Crown Crafts (NASDAQ:CRWS) Q1 2020 Earnings Call

0:01 Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc. Investors Conference Call. Your host for today's call is Mr. Randall Chestnut, Chairman, President, and Chief Executive Officer. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. 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, August 14, 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. Ms. Elliott, please go ahead.

0:46 Thank you. Welcome to the Crown Crafts Investor Conference call for the first 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 p.m. Central Daylight Time on August 21, 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 regards to comments made in today's conference call that are related to the company's recently announced dividend, its history of paying dividends, and the annualized yield on the company's common stock, 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 dividends.

1:54 I'll now turn the call over to Randall. Olivia and Anita, thank you very much and welcome everyone to our first quarter FY 2020 investor conference call for the quarter that ended June 30th of 2019. Before the market opened this morning, we issued a press release outlining the earnings of the quarter and I'm going to touch on those and Olivia will come back and add more to it before we open it up for questions at the end. For the quarter, net sales were $15,942,000 as opposed to $15,460,000 in the same quarter of FY19 or an increase of $482,000 or 3.1%. Net income was $1,079,000 as opposed to $264,000 in the same quarter last year or an increase of $815,000 or an increase of 309%. Diluted earnings per share were 11 cents this year as opposed to 3 cents in the same quarter last year. The gross profit in the current year quarter increased from 28.5% of net sales increased I'm sorry, 28.5%

3:25 of net sales from 26.7% of net sales in the previous year quarter. Historically, our first quarter has been our weakest quarter. This year, we're pleased that we've had improvement in net sales as compared to the first quarter of last year. We're also very pleased with the improvement in gross margin, net income, and earnings per share. Current year net income was favorably impacted by $0.03 per diluted share due to a state income tax adjustment that Olivia will discuss in more detail a little later. During the quarter, we liquidated all remaining Babies R Us private label inventory that we had had since they filed for bankruptcy and liquidation.

4:16 We're very pleased that we've been able to put this in the rearview mirror. The company's had a couple of difficult years with the transition to the naked crib and the loss of our second largest customer, which had a tremendous impact, and we weathered through it. We controlled our cost, weathered the storm, and we came out on the other end very healthy. Our staff did an amazing job getting through this very difficult period, and we're pleased with the current results. We finished the quarter with a cash balance of $3.5 million and unused borrowing availability of $19.2 million.

5:01 Our balance sheet remains very strong. Today in the announcement, the company also announced that its board directors declared a quarterly cash dividend on the company's Series A common stock of $0.08 per share which will be paid October 4, 2019 to shareholders of record at the close of business on September 13, 2019. This represents an annualized yield of 6.5% based on yesterday's closing of our stock price. We're very pleased to continue to reward our shareholders with cash dividends. That concludes my remarks, and I'll give it back to Olivia to add more comments.

5:50 Thank you very much. I'm 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 $15.9 million for the first quarter of fiscal 2020, compared with $15.5 million for the first quarter of the prior year. An increase of $482,000, or 3.1%. The increase in sales is primarily due to higher overall replenishment orders, with sales of bibs, toys, and disposables increasing by $1.3 million and sales of bedding and blankets decreasing by $808,000. Gross profit increased by $423,000 and increased from 26.7% of net sales in the prior years and many more. The increase in amount is primarily due to the higher sales in the current The prior year quarter included $210,000 in expenses to transfer the SASE inventory from Grand Rapids, Michigan to the company's distribution facility in Compton, California.

7:14 The current year provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 24.3% compared to 24% in the prior year quarter. During the current year quarter, the company reversed the reserves for unrecognized tax liabilities that it had previously recorded 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, the company recorded discrete entries associated with excess tax benefits or charges arising from the vesting of non-vested stock during the period, and also recorded reserves for unrecognized tax liabilities.

8:00 The effective tax rate from continuing operations, combined with the effect of these discrete income tax charges and benefits, resulted in an overall provision for income taxes of 5% for the current year and 23.3% for the prior year. Net income for the first quarter of fiscal 2020 was $1.1 million, or 11 cents per diluted share, which included $0.03 associated with the reversal of the discrete income tax benefit and the associated interest and penalty. Net income for the first quarter of fiscal 2019 was $264,000 or $0.03 per diluted share. And I'll now give it back to Randall. Olivia, thank you very much. Anita, if you'll come back on, you can open it up now for Q&A.

8:48 Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. The first question today comes from Josh Peters with Zena Sterling Advisors. Please go ahead. Hello. Thank you for taking my call, and congratulations. I really like the increase in profits year over year.

9:33 Thanks, Josh. How are you? Yeah, very good. I did want to dig in just a little bit to the differences in the sales trends, you know, where the – You know, bib and toy business up about 19% year-over-year, but bedding and blankets down 9.5%. And just add a little color, you know, what's driving the growth on the growth side and the continued decline on the bedding side. I mean, Josh, part of it is new placements and fixture fill and We shipped some of that in the quarter, and that's really the majority of it. There's nothing spectacular that stands out in the quarter that caused us to have an increase of any appreciable degree, except for just regular repeat business and some placements.

