Crown Crafts Inc Q4 FY2021 Earnings Call

Welcome to the Crown Crafts, Inc Fourth Quarter Fiscal Year 2021 Conference Call. Your host for today's call is Randall Chestnut, Chairman and CEO. Any reproduction of this call in whole or in part is not permitted without prior written authorization from Crown Crafts, Inc. As a reminder, this conference is being recorded today, June 9, 2021. I would now like to turn the call over to Craig Demarest, Vice President and CFO, who will begin. Please go ahead.

Thank you, Cole. Welcome to the Crown Crafts investor conference call for the fourth quarter and full year fiscal 2021. With me today are Randall Chestnut, the company's Chief Executive Officer and Olivia Elliott, President & Chief Operating Officer. A telephone replay of this call will be available one hour after the end of the call through 4:00 p.m. Central Daylight Time on September 9. 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. I will now turn the call over to Randall.

Craig, thank you very much and good morning to everyone. We are doing things a little differently this time. I'll make a few housekeeping comments and some general remarks, and Olivia and Craig will take it from there. First of all, I'd like to welcome Craig Demarest to our team as this is his first time on a conference call. He joined the company in February as Vice President and CFO. Additionally, Olivia, who has been with us for many years, was promoted to President and Chief Operating Officer in January after 19 years with the company. I'll make a few remarks before turning it back over to Olivia and Craig to report on operations. For fiscal year 2021, excluding the impact of the closure of Carousel Designs, we achieved the best diluted earnings per share in over a decade. We will discuss the Carousel portion later in the call. Net sales, excluding Carousel, increased by approximately 40% for both the fourth quarter and the full fiscal year 2021. As we reported in earlier calls, we continue to operate our warehouse while many of our competitors moved to third party models, commonly known as street deals. By operating our own distribution center, we have been able to drop ship directly to consumers for most of our large customers, which has greatly helped us during the past year and throughout the pandemic amidst the closure of many stores. Fiscal year 2021 was a very good year for us, and we are proud of the results. It is with great regret and disappointment that we announced earlier the closure of Carousel Designs effective May 21. Olivia and Craig will discuss the impact of that closure. For shareholders who have been with us for many years, you know that we make tough decisions to adjust operations when necessary, and unfortunately, this was one of those instances. With that, Olivia, I'll turn it over to you.

Thank you, Randall, and good morning, everyone. I'm going to start out by touching on the fourth quarter and full fiscal year 2021 results at a very high level, and then I'll turn the call over to Craig for more detail. Fourth quarter net sales were $21.8 million, compared with $20.3 million in the prior year, an increase of $1.5 million or 7.5%. For the full fiscal year 2021, net sales were $79.2 million, compared with $73.4 million in the prior year, an increase of $5.8 million or 7.9%. On May 11, we announced that we made the very difficult decision to close Carousel Designs. Associated with that decision, the company recorded a pretax $2.2 million impairment charge on Carousel's long-lived assets in the fourth quarter, which was $1.7 million after tax. If you exclude the after-tax charge, fourth quarter net income for the current year would have been $1.9 million, or $0.19 per diluted share, compared with $1.6 million, or $0.16 per diluted share in the prior year. Fiscal year 2021 net income would have been $7.8 million, or $0.76 per diluted share, compared with $6.6 million, or $0.65 per diluted share. On the balance sheet side, we finished the fiscal year with $613,000 in cash and no borrowings on our revolving line of credit. At year-end, our balance sheet included our Paycheck Protection Program loan of almost $2 million, classified as current. However, subsequent to year-end, we were notified by the SBA that they had fully forgiven our loan. On May 13, we announced that the company's Board of Directors had declared a $0.08 per share cash dividend on the company's common stock, payable on July 2, 2021, to stockholders of record as of the close of business on June 11, 2021. As Randall mentioned earlier, fiscal year 2021 was a very good year for us, and we are very proud of all our employees who stepped up to ensure we continued to operate during the COVID-19 pandemic. And now I'll turn the call over to Craig for more detail.

