Crown Crafts Inc Q3 FY2021 Earnings Call

Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc. investor conference call. Your host for today's call is Mr. Randall Chestnut, Chairman 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, February 10, 2021. At this time, I would now like to turn the call over to Ms. Olivia Elliott, President and Chief Operating Officer, who will begin. Please go ahead.

Thank you. Welcome to the Crown Crafts investor conference call for the third quarter of fiscal 2021. With me today is Randall Chestnut, the company's Chief Executive Officer.

Hi. Good afternoon.

A telephone replay of this call will be available 1 hour after the end of the call through 4:00 p.m. Central Standard Time on May 11, 2021. 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 dividend 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 good afternoon to everyone. As this is the first investor conference call since Olivia Elliott was promoted to President and Chief Operating Officer, I want to highlight this significant event, which took place on January 4 of this year at the start of this quarter. Olivia joined the company in 2001 and has spent the last 20 years managing the financial and operational aspects of the business. Her expertise makes her the ideal choice for this important position. We are glad to promote from within. Soon, we plan to announce the appointment of a new Vice President and Chief Financial Officer to take over Olivia's previous responsibilities. I encourage all investors to congratulate Olivia on her new role when the opportunity arises. Now, focusing on the third quarter—only the third quarter—I will provide an overview, while Olivia will discuss the year-to-date figures later. This year's net sales for the third quarter reached $19.5 million compared to $18.8 million last year, reflecting an increase of $889,000 or 4.8%. The net income for the quarter was $2.141 million compared to $2.095 million last year, representing a $46,000 increase or 2.2% over the same quarter last year. Diluted earnings per share remained at $0.21 this year, the same as last year. As previously mentioned, Olivia will provide insights into the year-to-date numbers shortly. The third-quarter results show an improvement in both net sales and net income compared to the previous year, which we are very pleased about. This year, the impact of certain tax credits included $74,000 or $0.01 per diluted share in the first quarter and $274,000 or $0.03 per diluted share in last year's third quarter. Excluding these effects, this year’s core diluted earnings per share would have been $0.02 higher than last year's third-quarter diluted earnings per share. Our gross profit for the quarter increased to 31.6% this year, compared to 31.3% in the same quarter last year. Over the last quarter and the past nine months, we have all been affected by COVID-19. Through flexibility and the dedication of our staff, we have navigated this challenging period, and we are grateful to all our employees for their support. Now, regarding our balance sheet, we remain strong, with a paid-off revolver and a cash balance of $3.7 million, along with $26 million available on the revolver as of December 27, 2020, which marked the end of the quarter. Today, we announced that our Board of Directors declared a quarterly cash dividend on the company’s Series A common stock of $0.08 per share based on yesterday's closing price. This results in an annualized yield of 4%. The dividend will be paid on April 2, 2021, to shareholders on record as of the close of business on March 12, 2021. We are happy to provide this dividend payment, reflecting the Board's confidence in the business and our ongoing commitment to delivering value to our shareholders.

Thank you, Randall. 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 this morning. Net sales were $19.5 million for the third quarter of fiscal 2021 compared with $18.6 million for the third quarter of the prior year, an increase of $889,000 or 4.8%. Net sales were $57.3 million for the first 9 months of fiscal 2021 compared with $53.1 million for the same period of the prior year, an increase of $4.2 million or 8%. The increase in sales is due to higher sell-through at major retailers, which has been partially offset by declines at certain customers that have been impacted by the COVID-19 pandemic, particularly one customer that has remained closed throughout the entire 9-month period of the current year. Gross profit increased by $332,000 and increased from 31.3% of net sales for the prior year quarter to 31.6% of net sales for the current year quarter. Gross profit increased by $2 million, an increase from 30.6% of net sales for the prior year 9-month period to 31.9% 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 were flat at $3.4 million for both the current and prior year quarters, but decreased from 18.4% 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 $258,000, but decreased from 19.5% of net sales for the prior year 9-month period to 18.5% of net sales for the current year 9-month period. The increase in amount for the current year-to-date period is primarily the result of higher outside services of $318,000 and higher advertising of $138,000, partially offset by lower travel expenses of $120,000 and lower amortization of $45,000. The current year-to-date provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 23.7% compared to 23.3% in the prior year. The recognition of certain tax credits favorably impacted the current year quarter and year-to-date period by $74,000, and the prior year quarter and year-to-date periods by $274,000. Prior year net income for the year-to-date period was also impacted favorably by $292,000 due to the reversal of a portion of reserves for unrecognized tax benefits and the related interest and penalties that had previously been recorded. The effective tax rate from continuing operations, combined with the effect of the discrete income tax charges and benefits, resulted in an overall provision for income taxes of 23.7% for the current year-to-date period and 16% for the prior year. Net income for the third quarter of both fiscal 2021 and fiscal 2020 was $2.1 million or $0.21 per diluted share. Net income for the first 9 months of fiscal 2021 was $5.8 million or $0.57 per diluted share compared to net income of $5 million or $0.49 per diluted share for the same period in fiscal 2020. The tax credits previously mentioned favorably impacted the current year quarter and year-to-date periods by $0.01 per diluted share. The prior year quarter was favorably impacted by $0.03 per diluted share and the prior year-to-date period was favorably impacted by $0.06 per diluted share. I will now return the call to Randall.

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

And the first question will be from Linda Bolton-Weiser with D.A. Davidson.

Congratulations, Olivia, on your promotion. I was curious when you're talking about bringing somebody into the CFO role. Do you think you'll promote from within? Or are you looking at outside candidates?