10:41 Okay, and the decline on the bedding side, is that just a function of naked crimp still taking a toll? It's a combination of that, and it's also a combination of one of our customers in the fourth quarter of last year took advantage and stocked up on quite a bit of inventory that carried over into the first quarter. which reduced their reorders in the first quarter. That probably had more of an effect on NoJo, the crib and bedding business than anything else. Okay. So it sounds like just, you know, normal variability but, you know, still solid progress on profitability.

11:31 One other question and then I'll let somebody else get on the line. It's great to see that you've paid off all your debt and you're back in a positive cash position. Well, cash is always positive. I noticed that your receivables balance has come way down. Is it at what you think of as a normal level going forward from here or can we expect maybe the net cash position might run back down in the next couple quarters? Josh, that would be A forward-looking statement to predict where cash will be, but I can tell you that, yes, it's going to bounce in and out of the revolver for the remainder of the year, but to no appreciable degree.

12:20 No degree that you should worry about, okay? Okay. Thank you very much, and again, congratulations on a solid quarter. Thank you very much. Have a good day. There appears to be no further questions. I would like to turn the conference back over to Randall Chestnut for any closing remarks. Okay, Anita, thank you very much, and that concludes. Well, we've got one more on now. Anita? Anita? The next question comes from Ralph Marish with First Manhattan. Please go ahead. Good afternoon. Thanks for letting me sneak in at the end there. Thank you. Another three seconds and we would have cut you off.

13:12 Exactly. Just two quickies. The early order, the fourth quarter order, was that an attempt to beat tariffs? Was that the reason? Not really. It was a customer that, if I gave you the name of, obviously you'd recognize them very well, but it was a customer that took advantage of just stocking up on some inventory at your end in the fourth quarter, our fourth quarter, which ended in March. And there was nothing spectacular about it except that when they do that, then it obviously has a negative effect on the following quarter. Okay. There's nothing, you know, unusual or spectacular about it. No, I don't think it related to the tariffs at all.

14:05 Okay, so then I'll just expand the tariff question. Are you seeing any kind of issues regarding tariffs, either from customer concerns or in your own order pattern, your own, yeah, order pattern with your suppliers? Ralph, to this point, we've only had two of our categories of any sizable degree that were affected, okay? and that was in round two, one in round two and one in round three. The round four that was announced to be effective September the 1st and now some of that has been postponed to December of 2019 is the 10% is going to get most of the balance of our products, okay?

15:00 And our philosophy has been, and we've told it and we've repeated it over and over again, is we're going to pass it on. We're going to raise the prices. And that we've done. And we've had some pushback, but by and large, most people understand and they're accepting it and passing it on. And we are phasing it through, meaning if we've got inventory in the warehouse, at the pre-tariff rates. We'll work through that before we put the new tariffs in. We'll work with the retailer in that form and fashion. So, but we've had a little bit of pushback, but by and large, most people have accepted it.

15:45 But we've taken a pretty firm stand that, you know, we're going to pass it on. Thank you, and thanks for answering the other questions. Thank you very much. Thanks for being on. The next question comes from Fred Foulkes with Boston University. Please go ahead. Oh, hi. It's a great question. You really answered my questions on tariffs, but I was wondering, some of your larger customers, you've still been able to, they're willing to accept your passing on those additional costs? So far, Fred, they have, okay? We had one item, and it was an item that was sitting on the bubble anyway that may or may not have been continued.

16:36 And one sizable retailer just said, okay, it's not performing that well. Let's discontinue it. That's been the only case we've had where we've had, you know, just out-and-out resistance. We've had some people say, oh, you've got to give us six months' notice to pass through a price increase. And our answer to that is, oh, we didn't get six months' notice on the tariff, so sorry. We'll work with you on the existing inventory, but we're passing it through. And a lot of major retailers, in particular one, Walmart, has been very vocal that they're going to pass it on. And so, you know, it's inflationary, and there's no question about it, and we are taking a very firm stand, and we're passing it on.

17:26 Okay, thank you. Our margins, as you see, are healthy, but they're not healthy enough to eat those kinds of increases. Thank you. You're quite welcome. Thank you. The next question comes from Dennis Skinnell with Rutabaga Capital. Please go ahead. Yes. Good afternoon, Randall and Olivia. Hello. Just a quick one from me. In previous calls, you've actually called out the sales contributions from SASE and Carousel. Is that something you're willing to do on a continuing basis? We didn't do that. The reason we had been doing that the last couple of years because it was primary differences between year over year because you had it for a partial year in one year and then a full year in the other, so it was called in major swings.

18:23 So we really didn't call those out specifically this year. Okay. Just out of curiosity then, where we saw betting down on a year-over-year basis, any commentary on how Carousel performed on a year-over-year basis? Was it up, flat, down? Dennis, it was down a little, okay? It basically is infant betting. and it was too affected by the effects of the NICI crib. So it was down slightly. Yes. Got it. Excellent. Thank you. That's all for me. Thanks a lot. You're quite welcome. This concludes our question and answer session.

19:09 I would now like to turn the conference back over to Randall Chestnut for any closing remarks. Okay. Thank you, Anita. Just a last closing remarks as we begin another year. We're very pleased and excited and optimistic about the future. And I will emphasize your company is very solid. And I'd like to repeat that. Your company is very solid. We'd like to thank all of our employees, suppliers, customers, and shareholders for their continued support. And we'll speak to you again in three months or so. Thank you very much. Have a good day. Thank you.