Welcome to the Crown Crafts, Inc Fourth Quarter Fiscal Year 2021 Conference Call. Your host for today's call is Randall Chestnut, Chairman and CEO [Operator Instructions]. Any reproduction of this call in whole or in part, is not permitted without prior written authorization from Crown Crafts, Inc. And as a reminder, this conference is being recorded today, June 9, 2021. At this time, I would now like to turn the call over to Craig Demarest, Vice President and CFO, who will begin. Please go ahead.

Thank you, Cole. Welcome to the Crown Crafts investor conference call for the fourth quarter and full year fiscal 2021. With me today are Randall Chestnut, the company's Chief Executive Officer and Olivia Elliott, President & Chief Operating Officer. A telephone replay of this call will be available one hour after the end of the call through 4:00 p.m. Central Daylight Time on September 9. 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. I will now turn the call over to Randall.

Craig, thank you very much and good morning to everyone. And we're doing a little bit different this time. I'll make a few housekeeping comments, and a few general comments and Olivia and Craig will take it from there. First of all, I'd like to welcome because this is the first time he's been on a conference call, Craig Demarest to our team. He joined the company in February as Vice President and CFO. Also Olivia, who is with us and has been with us for many years, was promoted to President and Chief Operating Officer in January after 19 years with the company. I'll make a few remarks then I'll turn it back over to Olivia and Craig to report on the operations. FY21 full year, excluding the impact of the closure of Carousel Designs was the best diluted earnings per share in over a decade. We will discuss the Carousel portion later in the call. Net sales excluding Carousel were approximately 40% for both the fourth quarter an full year FY21. As we had reported and discussed in earlier calls, we continue to operating our warehouse as many of our competitors moved to third party models many years ago, commonly known as street deals. By operating our own distribution center, we were able to drop ship direct to consumers for most of our large customers. This has helped us tremendously during the past year and during the pandemic and the closure of a lot of stores. FY21 was a great year and we're proud of the results. It's with great regret and disappointment that we announced earlier the closure of Carousel Designs effective May the 21st. Olivia and Craig will discuss the impact of disclosure. From any of our shareholders who have been with us for a number of years, you know that we will make the tough decisions to adjust operations when it becomes necessary. And unfortunately, this was one of those. With that, Olivia, I'll turn it over to you.

Thank you, Randall, and good morning, everyone. I'm going to start out by touching on the fourth quarter and full fiscal year 2021 results at a very high level. Then I'll turn the call over to Craig to go into a lot more detail. Fourth quarter net sales were $21.8 million, compared with $20.3 million in the prior year. An increase of $1.5 million or 7.5%. For the full fiscal year 2021, net sales were $79.2 million, compared with $73.4 million in the prior year, an increase of $5.8 million or 7.9%. On May 11, we announced that we've made the very difficult decision to close Carousel Designs. Associated with that closure, the company recorded a pretax $2.2 million impairment charge on Carousel's long- lived assets in the fourth quarter which was $1.7 million after tax, if you exclude the after tax charge fourth quarter net income for the current year would have been $1.9 million, or $0.19 per diluted share, compared with $1.6 million, or $0.16 per diluted share in the prior year, and fiscal year 2021 net income would have been $7.8 million, or $0.76 per diluted share, compared with $6.6 million, or $0.65 per diluted share. On the balance sheet side, we finished the fiscal year with $613,000 in cash and no borrowings on our revolving line of credit. At year end, our balance sheet included our Paycheck Protection Program loan of almost $2 million, and it was classified and current. However, subsequent to year end, we were notified by the SBA that they had fully forgiven our loan. On May 13, we announced that the company's Board of Directors had declared $0.08 per share cash dividend on the company's common stock that will be paid on July 2, 2021 to stockholders of record as of the close of business on June 11, 2021. As Randall mentioned earlier, fiscal year 2021 was a very good year for us. And we're very proud of all of our employees who stepped up to the play to make sure that we were able to continue to operate during the COVID-19 pandemic. And now I'll turn the call over to Craig to go into a lot more detail.

