ESCALADE INC Q4 FY2024 earnings call

• Navigated soft consumer demand in 2024 through operational discipline, asset optimization, expense reduction, and efficiency gains, leading to year-over-year margin expansion and strong cash flow.
• Fourth quarter sales declined 2% year-over-year, but gross margin improved by over 60 basis points due to lower manufacturing and logistics costs.
• Reduced workforce by ~23% and owned/leased square footage by nearly 20% through facility closures and rightsizing.
• Successfully reduced inventory levels by 44% in 2024 and nearly 20% vs year-end 2023, improving working capital efficiency.
• Generated $36 million in operating cash flow in 2024, paid down $25.3 million in debt, ended 2024 with net leverage ratio of 0.8 times, and repurchased $2.2 million in shares.
• Focus on consumer-led innovation, including launch of Onyx Malus raw carbon pickleball paddles, partnership with ACL, new Bear Archery bows, Adidas fitness accessories distribution, and Brunswick Gold Crown table launch.
• Addressed tariffs by diversifying sourcing, moving production back to domestic factories, and reengineering products to mitigate impact.

For the three months ended December 31, 2024, Escalade reported net income of $2.7 million or $0.19 per diluted share on net sales of $63.9 million. In the fourth quarter, gross margin was 24.9% compared to 24.3% in the prior year period, an increase of 61 basis points primarily due to lower operational costs. Inventory levels were reduced by 44% in 2024 alone and nearly 20% compared to year-end 2023. Fourth quarter total cash provided by operations was $12.3 million, down from $20.6 million in the prior year period.

• Intend to continue balanced return to capital program and disciplined capital allocation, realizing cost rationalization objectives.
• Positioned to capitalize on economic expansion and improved discretionary consumer spending on recreational products.
• Invest in consumer-driven innovation, strengthen consumer connections, and remain acquirers of complementary high-value brands.

• Macro-economic conditions and uncertainty impacting discretionary consumer spending on recreational goods.
• Tariffs and related impact on sourcing and costs, though efforts are in place to mitigate.

Q: With regards to inventories, with impending potential tariffs, would you think about boosting inventories near term for safety stock or lower prices before tariffs kick in? How to benchmark over next quarters?

A: Advanced some shipments ahead of tariffs to beat price increase, but goal is to be efficient with inventory and working capital, seeing opportunities for further inventory reductions while maintaining high service levels.

Q: Could inventories have been even lower not taking out safety stock in last few months/quarters?

A: Think there's opportunity to bring inventories down further, though not to the extent of the last two years.

Q: Talk about product mix shift and its impact on gross margin?

A: Running about fleet average, no big shift, but gross margins absorbed costs from inventory reduction and footprint rationalization, and expect better margins moving forward.

Q: Ballpark on nonrecurring expenses in 2023 and 2024?

A: One-time costs in 2024 roughly comparable to gain on sale of about $3.9 million.

Q: Balance sheet leverage down, how does it change capital allocation perspective?

A: Focused on debt reduction, now buying back stock, paying cash dividend, continuing to invest in core businesses, and being selective acquirers if right opportunity arises