Crown Crafts, Inc. (CRWS) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, everyone and welcome to the Crown Crafts, Inc. Third Quarter Investor Conference Call. Your host for today's call is Randall Chestnut, Chairman and 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. As a reminder, today's conference call is being recorded, today, February 13, 2013. This time, I'd like to turn the conference call over to Olivia Elliott, Vice President and Chief Financial Officer, who will begin the call. Please go ahead.

Thank you, Jamie. Welcome to the Crown Crafts Investor Call for the Third 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 February 21, 2013. 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 welcome to the Crown Crafts' Third Quarter Investor Conference Call. Today, we will review numbers which we released before the market opened earlier today for our third quarter and our fiscal 2013 year, which ended December 30, 2012. And I'll touch on some of the numbers and have a few comments. Olivia will come back and embellish that, and then we'll open it up to any questions that anyone on the call may have. Net sales for the quarter in 2013, FY 2013, were $20,070,000 versus $21,649,000 in the previous year or a decline of $1,579,000 or 7.3%. Net income for the same 3 months was $1,604,000 versus $1,548,000 in the previous year or an increase of $56,000 or 3.6%. Diluted earnings per share were steady year-over-year at $0.16. Turning to the year-to-date 9 months. Our net sales were $54,805,000 as opposed to $60,467,000 or an increase of $5.6 million or a 9.4% decline. Net income for the same 9-months period were $3,256,000 versus $3,145,000 or an increase of $111,000 or 3.5%. Diluted earnings per share for the 9 months did increase from $0.32 last year to $0.33 this year. The third quarter sales were impacted for several reasons. One, and we reported this now for the last several quarters, the discontinuation of an unprofitable private label bedding program, it impacted the third quarter and the year-to-date. And in both of the periods, the third quarter and the 9 months, accounted for slightly less than half of the sales decline. In addition, during the quarter and the year-to-date, retailers remain vigilant in controlling their inventories and sell-through at retail has continued to be impacted negatively by the soft economy and the lower birth rates. The gross profit did increase, improved from 24.2% in the prior year to 26.3% in the current year, and improved from 22.8% to 24.9% for the 9-month period. As we reported in many quarters passed, improvement can be attributed to 4 factors. One, the discontinuation of the private label bedding program which was at a loss whenever we were shipping it last year. Improved prices from our suppliers, as we're circling around against last year for raw material prices have declined. In addition, the continued success of our products that we had reengineered when raw material prices previously escalated so high, and in particular, the toddler bedding, which we converted most of the product from cotton, poly cotton to a polyester fiber. And in addition, we've reported in the past, we increased prices before we felt that we could do that and without affecting the sale in a big way. Turning to the balance sheet. The only comment I'll make, and Olivia will make a few more, we finished the quarter with no debt and a small cash balance even after we had paid the one-time special dividend of $0.50 in late December and $0.08 for the quarterly dividend in late December. Now turning to the dividends. Today in the press release, we also announced our 13th consecutive quarterly dividend and our fourth at $0.08 per share. At $0.08 per share at yesterday's close price, this represents 6% annualized rate, not a bad return. The quarterly dividend will be paid on April 5 to shareholders of record as of March 15 and will be funded from available cash balances. Olivia, I'll turn it over to you to go in a little more detail, then I'll be back. Thank you.

I'm only going to give financial highlights. For a more detailed analysis, please refer to the company's Form 10-Q filed with the Securities and Exchange Commission this morning. Net sales for the current year third quarter were $20.1 million, which is $1.6 million or 7.3% lower than in the third quarter of fiscal 2012. Fiscal 2013 year-to-date sales of $54.8 million were $5.7 million or 9.4% lower than prior year sales. Nearly half of the sales decrease was due to the transitioning away in the prior year from an unprofitable private label bedding program. Sales were also affected by the continued sluggishness in the economy, which has prompted many of the company's retail customers to maintain a tight control over their inventory. Gross profit increased from 24.2% of net sales in the third quarter of fiscal 2012 to 26.3% in the third quarter of fiscal 2013. For the year, gross margin has improved from 22.8% in the prior year to 24.9% 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. Marketing and administrative expenses for the 3- and 9-month periods of the current year remain stable compared with the same periods of the prior year. The provision for income taxes is based upon an estimated annual effective tax rate of 36.2% for fiscal 2013 compared with 38.1% 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 third quarter of fiscal 2013 was $1.6 million or $0.16 per diluted share compared to net income of $1.5 million or $0.16 per diluted share in the third quarter of fiscal 2012. Net income for the first 9 months of fiscal 2013 was $3.3 million or $0.33 per diluted share compared to net income of $3.1 million or $0.32 per diluted share for the first 9 months of fiscal 2012. I will now return the call to Randall.

Olivia, thank you very much. And my closing remarks. Management of this company remains optimistic about our future. We've now discontinued the private label bedding program, which represented an excess of $3 million, but was very unprofitable, and we transitioned away from that. We maintain tight controls over our costs at all times. We're debt-free and for the foreseeable future, we don't think that should be a problem. Yes, the declining birth rate and the unstable economy are concerns, but we're well positioned for the future. We'd like to thank all of our customers, employees, suppliers and shareholders for their continued interest and support in our company. Okay, Jamie, I'll call you back up. And you can open it up to any questions that anyone on the line may have.