Thanks, Olivia. I'm only going to give financial highlights. For more detailed analysis, please refer to the company's 10-K filed with the SEC this morning. As Olivia noted, net sales were $21.8 million for the fourth quarter fiscal 2021 compared with $20.3 million for the fourth quarter of the prior year, an increase of $1.5 million, or 7.5%. For the year, net sales were $79.2 million for fiscal 2021 compared with $73.4 million for the prior year, an increase the $5.8 million or 7.9%. The increase in sales is primarily due to higher sell-through at major retailers, which was partially offset by declines at certain customers that were impacted by the COVID-19 pandemic, particularly one customer that has remained closed throughout the entire year. Gross profit increased by $477,000 and increased from 26.3% of net sales in the prior year quarter to 26.7% of net sales in the current year quarter. Gross Profit increased by $2.5 million and increased from 29.4% of net sales for the prior year to 30.4% of net sales for the current year. The increase in gross profit is primarily due to the increase in net sales, as well as a more favorable customer and product mix. Marketing and administrative expenses increased from $3.5 million in the prior year quarter to $3.6 million in the current year quarter, but decreased from 17.3% of net sales to 16.6% of net sales over the same period. Marketing and administrative expenses increased by $365,000 but decreased from 18.9% of net sales for the prior year to 18% of net sales for the current year. The increase in amount for the current full year period is primarily the result of higher outside services of $336,000 and higher overall compensation costs of $236,000 partially offset by lower travel expenses of $117,000.…

Okay, Craig, thank you very much. And Cole, I'll ask you to come back up and open it up any questions that anyone on the line may have.

[Operator Instructions] Today we'll come from Linda Bolton Weiser with D.A. Davidson.

Hi, how are you? Hi, congratulations to everybody on their new roles. And welcome to the new CFO. So can I just start out by asking about Carousel Designs? Can you remind me, I was under the impression that that was an e-commerce business? Is that correct? Can you just describe what that business was a little bit?

Linda, it was and remained through the whole time we owned an e-commerce business. Yes, that made goods in the United States in Douglasville, Georgia, and sold it on its own website and through some other websites, very prominent websites. But it was all e-commerce. Yes. And it just got to the point that with diminishing sales, the pandemic, et cetera, that the company was not very prosperous anymore. And we realized that and knew that and we made the tough decision to move forward with the closure.

Okay, so the thing I just -- I'm confused about is during the pandemic e-commerce businesses have generally thrived. And I think you've even talked about the advantages to your business. And you've talked about the drop ship which I assume is shipping directly to customers that have ordered through e-commerce. So I'm just confused about is that operating separately from Carousel and you're thriving on the rest of the e-commerce and it was just Carousel that had the problems or can you just explain that?

Yes, I can explain it. I mean, the one I'm talking about there's two separate businesses Linda, the one I keep referring to this done so well during the pandemic is our NoJo and Sassy business, which is all important. Okay. And it's imported from Asia mostly and warehoused in Southern California and there we have established and do drop ship to our customers in consumer. Unlike Carousel Designs, Carousel Designs was made in the USA, which made the price point considerably higher. And therefore we ran into especially during the pandemic, when prices were so sensitive, that the only way to generate sales were to give substantial discounts off of the everyday price at Carousel that coupled with the higher advertising cost that we had to pay to get moved up onto the pecking order on the website made it when you add those two together it made it unprofitable.

Okay, now I understand. So should we, I mean, when I'm thinking about my model like, are those considered to be kind of going forward lost sales? Or do you think the sales will be made up through more sales in your other channels of distribution?

I mean, it's hard to say Linda. Who knows? Okay. I mean, it's like when you take out anything is spreads around to other places where we get it all about it. Okay, well, we get a portion of it. Yes. But it's going to spread around. So I can't quantify.

Okay.

And, Linda, let me say this, it's a different product, it was a very high end product that had a very high end ticket price. And, in many cases in some of the simpler items sold for twice what the import product sold for.

Okay. I got you. So -- are we -- should we assume that the benefit to your bottom line from closing the business would be reflected in your ongoing results? Or do you think you'll take that benefit and somehow reinvest in the rest of the business?

Well, I mean, Linda, again, that's a forward looking question. And we shy away from those as much as we possibly can, no; we shy away from a period. So unfortunately, you got to sort that out on your own. Okay. But we gave you the readers the information and it has been unprofitable, and has been unprofitable for a while.

In the first release that we put out, when we closed Carousel, we did put the historical offers that were associated with it.

Yes, so I did see that. And is there any way you can say what the sales and profitability was for FY21?

With -- what did we put in the press release? Hold on, Linda.

I think we put a range.

