Crown Crafts, Inc. (CRWS) Q3 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Crown Crafts Incorporated investor conference call. [Operator Instructions] With us today are Olivia Elliott, Vice President and Chief Financial Officer; and Randall Chestnut, President and Chief Executive Officer. I would now like to turn the conference over to Ms. Olivia Elliott, Vice President and CFO. Please go ahead.

Thank you. Good afternoon. Welcome to the Crown Crafts Investor conference call for the third quarter of fiscal 2015. With me today is Randall Chestnut, the company's President and Chief Executive Officer.

Hi, good afternoon.

A telephone replay of this call will be available one hour after the end of the call through 8:00 AM. Central Time on February 19, 2015. Also, a web replay of the 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 to everyone. And welcome to the Crown Crafts Incorporated investor conference call for the third quarter, which ended on December 28, 2014. I will go through some comments, Olivia will come back and follow-up with more detail. And as the moderator said, then we'll open it up for any questions that anyone may have from the audience. For the quarter that ended December 28, net sales for FY '15 were $23.743 million, as opposed to $20.619 million in the same quarter of the previous year or an increase of $3.1 million or 15.2%. Net income for the same period also increased from $1.779 million last year to $2.046 million this year or up $267,000 or up 15%. Likewise, diluted earnings per share also increased from $0.18 last year to $0.20 in this year's current quarter or an increase of $0.02 per diluted share. Turning to the year-to-date, net sales for the year-to-date were $59.9 million as opposed to $57.3 million in the same period one year prior or an increase of $2.6 million or 4.5%. Net income for the same nine-month period decreased $164,000 from $3.743 million in the previous year to $3.579 million in the current year. However, the diluted earnings per share decreased from $0.38 to $0.36 or $0.02 per diluted share. Year-to-date net income includes an after-tax charge of $530,000 or $0.05 per diluted share for the previously announced settlement for the patent infringement lawsuit. Without this change, year-to-date net income would have been $4.109 million or an increase of $366,000 or 9.8% compared to the same nine months of the prior year. And diluted earnings per share would have been $0.41, an increase of $0.03 or 7.9% increase in diluted earnings per share for the year-over-year quarter. For the third quarter, the sales increased $3.124 million or 15.2% over the same period in the previous year. The two main factors for the sales increase were new placements of programs that we placed in the third quarter that we had assumed from a former competitor. Also, we had a very strong quarter in our licensed toddler bedding. We are very pleased with our position in the marketplace in virtually every category that we participate in, and at most retailers we are the category leader within those markets, and we're very pleased with the position that we hold in the market, it's very strong. Our gross profit percentage decreased from 28.9% in the prior year to 27.9% in the current year. The decline in the gross margin is a result of the new placements which I just mentioned. These programs were assumed from a former competitor and were at lower pre-set prices and margins than we normally had. Year-to-date gross margin percentage is 28% versus 28.2% for the nine months of the prior year. On the balance sheet side, we've finished the quarter with no debt on the balance sheet and a small cash balance. Today, we announced our 21st consecutive quarterly dividend. This quarterly dividend of $0.08 per share will be paid on April 3, 2015, to shareholders of record as of March 13, 2015. This represents a 3.9% annualized yield based on yesterday's share close price. With that, I'll turn it over to Olivia for additional remarks.

