Earnings call transcript: Escalade Q1 2025 sees revenue dip, stock falls

Escalade Incorporated (NASDAQ:ESCA) reported its financial results for the first quarter of 2025, revealing a decline in net sales and a corresponding drop in stock price. The company posted earnings per share (EPS) of $0.19, aligning with market expectations, and reported actual revenue of $55.5 million, marking a 3% decline year-over-year. According to InvestingPro analysis, the company currently trades at an attractive P/E ratio of 15.6x and appears undervalued based on its Fair Value assessment. Following the announcement, Escalade’s stock saw a pre-market decrease of 3.99%, closing at $14.69, down from its previous close of $15.30.

Key Takeaways

• Escalade reported a 3% year-over-year decline in Q1 2025 net sales.
• Gross margins improved by 161 basis points, reaching 26.7%.
• The stock price dropped nearly 4% pre-market following the earnings release.
• The company continues to focus on innovation and strategic acquisitions.

Company Performance

Escalade’s performance in Q1 2025 reflects the challenges in the consumer discretionary sector, with net sales falling to $55.5 million, a 3% decline from the previous year. Despite this, the company improved its gross margins to 26.7%, up from 25% last year, indicating better cost management and pricing strategies. The company also saw a rise in EBITDA to $4.9 million, up by $500,000 compared to the prior year.

Financial Highlights

• Revenue: $55.5 million, down 3% year-over-year
• Earnings per share: $0.19, unchanged from expectations
• Gross margins: 26.7%, up from 25% last year
• EBITDA: $4.9 million, increased by $500,000
• Operating cash flow: $3.8 million

Market Reaction

Escalade’s stock experienced a 3.99% drop in pre-market trading, reflecting investor concerns over the revenue decline and soft consumer sentiment for discretionary goods. The stock is trading within its 52-week range, which has seen a high of $16.99 and a low of $12.53. Notable for income investors, the stock offers a 3.92% dividend yield and has maintained dividend payments for 16 consecutive years. InvestingPro data shows the company maintains a "GOOD" overall financial health score, with particularly strong ratings in cash flow management. This movement aligns with broader market trends where consumer goods companies face headwinds.

Outlook & Guidance

Looking forward, Escalade plans to optimize its supply chain, explore alternative sourcing options, and consider strategic acquisitions to bolster growth. The company’s strong financial position is evidenced by its current ratio of 3.88 and moderate debt levels, with total debt to capital ratio at just 11%. InvestingPro subscribers can access 7 additional key insights about Escalade’s growth potential and financial health in the comprehensive Pro Research Report. The company remains focused on innovation, particularly in its direct-to-consumer and e-commerce channels, and is set to launch limited edition Brunswick Billiards Cues to celebrate its 180th anniversary.

Executive Commentary

"Our diverse product portfolio helps us navigate these cross currents," said Armin Baum, CEO, emphasizing the company’s adaptability in a challenging market. Baum also highlighted the company’s strategic agility, stating, "We will remain agile and operate with a sense of urgency as the global trade situation evolves." Walt Glaser, Board Chairman, noted, "We believe low leverage with low cost debt is a good place to be in today’s environment."

Risks and Challenges

• Soft consumer sentiment for discretionary goods may continue to impact sales.
• Ongoing trade uncertainties, particularly with China, pose potential risks.
• Changes in consumer behavior patterns could affect product demand.
• Potential supply chain disruptions may challenge operational efficiency.
• Tariff impacts, which affected Q1 by over 100 basis points, could persist.

Q&A

During the earnings call, analysts inquired about Escalade’s tariff mitigation strategies and inventory management approach. The company confirmed a significant tariff impact in Q1 and highlighted its agility in responding to market challenges, emphasizing a proactive stance in managing these issues.

Full transcript - Escalade Incorporated (ESCA) Q1 2025:

Conference Operator: Good day, and welcome to the Escalade First Quarter twenty twenty five Results Conference Call. Participants will be in the listen only mode. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. Please note this event is being recorded.

I would now like to turn the conference over to Vice President of Business Development and Investor Relations, Patrick Griffin. Please go ahead.

Patrick Griffin, Vice President of Business Development and Investor Relations, Escalade: Thank you, operator. On behalf of the entire team at Escalade, I’d like to welcome you to our first quarter twenty twenty five results conference call. Leading the call with me today are Board Chairman, Walt Glaser President and CEO, Armin Baum and Stephen Warren, 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.

