Earnings Call Transcript - CRWS Q2 2021

Operator, Operator

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.

Olivia Elliott, CFO

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.

Randall Chestnut, CEO

Good afternoon.

Olivia Elliott, CFO

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.

Randall Chestnut, CEO

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.

Olivia Elliott, CFO

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.

Randall Chestnut, CEO

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.

Operator, Operator

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