Crown Crafts, Inc. (CRWS) Q2 2020 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen and welcome to the Crown Crafts, Incorporated Investors Conference Call. Your host for today’s call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer. [Operator Instructions] Any reproduction of this call in whole or in part is not permitted without prior written authorization from Crown Crafts, Inc. As a reminder, this conference is being recorded today, November 13, 2019. At this time, I would now like to turn the call over to Ms. 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 second quarter of fiscal 2020. 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 one hour after the end of the call through 4:00 p.m. Central Standard Time on November 20, 2019. 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 listeners 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. Also in regard to comments made in today’s conference call that are related to the Company’s recently announced dividend, and its history of paying dividends, we remind listeners that the declaration of each dividend is at the discretion of the Company’s Board of Directors and the Company expressly disclaims any assurances as to the frequency and amount of any future dividend. I will now turn the call over to Randall.

Olivia, thank you. Good afternoon again to everyone and welcome to our second quarter fiscal year 2020 investor conference call. And this is the quarter that ended September 29, 2019. And I will make some remarks, Olivia will come back and then as Rocco said, we will open it up for questions that anyone might have, that’s on the line. Second quarter this year net sales were $18.560 million as opposed to last year $20. 536 are down $1.976 million or 9.6%. Net income for the second quarter was $1.779 million as opposed to $1.809 million are down $30,000 or 1.7% and diluted earnings per share were flat. It was $0.18 per share this year and $0.18 per share last year. Gross margin for the current year quarter was 31.6% of net sales, up from 31% in the prior year quarter. Sales in the quarter were down primarily due to timing of shipments to certain retailers as well as a program that had been discontinued. During the quarter, we attended and presented product from Sassy and NoJo at the K&J show in Cologne, Germany. Because Sassy has such a strong international presence, we’ve chosen to brand all the company's products that are present at the show as Sassy. At the show, we visited with distributors and customers representing 30 different countries and at the show we presented 75 new product offerings from Sassy and NoJo. The show was highly successful and the response to the new product was well received. Turning to the balance sheet. On the balance sheet side, we ended the quarter with a small cash balance and no amount due on our revolving line of credit. Also on October 31, we announced that our Board of Directors had declared a special cash dividend on the company's Series A common stock of $0.25 per share along with a quarterly cash dividend of $0.08 per share. Both dividends were repaid on January 3, 2020 to shareholders of record as of the close of business on December 13, 2019. The company's financial health and exceptional cash flow allows us to once again reward our shareholders with a return on their investment. Upon payment of this special dividend and the $0.08 dividend, Crown Crafts will have distributed more than $40 million in total dividends to shareholders since we started paying dividends again in 2010. We remain committed to delivering value of operating our business in a disciplined manner, while continuing to invest in growth strategies and we’re pleased to announce a special dividend, which attests to the Board's ongoing confidence in the future of your company. With that, I will turn it over to Olivia. 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 this morning. Net sales were $18.6 million for the second quarter of fiscal 2020, compared with $20.5 million for the second quarter of the prior year, a decrease of $1.9 million or 9.6%. The decline in sales was primarily due to the timing of retail shipments as well as a discontinued program with one retailer. Net sales were $34.5 million for the first six months of fiscal 2020 compared with $36 million for the same period of the prior year, a decrease of $1.5 million or 4.2%. Sales of bibs, bath, developmental toys, feeding, baby care and disposable products increased by $485,000 in the current year, while sales of bedding, blankets and accessories decreased by $2 million in the current year. Gross profit decreased by $501,000, but increased from 31% of net sales for the prior year quarter to 31.6% of net sales for the current year quarter. Year-to-date, gross profit decreased by $78,000, but increased from 29.2% of net sales in the prior year to 30.2% of net sales for the current year. The decrease in amount is primarily due to the net lower sales levels in the current year. Marketing and administrative expenses decreased in amount by $351,000, but was mostly flat at 18.7% of net sales for the current year quarter compared with 18.6% of net sales for the prior year quarter. Year-to-date, marketing and administrative expenses decreased in amount by $584,000 and decreased from 20.9% of net sales for the prior year to 20.1% of net sales for the current year. Contributing to the decrease is the elimination in the current year of $210,000 in charges incurred in the prior year associated with trade for in most of the Sassy branded developmental toys, feeding and baby care product line inventory from Grand Rapids, Michigan to the Company’s distribution facility in Compton, California. Also, outside services decreased $216,000 and advertising decreased $129,000 in the current year. The current year provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 24% compared to 23.4% in the prior year. During the first quarter of the current year, the Company's reversed the reserves for unrecognized tax liability that had previously reported for fiscal years 2011 through 2013, which resulted in the recognition of a discrete income tax benefit of $232,000. In addition, during both the current and prior year quarters and year-to-date period, the Company recorded discrete entries associated with excess tax benefit or charges arising from divesting of non vested stock during the period and also recorded reserves for unrecognized tax liability. The effective tax rate from continuing operations combined with the effect of these discrete income tax charges and benefit resulted in an overall provision for income taxes of 18.8% for the current year and 26% for the prior year. Net income for the second quarter of fiscal 2020 and 2019 was $1.8 million or $0.18per diluted share. Net income for the first six months of fiscal 2020 was $2.9 million or $0.28 per diluted share compared with net income of $2.1 million or $0.21 per diluted share for the same period in fiscal 2019. And now I will turn the call to Randall.

