Crown Crafts, Inc. (CRWS) Q2 2013 Earnings Report, Transcript and Summary

Welcome to Crown Crafts, Inc., Second Quarter Investor Conference Call. Your host for today's call is Randall Chestnut, Chairman, President and CEO. [Operator Instructions] Any reproduction of this call, in whole or in part, is not permitted without prior written authorization of Crown Crafts, Inc. As a reminder, this conference is being recorded today, November 14. At this time, I would like to turn the call over to Olivia Elliott, Vice President and CFO, who will begin with the call. Please go ahead, ma'am.

Thank you. Welcome to the Crown Crafts investor conference call for the second 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 Standard Time on November 26, 2012. 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 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 we'd like to go through the numbers and talk a little about the quarter, which we reported yesterday afternoon, which is our second quarter which ended September 30, 2012. Our net sales for the quarter were $17.3 million, as opposed to $21.3 million in the same quarter of the previous year, or a decline of 18.9%. Net income for the quarter was $755,000, as opposed to $1,067,000 in the same quarter the previous year, or a decline of 29.2%. Likewise, diluted earnings per share were $0.08 versus $0.11 are down $0.03 or 27.3%. For year-to-date numbers: We were $34.7 million as opposed to $38.8 million, or down $4.1 million, which all occurred in the quarter, or 10.5%. Net income for the year-to-date was $1,652,000, as opposed to $1,597,000, or an increase of $55,000 or 3.4%. And likewise, diluted earnings per share went from $0.16 last year for the 6 months to $0.17 this year, or an increase of 6.3%. The second quarter of FY '13 was impacted by several factors, including the following. The discontinuation of an unprofitable private label bedding program, which we've talked about on these calls now for almost a year. The impact in Q2, which is the largest shipping quarter for the program, and FY '12 was just over $1 million in revenue. In addition, as we reported on the first quarter call, we did shift some goods from FY '13 Q2 into Q1, which had a negative impact on the current quarter. The remainder of the shortfall is attributable to the soft economy and the sell-through at retailers, which has contributed to the soft economy, and the lower birth rate. Also this year, we saw the retailers being very vigilant in controlling their inventories, and they were tenacious in pursuing that. Our gross profit percentage improved in the quarter from 22.2% to 22.6% in the current year and it improved from 22% to 24% in the 6 months year-to-date. The improvement can be attributed to 4 factors. Again, I go back to the discontinuation of the unprofitable private label bedding program. As we circle around year-over-year, we see the benefits of discontinuing that program. Second, the improvement of prices from our suppliers as raw materials continued to -- oh, did decrease in the current year versus the previous year. We also continued to see success of products which we reengineered when the raw material prices were at an all-time high, and we saw the benefit of that continue into the quarter. Also, as we had reported before, we increased prices where we felt that we could without having a big detrimental effect on the sales volume. Branded sales for the quarter improved 6.8% year-over-year, with NoJo leading the way and our secondary brand Neat Solutions also making new head roads. So that increased 6.8% year-over-year, and also it's increased 13.5% year-to-date for the 6 months. Turning to the balance sheet. We finished the quarter with no debt and $6.3 million in cash on hand, which we're very pleased with. Moving on to another area, dividends. Yesterday, we announced our 12th consecutive quarterly dividend and our third at $0.08 per year. Now I'll get to the record date and payable date in a moment. This represents a 5.3% annualized yield based on yesterday's closing price. One item we announced yesterday, which was a new addition that we had never done before, was a onetime special cash dividend of $0.50 per share. Both the quarterly dividend and the special dividend will be paid on December 27 of this year to shareholders of record as of December 14 of this year and will be funded from available cash balances. This action by the board to pay a special dividend is further evidence of the -- its continued confidence in both the health of the business and the strength of our cash flow. It is intended to reward our shareholders while retaining the financial flexibility to take advantage of opportunities as they arise. In closing, let me sum up a few things, and I'll give it back to Olivia to make some more comments. Management remains optimistic about our future, as well as the board. We have discontinued the private label program which represents more than $3 million in sales, and even though we're taking the hit for the loss of the revenue, we are seeing the benefits from the profit because the program was so unprofitable. As most of you know, who have followed us for a long time, we maintain tight cost controls at all times. And that is to our benefit at this particular point, is to maintain very tight cost controls. Next and very importantly, we're debt free. We have no debt. And even with the special dividend, the $0.50, plus the $0.08 that we're going to pay, the $0.58, we should still be debt free at the end of the quarter. Yes, the declining birth rate and the unstable economy are concerns, but frankly, we think we're well positioned for the future. All of our products and designs were received very well at an ABC trade show, All Babies and Children show, held in October in Louisville, Kentucky. One of the new lines that we previewed or showed at the show was a brand called Wendy Bellissimo and was received very, very well. And we are beginning to ship that in Q3, the quarter we're currently in. As I wrap up, before I give it to Olivia, I'd like to say thanks to all of our customers, employees, suppliers and our shareholders for their continued interest and support in the company. Olivia?