[Operator Instructions] And our first question comes from James Fronda from Sidoti & Co. James Fronda - Sidoti & Company, LLC: Could you just tell us how much of the revenue decline is weighted to the unprofitable bedding segment versus just general macro-economy that's not doing you guys any good?

In which period? The quarter or the year? James Fronda - Sidoti & Company, LLC: Yes, the quarter. Sorry.

The quarter, it was under -- just under $1 million. James Fronda - Sidoti & Company, LLC: Okay. And are there any new products that you guys are allowed to talk about? Or any type of segment you may want to pursue through an acquisition?

No. I mean, on acquisitions, there's nothing that I want to talk about at this point. As we've said in time past, we're looking at acquisitions pretty much on a continual basis. On new product, we introduced a new line that's actually in the stores now, and we're continuing to see successes with that. It is a licensed brand under the Wendy Bellissimo brand. And Wendy is a designer to the stars. And I've got to tell you, we're pretty excited about that one. And so we started shipping it in late December, and it's actually in the stores now.

[Operator Instructions] And our next question comes from Matthew Wallace [ph].

[indiscernible] current shareholder. I didn't have an opportunity to sit down and talk with you, so I hope you feel comfortable with me asking a couple of questions.

Sure. We missed the -- you broke up, Matthew, at the first part. We missed the first part.

Okay. I just wanted to say that I'm a current shareholder. I know there are 2 other publicly traded companies that seem similar in their customs to Crown Crafts. I'm thinking about Kid Brands and Summer Infant specifically. And I wanted to know, for us people who aren't in the industry, how much of Crown Crafts' revenue overlaps or competes directly with each of those competitors?

Okay. Matthew, it's a good question. And I'll take the easy one first. Summer Infant, I don't know. They do compete with us and on a small basis. Their main product lines do not compete with us, and we don't compete with them. They do have some soft goods and I can't even venture a guess. I think the overlap is relatively small compared to their overall total. On the other side of the coin, Kid Brand, they own 2 companies called and Kids Line and CoCaLo. And of those do compete with us, and they compete with our bedding division. And quite candidly, if you add the 2 of them together, they are larger than we are in the bedding sector of the business. So we do compete with them.

And my next question is, in your opinion compared to 6 months ago, has this become more competitive or stayed the same?

I mean, it's -- over the last 6 months, I don't think it's become a lot more competitive. I think it's pretty much stayed the same. I mean, it's been competitive for quite some time.

And I just have a couple more questions if you don't mind.

Sure. Go ahead.

Some of the publicly traded companies in your industry carry a lot of debt to help them generate revenue to services, then would you expect them to become even more aggressive than they are at the moment and to try and take more market share from us?

I can't answer that question. You have to ask the other people. We learned a long time ago that we just keep our head down and keep pushing and trying to do what we do best. And I really can't answer what their intentions would be.

Okay, one other thing here now. Randall, as the Chairman, you have to think of the company from a board perspective not as a manager perspective. And wearing that hat, a large shareholder who has been instrumental in the board's makeup has been selling stock, a lot of stock. That's all in the public filings. Should the shareholders' representatives choose not to stand up for reelection, what are the 2 or 3 critical things that you think about in replacing these directors?

Well, I mean that's -- the nominating and corporate governance committee would have to take that under advisement, and I'm not a member of those -- that committee at all. So I'm really not that poised to answer that question. And I don't know what -- I can't answer that question.

Okay. And this investor who has been selling his stock has been buying a major position in one of your competitors, Summer Infant, I don't know if you're aware of that or not.

Oh, yes, we're aware of that.

Okay. And the last thing is, this company generates about $8 million to $9 million in free cash flow over the last few years?

No, no. Not quite that much. We have to pay taxes. So by the time we pay the taxes, you can call it 6-ish or $6 million to $7 million. That's about it after we pay taxes.

Okay. And if you assume that paying the $0.08 a quarter, that comes out to about $3 million a year. What's our intentions to do with extra money that's left over?

Well, I mean, our intention is, Matthew, to use that money to where we think that we can find the right fit to grow this company to do acquisitions, that would be number one. And number two, we do or we have taken a pretty aggressive stand in giving money back to our shareholders through the quarterly dividend and the one-time special dividend. But I underline -- emphasize that was onetime. So we don't plan to just hoard cash, I promise you. We tried to -- we plan to employ it, to look for acquisitions and ways to grow the business and also reward shareholders.

[Operator Instructions] And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Okay, Jamie. Thank you very much. And again, I'd like to thank all the investors on the call for your interest and your following the company. And if you have questions and would like to call us, feel free to call either Olivia, myself at anytime in the future. Again, thank you. And we'll talk to you again in a few months when we report our fourth quarter and full year FY '13. Thank you, and have a good day. Goodbye.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.