Escalate has announced its financial results for the third quarter of 2024, with a net income of $5.7 million, or $0.40 per diluted share, and net sales of $67.7 million. The company is actively undergoing operational restructuring, including the sale of its Rosarito facility and rationalizing the Eagan, Minnesota site. Despite a decline in sales, Escalate has improved gross margins and reduced its operational footprint. The company remains focused on repaying debt and is optimistic about future economic recovery and its new partnership with Adidas (OTC:ADDYY).
Key Takeaways
- Escalate's net income stands at $5.7 million, with $0.40 earnings per diluted share.
- Net sales have declined by 7.7% year-over-year to $67.7 million.
- Gross margins have improved to 24.8%, aided by lower inventory costs.
- Operational restructuring is underway, aiming to reduce the footprint by 20%.
- The company has generated $10.5 million in cash from operations and is repaying debt, resulting in a net leverage ratio of 1.1 times trailing EBITDA.
- Strong demand in archery safety and basketball categories, with a 29% increase in direct-to-consumer e-commerce sales.
- Escalate is the upcoming official U.S. distributor for Adidas fitness accessories.
Company Outlook
- Escalate expects soft consumer demand in the near term but looks forward to holiday promotional activities.
- The company is optimistic about potential economic recovery due to Federal Reserve easing and a resilient job market.
- Plans to prioritize debt repayment and invest in innovation, including new product launches.
Bearish Highlights
- Sales have declined by 7.7% compared to the same quarter last year.
- The company anticipates soft consumer demand in the near term.
Bullish Highlights
- Gross margins have slightly improved despite a sales decline.
- There's a strong demand in specific categories and a significant increase in e-commerce sales.
- Optimism about economic recovery and new product launches.
Misses
- The company incurred $1.8 million in nonrecurring expenses due to restructuring.
- Sales figures have dropped year-over-year.
Q&A Highlights
- Walter Glazer confirmed the winding down of the licensed cornhole business in Orlando but is not exiting the business.
- The company plans to continue reducing higher-cost variable rate debt, which is currently at about 7.5% to 8%.
- Capital allocation will focus on dividends, share repurchases, and remaining open to acquisition opportunities.
- The recent increase in amortization expense is due to restructuring charges, expected to return to historical levels.
Escalate's third-quarter earnings call highlighted the company's strategic moves to improve operational efficiency and reduce debt while navigating a period of soft consumer demand. The company's restructuring efforts, including the sale of the Rosarito facility and the winding down of the Orlando operations, are set to reduce its operational footprint significantly. Despite the challenges, Escalate is making strides in e-commerce and remains committed to innovation and brand partnerships, as evidenced by the upcoming distribution deal with Adidas. The company's leadership emphasizes a prudent approach to capital allocation, with a focus on debt reduction and potential shareholder returns, while remaining open to strategic acquisitions.
InvestingPro Insights
Escalate's recent financial results and strategic moves are reflected in several key metrics and insights from InvestingPro. The company's stock has taken a significant hit over the last week, with a 7.83% decline in price total return, aligning with the reported challenges in consumer demand and ongoing restructuring efforts.
Despite these headwinds, InvestingPro data reveals that Escalate is trading at a low P/E ratio of 15.69 relative to its near-term earnings growth potential. This valuation metric suggests that the market may not be fully pricing in the company's future prospects, including its new partnership with Adidas and potential economic recovery.
Furthermore, an InvestingPro Tip highlights that Escalate has maintained dividend payments for 15 consecutive years, which is particularly noteworthy given the company's current focus on debt repayment and operational efficiency. The current dividend yield stands at an attractive 4.59%, potentially offering investors a steady income stream while waiting for the company's turnaround strategies to bear fruit.
It's worth noting that Escalate's liquid assets exceed its short-term obligations, as pointed out by another InvestingPro Tip. This financial stability is crucial as the company navigates through its restructuring phase and prepares for future growth opportunities.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Escalate, providing a deeper understanding of the company's financial health and market position.
Full transcript - Escalade Incorporated (ESCA) Q3 2024:
Operator: Good day, and welcome to the Escalate Third Quarter 2024 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Patrick Griffin, Vice President of Corporate Development. Please go ahead, sir.
Patrick Griffin: Thank you, operator. On behalf of the entire team at Escalate, I'd like to welcome you to our third 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 differ 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.
