Escalade, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended July 11, 2020. Escalade focuses on sporting goods, including basketball, archery, fitness, and indoor and outdoor recreation products. The company identified Sporting Goods as its revenue-generating segment.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $83.5 | $55.6 | $120.8 | $87.7 |
| Gross margin | 27.8% | 23.3% | 27.7% | 24.4% |
| Operating income | $10.9 | $2.5 | $13.3 | $2.9 |
| Net income | $8.7 | $1.9 | $10.7 | $2.1 |
| Diluted EPS | $0.61 | $0.13 | $0.75 | $0.15 |
- Sales increased 50.1% in Q2 and 37.7% in the first half year over year. E-commerce gross sales rose to $39.5 million in Q2 from $24.8 million; mass merchant and specialty dealer sales also increased.
- Gross margin improved, which management attributed to product mix, operating improvements, lower inventory and reduced markdown exposure. Facility closures early in Q2 due to COVID-19 partly offset those benefits.
- Q2 SG&A was $11.9 million, up 18.8%, but declined to 14.3% of sales from 18.0%. First-half SG&A was $19.4 million, up 9.0%, and 16.0% of sales versus 20.3%. The first-half effective tax rate was 19.6%, compared with 19.9%.
- Six-month operating cash flow was $16.7 million, versus $0.2 million in the prior-year period. Investing used $1.2 million and financing used $4.8 million. Cash increased by $10.8 million to $16.7 million.
Financial position and capital allocation
- At July 11, 2020, current assets were $109.9 million and current liabilities $33.7 million; cash was $16.7 million, receivables $49.5 million, and inventory $41.7 million.
- Total debt was zero, versus $0.1 million at year-end 2019 and $7.5 million a year earlier. The company said it expects adequate revolving-credit access for working-capital and growth needs.
- Quarterly dividends remained $0.125 per share; first-half dividends paid totaled $3.5 million. The company repurchased $1.3 million of stock in the first half, but none in Q2. In March, the board increased the repurchase authorization from $5 million to $15 million.
- Current liabilities rose to $33.7 million from $18.2 million at year-end 2019, including higher accounts payable and accrued liabilities.
Outlook, risks, and other disclosures
- Management reported heightened demand for fitness, basketball, playground, and home recreation products during the pandemic, but cautioned that demand may not persist and could fall below historical levels.
- Management warned of possible supplier, factory, and shipping delays affecting product availability and shipments as early as the second half of 2020 or first half of 2021. The company said it was placing 2021 orders earlier and developing other supply sources.
- No specific financial guidance was provided. Management said interim results are not necessarily indicative of full-year results and that the pandemic’s duration and effects remain uncertain.
- Risks cited include COVID-19 impacts on demand, customers, employees and supply chains; retail and consumer-behavior changes; competition and pricing; tariffs; customer and supplier relationships; and execution of acquisitions and strategic initiatives.
- The company reported ordinary-course litigation but does not expect existing claims to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pandemic-driven demand and the Q2 sales and margin gains continue, and how much reflects temporary shifts in consumer purchasing.
- Whether supplier capacity, shipping constraints, and prior facility closures affect inventory availability, delivery timing, or margins.
- The sustainability of cash generation and liquidity as receivables, payables, and accrued liabilities change with sales volume.
- Use of the increased stock-repurchase authorization, alongside continued dividends and investment needs.
- Any updates to COVID-19 exposure, customer or supplier credit quality, and the company’s ability to access revolving credit.