We put a range. Let me pull it back up.

Well, we put the '20 in there.

Yes, we put the last previous -- the previous reported year, which was net of $4.8 million.

$4.8 million in 2020, yes.

That's the last full reported year, Linda. So we have -- we didn't break down '20. Excuse me, '21.

Yes, okay. But I would assume it declined further.

That's probably a fair assumption.

Okay, got you. All right. And then when you talked about, I mean your gross margin was up year-over-year in the quarter. So that's good. I think you mentioned in the press release favorable customer and product mix. Can you elaborate on what does that mean? What customers and products in particular are most favorable for gross margin?

I mean it's a combination of a lot of different products, a lot of different shifts over the customers. There's not one particular product that you can report and point to is a combination. And Linda, let me go back and correct what I said. The Carousel sales for FY21, which we did not report were actually up a slight bit.

Mainly because of the first quarter and then it declined afterwards.

And also, it was up a little bit because of the continuing promotion off of regular price that we generated extra sales but did not produce profit. But, Linda, going back and to try to answer that question, it's hard to say I mean, it's a combination of a lot of different things that improve the gross margin; it's not one item that we can point to.

I mean many of your products are sold like on Amazon correct. With Amazon and e-commerce channels be higher or lower gross margin for you.

We don't, Linda, we don't report margins by customer. Okay. And we definitely shy away from math. But Amazon should be in the range of all our other customers.

Okay. And then I think you mentioned, well, have you reported anywhere or mentioned to investors, what percentage now of revenue is through all e-commerce channels?

Well, and the remarks that I made; we said that in the fourth quarter.

And in the year.

And in the year that 40% was through e-commerce.

When you exclude credit card.

When you exclude credit card. So it's a huge, it's a huge percentage. It's still 40%.

Okay, that's really high. Yes. And I mean, there must have increased in the pandemic, do you have a number like how does that compare to FY20?

We may have that Linda. That will include Carousel.

No.

It doesn't.

So last year that number was closer to say the lower 30%.

So it picked up 10 points.

Yes. Okay. Well, that's we've seen that for many companies, during the pandemic. So you also mentioned one customer that's been closed for pretty much the whole year. Are you referring to a certain restaurant chain where you provide some product? Or are you talking about something else?

No, that's the one we're talking about. And we say that they were closed, they were closed as far as we're concerned, the restaurant chain remained open, but they just didn't have inside dining. So they didn't use our product.

Right. And that should change pretty soon now with the reopening of everything, correct?

We hope so. We have seen a little bit of some of the stores Linda reopening. But it's sort of -- it's just starting to take place. And it's few and far between right now.

I mean was that a loss of -- was that material? I mean, was that a loss of a couple percentage points of your sales would you say?

Yes, it was material. You're close.

Okay.

There was enough that we, it made us cry.

Yes. And then on your, I mean your revenue growth has been very, it's been very good. And many companies have seen a lift during the pandemic, especially in the home goods areas. Is there any, I know you don't want to talk forward looking. But I'm just trying to gauge what your view of the consumer behavior is. I mean, do you think things will kind of change a lot once reopening occurs? Or like have they redone their baby's rooms and their furnishings? And they've done it? And so that's demand that will taper off? Or do you have any viewpoint on this?

We really don't make speculation on our part, and we don't have enough information to where we can nail that down. My gut instinct tells me that the trend towards shopping online is not going to reverse itself. Even as stores open back up, I still think there's going to be a heavy shift towards online shopping.

Okay. And then your PPP loan, you said you were forgiven on that. So how does that get classified? That just goes out and we won't see that as debt anymore? Or how does that work on the balance sheet?

That will no longer be debt and it will be a gain on the income statement, but it'll be a non operating gain.

Okay. And then, just finally, a lot of the companies have been talking about various cost pressures, shipping and freight delays. Are you experiencing any sort of delays getting product from Asia? What are you seeing in terms of the cost inflation side?

Linda, we are seeing, yes, we are seeing and feeling the effects of the cost increases coming out of Asia and mostly, particularly as it relates to freight rates. Freight rates are up appreciably. We had done as much as we possibly could, by doing ourselves to a couple of major carriers that we get a little better rate. So we're not as bad as some are, but it's still affecting us. We have seen some price increases coming out of Asia. And it's sort of a mixed bag. But yes, we are seeing as pretty much everybody is on goods coming out of Asia, seeing freight increases and seeing raw material, and price increases on purchase product.

