Crown Crafts, Inc. (CRWS) Q2 2014 Earnings Report, Transcript and Summary

Welcome to the Crown Crafts, Inc. 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. And as a reminder, this conference is being recorded today, November 6, 2013. At this time, I would like to turn the call over to Olivia Elliott, Vice President and Chief Financial Officer, who will begin the call. Please go ahead.

Thank you, Andrew. Welcome to the Crown Crafts Investor Conference Call for the Second Quarter of Fiscal Year 2014. 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 8:00 a.m. Central Time on November 13, 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.

Again, good afternoon to everyone. Earlier today, before the market opened, we released our earnings for our second quarter which ended September 29, 2013. Let me give you a few of the highlights of the quarter. Olivia will add some to it. And as Andrew said, we'll open it up at the end to anyone who has questions. Net sales for the quarter were $20.1 million, as opposed to $17.3 million in the previous -- same quarter of the previous year, or an increase of $2.8 million or 16%. Net income increased from $755,000 last year same quarter to $1,142,000 this year, or a 51% increase. Likewise, diluted earnings per share increased from $0.08 to $0.12 for the quarter. On a year-to-date basis -- and to remind everyone, our fiscal year ends in March, so our year-to-date is actually 6 months first and second quarter. Our net sales were $36.7 million, as opposed to $34.7 million in the previous year, or an increase of 5.6%. Net income increased from $1,652,000 year-to-date last year to $1,964,000 in the same 6 months period of this year, or an increase of 18.9%. Diluted earnings per share went from $0.17 to $0.20. The second quarter of 2014, the quarter we just ended, was a good quarter for the company. We began shipping 3 new programs during the quarter that we had alluded to in our last quarter conference call and press release. These 3 new programs reflect the continued effort by the company to diversify our portfolio and enhance our product mix. Sales at retail have continued to be challenging, but by shipping these new programs had allowed us to overcome this downward pressure at retail sales. Our gross profit for the quarter improved to -- from 22.6% in the prior year to 28.6% in the current year. Year-to-date gross profit improved as well, from 24% in the prior year to 27.9% in the current 6 months period. The improvement in gross profit is attributable to an increased level of sales in the current year compared to prior year and a more favorable customer and product mix in the current year as compared to the previous year as well. Turning to the balance sheet. We finished the quarter with no debt, which we continue to maintain, and we have a cash balance of $1.8 million. Dividends. Today, we announced as well the declaration of another quarterly dividend of $0.08 per share, payable on January 3, 2014, to shareholders of record as of the close of business on December 13, 2013. This $0.08 per share quarterly dividend annualized equates to 4.25% based on yesterday's stock closing price. Turning to some current activity. Recently, we attended the eighth ABC Trade Show in Las Vegas, which is the largest trade show that we attend on an annual basis. At this show, we rolled out 2 new programs, in addition to the 3 we alluded to that we shipped in the quarter. First, we introduced a modern contemporary product offering utilizing the Jonathan Adler license that we had announced earlier, and this was well received. We also showed a new product from U.K.-based Gro Company, which is a distributor agreement that we announced earlier. It includes the wearable Grobags, swaddle products, an infant thermometer and winter darkening shades. And as well, we were very pleased with the reception from the Gro Company product. In addition to these general merchandise lines, we showed several other new and innovative products. These programs and products are part of the ongoing initiative to expand our offering of new products to today's young families. The show was very successful. With that, I'll turn it over to Olivia, and she'll make additional comments. Thank you.

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 second quarter of the current year increased $2.8 million or 16% to $20.1 million from $17.3 million for the second quarter of the previous year. Year-to-date, net sales for fiscal 2014 were up $1.9 million or 5.6% to $36.7 million compared to fiscal 2013 net sales of $34.7 million. These sales increases were largely driven by 3 new programs that were introduced during the second quarter of the current year. Gross profit increased in amount by $1.8 million and, as a percentage of net sales, from 22.6% to 28.6% for the second quarter of fiscal year 2014 compared with the same period of fiscal year 2013. Year-to-date, fiscal year 2014 gross profit increased in amount by $1.9 million and, as a percentage of net sales, from 24% to 27.9%, compared with the same period of fiscal year 2013. Gross margin increased in amount primarily as a result of the increased level of sales and the gross margin percentage increase as a result of a more favorable customer and product mix in the current year compared with the prior year. The higher level of sales in the current year also provided better coverage of the fixed portion of the company's cost of sales than in the prior year. Marketing and administrative expenses for both the quarter and year-to-date increased in amount and as a percentage of net sales, as compared with the same period of fiscal year 2013, primarily due to increases in the company's performance-based compensation costs and higher legal fees which were primarily associated with the company's defense of 2 lawsuits. The company's provision for income taxes is based upon an estimated annual effective tax rate of 37.4% for fiscal year 2014 compared with 35.8% for fiscal year 2013. The increase in the estimated annual effective tax rate in the current year is related to a decrease in the current year in the amount of certain costs which are deductible for tax purposes but not for book purposes, as well as a decrease in projected state Enterprise Zones Wage Credit. Net income for the second quarter of fiscal 2014 was $1.1 million or $0.12 per diluted share compared to net income of $755,000 or $0.08 per diluted share in the second quarter of 2013. Net income for the first 6 months of fiscal 2014 was $2 million or $0.20 per diluted share compared to net income of $1.7 million or $0.17 per diluted share for the first 6 months of fiscal 2013. I will now return the call to Randall.