I am 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 this morning. Net sales were $23.7 million for the third quarter of fiscal 2015 compared with $20.6 million for the third quarter of the prior year, an increase of $3.1 million or 15.2%. Year-to-date fiscal 2015 net sales were $59.9 million compared with $57.3 million for the same period in the prior year, an increase of $2.6 million or 4.5%. The sales increase is largely related to initial shipments of new programs and the strength of a licensed toddler property. Gross profit for the third quarter increased in amount by $674,000, but decreased as a percentage of net sales from 28.9% to 27.9%. For the nine-month period, gross profit increased in amount by $581,000 in the current year compared with the same period in the prior year, and remained stable at 28% of net sales for the current-year period compared to 28.2% for the prior-year period. The increase in amount was associated with the increase in sales, while the decrease as a percentage of net sales was a result of the assumption of new business from a former competitor with lower pre-set prices. Legal expense for the nine-month period of fiscal 2015 increased as compared with the same period of the prior year. Current year legal expense includes $1.2 million associated with the BreathableBaby litigation, of which $850,000 represents a fraud recorded in the second quarter related to the settlement of the litigation, and $375,000 represents legal fees associated with the case. Legal expense for the nine-month period of fiscal 2014 included $375,000 of legal fees related to the BreathableBaby case. Other marketing and administrative expenses increased in amount from $3 million for the prior-year quarter to $3.3 million for the current-year quarter, but decreased as a percentage of net sales from 14.3% to 13.9%. Year-to-date, other marketing and administrative expenses increased in amount from $9.4 million in the prior year to $9.7 million in the current year, but decreased as a percentage of net sales from 16.5% to 16.1%. The increases in amount for both the three and nine month periods were primarily due to higher factoring fees and advertising cost, which were partially offset by lower performance-based compensation costs and a lower provision for doubtful accounts in the current year. The company's provision for income taxes is based upon an estimated annual effective tax rate of 37.1% for fiscal 2015 and 37.7% for fiscal 2014. Net income for the third quarter of fiscal 2015 was $2 million or $0.20 per diluted share compared to net income of $1.8 million or $0.18 per diluted share in the third quarter of fiscal 2014. Net income for the first nine months of fiscal 2015 was $3.6 million or $0.36 per diluted share compared to net income of $3.7 million or $0.38 per diluted share for the first nine months of fiscal 2014. Excluding the $530,000 after-tax impact of the BreathableBaby settlement, current year net income would have been $4.1 million or $0.41 per diluted share. Inventory at the end of the third quarter of the current year was $19.3 million compared to $17.2 million at the end of the prior-year quarter. The increase is primarily due to the increased level of sales in the current year. I will now return the call to Randall.

Olivia, thank you very much. And Dan, we'll ask you to come back and see if anyone in the audience has a question.

[Operator Instructions] And our first question comes from Dave King of ROTH Capital Partners.

I guess, first off, congrats on the strong revenue growth this quarter. I guess my question along those lines is, it sounds like a lot of that came from the two placements. Obviously, the licensed toddler stuff is very encouraging, but in terms of the two placements, are you able to quantify how much that contributed either to the growth or in terms of dollars? And then, as we think about that business on a go-forward basis, how much should that contribute annually or if we include replenishment orders, et cetera, how should we be thinking about that business?

Dave, let me first clarify something, it's not just two placements. When I said there is two areas, maybe it's a little misleading. The two drivers that drove the sales increase this quarter were the new placements that we took over, and they were not just two, there were a number of them, several. So, I didn't mean to mislead anyone to thinking it was just two. And the second point was the strength of the toddler bedding for the quarter, the licensed toddler bedding. We don't breakout those numbers separately, Dave. They were both appreciable and the programs that we took over from the former competitor, those are ongoing programs. And, yes, we had initial ship-ins and then you have replenishment to back that up.

I mean, obviously, some of that 15% year-over-year growth, is that initial sell-in the part, but it sounds like that's not a huge book of the 15% then, is that a fair characterization?

It's a good portion of it, the initial fixtures. The sell-in is a good portion of it. And again, without trying to give guidance on what the split is, there was a fair amount, but then there is also fair amount of replenishment going forward.

And then maybe switching gears a bit. In terms of, I feel like we haven't really talked about acquisitions in a while. I guess, Randall, any thoughts there in terms of the environment, opportunities, bid-ask spreads, et cetera?

We still look, Dave, on a regular basis, and we have compensations on a regular basis. And we have been actively involved over the past 12 to 18 months, and looking at a number of acquisitions that just we couldn't real in and bring in at a realistic, what we thought the price should be. And a couple of them, one of them or a couple of them, we walked away from, because we just didn't think it was worth. We thought it was in the early days. So we're very careful, but we continue to look, and we've got the wherewithal to do it as we reported in the Q, we’ve got a borrowing availability of $26 million, it’s untapped right now. So, we stand ready, willing, and anxious if we can find the right acquisition that will fit into what we do. So we're very actively looking.

