COVID-19 Pandemic
The emergence of the coronavirus (COVID-19) around the world, and particularly in the United States and China, presents significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. Economic and health conditions in the United States and across most of the globe have changed rapidly since the end of the Company’s first quarter. In the short-term, demand for the Company’s products has increased, notably in our fitness products, basketball, playground, and indoor/outdoor games. Some of the increase in demand is likely due to consumers being required or encouraged by governmental authorities to stay at home, schools being closed, and employers requiring employees to work remotely and/or implementing furloughs and layoffs. Such increased demand may not continue and/or demand may decrease from historical levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties.
In addition, increased customer demand for certain products presents challenges for the Company to anticipate and adjust inventory levels to meet such demand. So far, the Company has been able to obtain products from its suppliers on a timely basis, but management anticipates that there may be delays in the future due to factory and shipping capacities that may impact timing of shipments in the first half of 2021, if not sooner. The Company is seeking to alleviate such concerns by accelerating its timing for placing 2021 orders with its suppliers and by continuing to develop other potential sources of products and raw materials.
The COVID-19 pandemic did affect the Company’s operations in the second quarter and may continue to do so indefinitely thereafter. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees -many of whom are still working remotely, manufacturing, distribution, marketing and sales operations, customer and consumer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.
Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three and six month periods ended July 11, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the full impact of the COVID-19 pandemic on the Company’s sales channels, supply chain, manufacturing and distribution nor to economic conditions generally, including the effects on consumer spending. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.
Results of Operations
The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:
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Three Months Ended
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Six Months Ended
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July 11, 2020
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July 13, 2019
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July 11, 2020
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July 13, 2019
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Net revenue
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of products sold
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72.2
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%
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76.7
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%
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72.3
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%
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75.6
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%
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Gross margin
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27.8
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%
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23.3
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%
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27.7
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%
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24.4
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%
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Selling, administrative and general expenses
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14.3
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%
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18.0
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%
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16.0
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%
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20.3
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%
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Amortization
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0.5
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%
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0.8
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%
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0.7
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%
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0.9
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%
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Operating income
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13.0
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%
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4.5
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%
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11.0
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%
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3.2
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%
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Revenue and Gross Margin
Sales increased by 50.1% for the second quarter of 2020, compared with the same period in the prior year. The increase in sales was primarily driven by growth in our outdoor and fitness categories, including basketball, Lifeline Fitness and Victory Tailgate as demand for our fitness and home recreation products continues to be high amidst the COVID-19 pandemic. For the first half of 2020, sales were up 37.7% compared to prior year.
The overall gross margin percentage increased to 27.8% for the second quarter of 2020, compared to 23.3% for 2019 primarily due to product mix and operational improvements the Company has performed over the last year. In addition, lower inventory levels and cleaner inventory minimized markdown exposure. The improved margins were partially offset by headwinds in factory utilization due to closures of two of our operating facilities for an extended period of time due to COVID-19 early in the second quarter.
Gross margin percentage increased to 27.7% for the first six months of 2020, compared to 24.4% for the same period in the prior year.