Olivia, thank you very much. And Andrew, if you'll come back in, we'll open it up into questions. And then we'll make the closing remarks after we serve up any questions or answer any questions that anyone may have.

[Operator Instructions] The first question comes from Dave King of Roth Capital.

So I guess, first off, just on the gross margin, it's a pretty good improvement that you guys have now shown for a while here. It was up a lot last quarter, up again this quarter. And it sounds like it's product mix and also just better leveraging fixed costs. I guess, do you have -- besides the 35 basis points or so that you got, I think, from the distribution center, do you have a kind of a breakout of what really has been driving it? And is it more product mix, is it more leveraging those fixed costs? I guess just any color there would be really helpful.

Dave, let me answer that. It's a combination of both, okay? There are no other big call outs that you can make, except for that one that you mentioned, the closing or subletting at the distribution center that we did earlier in the year. That did have a positive impact. But otherwise, it's just leveraging the fixed costs over more revenue. And it's also an improved product mix/customer mix that has affected us in the last couple of quarters.

Okay. So then if you're thinking about on a go-forward basis, it's -- assuming things kind of improve at the same rate on the revenue side, you'd expect to get both of those things; assuming the mix holds, you'd expect to see some of that continuing in back half then?

Again, Dave, that's sort of more forecasting than we're comfortable in doing, but suffice it to say we're pleased with where we are right now.

Okay, fair enough. And then on the revenue side, that was also pretty strong growth and encouraging traction with the new products. I guess, how much of that is the new products that you think are really driving that growth? It sounds from your prepared remarks that it's mainly that and that the environment still remains somewhat challenged. I guess...

No, and Dave, you read that exactly correct. I mean, the majority of the increase is attributable to those 3 new programs that we had talked about before. That is the majority, the overwhelming majority of the increase. Just in general, retail continues to be somewhat problematic at retail, but by having these new programs, that did allow us to overcome the shortfall and get the increase in sales. But the majority of the increase were from the new programs.

Okay, that helps. And then just, I guess, anything you're seeing out there on the retail side that is a little bit more encouraging, anything anecdotal from some of your larger customers? Just how would you characterize the environment in general?

I'd characterize it as still questionable. And people said, "Well, you're going into the holiday season." The holiday season really doesn't help us, that's not -- our products are not traditional gift-giving products. It's a sort of a planned item, a planned purchase because you're expecting 9 months ahead of time. So you can somewhat move that date around on when you're going to buy our products. And in some cases, if there's more than one child in the family, ours are getting delayed. So they buy the toys for the other children. So we're getting into the holiday season, so we -- the best way we could characterize retail, it still continues to be a little questionable.

The next question comes from James Fronda of Sidoti & Company. James Fronda - Sidoti & Company, LLC: Can you just go into more detail, I guess, on what the 3 new programs are? I mean, I know one of them is the Sadie & Scout, but can you give more detail on the other 2?

On the call, I'd rather not, except to say that there were 3 new programs. And I won't deny that Sadie & Scout is one of them, which is a program that we developed and it's exclusive at one of our customers, particularly Babies"R"Us. But the other 2: one was at that same retailer, and then there was one at a third retailer, and it was an assortment of branded/licensed properties. But for competitive purposes, I'd rather not publicize that. James Fronda - Sidoti & Company, LLC: Right, right, that's fine. And I guess, just in terms of operating leverage, I mean, the last 2 quarters your operating expense was a little higher than the previous 2. Is this a good run rate, I guess, to use for the average for the back half of the year, I mean, the average of the first 2 quarters for the back half of the year?

Yes. Olivia? I'd say...

I'd say so.

It's close to normal. It's close to normal.

The next question comes from Igor Novgorodtsev from Lares Capital LLC.

A couple of questions, sort of follow-up on the previous callers'. Regarding the vastly improved gross margins, the product mix, you're talking about product mix in terms of different categories, that the more profitable categories sold better? Or this is a -- newly introduced as 3 categories versus the older products? I mean, what's on the margins?

No. It's not really new categories, Igor. It's more of new product within the same or existing or similar categories; new designs, new licenses, new brands, et cetera, that we've been able to create that we can leverage the sale through that. So -- but it's more of product, diversification of product, than it is new product categories.

Okay. So would it be fair to say that the 3 introduced new categories helped the gross profit margins because they can be sold at a higher margin?

Yes. The 3 new programs did help, yes. Yes. And it helped because it increased the revenue and it took the revenue and spread it over the fixed cost. So it helped from the standpoint that -- yes, I wouldn't say they're more profitable or characterize them as that, but they did help to spread the fixed cost over a larger base.

