Crown Crafts, Inc. (CRWS) Q4 2022 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the Crown Crafts, Inc. Fourth Quarter Fiscal Year 2022 Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Craig Demarest, Chief Financial Officer. Sir, please go ahead.

Thank you, Jamie. Welcome to the Crown Crafts Investor Conference Call for the fourth quarter and full fiscal year 2022. With me today is Olivia Elliott, the company's President and Chief Executive Officer. A telephone replay of this call will be available 1 hour after the end of the call through 4:00 p.m. Central Time on September 8. 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 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 Olivia.

Thank you, Craig. Good afternoon, and thank you for joining us for the fourth quarter and full fiscal year 2022 Conference Call. I want to start by congratulating Randall Chestnut on his retirement after serving as Chairman and CEO of Crown Crafts since 2001, and as part of our management team and a member of the Board since 1995. The ongoing strength of our company is a tribute to the legacy that Randall leaves behind. I had the privilege of working with Randall for over 20 years, and I'd like to thank him for all that he did for the company and for me personally as well. Turning to fourth quarter results. Fourth quarter net sales were $25.7 million compared with $21.8 million in the fourth quarter of last year. There were no current quarter sales of Carousel Designs, which ceased operations in May of 2021. But if you exclude Carousel from the prior-year fourth quarter, sales would have been $20.6 million. Net sales for fiscal year 2022 were $87.4 million compared with $79.2 million last year. If you exclude Carousel from both years, net sales for the current year would have been $86.7 million compared with $73.8 million last year, which represents an increase of 17.5% for NoJo and Sassy. We continue to see a shift in sales due to consumers starting to shop in brick-and-mortar locations again, but Internet-based sales still represent almost 30% of our sales. We've also continued to see higher international sales this year with those sales representing 4.2% of current year sales. Fourth quarter net income was $2.4 million compared with $238,000 last year. Prior year fourth quarter results included after-tax impairment charge of $1.7 million related to Carousel assets. When you exclude the impact of Carousel from both quarters, net income would have been $2.6 million for the current year quarter or $0.26 per diluted share compared with $2 million or $0.20 per diluted share last year. Net income for fiscal year 2022 was $9.9 million compared with $6.1 million last year. Current year net income included an almost $2 million gain from the forgiveness of the Paycheck Protection Program loan. When you include the impact of the forgiveness of this one from the current year and Carousel from both years, net income for the current year would have been $9 million or $0.89 per diluted share compared with $8 million or $0.79 per diluted share last year. We're very happy with the results of this quarter and for the entire year. We're also happy to have made progress in recovering from some of the headwinds that we've been discussing in prior quarters. Thankfully, Hurricane Ida, the Compton warehouse water damage and the warehouse management system implementation are behind us. We're also seeing signs that the bottleneck of containerships in California has receded and lockdowns in China are beginning to lift somewhat. So the delays that we're seeing now aren't as bad as what we experienced throughout fiscal 2022. We do, however, continue to see increased costs throughout the supply chain, and we pass along these increased costs to our customers whenever we can. Looking at the balance sheet. We finished the fiscal year with $1.6 million in cash and no borrowings on our revolving line of credit. On May 17, we announced that our Board of Directors had declared an $0.08 per share cash dividend on the company's common stock that will be paid on July 8, 2022, to shareholders of record at the close of business on June 17, 2022. This represents a 4.9% yield based on yesterday's closing price. We're very pleased that our financial strength allows us to continue this quarterly dividend. I'm now going to turn it over to Craig to discuss the quarter in more detail, and then we will come back and make some closing remarks and take some questions.

