Escalade, Inc. Q1 2026 Earnings Call - Margin Expansion Driven by Gold Tip Acquisition and Inventory Discipline

Conference Call Operator: Please note this event is being recorded. I would now like to turn the conference over to Wesley Smith, Vice President of Financial Reporting and Investor Relations. Please go ahead.

Wesley Smith, Vice President of Financial Reporting and Investor Relations, Escalade, Inc.: Thank you, operator. On behalf of the entire team at Escalade, I’d like to welcome you to our first quarter 2026 results conference call. Leading the call with me today is President and CEO, Patrick Griffin, and Stephen R. 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.

Patrick Griffin, President and Chief Executive Officer, Escalade, Inc.: Thank you, Wes, and welcome to everyone joining us on today’s call. We delivered a solid start to 2026, demonstrating the benefits of the leaner foundation and improved operating model we had built over the past several years. While the consumer backdrop remains uneven, our continued emphasis on operational excellence and efficiency has elevated our performance and created a more resilient business, one that generates healthier margins, retains operating leverage in a dynamic environment, and provides a stable platform for profitable growth. Net sales increased slightly in the first quarter compared to the prior year. This growth was driven by the contribution from Gold Tip, acquired in the third quarter of 2025, and continued strength in our billiards and safety categories, partially offset by softer demand in our outdoor and indoor games categories.

Through sensible portfolio management, targeted acquisitions, and accelerated product innovation in attractive niche categories, we are strengthening the resilience of our brand portfolio. We believe this approach will allow us to navigate challenging environments while positioning the company to realize profitable growth and generate attractive shareholder returns over the business cycle. The operating leverage we have built over the past several quarters was evident in first quarter profitability. Gross margins expanded by approximately 400 basis points year-over-year to 30.7. This improvement was driven by a sustained cost management, ongoing process and productivity initiatives, and a favorable customer and product mix with a shift towards higher value products, reflecting relative strength among more affluent consumers in several categories. We also made progress improving asset utilization.

Despite completing 2 acquisitions in the second half of last year, total inventory declined $3.4 million year-over-year in the first quarter. This reflects our ongoing focus on working capital efficiency as a contributor to free cash flow generation. As we move through 2026, we expect inventory levels to decline further as we progress toward our longer-term target of approximately 3 times inventory turns. We continue to closely monitor emerging tariff policy changes and are prepared to adjust as market conditions evolve. Looking ahead to the remainder of 2026, we remain mindful of potential headwinds, including inflationary pressures such as high energy costs, which could not only weigh on consumer demand but also create incremental cost pressure. If current macroeconomic and geopolitical conditions persist, we would likely expect consumer demand to remain uneven in the coming quarters.

That said, many of our products provide consumers with affordable at-home recreation entertainment alternatives, which may help offset softer discretionary spending. Looking ahead, we expect to deliver gross margins above prior year levels, driven by our improved operating model and ongoing cost management. A key pillar of our strategy remains thoughtful investment in our categories to support operational excellence and growth. Our improved free cash flow provides flexibility to reinvest in efficiency and growth while maintaining a strong balance sheet. M&A continues to be an important component of our capital allocation strategy as we pursue profitable growth. Our approach remains unchanged. We are focused on strategic accretive acquisitions that enhance our existing platforms, expand our presence in attractive categories, and strengthen our competitive positioning. Additionally, we plan to solidify our foundation for growth in 2026 through enhanced capital investments.

These investments are focused on expanding capacity, improving operational efficiency, and expanding our product development innovation pipeline. Given these strategic investments, we expect capital spending will be higher in 2026 compared to last year. We are building a denser pipeline of fresh and innovative new products across our portfolio. Bear Archery introduced several new bows during the first quarter. As an example, the 58-inch Grizzly Hunter recurve bow, inspired by the classic Grizzly models of the 1950s, is designed to blend longbow feel with recurve performance. We also launched the Cajun Bowfishing Sucker Punch Pro RTF bow, engineered specifically for high performance and confined bow fishing environments, as well as the new Trophy Ridge React 5 Max sight, designed to help serious bow hunters achieve fast and accurate shots. We also expanded product offerings within our indoor and outdoor games categories.

Following the Cornhole acquisition, we introduced a variety of new Cornhole bag designs to improve performance and playability, along with the new flagship Cornhole board that will be the official professional tournament board of the American Cornhole League moving forward. We also introduced the American Legend Westbrook 3-in-1 combo game table, which transitions seamlessly between billiards, table tennis, and dining while maintaining a high-quality furniture aesthetic. These launches are representative of a more consistent flow of new product development and innovation across our businesses, which is an important driver of category leadership and long-term profitable growth. Strengthening the balance sheet remains a priority. During the first quarter, we repaid nearly $2 million of long-term debt while also increasing cash balances. Given our low cost, fixed rate debt and the current interest rate environment, we continue to benefit from favorable cash arbitrage.