Thank you, Randall. 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 current year second quarter were $17.3 million. This is $4 million or 18.9% lower than in the second quarter of fiscal 2012. Fiscal 2013 year-to-date sales of $34.7 million were $4.1 million or 10.5% lower than fiscal 2012 year-to-date sales. The decrease is primarily due to the discontinuance late last year of an unprofitable private label bedding program and the shift of sales from the current quarter into the first quarter. Also, we continue to experience challenges associated with the difficult macroeconomic conditions. Gross profit decreased in amount by $827,000 but increased as a percentage of net sales from 22.2% in the second quarter of fiscal 2012 to 22.6% in the second quarter of fiscal 2013. For the year, gross margin has improved from 22% in the prior year to 24% in the current year. The margin improvement can be attributed to lower production cost resulting from the redesign of several product lines to reduce the company's dependence on cotton, the cost of which reached record-setting levels in the prior year, and the discontinuance of the unprofitable private label bedding program previously discussed. Also, amortization costs related to the acquisition of the baby products line of Springs Global in November 2007 were $122,000 lower in the current year second quarter and $244,000 lower year-to-date. Marketing and administrative expenses were $180,000 lower in the current year second quarter and $50,000 lower for the first 6 months of the current year, as compared to the prior year. The provision for income taxes is based upon an estimated annual effective tax rate of 35.8% for fiscal 2013 compared with 38% for fiscal 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 projected state Enterprise Zone wage credit. Net income for the second quarter of fiscal 2013 was $755,000 or $0.08 per diluted share compared to net income of $1.1 million or $0.11 per diluted share in the second quarter of fiscal 2012. Net income for the first 6 months of fiscal 2013 was $1.7 million or $0.17 per diluted share compared to net income of $1.6 million or $0.16 per diluted share for the first 6 months of fiscal 2012. I will now return the call to Randall.

Olivia, thank you very much. And Denise, I'll call you back, and we can open up for any questions that anyone on the line may have.

Certainly. [Operator Instructions] Your first question will come from James Fronda of Sidoti & Company.

I guess, could you just give us any insight into how sales are holding up, regardless of the new product introduction in the third quarter?

Again, James, we really don't -- as you know from following us, we don't make any forecast in anticipation. The closest I'll come to it is what I said, that we remain optimistic about the future.

Okay. And are you guys seeing any, I guess, inflationary cost pressure going forward?

You're talking about from the supply side?

Right.

We're seeing some, yes. I mean, we're seeing a little, and we're reeling that back and fighting that back as much as we can. And in some cases, we're having to grant a few price increases, but so far, they've not been severe.

Our next question will come from Nelson Obus of Wynnefield.

Look, I think this is a very important question, although it's a bit convoluted. First of all, I think there's extraordinary disarray in the infant and juvenile arena. And I think the short-term macros are nothing short of ugly. I also feel that, in light of that -- I'd just like you to counter this. In light of that, I think the special dividend is a very large error on the part of management and the board, and I'd just like you to refute this. I think one of the issues here has been that the company has not really ever achieved a critical mass. I do believe you've never had a quarter, in recent memory, where revenues have been so low. And I know there are all sorts of extenuating circumstances, but the trajectory of earning -- revenues has been down, down, down. With the dividend and now this extraordinary dividend, I think you kind of reinforced the idea that this is a dividend stock and not a dynamic stock. And as you know, I'm your largest shareholder and I've been an activist all along. And one of my issues has been that the company should either sell itself or it should get a little more aggressive in making acquisitions to create that. And what really bothers me here is having gone to the infant and juvenile show, there was an element of desperation I picked up on the floor that would allow you to do some serious bottom fishing with some of these entrepreneurial efforts like Bellissimo and create a whole growth leg for the company instead of the very slow incremental drop-in acquisitions that have characterized the company and frankly kept the earnings flat or growing during the period. So it's sort of a philosophic question. But frankly, the last thing I wanted to see was a special dividend. I think it constraints your ability to execute the strategy, and it really kind of creates status quo for the -- for everybody to see this as a cash cow rather than a dynamic company. And I know you don't like leverage, so that's the bear case. I'd like you to go ahead and refute it.

