Crown Crafts, Inc. (CRWS) Q4 2012 Earnings Report, Transcript and Summary

Hello, and welcome to Crown Crafts Investor Conference Call. [Operator Instructions] Any reproduction of this call, in whole or in part, is not permitted without prior written authorization of Crown Crafts, Inc. And as a reminder, this conference is being recorded today, June 20. At this time, we would like to turn the call over to 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 Fourth Quarter and Fiscal Year 2012. With me today is Randall Chestnut, the company's President and Chief Executive Officer.

Good afternoon.

A telephone replay of this call will be available one hour after the end of the call through 8 a.m. Central Daylight Time on June 28, 2012. Also, a web replay of this call will be available for 90 days, which can accessed by visiting our website at www.crowncrafts.com. Before we begin, I would like to remind everyone 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.

Olivia, thank you, and good afternoon, again. Before the market opened this morning, we released earnings for our fourth quarter and full year, which ended April 1 of this year. And today, we will address the -- we'll address comments for the quarter and also for the full year. Net sales for the quarter, as we reported this morning, were $24.8 million as opposed to $27.2 million in the prior year or down just over 8%. Net income for the quarter was $1.9 million, which was up from $1.6 million in the previous year or an increase of $300,000 or just over 19%. As well, diluted earnings per share went from $0.16 last year to $0.19 this year or almost a 19% increase. For the full year, sales were $85.3 million as opposed to $90 million in the previous year or a decline of $4.7 million or just over 5%. Net income for the year went from $4.3 million last year to $5 million this year or a 17% increase, and diluted earnings per share went from $0.45 in the previous year to $0.52 in the current year or an increase of 15.5%. The sales decline is attributed to a couple of areas that I'd like to address. The overall decline in sales is primarily due to lower sell-through at retail and, as we reported last quarter, the transitioning away from an unprofitable private label bedding program that we had decided to exit. In addition, it should be noted that fourth quarter and full year FY '11 contained 1 additional week in FY '12 versus FY '13, i.e. -- excuse me, FY '11 versus FY '12, i.e. this past year in this quarter was 13 weeks. In the previous year, the quarter contained 14 weeks. And as the year, it contained in the previous year 53 weeks versus 52 this year. The way our accounting calendar is kept, every 6 to 8 years, we have this phenomena that occurs. FY 2012, the year that just ended, was a very interesting year. As we began the year, cotton was at an all-time high of over $2 a pound. Labor rates in China were spiraling out of control, and we're also the -- the value of the U.S. dollar versus Chinese currency had lost value. As we began the year, it was not looking good. It looked like it was going to be a very, very difficult year. We positioned ourselves and took very quick and swift action to offset some of these increases. We increased prices on most of our product lines, as we have reported to investors on earlier calls. In some product categories, we redesigned product where we felt that price increases would discourage business, such as toddler bedding and change from cotton polyester to polyester microfiber, and we did that very swiftly. We also made tough decisions, like exiting a business that was no longer profitable when the fibers went as high as they did, and that was the private label bedding program I alluded to earlier. And we focused on our balance sheet to manage inventories throughout the year to be sure we didn't create problems within the inventory. Consequently, we finished the year 100% debt free with no debt on the balance sheet whatsoever, and I got to tell you, that feels pretty darn good from where we were many years ago. We also managed, as we made our way through the 4 quarters of the year, to improve the net income and come out with a 17% increase in net income year-over-year. During the course of the year, we also improved our branded sales by 7% in a very weak market, which we're pretty happy with. During the course of the year and early into this year, we also announced a couple of new partnerships that we feel good about. Wendy Bellissimo, which is a designer to the stars, we’re designing and introducing product during this year under the Wendy Bellissimo brand and also to the mass under a brand called Wee Bee [ph] for Wendy Bee, and we're pretty excited about both of them. Early into this year, we also announced a new partnership for us with Carters and to produce and distribute toddler bedding and to expand the dominance we have in the toddler bedding market already and give us a new foray into that particular license. During the course of the year, the company more than doubled the quarterly cash dividend. During the year, we went from $0.03 per share to $0.08 per share, which represents, at the most recent closing price, an 8 point -- excuse me, a 5.8% dividend based on the stock-closing price. In closing, it was an interesting year. We started off with a lot of clouds on the horizon, but we finished the year very strong, and we're very pleased with the year that we had. I'll turn it back over to Olivia to make a few additional remarks, and then we'll come back with any questions that you may have. Thank you.

