Crown Crafts Inc (CRWS) Q1 2022 Earnings Call Transcript

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. Joining Mr. Chestnut on the call will be Ms. Olivia Elliott, President and Chief Operating Officer; Mr. Craig Demarest, Vice President and Chief Financial 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, August 11, 2021.

Thank you, Kerry. Welcome to the Crown Crafts Investor Conference Call for the First Quarter of Fiscal Year 2022. With me today are Randall Chestnut, the company's Chief Executive Officer; and Olivia Elliott, the company's President and Chief Operating Officer. A telephone replay of this call will be available 1 hour after the end of the call through 4:00 p.m. Central Time on November 11. Also, a web replay of this 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 afternoon to everyone, and thanks for joining us on our first quarter fiscal year 2022 conference call. We're very happy with the results of the quarter. One disappointment was in May of this year. We announced that we had made the difficult decision to close Carousel Designs effective May 21, 2021. The financial impact of Carousel and the forgiveness of the Paycheck Protection loan during the quarter have caused the comparisons between this year and last year to be a little difficult. But when you separate the impacts from the results of the continued operations, which are NoJo Baby & Kids and Sassy Baby, these subsidiaries had a great quarter. Now I'd give it to Olivia and Craig to discuss the quarter in more detail, and we'll be back at the end to take any questions. Thank you.

Thank you, Randall. I'm just going to touch on the first quarter highlights at a very high level, and then I'm going to turn the call over to Craig, and he'll go into more detail. First quarter net sales were $18.7 million compared with $16.2 million last year, which was an increase of 15.5%. If you exclude Carousel from both quarters, the increase in net sales for our continuing operations of NoJo and Sassy was 22.9%. While we've seen a shift in sales due to consumers starting to shop in brick-and-mortar locations again, if you exclude Carousel's direct-to-consumer sales, Internet-based sales still represent approximately 30% of our sales. During the quarter, we were also happy to have a slight increase in international sales, which were hard hit during the height of the pandemic. First quarter net income was $2.7 million compared with $1.2 million last year. As Randall mentioned, there were quite a few gains and losses associated with Carousel and the Paycheck Protection loan forgiveness. When you exclude the impact of both of these, net income would have been $1.5 million in the current year compared with $1.2 million last year, an increase of 19.5%. We continue to feel the impact of rising freight costs, which impacted our gross margin this quarter. Craig will address this in a little more detail later on in the call. On the balance sheet side, we finished the quarter with $4.7 million in cash and no debt. The company's Board of Directors declared an $0.08 per share cash dividend on the company's common stock that will be paid on October 1, 2021, to stockholders of record at the close of business on September 10, 2021. This represents a 4.3% yield based on yesterday's closing price per share. We're very pleased that our financial strength allows us to pay this dividend. Overall, this was a very good quarter for us. And I'll now turn it over to Craig.

Thanks, Olivia. I'll give the financial highlights. For a more detailed analysis, please refer to the company's Form 10-Q filed with the SEC this morning. As Olivia mentioned, net sales were $18.7 million for the first quarter of fiscal 2022 compared with $16.2 million for the first quarter of the prior year or an increase of $2.5 million or 15.5%. The increase in sales is primarily due to the higher sales of bibs, toys, and disposables, offset by lower sales of bedding and blankets. The decline in sales of bedding and blankets is primarily the result of an $863,000 decrease in sales at Carousel Designs, which ceased operations during the current year quarter. Overall, sales have been higher at brick-and-mortar retailers and lower at online retailers as consumers have begun to return to stores that previously had been impacted by the COVID-19 pandemic. Gross profit decreased by $367,000 and decreased from 31% of net sales in the prior year quarter to 24.9% of net sales in the current year quarter. The gross profit dollars in the current year quarter decreased as compared to that of the same quarter in the prior year because the gross loss of $647,000 experienced by Carousel in the current year quarter was only partially offset by increased gross profit from higher net sales over the same comparable period. The loss from Carousel in the current year quarter is the result of the sale of inventory below cost and the recognition of charges of $344,000 associated with the settlement with a supplier of a commitment to purchase fabric, and $265,000 associated with the liquidation of Carousel's remaining inventory upon the closure of the business. The current quarter gross profit dollars and gross profit percentage are also adversely impacted by continuing increases in the cost of oceangoing freight. Marketing and administrative expenses were flat at $3.4 million for both the current and prior year quarters, but decreased from 20.9% of net sales in the prior year quarter to 18% of net sales in the current year quarter. As compared with the prior year quarter, the company incurred in the current year quarter higher overall compensation costs of $154,000 and higher costs for outside services of $47,000, which were offset by lower costs for Carousel, including lower advertising costs of $149,000 and the elimination of $64,000 in amortization costs. Other items in the quarter include a $1.985 million gain from the forgiveness of the PPP loan that Olivia mentioned earlier. The current quarter provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 19.2% compared with 25.1% in the prior year quarter. The current year quarter estimated annual effective tax rate includes no tax expense from the gain on extinguishment of debt, which will be permitted to be excluded from taxable income, the effect of which is expected to lower the effective tax rate for fiscal year 2022 by approximately 4 percentage points. During both the current and prior year quarters, the company recorded discrete tax benefits and/or credits to adjust reserves for unrecognized tax liabilities and the aggregate effect of excess tax benefits arising from the vesting of nonvested stock and the exercise of stock options. The effective tax rate from continuing operations combined with the effect of the discrete income tax items resulted in an overall provision for income taxes of 18.6% for the current year quarter and 25.9% for the prior year quarter. Net income for the first quarter of fiscal 2022 was $2.7 million or $0.27 per diluted share compared to net income of $1.2 million or $0.12 per diluted share for the prior year quarter. And with that, I'll return the call back to Randall.