Okay. I mean, Nelson, I -- it is a broad-ranging question or comment that you made, and I will try my best to answer all of them. First of all, as we said, the special dividend, the $0.50 per share that we're paying, is done from cash, it's not from debt. And so when we pay the dividend, the $0.50, plus the $0.08, at the end of December, we should still have some cash left on the balance sheet at the end of the quarter. And we will turn around and we'll start building cash again. And you've done the mathematics with me before: We generate on a free cash flow basis somewhere north of 6 to -- somewhere in the $6 million range per year. So we don't think and the board doesn't think that this hampers our ability. Plus, on the side, we have $19 million as of today of borrowing availability at 3.25% interest. And we think that is very attractive rates, to do acquisitions at 3.25%. And we've got 19% -- $19 million. I'll remind you, when we did the Springs acquisition in '07, we actually didn't use all of our revolver to do it. We did a $5 million fixed loan piece for 2 years, spread over 24 months, amortization. So if we did an acquisition, there's ways do it with the availability under the revolver and also some fixed coverage outside of the revolver. So $19 million is not just a limit. And the last point, and I think I'll cover all of this, is there is a lot of small businesses that are available to look at. And we are looking on a constant basis. We've had a few recently that we're very, very close to reeling in, and for various reasons, one of them being safety issues, we backed out. And one of them, we've seen recently that I'm very happy we did back out because they had a real problem with the CPSC and they've now closed their doors. So we're very careful from 2 standpoints, the safety that CPSC has put on those products, on our products and the industry. We don't want to buy into a troubled situation, and also we don't want to overpay. But we are looking and we'll continue to look. And we appreciate your remarks.

Let me just make one response to that because I think this is important. What you say makes a lot of sense from 5,000 feet. The problem, Randall, is that -- we've known each other a long time. And you've been a very capable steward of this company and probably the best operator that I know of in the I and J [ph] space, but you don't like that, and that's you. You don't like leverage. I don't know whether the leopard, i.e., you, can change its spots, but I will tell you, based on your prior record, leverage is toxic, it's an anathema. So I really -- you can talk all about what you want and what you have there in terms of availability, but I think that's something, based on your prior record, that you would feel very uncomfortable with. So I really look at it, like you took $6 million of buying power and turned it into 1. Now you tell me you can change it yourself at this era in your history knowing that you admit that this is a great opportunity to go bottom fishing. I'd feel a lot better. So I'd like to ask you that. Secondly, let's make it -- let me just make one more comment. I really think this is an appropriate quarter, in light of what I said, to show some guidance for the rest of the year just so we get some sense of how that cash might build, but that's just an aside. I'm more concerned about your willingness to take on debt for opportunistic reasons in this environment.

Okay. Nelson, let me address that and I can address it by example. When we took this thing over in 2001, we had $48 million of debt, which was way too much debt. In the first day of operations, we had $900,000 of availability left on our revolver. I mean, we could sneeze and go out of business and not make payroll. So you learn from those tough times, but in 2007, I went into debt for $11 million to buy Springs Global, and I borrowed the $11 million but straight off the -- out of our revolving line of credit. In addition, when we bought Neat Solutions, we borrowed $4.4 million, and we had debt at the time and we added more debt to the balance sheet to do that. And then a year later when we bought Bibsters, we did the same thing. We added $2 million of debt. So there's some truth in what you say but not totally. I mean, we will take on risk, I promise you.

All right. But [indiscernible] is -- in 2007, the animal spirits were pretty high up the scale. So I just hope that you can be a bottom fisher and leverage the company a little bit in this incredibly opportune time. I mean, I've been following this industry for 20 years, and I've never seen an uglier environment and what I would call a buyer's market. So I urge you to go a little bit against your conservative instincts and consider really taking down that line if something attractive in the $5 million to $10 million range comes about. Because I believe they're out there. Thanks.

Thank you, Nelson. I appreciate your comment.

And that will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Chestnut for his closing remarks.

Okay. I mean, we'll give it one second, Denise, and see if anybody else comes on. But if they don't, then we'll close it.

Very good.

Do you want to give instructions one last time?

Sure. [Operator Instructions]

Okay. I don't see anyone else coming on. So apparently, we -- that answers the questions from our shareholders today. Nelson, I know you're off, but I appreciate your comments, and I genuinely do. And we do listen to you even though sometimes you don't think we do. And we have been friends for a long time. But with that, we'll close and say thank you to all of our shareholders. And thank you for your interest in the company. Thank you for your time and participation today. And in the meantime, if you have questions, don't hesitate to call either Olivia or myself. Thank you, and have a good day.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your line.