Thank you, Randall. I'm only going to give financial highlights. For more detailed analysis, please refer to the company's Form 10-K filed with the Securities and Exchange Commission this morning. Net sales decreased 5.2% or $4.7 million from fiscal year 2011 to fiscal year 2012. Sales of bedding, blankets and accessories decreased 3.7% or $2.5 million, while sales of bed, bath and disposable products decreased 9.2% or $2.2 million. The overall decline in sales was primarily due to lower sell-through at retail and the transitioning away from an unprofitable private label bedding program. Gross profit decreased in amount by $548,000, but increased as a percentage of net sales from 22.3% in 2011 to 22.9% in 2010. The decreases in amount followed the decline in sales while the increase as a percentage of net sales was due to the redesign of several product lines to reduce the company's dependency on cotton, the cost of which reached record-setting levels in fiscal year 2012, as well as the discontinuance of an unprofitable private label bedding program and the decline in amortization cost related to the company's acquisition of the baby product's line of Springs Global, which were $204,000 lower in -- than in fiscal year 2011. Marketing and administrative expenses for fiscal year 2012 decreased both in amount and as a percentage of net sales as compared to fiscal year 2011, primarily due to a decline of $582,000 in compensation cost and professional fees associated with corporate governance and shareholder issues that were $419,000 lower in fiscal year 2012 as compared to fiscal year 2011. The company's provision for income taxes on continuing operations decreased to 36.4% during fiscal year 2012 from 38.6% in fiscal year 2011. The decline in the effective tax rate is due to a decrease in the current year in the amount of certain expenses which are not deductible for tax purposes, as well as an increase in state Enterprise Zone Wage Credits. Net income for the fourth quarter of fiscal year 2012 was $1.9 million or $0.19 per diluted share compared to net income of $1.6 million or $0.16 per diluted share in the fourth quarter of fiscal year 2011. For fiscal year 2012, net income was $5 million or $0.52 per diluted share compared to net income of $4.3 million or $0.45 per diluted share for fiscal year 2011. I will now return the call to Randall.

Okay. Olivia, thank you very much. And, Andrew, I'll turn it back to you, and we can open it up now to any questions that anyone may have.

[Operator Instructions] First question comes from Liz Pierce of Roth Capital.

So a couple of things. Can you just expand on 2 topics? The Carters account, how do you see that manifesting itself over the next say 12 to 18 months? Who do you think you're going to be taking market share from? And then also maybe just give us an update on what's happening with the pet category, and then I have a couple other questions.

Okay, I'll answer those 2 first. The -- first of all, the Carters is not really intended -- as you well know, Liz, the toddler category has -- is dominated and still is dominated by licensed properties that are led by movies and cartoon characters, et cetera. This is an attempt to offer the mom that doesn't want to put one of those into the kid's nursery when he's 2 years old and to put more of a decor into it. So we're designing the Carters to complement that, and we think, in some particular cases, it may not be a trade-off but be an add where it's the mother that basically was going to skip the toddler bedding category and go straight from the crib to the twin bedding. They may stop and go into the toddler bedding category and use this as a design implementation to augment the nursery. And as you know, we are the dominant supplier in toddler bedding with a significant market share. So we are doing this to complement that market share. The second question...

So I mean, it sounds like -- I guess the big question is, it really is -- it could be incremental from you. You're not going to be robbing your own -- it's not going to be cannibalizing yourself.

