Crown Crafts, Inc. (CRWS) Q1 2013 Earnings Report, Transcript and Summary

Welcome to Crown Crafts Inc. Investor Conference Call. Your host for today's call is Randall Chestnut, Chairman, President, CEO. [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, August 15. At this time, I 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 first quarter of fiscal year 2013. 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 1 hour after the end of the call through 8 a.m. Central Daylight Time on August 23, 2012. Also, a web replay of this call will be available for 90 days, which can be 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, and thanks for joining us today. After the market closed yesterday afternoon, we released our earnings for the first quarter, which ended July 1, 2012. And I'll make a few brief remarks about the quarter, and Olivia will then add some additional information from the financial side. Net sales for the quarter were flat at $17.5 million. However, net income was up from $530,000 in the same quarter last year to $897,000 in the quarter this year or just under 70% increase. Likewise, diluted earnings per share went from $0.05 to $0.09 or an increase of $0.04 per share, or up 80%. Throughout the quarter, we still continued to experience soft retail sales at the point-of-sale as we still were suffering through some of the economic issues. In addition, as the sell-through were not as good at retailers, retailers began to, and did throughout the quarter, continue to watch their inventory and adjust their inventory as necessary. We also, this year, circled around and we experienced the revenue loss from the private label bedding program, which we've told investors about on numerous occasions that we elected to discontinue last year because the product was very unprofitable, so we experienced that decline year-over-year as well. We were able to advance some orders from Q2 into Q1 where we had inventory which allowed us to match the previous year's sales and have a flat sales year-over-year. On the profitability side, the quick action we took in calendar 2011 helped us significantly, and these we've talked about before. We increased prices where we felt that we could and effectively increased those prices without damaging the sell-through in too large a fashion. We also redesigned product in a big way, particularly in our toddler bedding category to lessen our dependence on cotton, as cotton hit record highs of over $2 per pound. And last, we discontinued the unprofitable private label bedding program, which when cotton went as high as it did became very unprofitable and we made the choice to get out of that business. As we move through time, we've recently announced 2 new initiatives that we'd like to just bring up and mention. One, is a license with Little Me, which is owned by Mamiye Brothers, which is a brand that is for the higher end channel of distribution, particularly department stores. We're creating product which will start shipping next year, which has emphasis on blankets, bath and room decor, and in addition gift items, again, targeted for the department store trade. We also just recently announced an arrangement with a Canadian company called Cambridge Towel to expand our Canadian distribution. We have made a change there and we feel that this one is going to be very positive. We'll be stocking inventory in Canada so we can service the retailers in Canada as we need to on a swift basis. During the quarter, the first quarter, we increased our branded sales by 8.1% over the same first quarter of last year, which we're very pleased with. On the balance sheet side, we finished the quarter with no debt and we have had $3.6 million in cash, which we're very pleased with and we feel very good about that. In the press release from yesterday, we also announced our 11th consecutive quarterly dividend and our second at $0.08 per share, and this represents a 5.8% return based on yesterday's close price. And it's a way to reward the shareholders who've been with us, and we do appreciate it. Olivia, I'll give it back it to make additional comments.

Thank you. 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 for the first quarters of both fiscal year 2013 and 2012 were $17.5 million. The decrease in sales that resulted from the discontinuance of an unprofitable private label bedding program in fiscal year 2012 was offset by shift of sales from the second quarter of fiscal year 2013 into the current quarter. Gross profit increased in amount by $642,000, and as a percentage of net sales went from 21.6% in the first quarter of last year to 25.4% in the current year first quarter. The increase was due to lower production cost resulting from the redesign of several product lines to reduce our dependence on cotton, the cost of which reached record-setting levels in the prior year, as well as the discontinuance of an unprofitable private label bedding program and a decrease of $123,000 in amortization costs related to the company's acquisition of the baby products line of Springs Global in November 2007. Marketing and administrative expenses were slightly higher in the current-year first quarter as compared to prior-year. The provision for income taxes is based upon an estimated annual effective tax rate of 37.2% for fiscal year 2013 compared with 38.2% for fiscal year 2012. The decrease in the estimated annual effective tax rate in the current year is related to an increase in the current year in the amount of certain expenses, which are deductible for tax purposes but not for book purposes, as well as an increase in projective state enterprise zone wage credit. Net income for the first quarter of fiscal year 2013 was $897,000 or $0.09 per diluted share compared to net income of $530,000 or $0.05 per diluted share in the first quarter of fiscal year 2013. I will now return the call to Randall.

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

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

Nice job on the quarter, especially given those headwinds. So let's just start with that. Those headwinds, Randall, that you spoke about I presume -- based on our channel checks, I don't know that, that much has changed, but just curious to your opinion.

Liz, they're pretty much across all channels. I mean, I don't -- I can't say that any one is tougher than the others. Some may have been in a better sell-through at retail, but still, they had inventory adjustment issues where they had to adjust the inventories, where they carried too much over from previous quarters, so it was pretty tough all the way through. And it's not an easy -- it's not easy right now but the headwinds that we have, the birth rate's down, the economy and all of the other issues that go with it, but still, we were able to push through and equal our sales from the previous quarter. So we're pretty happy about that.

Right. So what does this mean? Can you quantify how much you pushed in -- out of Q2 into Q1, and how we should be thinking about Q2 revenues?

And again, and you know this, we don't forecast and I don't intend to forecast. But I will tell you that what we pulled up was only about equal to -- or actually a little less than the Koala solids that went away. Does that help you any?

Well, yes, I think you said on the last call that on an annualized basis that was about $3.5 million.

That's -- you've got a pretty good memory.