Thanks, Olivia. I'll only give financial highlights. For more detailed analysis, please refer to the company's 10-K filed with the SEC this morning. As Olivia noted, net sales were $21.8 million for the fourth quarter fiscal 2021 compared with $20.3 million for the fourth quarter of the prior year, an increase of $1.5 million or 7.5%. For the year, net sales were $79.2 million for fiscal 2021 compared with $73.4 million for the prior year, an increase of $5.8 million or 7.9%. The increase in sales is primarily due to higher sell-through at major retailers, which was partially offset by declines at certain customers impacted by the COVID-19 pandemic, particularly one customer that remained closed throughout the entire year. Gross profit increased by $477,000, and the gross profit margin increased from 26.3% of net sales in the prior year quarter to 26.7% of net sales in the current year quarter. Gross profit increased by $2.5 million, with the gross profit margin rising from 29.4% of net sales for the prior year to 30.4% of net sales for the current year. The increase in gross profit is primarily due to higher net sales and a more favorable customer and product mix. Marketing and administrative expenses increased from $3.5 million in the prior year quarter to $3.6 million in the current year quarter, but the percentage of net sales decreased from 17.3% to 16.6% over the same period. For the full year, marketing and administrative expenses increased by $365,000 but decreased from 18.9% of net sales for the prior year to 18% of net sales for the current year. The increase in expense is primarily the result of higher outside service costs of $336,000 and higher compensation costs of $236,000, partially offset by lower travel expenses of $117,000. The provision for income taxes is based upon an effective tax rate of 24% for both the current and prior years. The current year was favorably impacted by certain tax credits totaling $74,000, while the prior year benefited from tax credits totaling $274,000. Additionally, we benefited by $320,000 from the reversal of reserves for unrecognized tax liabilities. Net income for the fourth quarter of fiscal 2021 was $238,000, or $0.02 per share, compared to net income of $1.6 million, or $0.16 per share for the fourth quarter of fiscal 2020. Net income for fiscal 2021 was $6.1 million, or $0.60 per diluted share, compared to net income of $6.6 million, or $0.65 per diluted share for fiscal 2020. Included in net income for the current quarter and current year is a $2.2 million impairment loss, which is $1.7 million after tax or $0.17 per diluted share related to the impairment of the long-lived assets of Carousel Designs. The tax credits favorably impacted the current year quarter and full year by $0.03 per diluted share and $0.04 per diluted share, respectively. The prior year quarter was favorably impacted by $0.03 per diluted share, while the prior year was favorably impacted by $0.09 per diluted share. The effective tax rate from continuing operations and the effect of discrete items resulted in an overall provision for income taxes of 21.3% for the current year and 15.5% for the prior year. With that, I'll turn the call back over to Randall.

Okay, Craig, thank you very much. And Cole, I'll ask you to come back up and open it up to any questions that anyone on the line may have.

Today we'll take questions from Linda Bolton Weiser with D.A. Davidson.

Hi, how are you? Congratulations to everybody on their new roles. Welcome to the new CFO. Can I just start out by asking about Carousel Designs? Can you remind me, I was under the impression that that was an e-commerce business? Is that correct? Can you just describe what that business was a little bit?

Linda, it was and remained throughout the entire time we owned an e-commerce business. Yes, it made goods in the United States in Douglasville, Georgia, and sold it on its own website and through other prominent websites. But it was all e-commerce. Yes. Unfortunately, it reached a point with diminishing sales, the pandemic, etc., that the company was not very prosperous anymore. We knew that and made the tough decision to move forward with the closure.

I'm a bit confused as e-commerce businesses have generally thrived during the pandemic. You've discussed the advantages to your business and mentioned drop shipping, which I assume is shipping directly to customers who ordered through e-commerce. So I'm wondering, is that operating separately from Carousel? Are you thriving on the rest of the e-commerce business, and it was just Carousel that had the problems, or can you just explain that?

Yes, I can explain. The business I refer to, which has done so well during the pandemic, is our NoJo and Sassy business, which is all imported. It is warehoused in Southern California, and we have established drop shipping to our customers. Unlike Carousel Designs, which was domestically manufactured and therefore had a higher price point. During the pandemic, consumer price sensitivity became critical, resulting in substantial discounts required for sales at Carousel. Coupled with higher advertising costs to elevate our position online, it ultimately rendered it unprofitable.

Should we consider those kind of lost sales moving forward? Or do you think those sales will be compensated for through increased sales in your other distribution channels?

It's hard to say, Linda. Who knows? When you take something out, it often distributes to other places, and we will get a portion of it. Yes, but I can't quantify it. Let me clarify, it was a different product. It was a very high-end product with a notably high price compared to many of the simpler items we offer that sold for twice what the import product sold for.

Should we assume that the benefits to your bottom line from closing the business will be reflected in ongoing results? Or do you think you will reinvest that benefit in the rest of the business?

That's a forward-looking question, and we usually shy away from those. You need to sort that out on your own. We have provided the needed information indicating Carousel has been unprofitable for some time.

In the first release that we put out when we closed Carousel, we included the historical offers associated with it.

Is there a way you can share what the sales and profitability were for fiscal year 2021?

What did we put in the press release? Hold on, Linda.

We provided a range.

Yes, we included the last previously reported year, which was net income of $4.8 million.

I'd assume it declined further.

That's probably a fair assumption.

You mentioned your gross margin was up year-over-year in the quarter. Can you elaborate on what you mean by favorable customer and product mix? What customers and products are most favorable for gross margin?

It's a combination of various products and shifting over customers. There isn't a single product I can point to; it's a broad mix. Moreover, let me clarify that the Carousel sales for fiscal year 2021, which we haven't previously reported, were actually up slightly due to sales promotions that generated sales but were not profitable. There isn't one item that has significantly improved the gross margin.