Are you thinking that you'll try to pass that along to retailers and consumers? Or are you looking at cost reduction initiatives? Or what do you -- how are you thinking to offset?

I mean, Linda, where we can and we've always done this, we pass as much along as we can. And we're pretty tenacious on that. Will we get it all pass through? Probably not. But we will, it'll be our mission to recover as much as we possibly can.

Have you already taken price increases?

On some people we have, yes.

Okay. A couple of my companies have actually stepped up and I've had some M&A activity recently. And with all these facts, in the marketplace there's been a lot of deals in that area, have you thought about looking at any additional acquisitions? Since you just finished up such a strong year, and you're in a good position. Are you kind of considering anything on that front?

Linda, we stay and have an appetite continually for looking at acquisitions. And we continue to look at acquisitions on a regular basis. And our balance sheet, as you will know, is pristine to where we can afford to avail ourselves. So the opportunity that they might present themselves. So yes, we're always looking and that's where I'll stop. We're always looking.

What would be the highest level you would take leverage up to do a deal?

Oh, I don't want to go there. I mean, I don't know if it were the right deal, we would do some leverage. But it would have to be, we're not going to bet the whole company on one acquisition, which a lot of people do, and if they fail, the whole thing fails; we're not going to do that. But we would have an appetite to put some leverage on the company.

Okay. And then, sorry, I have so many. But just one last one for me. I know that you had talked a while ago about kind of ramping up some of the efforts internationally with your good sales grow. So you had in the fiscal year did international grow, kind of in line with the company or higher or lower on the sales line?

International went up a slight bit, but it was also affected by the pandemic. And we -- so therefore -- we -- it didn't do as well as we had expected. But so we think that's going to correct itself too going short forward in the future. We still have an effort to do that. And we plan to keep doing that.

And is your international sale; are they in just brick-and-mortar? Are you doing some e-commerce internationally as well?

No, we're doing both. We're doing both. We're doing both.

And our next question will come from John Adessa with Pinnacle.

Good morning, everyone. I was just curious, thanks for the color on Carousel. It's good to know what actually happened there. Are there any legacy assets there that you might be able to exploit going forward? You still own the brand, there's probably a detailed customer list with emails. Are there any fixed assets that you might be able to do something with?

Well, I mean, yes, John, most notably, we still own the brand. We still own the website. We still own the library of artwork, which is pretty large. Okay, which is transferable to some of our other products and divisions? So yes, there are some assets, the hard assets, the PP&E, the answer to that is pretty much no, because we don't do domestic manufacturing in anywhere else in the company. So those are not transferable. And those we are disposing off. But the other soft assets, yes, they are transferable.

Is there any initiative to cross-sell email addresses with your other brands?

Well, I mean, the email addresses are direct to consumer. And those we don't do. And our other division sales direct to consumer. We sell through retailers, and drop ship for the retailers. So the email addresses aren't transferable, so to speak.

Okay, you're right, understand. As your experience with Carousel done anything for your appetite for additional direct-to-consumer businesses going forward?

I would say yes, it is, no question. We've learned a lot. And what we did learn is made in the USA is quite expensive, one. Two, the consumer doesn't want to pay the price of a Made in USA products. So three, you wind up having to discount it. And four, the cost of getting up on the top position on the internet is quite expensive. So it's somewhat of -- it is not as attractive as most people think.

Right. Okay. Well, I mean, I guess, hindsight, always '20. And you're probably glad you did it. You learned a lot. And it'll help your business going forward.

Well, I mean, we regret that we had to make the decision. But John, again, we're a company and we've proved this over the years. We'll make those tough decisions when we have to.

This will conclude the question-and-answer session. I'd like to turn the conference back over to Randall Chestnut for any closing remarks.

Cole, thank you very much. And thanks to everyone who was on the call today. Just a few quick closing comments. As we began FY21, there was a lot of concern about the year due to the COVID-19. And we were part of that concern. With the quick response of our staff, we adjusted accordingly, thereby leading to a huge increase in internet sales, as we alluded to earlier. We'd like to thank all of our employees, suppliers, customers, and our valued shareholders to make FY21 a good year. And I repeat FY21 was a great year. Again, thank you very much. We look forward to speaking with you at the end of Q1. Have a good day. Thank you.

Bye.

Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.