Thanks, Olivia. I'm going to give financial highlights for a more detailed analysis. Please refer to the company's 10-K filed with the SEC this morning. As Olivia mentioned, net sales were $25.7 million for the fourth quarter of fiscal '22 compared to $21.8 million for the fourth quarter of the prior year, an increase of $3.9 million or 17.7%. For the year, net sales were $87.4 million for fiscal '22 compared with $79.2 million for the prior year or an increase of $8.2 million or 10.4%. Sales of bibs, bath, developmental toys, feeding, baby care and disposable products increased $9.9 million over the prior year, which was partially offset by a decrease of $1.7 million in the sales of bedding, blankets and accessories, which included a decrease of $3.5 million due to the closure of Carousel Designs in the first quarter of fiscal '22. The increase in sales in fiscal '22 is partially due to a strong new modular set and higher replenishment orders at a major retailer. Also in advance of the expectation that shipments and customers from the company's Compton warehouse would be suspended during the first days of April 2022 due to the company's annual count of inventory, customers were encouraged to place their orders earlier than they ordinarily would have. This resulted in approximately $700,000 being shifted from fiscal year 2023 into fiscal '22. And finally, the results for fiscal '22 also include an additional week compared with fiscal '21, as the company operated under a 53-week calendar year for fiscal '22. These increases were somewhat offset by declines in sales to online retailers as customers have begun to return to stores. Gross profit increased from $587,000, but decreased from 26.7% of net sales in the prior year quarter to 25% of net sales in the current year quarter. Gross profit decreased from $789,000 and decreased from 30.4% of net sales for the prior year to 26.7% of net sales for the current year. The closure of Carousel resulted in a $2.2 million decrease in gross profit, which in fiscal year 2022 included the sale of inventory below cost and the recognition of charges of $334,000 associated with the settlement with a supplier of a [commitment] to purchase fabric, and $265,000 associated with the liquidation of Carousel's remaining inventory upon the closure of the business. The company's gross profit was also adversely impacted in fiscal year 2022 by increases in costs across the entire supply chain. Marketing and administrative expenses decreased from $3.6 million in the prior year quarter to $3.4 million in the current year quarter and decreased from 16.6% of net sales to 13.2% of net sales over the same period. Marketing and administrative expenses decreased by $1.2 million and decreased from 18% of net sales for fiscal year 2021 to 14.9% of net sales for fiscal '22. The decrease in amount included lower charges incurred by Carousel of $2.1 million for fiscal year 2022 as compared with fiscal '21. Other items in fiscal '22 included the $2 million -- almost $2 million gain recognized in the first quarter from the forgiveness of the PPP loan, and other items in the fourth quarter and full year of 2021 include a $2.2 million impairment loss related to the impairment of the assets of Carousel. The provision for income taxes is based upon an annual effective tax rate on continuing operations, which was 20.1% in fiscal '22 and 24% in fiscal '21. The current year provision includes no tax expense from the gain on extinguishment of debt, which will be permitted to be excluded from taxable income, the effect of which lowers the effective tax rate for fiscal year '22 by approximately 4 percentage points. During the current and prior year, the company recorded discrete reserves for unrecognized tax liabilities as well as entries associated with excess tax benefits or shortfalls arising from the vesting of nonvested stock and the exercise of stock options. The effective tax rate from continuing operations, combined with the effect of the discrete income tax items resulted in an overall provision for income taxes of 19.5% for fiscal '22 and 21.3% for the prior year. Net income for the fourth quarter of fiscal '22 was $2.4 million or $0.24 per share compared to net income of $238,000 or $0.02 per share for the fourth quarter of fiscal '21. Net income for fiscal '22 was $9.9 million or $0.98 per share -- per diluted share compared to net income of $6.1 million or $0.60 per diluted share for fiscal '21. And with that, I'll turn the call back over to Olivia.

Thanks, Craig. We're extremely proud of the results for fiscal year 2022. Our entire staff has done an outstanding job of working through this year's many challenges and posting very good results. As we begin fiscal '23, we're excited about our opportunities for continued profitable growth in the future. We recently presented a new strategic plan to our Board of Directors, and we look forward to implementing those strategies. The strategies include, among other things, growing our toy category through market share expansion, entering new adjacent product categories, both organically as well as through tuck-in acquisitions, selling directly to consumers, implementing operating cost efficiencies and making further investments in technology and our organizational structure. We'll implement these strategies without losing focus on cost containment, maintaining our strong balance sheet and delivering solid returns to our shareholders. And with that, Jamie, I think we'll take questions before we deliver the final closing remarks.

[Operator Instructions] And our first question today comes from Tony Chiarenza from Key Equity Investors, Inc.

My first thought here is, obviously, in terms of your sales, you're very concentrated between Walmart and Amazon. And I heard you mention as part of your new strategic plan is to kind of go directly to consumers. Is this something that you're trying to diversify. Obviously, it's difficult to run a business when Walmart is half your sales, if they decide to cut off a category or cut you off, you're in serious trouble. So what's the plan to kind of diversify the customer base?

So part of that is going direct to consumer. I mean it's something that almost everybody is doing in today's day and age, and it's something that we really need to get -- keep going with. There are candidly, no more Walmarts or Targets or Amazons out there, where we're going to get 50% of our business. But there are other small customers out there. It may be $1 million here, $2 million there. There's no smoking gun out there that it's going to be another $30 million in sales. But internationally can be a good opportunity for us. Part of that is building further our own brands because you don't exactly have licenses that go worldwide. Most of those are in the U.S. and Canada only. So building our brand, going internationally, direct to consumer and then everything else will be a little bit here or there.

Okay. How would you consider your relationship with Walmart at this point?

We believe we have a really good relationship with Walmart. I mean, we service them well. We keep a good eye on our designs. And as long as we bring forth the designs that the consumer wants, then we think our relationship is very good.

Good. Now how competitive is the category at Walmart? I mean how many -- would you say how many providers are there that are in your space at this point also going to Walmart?

