Escalade Inc (ESCA) 2025 Q4 法說會逐字稿

Good day and welcome to the Escalade, fourth quarter 2025 results conference call. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Wes Smith, Vice President, Financial Reporting and Investor Relations, please go ahead, sir.

Thank you, operator. On behalf of the entire team at Escalade, I'd like to welcome you to our fourth quarter 2025 results conference call. Leading the call with me today is interim President and Chief Executive Officer, Patrick Griffin, and Steven 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 uncertainty, 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 Patrick.

Thank you, Wes, and welcome to everyone joining us on today's call. We ended 2025 on solid footing. While the consumer environment remains mixed, our focus on operational excellence and on reshaping our cost structure is paying off. Over the past years, we have built a durable foundation for the business. This foundation gives us a healthier margin profile, the ability to maintain operating leverage in a dynamic environment, and a strong platform from which we can pivot towards profitable growth.

Consistent with broader consumer spending for discretionary leisure products and is expected, net sales declined 2.2% in the quarter, driven by a softer consumer demand and categories such as basketball and outdoor games in our e-commerce sales channel. At the same time, we partially offset these declines through healthy growth in archery and billiards driven by a recent acquisition and new product introductions. These trends reaffirm that we are positioned in the right niche categories where consumers remain engaged and where our brands have equity.

The impact of our operational improvements was also reflected in our fourth quarter results. Gross margin improved 280 basis points year over year to 27.7% of net sales. Despite a 2.2% decline in net sales, this improvement reflects the structural cost actions we've executed, and the discipline embedded across our operations.

We also made meaningful inventory efficiency improvement in the quarter. Total inventory declined 10% year over year, reflecting our ongoing effort to sharpen working capital management to support improved free cash flow. We expect to further reduce inventory levels in 2026 as we work towards our longer-term target of 3 times inventory returns. This objective is a key element of our broader balance sheet management strategy.

Looking ahead to 2026, we expect consumer conditions to remain mixed, shaped by the contrast between moderating interest rates and persistent inflation. Less affluent consumers will likely continue to be more price sensitive, while more affluent consumers will likely continue to be less price sensitive. Against this backdrop, our focus is shifting from cost optimization to profitable growth while continuing to leverage our leaner balance sheet. And the operational discipline we established in 2025.

We are closely monitoring emerging tariff policy changes and are prepared to adjust as market conditions clarify. We do not see any immediate impact from the recent changes. Our established playbook enables us to remain agile and proactive in navigating through this dynamic environment. A central component of our growth agenda is to strategically invest in our businesses. Our strengthened free cash flow allows us to invest in growth opportunities and pursue accretive M&A opportunities.

Following our recent gold tip archery purchase, we completed another acquisition during the fourth quarter to further support growth. The acquisition of all cornhole brings a leading brand in competitive cornhole bags to our growing outdoor recreation portfolio.

During the fourth quarter we fully integrated gold tip archery, which was required in the third quarter. This business was accretive in the fourth quarter. Looking forward, M&A remains a capital allocation priority as we concentrate our profitable growth.

Our approach will remain consistent, focused on strategic acquisitions that are creative and complement existing product categories, as well as strengthen our market position where we have competitive advantages.

In addition to M&A, we expect to increase growth investments in 2026 through targeted capital expenditures that expand capacity, improve efficiency, and support long-term growth. As a result, we expect capital expenditures to increase next year.

We also plan to selectively invest in and optimize our manufacturing and distribution footprint. In the fourth quarter, we purchased a 110,000 square foot facility to support continued growth in our safety and fitness categories.

We had several significant new product launches during the fourth quarter to support our growth agenda in our bear archery business. We launched the new Alaskan Pro Bow, which has been awarded Best Value compound bow in many publications and online review platforms. We also launched an entire new line of Trophy Ridge accessories featuring new designs and a fresh new look.

Additionally, during the quarter, our US weight business expanded our safety offering with several new umbrella bases to fully address market opportunities. Strengthening our balance sheet continues to be a priority. During the fourth quarter, we repaid nearly $2 million of long-term debt while also increasing our cash levels. Given the current interest rate environment and our low-cost fixed rate bank debt, we are taking advantage of attractive cash arbitrage. Our strong free cash flow generation gives us confidence in our ability to meet our financial commitments while continuing to invest in future growth.

In summary, we have made significant progress in repositioning the company as we move from cost optimization to profitable market share-driven growth. As we move further into 2026, we believe we are operating from a position of strength supported by a leaner cost structure, stable, free cash flow profile, and a disciplined capital allocation strategy aimed at expanding our leadership in key categories. These actions will allow us to deliver durable value for shareholders as we move through the cycle.

With that, I will turn the call over to Steven for a review of our fourth quarter financial results.

