking forward, we remain committed to maximizing our return on assets through optimizing our asset base and cost structure, which we believe will position us to enhance our long-term profitability. First quarter net sales increased to 0.7% as consumer demand for our products stabilized. Importantly, we saw a more normal seasonal sales mix during the quarter. The sales of our basketball, table tennis, outdoor games and archery categories grew year-over-year. As I mentioned on our last call, our retail partners successfully reduced their inventory levels coming into 2024. So we now believe most channel inventories of our products are relatively light. Our online sales growth remains a key area of opportunity for us with our direct-to-consumer or DTC sales up 28% on a year-over-year basis in the first quarter. Looking ahead, we continue to closely monitor the health of the consumer. While U.S. consumer spending will likely be softer this year in our categories, we believe that our brands position us among a higher income, more durable segment of consumers who can maintain a base level of spending. As overall demand and gross margins are normalizing, so too is the seasonality of our operating cash generation. During the first quarter, we generated a modest amount of cash from operations as our inventories and accounts receivable both grew late in the quarter ahead of the spring selling season. While inventory levels did increase on a sequential basis, we still expect to reduce our inventories as we move through 2024. When combined with our improved overall operating leverage, we expect to generate ample cash flow this year. As before, we continue to prioritize the repayment of our variable rate debt. At the end of the first quarter, our net debt leverage was 2.0x EBITDA, which was within our target long-term range of 1.5x to 2.5x. We believe that our diverse portfolio of products, continued focus on operational excellence and cost discipline, together with a well-capitalized balance sheet, position us to successfully navigate a period of soft consumer demand, while continuing to build market-leading positions with our established portfolio of indoor and outdoor recreational brands. In the interim, we will continue to focus on creating exceptional consumer experiences to build brand loyalty, all while creating long-term shareholder value. We look forward to updating you with all our progress next quarter. With that, I’ll turn the call over to Stephen for his prepared remarks.
Stephen Wawrin: Thank you, Walt. For the 3 months ended March 31, 2024, Escalade reported net income of $1.8 million or $0.13 per diluted share on net sales of $57.3 million. For the first quarter, the company reported gross margins of 25% compared to 19.4% in the prior year period. The 560 basis point improvement was primarily the result of more favorable product sales mix, lower freight cost, reduced inventory handling expenses, and a reduction in fixed costs associated with our facility in Mexico. Selling, general and administrative expenses during the first quarter increased by 4% compared to the prior year period to $10.7 million. As a percentage of net sales, SG&A increased by 60 basis points year-over-year to 18.7% in the first quarter of 2024 compared to 18.1% in the first quarter of 2023. The year-over-year increase was driven by higher professional service expenses and normalized incentive compensation expenses, partially offset by lower marketing expenses. Earnings before interest, taxes, depreciation and amortization increased by $2.8 million to $4.4 million in the first quarter of 2024 versus $1.6 million in the prior year period. Total cash provided by operations for the first quarter of 2024 was $7,000 for the quarter compared to $4.5 million in the prior year period. The reduction in cash flow from operations primarily reflects a decrease in cash flow generated from net working capital, due to a normal seasonal increase in inventories and accounts receivable ahead of the spring selling season during the first quarter of 2024, which was not reflected in the prior year period due to our inventory reduction initiatives. As of March 31, 2024, the company had total cash and equivalents of $283,000, together with $62.4 million of availability on our senior secured revolving credit facility maturing in 2027. At the end of the first quarter of 2024, net debt outstanding or total debt less cash was 2x trailing 12-month EBITDA. As of March 31, 2024, we had $53.5 million of total debt outstanding, including $22.6 million of high interest variable rate debt. We continue to prioritize the repayment of this variable rate debt during 2024, while managing our total net leverage within our long-term target range of 1.5x to 2.5x EBITDA. As discussed in our prior calls, we are focused on resolving several material weaknesses in our internal controls over financial reporting as well as developing strong internal controls in a timely and compliant manner. To that end, we engaged a reputable consulting firm to assist us with our remediation initiatives and have started the process. We expect to conclude our remediation this year. With that, operator, we will open the call for questions.
Operator: Thank you. [Operator Instructions] Our first question today comes from Rommel Dionisio with Aegis Capital. Please go ahead.
Rommel Dionisio: Good morning. Thanks for taking my question and really nice progress on the gross profit – gross margins. You guys have been generating cash flow and paying down debt here successfully over the last few quarters, I wonder if you could just talk about further use of cash or free cash flow going forward. I know you talked about continued debt repayments. But in this environment, I imagine there is some acquisition targets you’re looking. I wonder if you could just share with us some of your strategic – without asking for obviously specifics on potential acquisitions. Just how you guys think about use of cash going forward? Thanks.
Walt Glazer: Yes. Good morning. Rommel, and thanks for your question. Yes, as you point out, we’ve been focused on paying down our debt. And for the near-term, we will continue to do that. We have a nice piece of low-cost fixed-rate debt, it’s about $30 million, and the rest is a higher cost variable rate debt. So our focus right now is to pay down that higher cost piece to reduce our interest expense. As you know, we’ve been acquisitive over the years, and we continue to look at various opportunities. I would say that we feel really good with our portfolio today we don’t feel like we have to do anything. But of course, we’re certainly open to look at any opportunities and we would balance the opportunity of any acquisition against the continued debt repayments. And as you know, we’ve done share repurchases in the past as well.
Rommel Dionisio: Okay. And maybe just a follow-up, could you just give us an update on the supply chain with regards to the production you have in Mexico, has that all been shifted over at this point and where that – where the divestiture stance? Thanks.
Walt Glazer: Sure. Rommel. So the bigger story on the supply chain is that things are much, much better. So you didn’t really ask about the China situation and ocean freight, but our costs are much, much lower than they were a couple of years ago. So we feel good about that. We have moved all of our operations from Mexico to our U.S.-based facilities. And we are in the process of selling the property and engaged with a number of potential buyers, but nothing to report at this time.
Rommel Dionisio: Great. Thanks very much. It’s very helpful.
Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Patrick Griffin for closing remarks.
Patrick Griffin: Once again, thank you for your interest in Escalade and joining our call. Should you have any questions, please feel free to contact us at ir@escaladeinc.com and a member of our team will follow-up with you. This concludes our call today. You may now disconnect.
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