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 continue to change. 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 continued to affect the Company’s operations in the third 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 nine month periods ended October 3, 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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Nine Months Ended
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October 3, 2020
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October 5, 2019
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October 3, 2020
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October 5, 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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69.9
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%
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78.1
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%
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71.4
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%
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76.4
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%
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Gross margin
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30.1
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%
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21.9
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%
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28.6
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%
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23.6
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%
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Selling, administrative and general expenses
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13.3
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%
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14.8
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%
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15.0
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%
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18.4
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%
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Amortization
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0.4
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%
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0.8
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%
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0.5
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%
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0.9
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%
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Operating income
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16.4
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%
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6.3
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%
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13.1
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%
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4.3
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%
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Revenue and Gross Margin
Sales increased by 70.6% for the third quarter of 2020, compared with the same period in the prior year. The increase in sales was attributable to growth in nearly all of our product categories, but most notably in our archery, outdoor and fitness categories, including basketball, Lifeline Fitness and Victory Tailgate. For the first nine months of 2020, sales were up 49.0% compared to prior year.
The overall gross margin percentage increased to 30.1% for the third quarter of 2020, compared to 21.9% for 2019 primarily due to factory absorption and product mix.
Gross margin percentage increased to 28.6% for the first nine months of 2020, compared to 23.6% for the same period in the prior year.