Our next question comes from Danielle McCoy of Wunderlich Securities.

I was wondering if you could provide a little bit more color on the new partnership with Zutano, maybe in terms of collaboration, distribution, price points, and may be expected timing of initial sell-ins?

It is a license agreement, Danielle, and as I'm sure you are, Zutano is more of an upscale brand, so it is going to be pegged at the upper crust of the market, and price points will be just slightly above our normal price points, are not going to be outrageous. So, they will be competitively priced, but at the upper crust of the distribution channel. And you won't see any shipments or activity until late in 2015. We're pretty excited about it. We think it's an opportunity to build something we thing that got some very good designs, and that we can collaborate with them and do something pretty cool.

And then just in terms of, is there any impact on the business from the closure of targeting Canada at all?

Danielle, we would like to report -- well, no, no. We will report that the closure of targeting Canada didn't affect us any on the day they closed. As luck would have it, we have one shipment that was due to go out the next week, and obviously that didn't go, okay. So we stopped that. It does affect going forward by some very some small number that we had anticipated in our forecast going forward into FY '16. We had a small program for Hamco, but not huge numbers. It is not enough to worry about. The biggest thing we were happy with is the shipment that was ready to go out, would have gone the next week, whenever we got wind [ph] of the bankruptcy. So now it won't affect us in any appreciable way.

And just lastly, we've been hearing a lot about port issues on the west coast, it’s been somewhat of a topic of conversation, is that impacting you guys at all or if so how you're guys dealing with that?

Danielle, it's not impacted us in any big way. We've had a couple of containers that have been delayed for slight short periods of time, but we've been able to get those through in a fairly timely basis. And we take the posture, I think that the rest of the world is taking, we're waiting to see what's going to happen and we're monitoring it on a daily and hourly basis. I mean we keep reading. I've read several articles this morning, everything we can get our hands on to try to see what the current state of the ports are. And as of today, the freight is still moving and we have had a few delays, but nothing of any appreciable degree. We as everybody else are in hopes that this can be resolved pretty quickly, so it doesn't escalate in to being a problem.

And our next question comes from [ph] Len Ruediger of Trust Management.

I just had a quick question. If there are any other legal issues on the horizon that would have the amount of impact, the one that was settled during the last quarter, just if there is anything out there? I'm sure there is other legal issues out there, but if there is anything significant out there, I was just wondering what your feelings were on it?

For the first time, and I don't want to jinx this, and I hope you're not helping me jinx it, for the first time in a long time, we don't have any legal issues at the moment that we're aware of, unless there's one brewing that has not filtered and floated in. So I can truthfully tell you, we have no open legal issues at the moment that we're negotiating or we're dealing with at all. And that's a pretty good feeling. It's been quite a while, since we can say that.

Keep that feeling. I appreciate that. Thank you.

We hope we don't jinx it, but thank you very much.

At this time, I see no further questions. I would like to turn the conference back over to Randall Chestnut for any closing remarks. End of Q&A

Dan, thank you very much. Olivia, thank you for your help. And let me just make some few closing remarks. I would tell you and I'll say this very strongly, we're pleased with the results of the third quarter. We're also very pleased with our position in the market. We think we've got a very good position, and as I said earlier in the product categories that we're in, the retailers we're in, we are the market leader in virtually every single one. Your company remains debt free with the cash balance on the balance sheet. We're paying a dividend and have been paying it now for quite some time. And we have strong licenses and we have very strong designs. We have very good employees. We have great suppliers and we have great shareholders, and we have very good customers. And we appreciate everyone's continued interest in the company. And just as a reminder, we are a March ending fiscal year, so the next time we'll be back for our quarterly conference call will be some time in mid-to-late June of 2015, when we report on the fourth quarter and the full year of FY '14. In the meantime, if you have questions please don't hesitate to give us a call. Thank you very much. Have a good day.

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