At this point, we prefer not to say, Linda. It's still being ironed out.

Okay. And congratulations on the quarter, I mean it was really good profit growth and you're seeing some nice leverage because of your sales growth. In looking at your segments, I did notice that the bibs, bath, toy, feeding segment was down year-over-year, whereas it was up last quarter. Is there something that changed there? Or why was it down whereas it was up in the second quarter?

No, Linda, nothing really changed. The biggest thing that changed probably was we had an upcoming reset, which we've now implemented and we're almost through it at one of our major customers. And when they start doing that, they start paring down inventory, meaning they slow down buying of inventory. But nothing has changed, except basically that.

Okay. Your growth continues to be strong overall, particularly in bedding, blankets, and accessories. I assume that's driven by e-commerce. Can you share how much your e-commerce sales increased in the quarter compared to your brick-and-mortar sales?

We don't disclose those numbers, Linda, but it was up appreciably. And we don't disclose them, and therein lies a little bit of a fallacy when you compare Sassy, the bibs to NoJo because the bibs at Sassy, the price point of the bibs don't lend themselves very well for Internet sales because in many cases, the price of the merchandise would not be as big as the freight would be. So therefore, it makes it difficult unless you bundle them, which we do where we can and ship multiple units. So we don't break those numbers out.

Okay. So overall, I mean your growth does seem to have picked up here during the pandemic. Do you think it's just that consumers have more time to think about decorating their child's bedroom or buying new things for their child or infant? Or is there something else that you can point to that has actually changed consumer buying behavior here during the pandemic?

No, not really. We're hearing from many different areas, not just our category but others unrelated to baby. As people are staying home, they're investing more in their living spaces to enhance and take pride in their homes. This trend is evident across various sectors, and I’m sure you’ve noticed it as well. That’s the main factor. It has certainly contributed to our business, even though it has been challenging for the American economy. Additionally, the stimulus checks have also played a role.

I'm a little curious about whether you are starting to see any commodity cost pressures, as some companies I know have mentioned facing them. Do you expect to encounter these pressures in the upcoming periods?

We do, Linda. There's no doubt about it. The U.S. dollar to the RMB has decreased by approximately 10% since last May. As a result, Chinese suppliers are coming forward and requesting price increases. We understand their position and will consider some increases, but we're also taking a firm stance. If we approve an increase, we will pass that on to retail because the changes in the RMB and dollar are not related to our business. This situation stems from the stimulus and the amount of money that the U.S. government has printed to support the stimulus checks, which has devalued the dollar and is beyond our control. Just like we did with tariffs, we will take the necessary actions and pass the costs along.

Okay. I'm just wondering, in looking at my fourth-quarter projections, I know you don't give guidance or anything. But in the prior year fourth quarter, there did seem to be a little bit of an escalation in advertising expense. Is that something that the ratio spending increases always in the fourth quarter? Or was there something special last year? I'm just thinking how I should think about that comparison in the fourth quarter?

I'm not recalling anything particularly notable in the fourth quarter. I expect advertising to remain relatively stable compared to this year. I don't remember anything remarkable, and I also do not anticipate anything extraordinary happening this year in comparison to the first three quarters.

Except for Carousel, our advertising, Linda, is more support for the retailers through their advertising campaigns. I mean we really don't go out in the market and buy advertising except for Carousel.

Okay. So I'm just curious, I know this happened a long time ago. But in terms of the Toys 'R' Us bankruptcy and you actually managed through that pretty well. Have you found that your products have found new homes in terms of new distribution in some cases or expanded distribution? Are there any other changes that have been like permanent changes that have taken place since that time? And have you kept all that new distribution that you gained after the Toys 'R' Us bankruptcy?

Well, I mean, I can't sit here and say dollar for dollar we have, but we took a look and then kept on going. And I think, yes, we've overcome that, okay? It took a few quarters to do it. You don't lose that kind of business. They were our second largest retailer without feeling the impact of it, and we did feel the impact of it. But yes, I think we're pretty much over that. And we don't want to do it again, let's put it that way.

Are you experiencing any issues with having supply retailers that have gone under here during the pandemic? Or is that relatively small impact?

For us, it's a relatively small impact, Linda. We don't sell a lot to independent retailers, just a little in the toy segment. Those impacts don't really affect us since we factor most of our transactions, around 99.8%. So we're covered from a credit standpoint and do not assume the risk. To my knowledge, there have been very few cases, and no, it hasn't had an impact on us.

Okay. And lastly, I guess I would just like to ask about some of your international growth opportunities and progress. You had been talking about some opportunities. How is that progressing? Are you continuing to further penetrate the international markets?

Yes, Linda. The pandemic did cause some delays, particularly in getting merchandise from Asia to other countries, but we are actively working on it. We have a conference call scheduled for Friday to start ramping things back up and try to grow that business as much as possible. We were making good progress before, and while the pandemic has slowed us down, we are still maintaining a reasonable level of business.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Randall Chestnut for any closing remarks.

Chad, thank you very much, and thanks to everybody that was on the call today. As we said in the early opening, we're very proud of the performance of the quarter and the year-to-date period. When we started this year out, there was a lot of uncertainty and a cloud hanging over, and we came out with 3 quarters, knock on wood, we've got 1 more to go. But we came out with 3 quarters that were phenomenal. We'd like to thank all of our employees, suppliers, customers, shareholders for their continued support, and we look forward to speaking with you after we close our year-end, which will be sometime in ...

Mid-June.

Thank you very much, and this concludes our conference. Have a good day. Thank you.

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