And I'm not sure if there's any seasonality to how that would have shift, whether we should think about that kind of radically for each quarter.

A slight bit, not a whole lot, Liz. It's very slight from quarter-to-quarter. And as you know, you've been following us, first quarter is always our weakest quarter, typically has been from a sales standpoint. And but the amount we pull forward equaled to just about the amount -- or a little less than the amount for the Koala solids -- excuse me, the solids program.

Got it. Okay. So in terms of the -- 2 questions on some of these new announcements that you talked about. On the Little Me license, I don't believe that you were doing anything with department stores before, but I wanted to verify, so that becomes a new channel for you?

We are not -- and don't let me say we're not doing anything. We're doing very, very little. We haven't really focused on it, Liz, okay? Because we didn't have a brand that was designed for that channel of distribution, and that's what we were looking for. And that's what Little Me gives us, is a brand that's intended to go into that channel of distribution. But you can pretty much say we had 0.

Okay. And do you have stores lined up?

Well, no. We've got to get product first, and we're designing and developing product now. And because the Little Me apparel products are in the department store, the entree is there because the brand's there.

Right, I've seen the brand.

Right.

Okay. So product first, and you think that maybe by the first of -- when you said early next year, do you mean calendar year or fiscal year?

We mean probably early calendar year, we'll be hopefully showing product and start the shipping. We could be shipping in the fourth quarter, which is our fourth quarter, first calendar quarter. But more than likely, it'll be first quarter of next year.

So could ship in Q4, which would be your March-ending quarter?

That would be correct, yes. That would be the earliest.

Okay. And then on the Cambridge, what does this mean in terms of your inventory, I mean, commitments? If you're going to be carrying it, that means you're going to have more -- that you have to, in terms of working capital?

It's not going to be appreciable. And because, as you know, we turn our inventory on a fairly swift basis and we intend to do Canada the same way, so we're going to monitor that inventory as well. We will be bringing inventory in, directly into Canada from Asia, so we can avoid bringing it through the U.S. and going through that headache. So we'll be bringing goods in directly from Asia into the Canadian warehouse. And we're pretty excited about that. But it's not going to be an appreciable inventory level, at least not to begin with.

Okay. And then a similar kind of question, are -- do you already have retailers lined up? Is this -- so this is like a distributor, right?

It is like a distributor, Liz. They're going to be doing the sales, marketing and distribution. But we own the inventory and we'll get the top line revenue. We had an arrangement in Canada for a number of years where we didn't get the top line revenue, it was more of a design fee, a royalty-based. And this, when we get the top line revenue, and -- which is good. We do have retailers lined up. We are shipping already to 2 retailers in Canada and have been for quite some time, but this is to get more than just those 2. But we've been shipping a fair amount to 2 retailers now for a couple of years. But we've been doing that out of our L.A., our Los Angeles warehouse, and that began -- the retailers want the inventory closer to their store and to their DCs.

Okay. And then on the Wendy Bellissimo, is -- has that shipped? I hadn't seen it yet, but I wasn't sure if it hadn't made its way to the West Coast?

It hasn't shipped. It will start shipping in the third quarter, our December-ending quarter. It has been placed. And I got to tell you, we're pretty excited about that one. It looks good. It looks very good.

Okay. And on the -- and then the Carters [indiscernible] Carters?

We have made some placements on that, too. But that, too, has not started shipping.

Okay. And should that ship in Q3?

We hope that will be Q3 but probably because of -- it could be Q4.

Okay. And then just 1 last question on Walmart and some of the Neat Solutions. I mean, I've -- are they changing their kind of -- I don't know, I've seen the in-stock hasn't been as consistent, and I was just wondering if there was something going on?

They're dropping 1 item. They're dropping an item that was an activity mat. It was a mat with little stick-ons that the child can play with while they're dining. That one has not done so well. But overall, they've added another SKU in. So they're dropping 1 SKU, they're adding another SKU in the traditional tabletopper and it's another licensed product. So, no, we're not losing anything there from an overall standpoint.

The next question comes from Jay Kumar of MidSouth.

By cotton dropping up so much, are you guys thinking about getting back into cotton? Or how would that affect the business?

You're talking about going back into more cotton?

Yes, because it's dropped from $2 a pound to $0.70 right now.

No, no, no, I understand that. But Jay, really, the one we converted the majority on was the toddler beds. And no, we don't plan to go back to cotton. We're on the micro -- the 100% polyester micro fiber and we intend to stay with that. It actually prints better than cotton and it has a very good hand, and it doesn't have quite the unpredictability of prices that cotton has. So no, we don't plan to go back into more cotton at this point.

Okay. Finally, do you -- does your business get affected by the cotton price? I mean, I know you've reduced quite a bit, but is there any part of the business still -- which gets hit by cotton prices?

Yes. I mean, we still use a lot of cotton in the bedding category and the sheets. We still use an appreciable amount of cotton. So if cotton goes up or goes down, it does affect us. We don't buy cotton directly, I mean, we buy finished product out of Asia, so it's from the grey goods. So it has a little bit of a lag time, it's not an immediate situation.

So probably in another quarter or 2 because the price is coming down, your earnings may be better off because prices may come down, right?

I'm not going to predict that. Let's hope it stays down, okay?

There are no more questions in the queue. I would like to turn the conference back over to Randall Chestnut for any closing remarks.

Drew, thank you very much. We appreciate everyone's time and attention, and we hope to speak with you -- or will speak with you again at the end of our second quarter, which will be sometime in November. And in the meantime, if you have questions, feel free to call either myself or Olivia. In the meantime, have a good day, thank you very much. Goodbye.

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