Thank you, Patrick. For the three months ended December 31, 2025, Escalade reported net income of $3.7 million or $0.27 for diluted share on net sales of $62.6 million. For the fourth quarter, the company reported gross margins of 27.7%. Compared to 24.9% in the prior year period, the 280 basis point increase in gross margin was primarily the result of lower operational costs driven by our facility consolidation and cost rationalization program, a reduction in storage and handling costs, and the benefit of the gold tip acquisition, which was completed in the third quarter of 2025 and accreted to our fourth quarter results.

Selling general and administrative expenses during the fourth quarter increased by 6.8% or $0.7 million compared to the prior year period to $11.6 million. The increase in SG&A primarily reflects $0.5 million of non-recurrent executive transition expenses incurred during the fourth quarter of 2025.

Earnings before interest, taxes, depreciation, and amortization increased by $0.6 million to $6.5 million in the fourth quarter of 2025 versus $5.9 million in the prior year period. This increase primarily reflects an improvement in our gross profit, partly offset by the non-recurrent executive expenses I just mentioned.

Total cash flow from operations for the fourth quarter of 2025 was $14.9 million compared to $12.3 million in the prior year period. The year over year increase in operating cash flow primarily reflects a 10% or $7.6 million decrease in our inventory coupled with improved profitability.

As of December 31, 2025, the company had total cash equivalent of $11.9 million. At the end of the fourth quarter of 2025, net leverage was 0.3 times. As of December 31, 2025, we had $18.5 million of total debt outstanding.

With that operator who will open the call for questions.

(Operator Instructions) Rommel Dionisio, Aegis Capital Corp - Analyst

Good morning. I wonder if we could just, ask a couple of questions on, the acquisition of the new facility, the 110,000 square foot facility. Is that production or distribution or both? Is it domestic? And if so, would that alleviate some of the tariff pressure?

Thank you.

Hey Rommel, Patrick here. That's a good question. The facility is located in only Illinois where we already have two facilities there and initially it's going to be used primarily for warehousing for our fitness and safety businesses, but you know we're looking at other uses for that facility so we may consolidate some additional categories, into that facility or you know acquisitions further down the road could go you know into that but it's really was meant to support future and growth in those categories. For our US weight business, but then also maybe some future, growth plans as well.

Okay, and as a follow-up question, I wonder if we could just, delve into the product mix a little bit in the quarter. I know there's a lot of moving parts there, so between, product categories and price points, but you highlighted, demand across your, I'm just reading from your press book, demand across your higher value premium brands remains resilient. So would that have been a sort of a positive mix driver, during the quarter, and I know that's offset with Consumer shifting down to some lower price points as well. I just want to think about how we think about product mix shift overall in the quarter. Thank you.

Yeah, the great question. I mean, we're, on the higher price points, we're generally seeing, favorable sales trends there, and then, on our opening price point product we're not seeing as favorable trends. So, with our, leading brands that you kind of referred to with Behr archery, that's accretive to the overall, margin profile, and I would say that's true for, a lot of the Brunswick portfolio, as well.

Okay, and maybe just one last one. I know you took some price increases last summer, to help offset some of the tariff impact. How do you kind of think about that situation? Obviously, it's a very fluid, environment with regards to even the last few days with regards to tariffs, but how do you guys think about, the proclivity for additional price increases as we look after 2026? Thanks.

Yeah, no, we feel good. We were early, on our price increases, as we, as you mentioned there, and, to the extent that that environment changes, we'll see where that ends up. But we don't have any, near term changes right now. We're not planning on passing on any significant, additional price increases at this point, if tariff. You know if that environment changes a lot, but you know there could be some changes down the road, but we're, we don't see any near term impact as the environment's very dynamic, at this point in time.

Great. Thank you very much.

(Operator Instructions) David Cohen, Minerva Advisors - Analyst

Good morning, guys. So, just a quick follow-up with regard to tariffs. Should the Supreme Court's decision occasion the refund of tariffs paid, up until this point, is that a meaningful number for SCO?

Yeah, great question, David. Thank you. Yes, it is a meaningful number for us, and you know we're, waiting to see what happens with the actual implementation of those refunds. Some of the tariffs we paid are, not tied to the IEPA tariffs, so it's not our total amount, but it, the amount that would be, refunded is meaningful.

Do you want to put any numbers around that, a range.

Perhaps? Yeah, no, it's in the, I'd say, $4 million to $5 million range.

Okay. Thank you very much.

Yes, you're welcome.

Thank you. And ladies and gentlemen, that concludes our question-and-answer session. I'd like to turn the conference back over to Wes Smith for any closing remarks.

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 reach out to us at IR@ escalateinc.com, and a member of our team will follow-up with you. This concludes our call today. You may now disconnect.

Thank you. That concludes today's conference call, and we thank you all for attending. You may not disconnect your lines and have a wonderful day.