Escalade Inc 2026 Q3 Earnings Call

On behalf of the entire team at Escalade, I'd like to welcome you to our third quarter 2026 results conference call. Leading the call with me today are President and CEO, Patrick Griffin, and Stephen 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 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 Patrick.

Thank you, Wes, and welcome to everyone joining us on today's call. Our third quarter results demonstrated the effectiveness of our more efficient operating model in generating earnings and cash flow growth, even in the face of deteriorating consumer sentiment and a difficult year-over-year comparison. The strength of our innovative product offering, favorable sales and customer mix, disciplined cost management, and strong operational execution combined to help us deliver a healthy improvement in gross margin compared to the third quarter of last year. Net sales declined 3% year-over-year, reflecting softness in our basketball, indoor games, and table tennis categories, as well as a challenging comparison with last year's third quarter, which benefited from shipments delayed from the second quarter by tariff-related market volatility. Our strategic exit from certain lower-margin product lines also contributed to the net sales decline.

The decline was partially offset by growth in archery, driven by strong vertical bow demand and the incremental contribution from our September 2025 acquisition of Gold Tip, along with increased demand in the safety and outdoor games categories. Gross margin expanded by approximately 123 basis points year-over-year to 29.4%. This expansion was driven by a favorable sales mix, higher fixed cost absorption, and strong operational execution. We also continued to make progress improving asset utilization. Despite the additional inventory from the Gold Tip and AllCornhole acquisitions in the second half of last year and the ASL Solutions acquisition during this year's third quarter, total inventory was $2.9 million below the prior year level. This progress reflects our focus on driving working capital efficiency and generating free cash flow. We continue to work towards our longer-term inventory turn target of three times.

As we move towards the heart of the holiday season, we continue to collaborate with our retail partners to deliver a more frequent cadence of promotions that highlight newness as well as value and engage consumers to accelerate sell-through. Although inflation and broader economic uncertainty continue to pressure discretionary consumer spending, our more resilient operating model gives us confidence in our ability to manage through these challenging market conditions. We expect recent and upcoming new product introductions to support market share gains across several key categories as we move into 2027. In pickleball, we had several new paddle launches from Onix, including the Praxis. The Praxis features an Endurafoam core designed for durability and a raw carbon fiber surface that enhances spin and control.

The new Onix Aeris offers an accessible entry price, a range of colors, and lightweight construction that helps players react quickly and stay comfortable during extended play. We've also been active in the game room with several new products in both table tennis and billiards. The STIGA Onyx18 tennis table features a quick play design that assembles in minutes and has premium features such as integrated ball storage and locking caster wheels for easy mobility. Our new Pro Carbon Cybershape racket's unique profile combines a larger optimal hitting area with carbon-powered performance. Within billiards, we launched the American Heritage Ann Arbor 8-foot table, which features a modern architectural design that makes it a showpiece for the home game room. Its 1-inch, three-piece slate delivers exceptional playability and consistent ball roll. These launches illustrate our increased investment in product innovation across our portfolio.

We expect our current and ongoing investments in innovation to drive an acceleration in new product introductions as we move into 2027. Strengthening the balance sheet remains a priority. During the third quarter, we repaid $1.8 million of debt and increased our cash balance by $8.1 million, ending the quarter with a net cash position of $11.4 million. Our low-cost fixed-rate debt and higher cash balances also contributed to increased net interest income. Our consistent free cash flow and strong balance sheet also positions us to invest in innovation, accretive acquisitions, and our facilities to improve capacity as well as efficiency to support future growth. We remain focused on strategic, accretive acquisitions that enhance our existing platforms, expand our presence in attractive new categories, and strengthen our competitive positioning.

We are encouraged by our growing pipeline of acquisitions opportunities that meet this criteria. In closing, our third quarter results demonstrated our ability to improve gross margins and cash generation in a challenging macroeconomic and geopolitical environment that is impacting consumer discretionary spending. We expanded margins, improved working capital efficiency, and strengthened our balance sheet. Looking ahead, we believe our more efficient operating model, recent acquisitions, disciplined capital allocation, and financial flexibility position us to continue to pursue growth opportunities and create long-term shareholder value. With that, I will turn the call over to Steven to walk through our third quarter financial results.

Thank you, Patrick. For the three months ended September 30, 2026, Escalade reported net income of $6.7 million or $0.48 per diluted share on net sales of $65.6 million. Gross margin was 29.4% compared to 28.1% in the prior year period. The 123 basis point improvement was a result of lower operational costs driven by better absorption and a favorable sales mix. Gold Tip, which we acquired in September 2025, contributed to the favorable mix as we continued to ramp up the business over the past year.

Selling, general, and administrative expenses were $11.6 million during the third quarter, a $0.4 million increase compared to the prior year period, largely related to costs associated with the AllCornhole and Gold Tip businesses, acquisition-related professional fees, and an increase in advertising expenses. Earnings before interest, taxes, depreciation, and amortization increased by $1.4 million to $10 million in the third quarter of 2026 versus $8.6 million in the prior year period. This increase reflects the year-over-year improvement in our gross profit as well as the benefit of recovery for previously paid tariffs received during the quarter of $1.6 million. Cash flow from operations was $14.9 million in the third quarter compared to cash used of $1 million in the prior year period.

The increase primarily reflects our higher net income and lower working capital requirements. As of September 30, 2026, the company had total cash and equivalents of $24.5 million. As of September 30, 2026, we had $13.1 million of total debt outstanding, all of which was classified as current as of the end of the quarter. With that, operator, we will open the call for questions.

Thanks. Hey, Rommel. Patrick. That is a great question.