Olivia, thank you very much. And Rocco if you will come back in now, we will open it up to any questions with anyone on the line may have.

Absolutely, sir. [Operator Instructions] Today’s first question comes from Linda Bolton Weiser of D.A. Davidson. Please go ahead.

Hi. How are you?

Hey, Linda. Good.

Hi.

How are you?

Good. So your gross margin performance has been pretty good for a couple of quarters now with year-over-year increase in gross margin. What are the specific reasons for that? And I’m just trying to figure out if that’s a trend that will continue in the second half of the fiscal year?

Well, I mean, I will answer on separately, Linda. For the second half of the year, as you will know, we don’t get forecast that we don’t guide -- give guidance. So you have to judge us, you sort of -- got to look in the rearview mirror. And the reason for the increase is a slight change in product mix. But most importantly it's really the ongoing efforts with the company that maintain cost control, which we’ve done now for many years and we continued to do. And that’s one of the things that we pride ourselves on is running a very tight operating company.

Okay. So I guess it's not going to change in terms of your focus on your cost control, correct?

It hasn’t in 20 years, and I don’t see it changing any day soon.

Because actually your tariff impact even though you've been able to offset with pricing and maybe maintain gross margin dollars, it's a negative impact on margin percent. Is that correct?

It is Linda, but to be very candid about it. Through the second quarter, the quarter that ended in September, the one we are discussing today, in our product category it didn’t have a lot of items that were hit by the tariffs, we had a few. The majority came October 1 and the balance will come December 15. So we didn’t have a huge effect from the tariffs given in -- of impact in the quarter that just ended. Going forward and we’ve said this before, our intent is to control and to mitigate the cost of the tariffs for passing on price increases, and controlling our cost of sourcing out of Asia. Meaning, trying to reduce prices, first cost coming out of Asia which we’re doing. As far as passing price is on, there are some successes and there are some that we’re still struggling with. So it's not a slam dunk, okay? We are -- we don't have people standing in line, waiting and saying, I will take the inputs. So we are having the fight here every while.

Okay. And then, on the sales line, when you mentioned some of your decline was due to a program that was discontinued by a retailer. Was that related to tariff related price increase, where they wouldn't accept it and they decided to drop the program, is that what you’re talking about?

No, it has nothing to do with tariffs at all, Linda. It was a program that we were granted middle of the year before middle of calendar 2018, and we started shipping it. And we paid what’s called a slotting fee to get the space on the shelf. And it came up one year anniversary and since we have the space, that retailer wouldn’t get another slotting fees from us, so they went to somebody else and got another slotting fee. And so we lost that program.

So, did that -- did the loss that’s occurred this quarter meaning we're going to have that negative impact in the next couple of quarters, and so we annualize that and is there any way to quantify that particular impact that occurred in the quarter?

It's going to have a recurring effect, because we started shipping it last year -- this year and this last year and the late -- in the first quarter and majority of it in second quarter, so when we circled around on it this year, it was in the second quarter. So you’re going to see some effect -- the tail effect of that for the remainder of this year until it gets back to the anniversary day, which will be late June, early July.

So would you say that was half of the decline of revenue or most of it, or -- in the quarter?

No, it was less than half, Linda.

Okay.

It was less than half. I have the number someplace, but it was less than half of the decline in the quarter.

Okay. That’s helpful. And then if I could just ask about …

[Indiscernible] time.

Okay. Your special dividend is noteworthy of course. And -- but we noted too that your operating cash flow is actually down year-over-year a little bit in the first half. So I’m just trying to do my numbers here, and it looks like you need to have an improvement year-over-year in the second half in order to pay for that dividend with your internally generated cash flow. I’m assuming you don’t intend to put more data on the balance sheet to pay for it. Am I thinking correctly there?

That would be a fair assumption, yes. But, Linda, one thing that you have to take into consideration, and the cash flow is in advance of the tariff increases we did, the inventory ahead of time and at the -- to bring it in pre-tariff increases. So we stocked up on goods, where we could. But we feel very safe, those goods were not going to be problematic and that we’re going to flow through in the normal course of business, we did buy selective goods. But your assumption is correct.

Okay. I understand. And then maybe just related to that dividend, obviously your -- giving cash back for the shareholder, but I’m just curious about it seems like your operations are pretty stable and you do have this cash and generating free cash, is it the M&A environment, are you finding the valuations are too high, or you just not finding what you want, or just curious about why not pursue a deal instead of doing the dividend?

Linda, it's both of the above. The valuations that we found of recent are little higher than what we would like to say. And we haven’t found of recent, ones that really pique our excitement level to the point is we’re ready to jump outright and check for it. So we haven’t found anything that just really excites at this point.

Okay. I guess that’s all for me. I will pass it on. Thank you so much.

Well, thank you. Appreciates your attending.

Thank you.

[Operator Instructions] And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chestnut for any final remarks.

Okay. Thank you, Rocco, and thanks everyone, ladies and gentlemen, for being on the investor conference call today. We appreciate your interest in the company and we appreciate your time to attend the meeting. The management and the Board of Directors of the company remain optimistic about the future of our company. And I’ve said this before and I repeat this again, your company is very solid financially and [indiscernible]. We would like to thank all of our employees, suppliers, customers, shareholders for their continued support and we look forward to talking with you next quarter. Thank you and have a good day.

Thank you, sir. Today’s conference call is now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Thank you.