Okay. My other question, I realize that you don't want to explicitly track it, but to the best of your ability, are there still a lot of sales now move to the Internet? Amazon and even places like Target and Walmart sell through the websites. Do you track at all how your product is being sold? Is it sold now more online? Or it's still -- more and more online or are the brick and mortar still the vast majority of all your sales and your online sales are small?

It's an interesting question. I mean, we do track it. We know what percent of our sales go through the Internet. And we do sell every major brick-and-mortar customer that also has an Internet website, and that's pretty much all of them. And we also sell to Internet retailers, in some cases, that don't have brick and mortar. It's still the majority, by far, the majority of our sales are through the "traditional channels," but the Internet-based retailers, that business is picking up. And we've seen it increase drastically over the last 2 to 5 years and it continues to increase. But still, the overwhelming majority is still to the traditional brick and mortar.

Okay. And my last question, I remember that the last quarter you had somewhat elevated legal expenses due to the lawsuits. How did the legal expenses look this quarter?

It's in the Q. And I think in the Q, we said -- Olivia is looking it up. Bear with us 1 second and we'll tell you what they were in the quarter. From memory, I think it's $400,000 and change.

For the quarter, legal expenses were $298,000 compared to $109,000 last year. And for the 6 months, it was $557,000 compared to $233,000 last year.

Okay. And going forward, it's a little bit difficult to predict what the legal expense are going to look like?

This is true.

That's an understatement.

The last question comes from Ralph Marash of First Manhattan Co.

Just a follow-up on the patent dispute. So there's a stay right now on discovery, and you've also been issued a patent. Anything that you can update us on how that's going to potentially play out?

I'm impressed. And you are on top of it. There has been a stay on discovery issued for the moment. So we're not in the throes of a deep discovery anymore. And one patent has been issued, and we think a second patent will be issued over the next 60 to 90 days of -- for a similar product, just a little bit different way it's put together. So we are getting the patents. And beyond that, Ralph, I can't really address litigation, and I'm sure you can appreciate that.

Okay, I do understand. And then to go back to the 3 new programs again, the revenue -- the added revenue that you saw this quarter, obviously, it was new product coming in, but was this just like a onetime bump? And subsequent quarters, even if the product is successful, the revenue growth would be smaller than in this quarter? Or is this like a quarterly...

Well, it's -- the answer is both, okay? I mean, look -- and it's not a simple answer. It's not a onetime in-and-out proposition, hopefully. If the program sells, then there'll be repeat business. It is true that when you do an initial ship, you get the initial fill because you're starting with 0 in the store and you're having to fill up the bucket, okay? So then the bucket gets a quarter empty and you fill it back up again. So you don't get that fill rate of the empty bucket over and over again, is the best way I can explain it to you. But it should continue to contribute sales for the future unless, as eventually, they cycle out and they're replaced by other items.

Okay. And all 3 are exclusive to the retailers that picked them up?

They're exclusive in different forms or fashion, yes, okay? I'm trying to think through all 3 of them. One of them is an exclusive, it's truly an exclusive. Yes, they're all exclusive. The third one is exclusive designs, yes.

Okay. And they all -- you mentioned one retailer who got 2 of the lines. And the third retailer, is that an existing customer?

It was an existing customer, but this was sort of a lot of increased revenue with that existing customer.

Okay. That's obviously great to hear. And then just 2 detail -- or questions about financial details. The accounts receivable went up by about $2 million versus a year ago?

That's because the sales were higher in the quarter.

Strictly, sales.

Okay. And I'm assuming it's the same with inventory going up?

Yes.

Inventory going up is in anticipation of the -- to cover for the sales and future sales.

Well, and our inventory, it's compared to the year-end inventory, which is always our lowest level of inventory.

March is always the lowest.

Right. But I think the actual increase, from the cash flow statement, was fairly heavy compared to last year.

Right. No, it's going to be related to the new programs.

The next question comes from Dave King of Roth Capital.

Just a quick follow-up, if I may. In terms of the COGS, just trying to understand the fixed cost leverage a bit more. Is there any way you can characterize how much of your cost of goods sold is variable versus fixed in nature, how we should think about that?

No, Dave. That would be...

I'm just shaking my head, no.

We'd be on here for hours trying to explain that to you. It's not a quick answer, no.

Okay. Then but no general kind of...

There is not a -- no, there's not a general rule of thumb for -- it's always variable.

[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. Olivia, thank you. And I'd like to conclude by saying that management is very pleased with the results of the quarter that just ended. It was a very good quarter for the company, and we're very happy with it. We'd like to thank all of our customers, employees, suppliers and shareholders for their continued interest and support in the company. And if you have additional follow-up questions, please don't hesitate to call us. And we'll speak to you again at the end of our third quarter, which will be sometime in mid-February of 2014. Thank you very much. Have a good day. Goodbye.

Thank you.

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