Our strong free cash flow generation supports both prudent debt management and continued investment in efficiency and growth. In closing, we continue to build momentum as we transition from a focus on optimizing our cost structure and balance sheet towards the prioritization of profitable growth. The first quarter underscores the progress we have made delivering strong margins, improving working capital efficiency, and maintaining financial flexibility despite a challenging consumer and geopolitical backdrop. As we move through 2026, we believe we are well-positioned with a lean operating model, durable free cash flow generation, and focused corporate and capital allocation strategies designed to strengthen our leadership positions and create long-term shareholder value. With that, I will turn the call over to Stephen to walk through our first quarter financial results.

Stephen R. Wawrin, Chief Financial Officer, Escalade, Inc.: Thank you, Patrick. For the three months ended March thirty-first, 2026, Escalade reported net income of $4.4 million, or $0.32 per diluted share on net sales of $55.8 million. For the first quarter, the company reported gross margins of 30.7% compared to 26.7% in the prior year period. The 400 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 a favorable sales mix. The favorable sales mix shift included the benefit of the Gold Tip acquisition, which was completed in the third quarter of 2025 and accretive to our first quarter results.

Selling, General and Administrative expenses were $10.7 million during the first quarter, a $0.1 million increase compared to the prior year period. Earnings Before Interest, Taxes, Depreciation, and Amortization increased by $2.2 million to $7.1 million in the first quarter of 2026 versus $4.9 million in the prior year period. This increase primarily reflects the improvement in our gross profit. Total cash flow from operations for the first quarter of 2026 was $6.1 million compared to $3.8 million in the prior year period. The year-over-year increase in operating cash flow primarily reflects a 4% or $3.4 million decrease in our inventory coupled with improved profitability. As of March 31, 2026, the company had total cash and equivalents of $13.1 million.

At the end of the first quarter of 2026, net leverage was 0.1 times. As of March 31st, 2026, we had $16.7 million of total debt outstanding, all of which was current as of the end of the quarter. With that, operator, we will open the call for questions.

Conference Call Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Rommel Dionisio with Aegis Capital. Please go ahead.

Rommel Dionisio, Analyst, Aegis Capital: Thank you. Good morning. Thanks for taking my question. As I’m going through the breakdown of gross sales by channel in the 10-Q, there was a dip in mass merchants in the quarter and a rise in specialty dealers revenue. Could you just maybe walk through the moving parts there? Was that just maybe a timing of revenue recognition or is there maybe a broader trend to see there? Thank you.

Patrick Griffin, President and Chief Executive Officer, Escalade, Inc.: Hey, Rommel, this is Patrick. Thanks for the question. A great question. The channel kinda changed there that you see. The specialty dealer growth was driven by the Gold Tip acquisition. A lot of specialty archery dealers and as we distribute the Gold Tip product through that channel, you see some growth there. We had some sales last year that didn’t repeat in the mass merchant channel, primarily with the Target there, that’s why you see the dip there in the mass merchant channel.

Rommel Dionisio, Analyst, Aegis Capital: Okay, that’s very helpful. Maybe just a bigger picture question. You know, as we look at the price of airline tickets and gasoline these days, you know, I think you touched on in your in the press release, but, you know, the travel this year may not be quite what it has been in prior years. For the benefit of everyone on this call, I know, Patrick, you and Stephen and myself, we all lived through this back in 2020. Could you just walk us through the last time in history we saw, you know, this trend of people not traveling? Could you just refresh everyone’s memory in terms of kind of what happened in your categories in 2020? You know, which categories showed strength?

Just maybe walk through the strategic points of what you saw back then on a category by category basis when, you know, people stayed home for the summer. Thanks.

Patrick Griffin, President and Chief Executive Officer, Escalade, Inc.: Yeah, no, it’s a great question, Rommel, sometimes we’ve seen this at a couple different points in history, but we, you know, it’s called a kind of staycation kind of situation, where people look at their alternatives instead of maybe going to Disney or some other road trip. They might stay at home and maybe buy a table tennis table, maybe a Cornhole set. Maybe it’s some other outdoor game, indoor game. That’s kind of where we see most of the benefit, things that would be around the home. You know, less so in like water sports and so on, you know, where those are behind the boat. I would say table tennis, indoor games, outdoor games, billiards to some extent. You know, that’s continues to be strong. We’re seeing strength there.

A couple other categories, Rommel, that might go on, basketball and so on.

Rommel Dionisio, Analyst, Aegis Capital: Okay, maybe just to follow up on that question. Do you get the sense that retailers are prepared for, you know, if there is some pickup from people staying at home from an inventory situation to handle a possible change in demand if that plays out over the next few months? Thanks.

Patrick Griffin, President and Chief Executive Officer, Escalade, Inc.: Yeah, no, great question. I think based on the conversations we’re having with our key retail partners, they’re, you know, leaning into those categories and, you know, backing that up with, you know, good order uptake and forecasting. I think, you know, we’re preparing, and I think the retailers will be prepared if, you know, there’s some upside there.

Rommel Dionisio, Analyst, Aegis Capital: Great. Thanks very much. That’s very helpful.

Patrick Griffin, President and Chief Executive Officer, Escalade, Inc.: Yep, you’re welcome.

Conference Call Operator: If you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Wesley Smith for any closing remarks.

Wesley Smith, Vice President of Financial Reporting and Investor Relations, Escalade, Inc.: 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 contact us at [email protected], and a member of our team will follow up with you. This concludes our call today. You may now disconnect.