Crown Crafts Inc Q2 FY2021 Earnings Call

Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc. Investors Conference Call. Your host for today's call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer. Any reproduction of this call in whole or in part is not permitted without prior written authorization from Crown Crafts, Inc. And as a reminder, this conference is being recorded today, November 11, 2020. And at this time, I would now like to turn the call over to Ms. Olivia Elliott, Vice President and CFO, who will begin the call. Please go ahead.

Thank you. Welcome to the Crown Crafts Investor Conference Call for the Second Quarter of Fiscal 2021. With me today is Randall Chestnut, the company's President and Chief Executive Officer.

Good afternoon.

A telephone replay of the call will be available 1 hour after the end of the call through 4:00 p.m. Central Standard Time on November 18, 2020. Also, a web replay of the call will be available for 90 days and can be accessed by visiting our website at www.crowncrafts.com. Before we begin, I would like to remind listeners of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in today's conference call. Also, in regard to comments made in today's conference call that are related to the company's recently announced dividends and its history of paying dividends, we remind listeners that the declaration of each dividend is at the discretion of the company's Board of Directors, and the company expressly disclaims any assurances as to the frequency and amount of any future dividend. I will now turn the call over to Randall.

Thank you, Olivia, and thanks to everyone for joining today. We'll provide a few comments, and Olivia will add more later. After that, we will open the floor for any questions. I will focus on the quarter ending on September 27, 2020, for which we reported earnings yesterday afternoon after the market closed. Net sales for FY 2021 were $21.659 million, compared to $18.560 million in FY 2020, marking an increase of $3.099 million or 16.7%. This year's net income was $2.487 million, up from $1.779 million last year, which is an increase of $708,000 or 39.8%. Diluted earnings per share this year were $0.24, compared to $0.18 last year. The gross margin for this quarter was 32.8% of net sales, up from 31.6% in the same quarter last year. Q2 was a record quarter for net income, and it was the best second quarter we have seen since 2002. It is also the best quarter we have posted in over a decade, with only one quarter slightly better about ten years ago. Overall, it is a quarter we are very proud of and pleased with. Sales for the quarter increased primarily due to strong sales to Internet retailers and direct shipments to consumers. Demand for our products remained high during the COVID-19 pandemic. Our product development teams are dedicated to creating products that meet the high standards of our customers, which contributed to our Sassy Stacks of Circles and Ring Stackers being recognized as Newsweek's Best in STEM 2021 for all age groups, an award we are very honored to receive. Now, turning to the balance sheet, we ended the quarter with $6.8 million in cash and no outstanding balance on our revolving line of credit. Late yesterday, we announced that our Board of Directors declared a cash dividend of $0.25 per share for the company's Series A common stock as a one-time dividend, and a quarterly cash dividend of $0.08 per share, resulting in a total of $0.33. Both dividends will be paid on December 31, 2020, to shareholders recorded by the close of business on December 11, 2020. Our strong financial health and exceptional cash flow enable us to reward our shareholders with returns on their investment. After issuing the special dividend and the quarterly cash dividend, Crown Crafts will have distributed over $46 million in total dividends to shareholders since 2010. We remain committed to delivering value while continuing to invest in growth strategies. We are pleased to announce a special dividend, reflecting the Board's ongoing confidence in Crown Crafts' future. I will now turn it over to Olivia for additional comments.