Many of your products are sold on Amazon. Would you say that Amazon and e-commerce channels have higher or lower gross margins for you?

We don't report margins by customer, and we shy away from that math, but Amazon's should be in the range of all our other customers.

Have you mentioned to investors what percentage of revenue comes from e-commerce channels?

In the remarks I made, we said that in the fourth quarter, and in the year, that 40% was through e-commerce, when you exclude credit cards.

That seems high. It must have increased during the pandemic; do you have a comparison to fiscal year 2020?

Yes, that included Carousel, but the figure for last year was probably in the lower 30% range.

Are you referring to a certain restaurant chain where you provide some product when mentioning the customer that was closed for most of the year?

No, that's the one; as far as we're concerned, the restaurant chain remained open but they did not have inside dining, which led to them not using our product.

That should change with the reopening, correct?

We hope so. We have seen some stores, Linda, starting to reopen, but it's sporadic at the moment.

Was that customer loss material? A couple of percentage points of your sales, would you say?

Yes, it was material. It affected us significantly.

Your revenue growth has been excellent. Many companies have seen a lift during the pandemic, especially in home goods. What is your view on consumer behavior post-reopening? Do you think demand will taper off?

We don't speculate on that. We lack sufficient data to draw conclusions. However, I believe the trend towards online shopping won't reverse itself, even with stores reopening. There will likely be a continued heavy shift toward online shopping.

Regarding your PPP loan, you mentioned it was forgiven. How will that be classified on your balance sheet?

That will no longer be classified as debt but recognized as a non-operating gain on the income statement.

A lot of companies have talked about various cost pressures and shipping delays. Are you experiencing any issues getting products from Asia? What are you seeing regarding cost inflation?

Yes, we are seeing effects of cost increases, especially with freight rates. We have managed to secure better rates with a couple of major carriers, but we are still affected overall. There are price increases coming out of Asia, particularly raw material costs and freight. It's a mixed bag of challenges.

Are you planning to pass these increased costs along to retailers and consumers, or are you considering cost reduction initiatives?

Whenever possible, we pass as much along as we can. We are tenacious in that regard. Will we get it all passed through? Probably not, but we will strive to recover as much as we can.

Have you already implemented price increases?

In some cases, yes, we have.

Some companies have engaged in M&A recently. Given your strong position, have you considered looking at additional acquisitions?

We consistently have an appetite for acquisitions and regularly look for opportunities. Our balance sheet is strong, allowing us to explore potential deals. Yes, we're always looking.

What would be the maximum level of leverage you would consider for a deal?

I don’t want to go there. We'd consider leveraging for the right deal, but we won’t bet the whole company on one acquisition, unlike others who do. We won't unbalance the company over a single acquisition.

You spoke previously about ramping up international efforts for sales growth. Did international sales grow in line with the company or higher or lower this fiscal year?

International sales increased slightly, but were also affected by the pandemic. Therefore, they didn’t perform as well as we expected. We anticipate that will improve moving forward.

Are international sales primarily through brick-and-mortar, or are you also doing some e-commerce internationally?

No, we're doing both. We're active in both brick-and-mortar and e-commerce internationally.

Our next question will come from John Adessa with Pinnacle.

Good morning, everyone. Thanks for the insight on Carousel. It's helpful to know what happened there. Are there any legacy assets that you might be able to leverage moving forward? You still own the brand, and there's likely a detailed customer list with emails. Are there any fixed assets that could be useful?

Yes, John, most notably, we still own the brand, the website, and the large library of artwork, which can be transferred to some of our other products and divisions. However, in terms of hard assets, we don't have much transferable since we don't do domestic manufacturing elsewhere.

Will there be any initiative to cross-sell those email addresses with your other brands?

The email addresses are direct-to-consumer. Our other division sells through retailers and drop ships for them. These addresses aren't transferrable.

Has your experience with Carousel influenced your appetite for additional direct-to-consumer ventures going forward?

Yes, it has without a doubt. We've learned a lot, particularly that made in the USA products are quite expensive. The consumer is reluctant to pay these higher prices. Discounts and advertising costs to elevate visibility online can be quite steep as well. Therefore, direct-to-consumer isn't as appealing as it may seem. We regret having to make this decision, but as a company, we have a history of making tough calls when necessary.

This concludes the question-and-answer session. I'll turn the conference back over to Randall Chestnut for any closing remarks.

Cole, thank you very much. And thanks to everyone who was on the call today. Just a few quick closing comments: as we began fiscal year 2021, there were concerns about the year due to COVID-19, which we shared. Our staff quickly adapted, leading to a significant increase in internet sales as we've alluded to earlier. We'd like to thank all of our employees, suppliers, customers, and valued shareholders for making fiscal year 2021 a good year. To reiterate, fiscal year 2021 was a great year. Thank you again, and we look forward to speaking with you at the end of the first quarter. Have a good day.

Bye.

Thanks.

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