We hope, Liz, that it's not going to be a replacement, but we hope that it's bringing a new consumer in that was going to avoid the category altogether because it was so driven. There hasn't been a good alternative to licensed properties, okay. And when I say licensed properties, you know the ones I'm talking about. They're driven by the movies and the cartoon characters, et cetera, without calling names. But nevertheless, we think it could be a complement to it. Pet business is -- we're still taking it slow and steady. We are selling to the pet specialty stores, and we're having some success. The numbers are not big huge numbers, but we're learning as we go, and we're redesigning product where we have to. But we are on target to have an okay year with it again this year. And we're looking to expand it, but not to the big box at this particular point.

So it's mainly in the specialty channel?

It's 100% in the specialty channels, and it is online. I mean, we sell on amazon.com and a few other people.

Right. Just back though to -- on the toddler bedding. Remind me, when does this -- when should we see this in stores?

It's going to be late this year, early next year. Late 2012, early 2013.

But you're talking your fiscal year -- or you're talking calendar?

I'm talking, really, calendar. It could be third -- it could be fourth calendar quarter this year or first calendar quarter last year, or our third and fourth quarter.

Okay, okay, okay. And then in terms of how we should be thinking about the business, I know there are still, clearly, some macro headwinds out there, whether it's just the consumer really still playing it very closed, the birth rate. I mean, how are you feeling compared to how you felt a year ago about the -- this -- the current fiscal year, like if you could just compare your own as you talk with your customers, et cetera?

I mean, that's an easy one, Liz. A year ago, we were facing the cotton increases in the first quarter of last year. We were fighting those, and we were aggressively pushing price increases through. So I got to tell you, I feel better about this year than I did last year. You are right. There are still some economic issues that we're dealing with. The consumer is not spending as much. Retailers are adjusting inventories on a constant basis. But I got to tell you, last year -- in the first quarter of last year and going into the second and even early into the third, the cloud that was over our head was not just a cloud, it was pouring rain. And we came out with a pretty darn good year. And so I feel better this year than I did last year.

So do you think it's possible that you could get -- the sales this year could be up? Do you think we've kind of leveled off, particularly with some of these drivers that you have, and then perhaps also see a little expansion on margins?

I mean, I don't want to forecast. I really don't, and we've taken a stand not to do that but...

I guess I was trying to change your mind.

I know, but I'll back out of that politely.

The next question comes from Stephen Zelkowicz of Wynnefield Capital.

This is Max Batzer for Stephen Zelkowicz. My question is this: Of the decrease in sales that you had, you attributed it to 2 or 3 causes. But the cause I'm interested in is: How much of that was from the private label line that you discontinued?

Year-over-year, Max, it was in excess of -- the program in total is a significant program. It's well over $3 million in annual revenue. However, year-over-year, the decrease was much smaller than that because we -- as we announced, we started exiting that in third or fourth quarter -- third and fourth quarter. I don't know the exact number. But it would have been something -- it's way less than $3 million, but something well above 0. So it would have been somewhere in between.

But you would say that, that exit is now complete? Or are you still doing it, exiting?

No, it ended in fourth quarter. We finished it. It's gone, and we exited that. And I'm pretty happy to report, too, that we weren't left with any residual inventory issues from that.

The next question comes from Jay Kumar from MidSouth Fund.

Yes. What is that item on the balance sheet, finite-lived intangible assets?

Those are the assets when you -- when we acquired Neat Solutions and Springs and Bibsters from 2007 to 2010. You value your assets, and that's things like customer relationships, trade names, designs, non-competes, and you capitalize those on your balance sheet and amortize them over a period of time.

Okay. It's -- I've never seen the term finite like -- listed that way. Then second question, you went -- got rid of some of the cotton in some of your products and went to synthetics. Will you be going back to cotton? And then also, along that same line, with the price of cotton dropping, I guess, below $1 a pound right now, is that going to have a significant impact on your bottom line? That's my last question. Go ahead and answer those.