I'm only going to give financial highlights. For more detailed analysis, please refer to the company's Form 10-Q filed with the Securities and Exchange Commission yesterday afternoon. Net sales were $21.7 million for the second quarter of fiscal 2021 compared with $18.6 million for the second quarter of the prior year, an increase of $3.1 million or 16.7%. Net sales were $37.9 million for the first 6 months of fiscal 2021, compared with $34.5 million for the same period of the prior year, an increase of $3.4 million or 9.7%. The increase in sales is due to a higher sell-through at major retailers, which has been partially offset by declines at certain retailers that have been impacted by the COVID-19 pandemic, particularly one customer that has remained closed throughout the entire 6-month period of the current year. Gross profit increased by $1.2 million and increased from 31.6% of net sales for the prior year quarter to 32.8% of net sales for the current year quarter. Gross profit increased by $1.7 million, an increase from 30.2% of net sales for the prior year 6-month period to 32% of net sales for the same period in the current year. The increase in gross profit is due to the increase in net sales, as well as a more favorable customer and product mix. Marketing and administrative expenses increased by $326,000, but decreased from 18.7% of net sales for the prior year quarter to 17.6% of net sales for the current year quarter. Marketing and administrative expenses increased by $254,000 but decreased from 20.1% of net sales for the prior year 6-month period to 19% of net sales for the same period in the current year. The increase in amount for the current year-to-date period is primarily the result of higher outside services of $201,000 and higher advertising of $115,000, partially offset by lower travel expenses of $67,000. The current year-to-date provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 24.2% compared to 24% in the prior year. During the prior year 6-month period, the company reversed the reserves for unrecognized tax liabilities that it had previously recorded for fiscal years 2011 through 2013, which resulted in the recognition of a discrete income tax benefit of $232,000. In addition, during both the current and prior year quarters, the company recorded discrete entries associated with excess tax benefits or charges arising from the vesting of nonvested stock during the period and also recorded reserves for unrecognized tax liability. The effective tax rate from continuing operations, combined with the effect of these discrete income tax charges and benefits, resulted in an overall provision for income taxes of 24.9% for the current year-to-date period and 18.8% for the prior year. Net income for the second quarter of fiscal 2021 was $2.5 million or $0.24 per diluted share. Net income for the second quarter of fiscal 2020 was $1.8 million or $0.18 per diluted share. Net income for the first 6 months of fiscal 2021 was $3.7 million or $0.36 per diluted share compared to net income of $2.9 million or $0.28 per diluted share for the same period in fiscal 2020, which included $0.03 associated with the reversal of the discrete income tax benefit and the associated interest and penalties. And I'll now return the call to Randall.

Olivia, thank you very much. And Andrea, if you'll come back on, we'll open it up for any questions that anyone might have.

The first question comes from Linda Bolton-Weiser of D.A. Davidson.

Congratulations on a great quarter. So I was wondering if you could just give a little bit more color on the demand for your products because I guess I'm used to having it rely more on birth rates and things like that. But I mean, do you have any insight into what is going on? I mean, are people just redoing their nurseries and buying things for their infants or what color can you give us on the demand?

Our demand has remained extremely high throughout this entire period. We track point of sale data for about 80% of the retail volume, and it has stayed strong. This is likely due to people spending more time at home and shopping online, which has boosted our Internet business. Early on, stimulus checks also helped move some goods, but even beyond that, our products have continued to perform well. We experienced strong demand despite certain challenges, including one major customer that has not been active for the first and second quarters. Overall, we are very pleased with the sustained high demand.

Was there anything in the quarter that you could call out as unusual, any shifting of sales from prior quarter or anything of that nature?

Linda, no. Not at all. There's nothing unusual that shifted from quarter-to-quarter. I hate to say it, it was just a good quarter. And we're proud of it.

Right. So can I just ask about your marketing and administrative expenses? If you exclude the advertising, it crept up a little bit from $3 million to $3.4 million from the last quarter sequentially. So is that like a permanent new level? Or did you have some special costs that were in the quarter?

It's normal expenses. I mean, some of it may be a little bit of timing here or there, but for the most part, other than advertising, it was just some outside services that are normal expenses.

Okay. Yes.

There is nothing extraordinary.

You mean, nothing unusual?

No, there was nothing unusual or extraordinary.

Okay. And last quarter, you mentioned the gross margin was helped by certain retailers being closed, the lower margin channels were closed. But you still had really good gross margin expansion. Did those retailer, some of those lower discount retailers, did they reopen back up in the quarter?

They did. Some of them did, not all of them and not all of them to a full degree that we'd like to assume. But there's still some improvement in our gross margin by the fact that some of the people that normally buy with lesser gross margins have not had an opportunity to buy because their doors remain closed. But that's not a big degree.

Okay. And then finally, regarding your cash flows, which are very strong, do you plan to maintain the small amount of debt on your balance sheet for the rest of the year, or do you anticipate paying it off in the second half of the fiscal year?

The debt that's on the books right now is the PPP loan, which we have now filed for forgiveness to request that forgiveness, but we have not heard back yet. So that all depends on when we get word as to whether that's forgiven, and we need to either repay it or move it off from the balance sheet into a gain.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Randall Chestnut for any closing remarks.

Andrea, thank you very much. And we appreciate everyone's time today and interest in the company. And to close, I'd like to say that management and the Board remains optimistic about the future. And as we have said many times on these conference calls and I'll say again, your company remains solid. Let me repeat that. Your company is solid. We'd like to thank all of our employees, suppliers, customers, and shareholders for their continued support, and we look forward to speaking with you at the end of next quarter. This concludes our presentation. Thank you very much. Have a good day.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.