Walt Glaser, Board Chairman, Escalade: Thank you, Patrick, and welcome to everyone joining us on today’s call. I’ll begin with an overview of our first quarter results before turning the call over to Armen for a strategic update. As many of you know, Armen joined Escalade as our President and CEO at the April and has been actively engaged with the team as we continue to navigate a dynamic operating environment. I’m very pleased we were able to recruit Armen, have enjoyed working with him to plan a smooth transition and look forward to his leadership and contributions to Escalade’s success in the years ahead. Our strong first quarter results reflect the continued benefits for operational discipline and strategic focus.

Over the past few years, we’ve implemented a series of initiatives designed to streamline our cost structure, improve operating efficiency and position the business for sustainable profitable growth across the economic cycle. These efforts drove a meaningful improvement in our gross margins during the quarter despite ongoing softness in discretionary spending and declining consumer sentiment. Net sales declined approximately 3% year over year as anticipated, but we expanded gross margins by more than 160 basis points driven primarily by lower manufacturing and logistics costs resulting from facility consolidations and our cost rationalization program. Importantly, we view this margin improvement as durable and reflective of the leaner, more agile operating model we built. While overall consumer demand for discretionary goods remain soft, we saw encouraging growth in several key categories, archery, safety, darting, and outdoor games, all of which outperformed the prior year period.

These results highlight the advantage of our diversified portfolio and the resonance of our market leading brands with consumers. We maintained a sharp focus on working capital efficiency. Inventory levels rose modestly during the quarter as we selectively built ahead of the spring selling season for our archery, basketball and playground categories. Despite this, we generated nearly $4,000,000 in operating cash flow driven by our enhanced profitability and disciplined working capital management. Consistent with our capital allocation strategy, we deployed this cash to reduce debt and return capital to shareholders.

In the quarter, we reduced our bank debt by $1,800,000 paid a quarterly dividend of $2,100,000 and repurchased $1,400,000 of Escalade shares. Over the past twelve months, we reduced our debt by nearly $30,000,000 driving our net leverage ratio down to 0.8 times trailing twelve months EBITDA. With cost of debt of just 2.97%, we continue to have opportunities to benefit from positive cash arbitrage. We believe low leverage with low cost debt is a good place to be in today’s environment. To summarize, our first quarter results reflect strong execution and reinforce the progress we’ve made toward building a leaner, more resilient organization.

On behalf of the Escalade Board of Directors and the entire Escalade team, I want to reaffirm our long standing commitment to delivering innovation, operational excellence and long term value creation for our shareholders and customers alike. With that, I’ll turn the call over to Armen for a strategic update and a look at the road ahead.

Armin Baum, President and CEO, Escalade: Thank you, Walt, and good morning, everyone. It is a privilege to join Escalade and build upon the strong foundation that the team has put in place. Over the past month, I’ve had the opportunity to immerse myself in the business and meet many of the talented individuals driving our success. Their focus, passion, and resilience have reaffirmed my excitement about what we can achieve together. Escalade has a clear and compelling strategy rooted in operational discipline, innovation, and customer centricity.

That strategy has served us well, particularly while facing the heightened complexity of today’s macroeconomic and geopolitical landscape. While consumer sentiment remains soft and the trade environment continues to evolve, our team is focused on controlling the variables within our control. Leveraging our US based manufacturing footprint, optimizing our supply chain, and aligning inventory to demand. Escalade has balanced domestic manufacturing and global sourcing for decades, which has enabled the company to remain competitive in the marketplace and responsive to customer demand. Our domestic manufacturing footprint gives us flexibility and speed.

Regarding our global sourcing, we source a meaningful portion of our products in Asia through trusted partners. While we have taken important steps in the last years to diversify our global sourcing footprint, the current trade uncertainty, especially around China, has prompted us to further analyze and plan for a range of expanded sourcing scenarios. We began to see the early effects of new tariffs on shipments of imported goods late in the first quarter and are continuing to take mitigation actions to reduce the impact going forward. These actions include designing and engineering new solutions to reduce our tariff exposure, rationalizing product assortments, collaborating with our retail and supply partners to enhance our supply chain resilience, and expanding domestic manufacturing capacity. We are also reviewing additional levers, including targeted pricing where appropriate, As we expand and refine our playbook, we will remain agile and operate with a sense of urgency as the global trade situation evolves.