Okay. Craig, thank you very much. And Kerry, I'll call you back up and you can open it up for any questions that anyone may have.

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

So yes, congratulations on the good sales in the quarter. And I'm just trying to figure out on the gross margin, could I ask you to repeat it? It sounds like there were 2 special items that maybe I would want to exclude $344,000 and $265,000. Is that correct, if those were kind of special items?

Yes. The prior Carousel gross loss was $647,000 in the current year quarter, and it included the 2 items you're referring to, the $344,000 and the $265,000.

Okay. So then if I exclude those items from gross margin, I would get to some kind of normalized level. Do you happen to know that off the top of your head? Or I guess I could do the calculation. I'm just trying to figure out how much the gross margin was down excluding those items.

I don't have that handy.

If you look at the press release, we disclosed the sales. If you excluded both the Carousel from both quarters as well as the PPP loans, we included what net sales, gross margin and net income would have been. So let me get to that. The quarter would have had $18.1 million in sales, net sales, 29.3% of the gross margin and $1.5 million as your net income, if you exclude both of the growth one-time events.

Okay. So I guess that would make the gross margin down about 200 basis points or so, not quite. So maybe a 29% gross margin, I know you don't want to give guidance, but maybe that's a decent level going forward, if one were to assume the freight inflation pressures were to continue?

You've got to figure that out on your own, I'm sorry.

I think we can go on. We can't, Linda.

Okay. Well, you mentioned price increases on the last call. What is the current status of those pricing increases?

We carefully analyze our business and identify items that are sensitive to price changes. When we believe a price increase could significantly impact the market or make our products unaffordable, we avoid those increases. In other areas, we’ve been consistent in implementing price hikes, which has brought us some success. However, we haven't been able to offset rising freight costs through price adjustments because these costs fluctuate more rapidly than we can react. It's quite unpredictable, changing almost daily.

Okay. So in terms of the Carousel, I think you said that the bedding and blanket segment was down $863,000 because of Carousel closing down. But Carousel was in there for about 2 months of the quarter. So I'm just trying to figure out like the $863,000 of sales loss is just for 1 month of the quarter. It seems very large.

The $863,000 is the difference between last year and this year.

Right. Including the months in the June quarter this year where Carousel was...

So there were some sales in last year that we also did that math in the press release where we took the impact of Carousel out of last year and compared it to this year. As Randall said earlier in the call, it's definitely a tough quarter to be able to compare. So we tried to do what we could in the press release to make it a little bit clearer.

Okay. Can you just remind me the full year amount of Carousel sales and profit or something in 2020, I mean FY '21?

Keep asking your questions, and we'll refresh ourselves on that number while you're asking.

We'll give you that in a minute, Linda.

I think it was around $4 million to $5 million is what I seem to have here.

That's close. I'm just going to get the exact amount.

Okay. And so in other words, your sales increase, it's even with the discontinuation of Carousel through part of the quarter. So it's very strong. To what do you attribute the strength of the sales performance, just generally people going back to stores?

Yes, Linda, even during the pandemic, we remained relatively strong because we adapted our business model to handle drop shipping and direct shipments to online retailers. As the pandemic started winding down, people wanted to return to shopping in person. We have noticed a significant resurgence in brick-and-mortar stores, which has positively impacted us across various retailers. This resurgence has been beneficial for our other retailers, although it does not influence Amazon since they lack physical stores. The ability to regain strength through consumers returning to physical stores has been crucial. Excluding the Payroll Protection Program for clarity, we are pleased with the forgiveness we received for that. Aside from Carousel and the payroll protection gain, as mentioned earlier, the performance of NoJo Baby & Kids and Sassy Baby has been very strong. It's worth noting that this success occurred even without the contributions from a specific specialty retailer that Sassy typically partners with, which had no sales during the quarter.

Right. When is that retailer going to come back to purchasing, do you think?

It's beginning to recover slightly. When I say slightly, I mean very minimally. This recovery didn't occur in the quarter we just reported; it will be reflected in the current quarter. We've received a few orders, but it's just starting to trickle back in.

So Linda, just to follow up on the question about Carousel sales, we actually never have reported the fiscal '21 sales. But in fiscal '20, the sales were $4.8 million, and it's safe to say that it wasn't far off from that number in 2021, maybe a little higher.

Also, we've never reported the net income. But it's also safe to assume that if it were profitable, we wouldn't have canceled or closed the operation. So you've got to assume it was not profitable.

Seeing no further questions, I'll turn the call back over to Mr. Chestnut for any closing remarks.

Kerry, thank you very much. And again, I'd like to say thanks to all who participated in today's call. We repeat we're very happy with the results of the quarter. And we want to thank everyone for their continued support and interest in the company. We'd like to thank all of our employees, suppliers, and customers, and we'll talk to you again in mid-November when we release our second quarter results. Thank you very much. This concludes our conference for today. Have a good day.

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.