ESCALADE INC Q2 FY2025 earnings call

• Demonstrated strong operating leverage despite a $1.6 million tariff headwind and 13% year-over-year net sales decline.
• Expanded gross margin by nearly 60 basis points due to lower manufacturing and logistics costs from facility consolidations and cost rationalization.
• Reduced inventory by $14 million in Q2, enhancing working capital efficiency.
• Successfully minimized tariff impact through disciplined execution of tariff mitigation playbook.
• Launched new products like ONIX Hype and Hype Pro pickleball paddles, STIGA Paragon table tennis table, and celebrated 50th anniversary of Woodplay.
• Delivered strong free cash flow, repaid $2 million in debt, reduced net leverage to 0.5x trailing 12 months EBITDA, repurchased nearly $800,000 of shares, and increased cash position.

For the 3 months ended June 30, 2025, Escalade reported net sales of $54.3 million. Gross margin was 24.7%, a 56 basis point increase driven by lower manufacturing and logistics costs. Net sales declined approximately 13% year-over-year. Inventory was reduced by approximately $14 million in the second quarter compared to the prior year quarter. Gross margin was affected by approximately $1.6 million in tariff-related expenses and an approximately $900,000 headwind from exiting certain categories. Selling, general and administrative expenses decreased by 1.8% to $10.2 million, though partially offset by nonrecurring executive transition expenses.

• Expect a slightly lower seasonal inventory build in Q3 ahead of holiday season.
• Tariff-related expenses will increase in H2 due to holiday season goods, offset by strategic price increases and sourcing partner cost sharing.
• Continue to investigate supply chain resiliency measures, including increasing U.S.-based manufacturing capacity and streamlining product assortments.

• Uncertain tariff landscape impacting customer orders and sales.
• Macro-economic uncertainties leading to shifting consumer behavior and delayed discretionary spending.
• Unfavorable weather conditions affecting seasonal demand in some regions.
• Headwind from exiting certain categories over past year.
• Impact of elevated interest rates and frozen housing market on indoor and outdoor recreational sales.

Q: Just with regards to new product cadence over the next several quarters. I wonder if you could just talk about -- not necessarily specific new products, but just does the tariff situation and the retail situation -- retail inventory situation change or push out your new product launch plans for the next several months or quarters?

A: We are working very, very close with our customers at that moment in time. We are really working in lockstep with our key accounts planning for a strong holiday season. Preorder volume is very stable and our joint marketing plans at this moment in time are all discussed. We have a very strong assortment lineup and will launch impactful product innovations in the second half of the year. We will not make any changes to our product launch cadence. On the contrary, we were actually leaning in, in terms of product innovation, working over the last 3 months very, very close with our accounts and actually are accelerating our product -- our new product introduction frequency on that side. While doing that, we will also watch the market, of course, pricing and the promotion dynamics that are out there with diligence. And at once replenishment orders will depend really on consumer behaviors and how they will react on the overall price increases on the market. But again, I want to underline that we are leaning in, in terms of product innovation, and we are even increasing our bringing new product to the marketplace.

Q: Just a quick follow-up, if I may. Obviously, you saw significant progress in gross margins despite pretty significant headwinds on tariffs and cost absorption from reduced sales. I did note it was in the 10-Q or the press release, unfavorable product mix being a headwind on gross margins in the quarter. I wonder if you could just maybe just provide a little more granularity on specifically what categories resulted in that unfavorable product mix on gross margin?

A: Well, so last quarter, what we have seen in 2 areas was we were impacted on one side really by weather. I hate to say that, but it was absolutely true for us. I mean we are loading up for spring/summer season. So the heavy rains that we have seen in the storms and the late start of the summer, in particular, impacted our basketball and outdoor recreational product on one side. On the other side, obviously, working very close with our key accounts, while all of a sudden the tariffs exceeded, I mean, raised up. We stopped actually with our retailers also all shipping at that time because we wanted to avoid the extremely high tariff situation at that time. And then started again floating once the tariffs didn't normalize, but they were less exorbitant. So that had an impact on our shipments actually, and you see that in our quarter 2 results.