We currently have reasonable levels of inventory across our categories to meet near term customer requirements as we further assess the longer term outlook. From a demand perspective, we have seen changing consumer behavior patterns. Some consumers are accelerating purchases ahead of potential price increases, while others are holding back due to broader economic uncertainty. Our diverse product portfolio helps us navigate this cross currents. And our balance sheet gives us flexibility to respond to these changing conditions in real time.

Looking forward, we are focused on strengthening our direct to consumer and e commerce presence, while connecting with consumers in new and meaningful ways. To that end, we have launched several initiatives aimed at deepening consumer engagement, building loyalty, and accelerating share gains in both domestic and international markets. We are also investing in innovation, expanding our consumer led brand development efforts, particularly with our Stiga table tennis and Onyx pickleball assortments. With more exciting products in the pipeline that align with emerging consumer trends and healthy active lifestyle preferences. Additionally, this year marks the one hundred and eightieth anniversary of Brunswick Billiards.

John Brunswick founded his namesake company in Cincinnati, Ohio in 1845. Resilient and adaptable, Brunswick Billiards has navigated through wars, pandemics, prohibition, that depression, and thrived over decades to become an American institution and a cultural and lifestyle icon. To commemorate this significant anniversary, we are releasing limited edition Brunswick Billiards Cues and St. Daniel’s Boards, as well as launching the Gold Crown seven, which continues the legacy that began in 1961 when the legendary Gold Crown I was released. This reimagined classic blends the familiar elegance of historic gold crown designs with today’s cutting edge technology.

This is an exciting anniversary year for Brunswick Billiards. In parallel, we remain open to strategic acquisitions that enhance our brand portfolio and expand our addressable markets. We’ll approach M and A with the same financial discipline that defines our broader strategy, focused on attractive risk adjusted returns, category and cultural alignment, and shareholder value creation. In closing, I’m confident in our team, our strategy, and our ability to drive long term profitable growth. I look forward to working closely with our partners, customers, and shareholders as we enter this next exciting chapter in Escalade’s journey.

With that, I’ll turn the call over to Steven for a review of our first quarter financial performance.

Stephen Warren, Chief Financial Officer, Escalade: Thank you, Armen. For the three months ended 03/31/2025, Escalade reported net income of $2,600,000 or $0.19 per diluted share on net sales of $55,500,000 For the first quarter, the company reported gross margins of 26.7% compared to 25% in the prior year period. The 161 basis point increase was primarily the result of lower operational costs driven by our facility consolidation and cost rationalization program. Selling, general and administrative expenses during the first quarter decreased by 1.2% or $100,000 compared to the prior year period to $10,600,000 Earnings before interest, taxes, depreciation and amortization increased by $500,000 to $4,900,000 in the first quarter of twenty twenty five versus $4,400,000 in the prior year period. Total cash provided by operations for the first quarter of twenty twenty five was $3,800,000 compared to $7,000 in the prior year period.

Cash used for working capital purposes was lower in the first quarter of twenty twenty five compared to the prior year due to lower anticipated sales. As of 03/31/2025, the company had total cash and equivalents of $2,200,000 At the end of the first quarter of twenty twenty five, net debt outstanding or total debt less cash was 0.8 times trailing twelve month EBITDA. As of 03/31/2025, we had $23,800,000 of total debt outstanding. During the first quarter of twenty twenty five, we completed remediation of the remaining material weaknesses in our internal financial reporting controls. The material weaknesses were initially disclosed in March of twenty twenty four and management worked diligently to resolve these identified issues as quickly as possible.

As a reminder, these material weaknesses did not impact the accuracy of our historical financial statements. We will remain focused on maintaining strong internal controls across the organization. With that, operator, we will open the call for questions.

Conference Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question comes from Rommel D’Annacio with Aegis Capital. Please go ahead.

Rommel D’Annacio, Analyst, Aegis Capital: Yeah. Good morning. Thanks for taking my question. Just maybe a couple of follow-up questions on the on your proactive steps to address the tariff situation. I think you mentioned that, obviously, highlighted a great point, Darmin, about the global sourcing platform that Escalade’s had in place for many years.