Walter Glazer: Thank you, Patrick, and welcome to those joining us on the call. During the third quarter, we made substantial progress optimizing our asset base and cost structure as we navigate a transitional period in consumer demand. While net sales declined 7.7% versus the prior year, we achieved modest gross margin expansion even while absorbing $1.8 million of nonrecurring business rationalization expense in our cost of goods sold. Excluding these nonrecurring expenses, our gross margin would have been 27.4%, representing a 265 basis point improvement over the prior year. Our portfolio optimization efforts during the quarter included the sale of our Rosarito, Mexico facility, the cost rationalization at our Eagan, Minnesota facility, the wind down of operations in Orlando, Florida and the consolidation of our high-end billiards accessory products into our Bristol, Wisconsin facility. The optimization of our operational footprint will largely be complete by year-end. With the completion of this program, we will reduce our operational footprint by approximately 300,000 square feet or 20%. The team has done an outstanding job this year, rescaling our operations while still providing ample capacity to support a recovery in consumer demand. In addition, we remain focused on maximizing our cash flow and generated $10.5 million of cash from operations during the quarter. Along with proceeds from the sale of our Rosarito facility, we distributed over $2 million in dividends, made capital expenditures to support our operations and repaid nearly $14 million of debt taking our net leverage ratio to 1.1 times. Going forward, we expect these efforts to drive higher gross margins through the end of the year and 2025 despite near-term softness in consumer demand. As we move into the holiday season, we anticipate a higher level of promotional activity as we believe consumers will be price conscious given the economic environment. At the same time, we anticipate promotional activity will serve to accelerate the inventory destocking efforts already underway at many retailers. Despite soft consumer spending for consumer discretionary goods, we continue to see favorable demand in our archery safety and basketball categories driven by new product introductions. Additionally, our own direct-to-consumer e-commerce volumes continue to increase, up 29% year-over-year during the quarter. We believe consumer loyalty to our market-leading differentiated recreational brands continues to position us to deliver above-market performance as we move through the next phase of the retail cycle. As before, we continue to invest in connecting more deeply with consumers through our owned e-commerce initiatives, marketing programs and corporate partnerships while continuing to deliver category-leading innovative brands to build loyalty across a diverse base of established and emerging recreational sports. Looking ahead, we are encouraged by the Federal Reserve's recent monetary easing as well as a resilient job market. We continue to closely monitor household balance sheets and consumer sentiment. As interest rates likely move lower, we expect this will aid a recovery in consumer demand for discretionary recreational goods. However, we recognize the cycle will take some time, and we do not expect to see materially stronger demand in the near term as we settle into consumer spending patterns more similar to the pre-pandemic economy. In the meantime, we are committed to improving our financial position through optimizing our cost structure and maximizing our operating leverage. These efforts, along with ongoing inventory rationalization, will not only position us to navigate the ongoing trough in consumer demand, but also position us for profitable growth and outperformance through the next cycle. As we continue to generate strong cash flow, we are prioritizing the continued repayment of our higher cost variable rate debt, which we expect to pay off by the end of the year. In addition, we are continuing to invest in innovation, ensuring continued outperformance. A notable example is the Bear Archery team, which did an amazing job designing, manufacturing and marketing a whole new lineup of compound bows. They've delivered substantial upgrades to five of our top 6 selling bows and have brought integrated riser capability to price points never seen before in the industry. A highlight is the newest version of the Adapt to in partnership with the Hunting Public, an influencer group with online video series and podcast for avid hunters, which has exceeded even our admittedly high expectations. We also launched the new Onix Supercell Pickleball Paddle, which introduces cloud control technology to the market. The 22-millimeter proprietary construction of the paddle creates an expansive sweet spot provides outstanding control, touch and power. As recently announced, we entered into an exciting new agreement to be the official U.S. distributor of Adidas fitness accessories. The Adidas brand is globally recognized and synonymous with high performance. This new partnership will expand our fitness offering, which today includes the STEP, Lifeline and U.S. weight brands, our Adidas fitness success we offering will be available online and in retail in early 2025. Finally, during the third quarter, we began consolidation of our Cue & Case accessories business into the Bristol, Wisconsin headquarters for our Brunswick (NYSE:BC) Billiards Group. This allows us to combine dealer shipments of Brunswick, American Heritage Billiards and game room tables, along with a wide range of high-quality Cue & Case billiards accessories. Dealers will benefit from the efficiency of the combined shipments, further building upon our competitive advantages in this category. The Bristol team did a fantastic job planning and preparing while working hand in hand with our highly capable Evansville associates to execute this transition, which is now complete. Our vision is to build and strengthen our brand portfolio centered on helping consumers create great memories while engaging in healthy activities with their family and friends. We look forward to updating you with 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 three months ended September 30, 2024, Escalade reported net income of $5.7 million or $0.40 per diluted share on net sales of $67.7 million. For the third quarter, the company reported gross margins of 24.8% compared to 24.7% in the prior year period. The 10 basis point increase was primarily the result of lower inventory handling costs and a reduction in fixed costs associated with our facility in Mexico, partially offset by lower net sales and a $1.8 million and nonrecurring optimization expenses. Selling, general and administrative expenses during the third quarter increased by 6% or $0.6 million compared to the prior year period to $11.1 million. The third quarter SG&A increase was mainly driven by higher professional fees. Earnings before interest, taxes, depreciation and amortization increased by $2 million to $9.9 million in the third quarter of 2024 versus $7.9 million in the prior year period. I would also note that in conjunction with the divestiture of our Rosarito, Mexico facility, we recognized a $3.9 million gain on the sale of assets, which is reflected in our third quarter 2024 operating income. Total cash provided by operations for the third quarter of 2024 was $10.5 million for the quarter compared to $14.8 million in the prior year period. The decrease in operating cash flow is driven by timing of inventory management initiatives in the prior year which drove strong free cash flow generation in the third quarter of 2023. As of September 30, 2024, the company had total cash and equivalents of $426,000. At the end of the third quarter of 2024, net debt outstanding or total debt less cash was 1.1x trailing 12-month EBITDA. As of September 30, 2024, we had $29.5 million of total debt outstanding including $2.1 million of high interest variable rate debt. We will continue to focus on repaying the remainder of this variable rate debt this year while driving our total net leverage below our long-term target range of 1.5x to 2.5x EBITDA. On October 11, we proactively entered into an amendment to our senior secured revolving credit facility, which reduced our borrowing capacity by $15 million or 20%. As a result of this amendment, we had total availability of $58.3 million. Recognizing the significant improvement in our working capital position this past year, we believe this new amendment provides ample availability for our current sales level and for future growth. As part of the amendment, we also exchanged our fixed charge coverage ratio covenant with an interest coverage ratio, giving us additional operating flexibility. With that, operator, we will open the call for questions.