Okay, all right. There are 2 separate questions. One, on the products, we switched away from cotton to synthetic fiber. No, we're not going to go back, because cotton is a commodity. It can have some pretty dramatic swings. You are right. Right now, it's way down. And -- but no, we're not going to switch back. And quite candidly, the particular products that we switched, which was, most notably, the toddler bedding, the product looks better with microfiber than it did with polycotton. So we're happy with that, and we're going to stay. The second part of the question you had is cotton. And we don't make the same widget year after year after year. We introduce new widgets. So as we introduce new widgets, the retailers know that cotton is back down, so we're not able to hold onto the prices that were built in at over $2, and now, it's $0.60, $0.70. But we are -- if it's the same product, we pretty much have held on to it. But as we introduce new products, we're having to give up some of that. But still, from the contribution to the company, it should not have a dramatic effect on the profitability.

The next question comes from Nelson Obus of Wynnefield Capital.

You’ve owned Neat Solutions for a number of years here and -- I mean, how would you assess your ability and potential to get into alternate product lines? Certainly, you can imagine, but I'm sure you've run into some impediments or maybe not. Help us out a little bit.

Well, I mean, Nelson, the biggest thing that -- one of our intentions were -- and it still is our intention, we haven't changed that, is to expand our reach into the casual-dining restaurants, because that is a good-sized piece of that business with 1 or 2 accounts now. We're aggressively going after that business, but with the economy, the casual-dining restaurants haven't been coming forth to add cost to the items that they're going to give away. With that said, the overall -- our overall performance and reaction to Neat Solutions has been good. Whenever we bought the company, they had lost a placement at Walmart. We're back in Walmart again with the product. We've introduced new products into the disposable category. We've got an activity mat that we've introduced that we've sold into the store, which is a table topper with an activity that goes with it, and we've sold sippy cup labels for use for kids when they go to preschool. So we've introduced a few new items, and we've had a lot of -- we've had some success with it. So we're pretty happy with the overall performance of that acquisition.

Have you been able to grow the top line all in all?

We have been able to grow the top line overall, yes, even without the penetration into the restaurant trades.

Next question comes from Bobby Melnick of Terrier Partners.

Randall, could you talk about margins, EBIT margins or pretax margins, which, no doubt, are basically the same thing? We've -- over the last several years, you've dropped some low profit or unprofitable businesses, and it seems like we’ve been shifting to higher margin or more proprietary-type products. And I wondered if you could assess where you think the company stands with respect to margins. So specifically -- and believe me, I'm not trying to coerce you into giving a forecast or a forward-looking comment. But let's make a hypothetical. Let's say a couple of scenarios unfold. Let's say that our sales were completely flat for the next year, and then let's take a scenario where our sales were up, I don't know, 3% to 5%. And I'd be curious to know where you think the EBIT margins would stand if we had either of those 2 scenarios. And what are the factors that are contributing to any change in EBIT margin, please?

Okay, Bobby. That answer, I can answer that question pretty easily. Overall, when you take the program that Max questioned, which I said is over $3 million, and it's really more in the $3.5 million range, and you take that out of the equation of our $90 million, it's a pretty significant number. It's 3 to 4 percentage points, and it was with bloody numbers. When you take that out and replace it with numbers that are not that way, it does have a pretty significant swing. In that one account, we've had a drastic swing on the bottom line contribution from that one account. So that's the biggest change, Bobby, that we've had of reengineering product, okay, of taking it out of one and putting it into another. If we held the sales steady, then the margin should be improved. If we improve the sales, we're not going to add proportional overhead to the improved sales, and it should fall through as improved margin. And that's as far as I'm going to commit.

The next question comes from Arnold Brief of Goldsmith & Harris.

When I walk through the store at BRU, it looks to me like they're going more and more committed to private label products. Two questions. One, do you see that same trend? And two, how does that impact you? And then part of that maybe, could you give us what percent of your product is branded? And then part of that would be, most of the products -- as you say, you've got to introduce new designs every year, and most of these designs have a life cycle. It varies obviously with different products and how hot they are and what the competition is doing. But where do you see the NoJo product life cycle? Three questions there.