Could you just maybe talk about how quickly are you able to react and shift over production from hypothetically China to Vienna or whatever the case is, especially given the seasonality of your businesses? Can you maybe talk about that? Thank you.

Armin Baum, President and CEO, Escalade: All right. Roma, very nice to meet you.

Rommel D’Annacio, Analyst, Aegis Capital: My question.

Armin Baum, President and CEO, Escalade: Very good question about tariffs, of course. So let me set the plate here as well a little bit. Okay, so first of all, of course, we recognize that at the moment they are operating, there’s a very high uncertainty in the marketplace. However, we believe that our diversified category portfolio, our strengthened margin structure that we currently have, our agile supply position that we are in sets us really well up to navigate this year and actually what comes beyond. We had Escalade.

We were confronted with challenges already in the past. And we quickly reacted to current challenges by taking actions to manage those elements that are within our control. So let me give you a couple of examples there of what we’re going to do. So, on one side, we are in process to optimize our supply chain. Number two, we need to look into pricing actions as well.

Number three, we are working on reducing our cost structure. And number four, we have to manage our inventory level diligently. Over the last year, we have been continuously optimizing and diversifying our manufacturing footprint already. Today, we source products from several Asian countries and manufacture domestically in our own and operated facilities in Florida and Illinois. However, as you know, China is still representing a significant share of our sourcing volume and is also the number one supplying country for our industry segment.

We also recognize our tariff exposure related to China production and are currently working very close with our value chain partners and are evaluating all options on hand. Our teams have been fully engaged in analyzing and planning for a range of scenarios ahead. We are finding savings and reducing costs in our supply chain. This includes negotiating with our contract manufacturers and identifying cost opportunities and efficiencies across the supply chain. While our Chinese suppliers already signaled cost concessions, Other scenarios include evaluating pivots to switch supply lines and import products from other parts in Asia.

Next to include evaluating pivots to switch supply lanes, we are also looking and we look into other mitigating actions such as price adjustments. Pricing is a potential lever, and any adjustments will be very surgical. We are working closely with our retail partners to achieve the right balance and always keep consumers in mind when we consider pricing actions. While we can also not predict the future, we are considering all options and variables that we have in our own control and evaluate different scenarios to mask the current uncertainties and to explore opportunities ahead. We will remain agile and operate with a high sense of urgency.

Rommel D’Annacio, Analyst, Aegis Capital: Okay. Maybe just a couple of quick follow ups on the financials, perhaps for Steven or anyone else. The two things I noticed. You mentioned there was a hit to the cost structure in late in the quarter from tariffs, but you did post 100 and I think 60 basis point improvement in gross margins, like you’d never know it, but obviously strong performance from you guys given the macro headwinds. Could you quantify what the tariff impact may have been in the first quarter?

The second question was on inventories. I think you mentioned maybe Walt, you mentioned you’re proactively taking out some inventory in anticipation of the tariffs, but inventories I just noticed were $77,000,000 way down from last year, granted there were corporate restructuring actions. But was that just a function of what happened to be on March 31? Or did inventories kind of rise into second quarter? How should we kind of think about that number?

Thanks.

Walt Glaser, Board Chairman, Escalade: Sure. Thanks, Ramel. This is Walt. And Stephen can join me if he likes. But yes, the first question around the tariff cost, it was a little bit over 100 basis points negative impact in Q1.

But as you point out, we still despite that reported 161 basis point improvement. So that gives you some sense of the scale of the improvements we’ve made. And then secondly, you know, on the inventory levels, we’ve been, you know, despite our current the current environment where, you know, our old inventory, our existing inventory is valuable today, because it doesn’t have the tariffs, you know, we had too much inventory a few years ago. So we’ve been focused diligently on decreasing inventory over the last few years and that process, you know, has just continued. And part of the cost savings, revolves around storage, handling, managing all that inventory.

So the fact that we have more right sized inventory is part of the story of why our costs were lower.

Rommel D’Annacio, Analyst, Aegis Capital: Great. That’s very helpful. Thank you both very much.

Conference Operator: Thank you. We have no further questions, ladies and gentlemen. I would like to turn the conference back over to Patrick Griffin for any closing remarks.

Patrick Griffin, Vice President of Business Development and Investor Relations, Escalade: Thank you, operator. 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 irescaladeinc dot com, and a member of our team will follow-up with you. This concludes our call today. You may now disconnect.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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