I mean, there's quite a few, and there's always competitors that are more than happy to take that shelf space. So we -- in most of our categories, there are particular set dates. And so we're competing at any given point in time with people that want the business.

Okay. And just a question of you having a product and having the design that the customer will demand at a particular time.

That, and the ability to service the customer. I mean they have certain requirements for in-stock levels and things like that. So it's the entire ability to service them.

Okay. Good. One question. I know you paid a dividend and the dividend is great. I think it's a good show of support to the shareholders. Have you given any thought to a share buyback given the price of the stock?

We've done share buybacks in the past. And just because of our liquidity, it really -- it hasn't really helped things. And so at this point in time, while we discuss it from time to time, dividend seems to be the best answer for us.

Yes. I think it makes sense. Obviously, since the liquidity is so limited, if you remove more shares from the market, that's only going to make the problem even worse. Hopefully, you grow larger at some point and then you have more shares and increased liquidity. Good luck. And congratulations on a great quarter.

Thank you very much.

And our next question comes from Ralph Marash from First Manhattan Co.

So you certainly seem to have navigated all the difficulties over the last 12 to 18 months very well. And you mentioned increasing costs, which we know everyone faces. But you also mentioned that you seem to be able to pass along those costs and your gross margin performance would indicate that you're pretty much in line. So is that an accurate impression?

We certainly try to pass them on where we can. We do have some categories that are a little more price sensitive. Some of those being things like toddler bedding set, et cetera, that we may not be able to pass along the entire price increase, but we do what we can. In most categories, we have passed on that price increase. There was some difficulty, I guess, in the beginning in trying to get them through. But I think now in the world that we're in today, everyone is passing on price increases, and it's become a little bit easier to do.

Okay. And your comparative inventory numbers seem to indicate that inventory is in pretty good shape as well. I know for much of the last 18 months or so, you've been a little heavy on inventory on purpose to avoid disruptions. So could you just comment on where your inventory stands now in terms of where you'd like it to be?

We are in really good shape in inventory. The majority of our inventory is current SKUs, and so we're not at all worried about it. We did bring in extra inventory in the fall when all of the problems started happening, partially just because we were a little worried about the supply chain, partially because we were trying to get some inventory before price increases to effect. There's probably still a little bit of ove- inventory in some areas just because we knew that we could sell through it in a period of time, and we -- it was going to be a decent price increase. But for the most part, I think it's at a good level.

[Operator Instructions] Our next question comes from John Deysher from Pinnacle.

I was just curious on the direct-to-consumer initiative that you mentioned. I think that was Carousel's business. And I think, if I recall correctly, there were some issues there with fulfillment, advertising being on the search engines. I'm just wondering kind of how you -- why you think you should reenter the direct-to-consumer business when it didn't quite work, at least to us with Carousel. What's different?

It's really 2 different models. So Carousel was manufacturing in the U.S., which was quite expensive. And then often in the vast majority of the products we were selling from Carousel were -- they were 1 piece here, 1 piece there. The consumer was actually designing the product. Here, we would be selling products that's already in our warehouse. It's finished goods. There's no manufacturing. And we're already -- for many of our dot-com customers, we're already shipping direct to the consumer on their behalf. So we have the ability to ship direct to consumer. And it's just -- it's such a different model, we think that it can be successful.

Okay. So the infrastructure is in place already since you're fulfilling it for your dot-com customers. But I mean, how are you going to attract traffic to your website? How do you gain customers?

There's definitely going to have to be some advertising. We have to start by -- part of it, we're going to sell, we're going to do some third-party selling on Amazon. So that's how we're going to start out. But we're also going to get our websites updated and have the ability to sell, and there's going to have to be some advertising. And so while you see -- because we're selling direct to consumer, the price can be higher than what we're selling at to our retailers, but there will be a cost associated with it.

Do you expect the profitability to be comparable to the core business right now?

I think that we will have -- we can be just as profitable on a dollar perspective, maybe even more profitable. Percentages may not be the same because you are going to have a higher advertising cost.

Okay. When will you launch this?

We're very much in the early stages of it. So we hope to get -- begin selling direct to consumer sometime in the latter half of this fiscal year, but every little thing you do, a problem kind of pops up that you have to resolve. So I mean the plan is this fiscal year, but I'm not exactly sure what month it will happen.

Okay. No. We agree. Take your time. And hopefully, you'll break that out going forward so we can kind of keep track of what you're doing direct-to-consumer wise.

Great. Thank you very much.

And ladies and gentlemen, I'm showing no additional questions at this time. I'd like to turn the floor back over to Olivia Elliott for any closing remarks.

Great. Thank you, Jamie. We want to thank everyone for your continued support and interest in our company. And a special thanks to all of our employees, suppliers and customers. We look forward to talking to you again in mid-August when we release our first quarter results. Thank you very much.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.