Okay. Well, let me sort of answer them in reverse, Arnold. The NoJo life cycle can run from 3 to 6 months to 18 to 24 months, and I've got 1 or 2 that's been out there 4 or 5 years. But those are rare. The typical life cycle is going to run from 1 year to 18 months. If it doesn't sell very well, it could exit in 6 months. The second part of your question, private label at BRU, we have been affected over the last number of years by them switching to more private label, particularly in the bib category. It had a tremendous swing where they went to private label and did some direct sourcing. But we've been over that for a number of years now. In the bedding category, they are doing some private label. But in the NoJo-branded category, our sales have been up. Our placements have been up. And if you'd look at the back wall at Babies"R"Us, you would see that we have a pretty hefty percentage of the back-wall placements under NoJo, our -- under some of our other licensed brands, Nautica, et cetera on the back wall at Babies"R"Us. So that has gained in market share. Did that answer your questions? Or was there one more in the middle that I missed, Arnold?

Percent branded.

If you exclude the toddler business, which is almost 100% licensed…

And let me explain why you have to exclude that Arnold, okay? As I talked with Liz earlier, you have to set the toddler business aside because, right now, it is 99% licensed, okay? So -- and that's what the 2-year-old toddler wants, okay? We're trying to change that a little bit with the Carters license and expand that, which we talked about earlier. But if you set that toddler aside, our business is basically -- and set that aside as all licensed, the rest of our business is basically 1/3, 1/3, 1/3. It's 1/3 branded, our own company brands, 1/3 licensed and 1/3 private label.

Next question comes from Ralph Marash of First Manhattan Company.

A couple of financial questions. The backlog is down substantially, actually more than half. And I understand it's lumpy, and I understand it's somewhat seasonable. But I'm just curious, because that's quite a drop.

You've -- Ralph, I start stuttering because backlog used to mean something. It means nothing anymore. I mean, we get the orders when we open up the EDI in the morning. And we get projections, and we work off projections, and we make inventory to projections. But the real live orders come in typically 3 days to a week before we ship them. So it doesn't really mean much of anything.

Okay. So I shouldn't infer that fourth quarter might have stolen some sales from...

No, you should not. No, sir.

Okeydokey. A detail here. The compensation seems to have been down more than a minor dip in revenues for last year.

Yes. That's going to be total compensation, and a good piece of that is going to be in stock-based compensation. I'm trying to get to that number right now.

Okay. Just philosophically, you gave out less stock. Is that what it is?

Well, what happened, if you recall, we did the stock grants to management in June of 2010, and those overlapped with the previous grants that had been done 4 years earlier. So there was a little extra expense last year.

There was less given out last year, yes, Ralph, and that's a good portion of the decline.

Okay. And can you update us on the 2 lawsuits that were mentioned in the 10-K?

Beyond what's in the K, Ralph, we really don't talk about either litigation or pending litigation. I'm sure you can respect that. Beyond what's in the K is really -- and I looked at that wording again just before the phone call, and there's really nothing more than I can embellish upon that on this phone call. I hope you respect that.

The next question comes from Michael Bernstein, a private investor.

A few questions. buybuy BABY is expanding pretty rapidly. Is your business increasing with them?

Very definitely. Our business with them is up considerably, yes.

Okay. Your price increases that you had mentioned should have increased sales. What portion of your sales could you allocate to price increases?

I don't know that number, Michael, but it could -- it's in the -- I mean, it's in the low-single digit range. Because as you go through the year, and cotton's back down, you introduce new product, and it doesn't have the cost increases in it. As I said earlier, we don't make the same widget all year. So it's not a set number, but it was -- I don't know the number, I don't, and it would be very difficult to figure that out.

Can you -- have you been able to hold the increases as cotton has come down in price?

On same styles, yes. We have not -- on the same style, like style, exact same style, we have not cut a price and reduced a price to the retailer. What we have done is as those products cycled out and we put new products in, you cost it based on the current circumstances, and so some of the cotton increases were not costed into it because they weren't needed. The cotton was back down, and the price of the product was back down. But we have not given up on like product.

And you've done a number of small tuck-in acquisitions. If you looked at what you've done in the last 3 years, from the time you bought those companies through this fiscal year, have you increased sales, decreased sales, sales stayed the same?