Operator: [Operator Instructions] And the first question will come from Rommel Dionisio with Aegis. Please go ahead.
Rommel Dionisio: Good morning. A couple of questions on the -- some of the newer restructuring initiatives. Maybe you could just touch base some of the Minnesota rationalization. I believe that's water sports or is that in the distribution facility? Is that going to go elsewhere? Or are you just kind of maybe trimming the product assortment and you're able to generate some customers that way. Can you just provide a little more detail on that, please?
Walter Glazer: Sure. Good morning, Rommel, and thank you for your question. Yes, so Minnesota in Eagan, we have our water sports business, and we've had excess inventory there. So we've reduced our square footage, our space. We've also recognized that the category is temporarily smaller than it was traditionally. And so we had to make some tough decisions around staffing and personnel. So those decisions have been made and the costs have been -- cost structure has been corrected, and we are prepared to grow that business when and if the consumer is ready to buy water sports again.
Rommel Dionisio: Okay. And maybe switching gears to the Orlando action. I think you mentioned you want to wind that -- you're targeting to wind that down by the year-end. So that's -- if I remember correctly, that's manufacturing and distribution for Cornhole will that be shifted elsewhere? Or are you thinking maybe downshifting on the business of overall or could you sort of walk us through your thoughts on that one?
Walter Glazer: Sure, Rommel. Yes, you're correct. That was the licensed cornhole hold business. And we've done a couple of things. One is we're shifting to more of a pre-printed import model as opposed to print on demand in Orlando. So we've made that change. And then additionally, we're going to consolidate that inventory into other facilities, primarily in Evansville and some in Gainesville, Florida as well. So just once again, adjusting the cost structure for the reality of the business today.
Rommel Dionisio: Okay. No, that's fair enough. That's great detail. So there's no intention of kind of exiting that business or even kind of shrinking business. It's just more cost savings than relocation in other facilities and some offshoring as well. Do I understand it correctly, Walter?
Walter Glazer: Yes, we just want to make sure that our cost structure is appropriate and that we're delivering great value to our consumers. So that was very difficult to do with all the handling and labor in Orlando.
Rommel Dionisio: Great. Okay. And maybe just one last housekeeping question, if I could, maybe more for Steve. Steve, the amortization expense was mainly about $400,000, a little higher than what had been previous quarter. Is there something nonrecurring there? Or how should we think about that as kind of an ongoing level for quarterly amortization?
Stephen Wawrin: No, you're correct, Rommel. That was actually part of the restructuring charges surrounding Orlando and writing off some of our intangible assets in the facility.
Rommel Dionisio: Okay. So maybe a 600 -- so the prior historical level seems like that should be more of an ongoing level. Is that kind of what I'm hearing?
Stephen Wawrin: That's correct.
Rommel Dionisio: Okay. Perfect. Great. Thanks so much, gentlemen.
Walter Glazer: Thank you.
Operator: The next question will come from David Cohen with Minerva. Please go ahead.
David Cohen: Thanks. Good morning, guys. As always, really good job of managing the balance sheet and paying down debt. As you alluded to, you're now sort of below your target debt range. And I'm wondering whether that occasions, any reconsideration of capital allocation priorities, or whether you're not going to make any decisions until there's a new CEO in place. Could you just give us whatever flavor you can of those conversations?
Walter Glazer: Sure. Good morning, David. thank you for your question. Yes, as you point out, we are below the range we've described of 1.5x to 2.5x. We're at 1.1x and is likely going to be lower than that by year-end. So we are going to continue to pay down the higher cost variable rate debt which has cost us about 7.5%, 8%. So that's a good use of capital, we think. As far as the other capital allocation opportunities, we pay a strong cash dividend. We have historically been a share repurchase when the opportunity arose and we've been an opportunistic acquirer as well. I would say on the acquisition side, we don't feel like we have to do anything now. We don't have any holes that we need to fill but we are active in the flow of information, we're aware of businesses that are for sale or coming for sale. So we will continue to use all the levers of capital allocation, just depending on the opportunities that we're able to uncover. So that's where we stand today.
David Cohen: Okay. Well best of luck, all.
Walter Glazer: Thank you, David, very much. I appreciate it.
Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Patrick Griffin for any closing remarks. Please go ahead, sir.
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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