Well, if you go back one-on-one, okay, I mean, Nelson asked the question about Neat Solutions, and we said we had increased sales. On the Springs acquisition, on the toddler portion, we've increased sales and held our own. On some of the other portion that Springs had, this goes all the way back to 2007, we gave up part of that business because we learned, as we got into it, that it wasn't businesses we wanted to be in, and it wasn’t profitable, et cetera, et cetera. And we bought it for the toddler business, period, and it's been very successful. The Bibsters has been a little more problematic. It's down slightly from where it was whenever we bought it and -- but still, was it a good acquisition? Yes. Is it profitable? Yes. Is it making money? Yes. Would I do it again? Yes.

All right. Given your profitability has been good, but if you look at the last quarter, I mean, your increase in income from operations is basically $15,000, and I'm assuming that, that $15,000 was caused by, at least, price increases. Do you think that they're -- that focusing on top line growth, adding -- you've added new businesses but -- I mean, maybe you've added a top sales executive, but I mean, I'm just not aware of it. Really focusing on adding some human being that might be able to drive sales to put a new perspective on the business should be something that you look at, because top line seems to be the problem that you've had for now a number of years.

For the last time, you knew the management staff, Michael. It's been probably 10 years. We have added new people, okay? We don't publicize that. We don't announce it, but we have added new sales people at Hamco. There's 2 new ones. We've added 1 new international. That one we did publicize. And we've added 2 new ones at CCIP, and all those have been within the last 2 or 3 years.

Okay. I mean, you mentioned -- yes, I've been away from it for 10 years, I agree, but I just haven't seen a senior person that has been announced.

The only one announced was the international.

Yes. But I take it that's just a tiny part of your business.

It's a small part of the business, but it's something we're trying to grow.

And there's a follow-up from Arnold Brief of Goldsmith & Harris.

Two questions. One, there's no real answer, but I'd like -- maybe you could just discuss it anecdotally. Do you see the BRU private label program accelerating, changing in any way? Do you feel there's a limit on how far they can go? I know they got bedding on the back wall now with FAO Schwartz. I mean, is there any feel for how much further this can impact you? Do you feel you're through the worst of it? And the second question...

Let me answer that one first, Arnold. Your questions are so complicated, I forget what you ask. I can't answer that one, Arnold. You know that, okay. I mean, it's -- I mean, they've got another private label program that they're just getting ready to roll out this fall, which is Heidi Klum, which is a brand that they control, and it’s their license, and it's a private label program. But I don't know how much further they can go. I really don't know. And we haven't seen much changes in the bedding area. We've seen it in other parts of the store. But still, we fight for every piece of real estate, and we'll continue to do that.

You see any way that they price promote, put on sale their private label versus...

There's no question -- not just on private label. I mean, you know this, Arnold, and you know it very well, that they've been promoting now for the last couple of years a lot more than they've ever promoted. And I don't see that changing. I mean, they sell a lot on promotions now.

Okay. My second question relates to your inventories in the field. You mentioned the fact that your new product has got lower prices than the products that were priced based on higher-cost cotton. You mentioned retail inventories are being adjusted constantly. You mentioned that, at one point, the sell-through at retail hasn't been great for the industry. All of this could or could not lead to inventory problems in the field. Could you discuss that at all?

Well, as I said earlier, we -- early on in the year, Arnold, we decided, in a difficult year, where prices were escalating, that inventories could get out of control, and we started aggressively managing inventories and holding back. And we're pretty pleased with where our inventory is. I mean, we turn our inventory very aggressively. And for a company that's -- we're a virtual company, but we source it. And we own the inventory when it goes on the boat and it leaves Asia. So you've got 2 to 3 weeks tied up on the boat that's in our inventory, and we turn it pretty aggressively. So I don't consider that inventory has been much of a problem. We have pockets of it, but we move through it as we do.

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

Andrew, thank you very much. And for all the investors on the call today, we appreciate your interest in the company. We appreciate your time and attention. And if you have questions in the meantime, please don't hesitate to call, and we'll be back in a couple of months to speak with you when we report the first quarter of FY '13. Thank you, and have a good day.

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