Crown Crafts (NASDAQ:CRWS) Q2 2020 Earnings Call

0:00 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, November 13th, 2019. At this time, I would not like to turn the call over to Ms. Olivia Elliott, Vice President and CFO, who will begin the call. Please go ahead.

0:46 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 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.crowncraft.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.

1:31 Also, in regard to comments made in today's conference call that are related to the company's recently announced dividends 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 dividends. 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 the 29th 2019 and I'll make some remarks Olivia will come back and then as Rocco said we'll open it up for questions that anyone might have that's on the line second quarter This year, net sales were $18,560,000 as opposed to last year, $20,536,000 or down $1,976,000 or 9.6%.

2:31 Net income for the second quarter was $1,779,000 as opposed to $1,809,000 or down $30,000 or 1.7%. and Deluded Earnings Per Share were flat. It was 18 cents per share this year and 18 cents 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.

3:25 During the quarter, we attended and presented product from SASE and NOJO at the K&J show in Cologne, Germany. Because SASE has such a strong international presence, we've chosen to brand all the company's products that are presented at the show as SASE. At the show, we visited with distributors and customers representing 30 different countries and at the show, we presented 75 new product offerings from SASE 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.

4:16 Also, on October 31st, we announced that our board directors had declared a special cash dividend from the company's Series A common stock of 25 cents per share along with a quarterly cash dividend of 8 cents per share. Both dividends will be paid on January the 3rd, 2020 to shareholders of record as of the close of business on December 13th, 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, Crowncrest will have distributed more than $40 million in total dividends to shareholders since we started paying dividends again in 2010.

5:14 We remain committed to delivering value by 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'll 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%.

6:01 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, baths, developmental toys, feedings, 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. Growth 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.

6:51 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.

7:40 Contributing to the decrease is the elimination in the current year of $210,000 in charges incurred in the prior year associated with transferring most of the SASE-branded developmental toy, 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 for continuing operations of 24% compared to 23.4% in the prior year. During the first quarter of the current year, 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.

8:40 In addition, during both the current and prior year quarters and year-to-date periods, the company recorded discrete entries associated with excess tax benefits or charges arising from the vesting of non-vested stocks during the period and also recorded reserves for unrecognized tax liabilities. 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 18.8% for the current year and 26% for the prior year. Net income for the second quarter of both fiscal 2020 and fiscal 2019 was $1.8 million or 18 cents per diluted share. Net income for the first six months of fiscal 2020 was $2.9 million or 28 cents per diluted share compared with net income of $2.1 million or 21 cents per diluted share for the same period in fiscal 2019. And now I'll return the call to Randall.

9:44 All right, Olivia, thank you very much. And Rocco, if you'll come back in now, we'll open it up to any questions that anyone on the line may have. Absolutely, sir. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Linda Bolton-Weiser of DA Davidson. Please go ahead. Hi. How are you? Hey, Linda. Good. Hi. How are you? Good. So your growth margin performance has been pretty good for a couple of quarters now with year-over-year increase in growth margin.

10:32 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'll answer them separately, Linda. For the second half of the year, as you well know, we don't give forecasts and we don't give guidance. So, you know, you have to judge us. You sort of got to look in the rearview mirror. The reason for the increase is a slight change in product mix, but most importantly, it's really the ongoing efforts of the company to maintain cost control, which we've done now for many years and we continue to do. That's one of the things that we pride ourselves on is running a very tight operating company.

11:29 Okay. So I guess that'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're discussing today, in our product category didn't have a lot of items that were hit by the tariffs. We had a few. The majority came October 1st, and the balance will come December 15th.

12:25 So we didn't have a huge... and many more. And we've said this before, our intent is to control and to mitigate the cost of the tariffs by passing on price increases and controlling our cost of sourcing out of Asia, meaning trying to reduce prices first calls coming out of Asia, which we are doing. As far as passing prices on, there's some successes and there's some that we're still struggling with. So it's not a slam dunk, okay?

13:11 We don't have people standing in line waving saying, I'll take the inputs. So we're having to fight for every one of them. Okay. 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 had nothing to do with tariffs at all, Linda. It was a program that we were granted middle of the year before, middle of Calender 2018, and we started shipping it. And we paid what's called a slotting fee to get the space on the shelf.

14:03 And it came up one year anniversary, and since we had the space, that retailer wouldn't get another slotting fee from us, so they went to somebody else and got another slotting fee. And so we lost that program. So did the loss just occur this quarter, meaning we're going to have that negative impact in the next couple of quarters until 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 first quarter and majority of it in second quarter.

14:53 So when we circled around on it this year, it was in 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 date, which will be late June, early July. So would you say that was... and many more. Okay. Your special dividend is noteworthy, of course, but we noted, too, that your operating cash flow is actually down year-over-year a little bit in the first half.

16:03 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 debt 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 in the cash flow is in advance of the tariff increases we did by inventory ahead of time and to bring it in pre-tariff increases. So we stocked up on goods where we could. But we felt very safe that those goods were not going to be problematic and that they were going to flow through in the normal course of business.

16:55 We did buy some extra goods. But your assumption is correct. Okay, I understand. And then maybe just related to that dividend, Obviously, you're giving cash back to 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 that valuations are too high or you're just not finding what you want? I'm just curious about why not pursue a deal instead of doing the dividends? Linda is both of the above. The valuations that we've found of recent are a little higher than what we would like to say.

17:47 And we haven't found of recent ones that really peak our excitement level to the point that we're ready to jump out and write a check for them. So we haven't found anything that just really excites us at this point. Okay. I guess that's all for me. I'll pass it on. Thank you so much. Well, thank you. Appreciate your attendance. Thank you. And, ladies and gentlemen, once more, if you have a question, please press star then 1 at this time. We will pause momentarily to assemble our roster. And ladies and gentlemen, this concludes our question and answer session.

18:36 I'd 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 directors of the company remain optimistic about the future of our company. And I said this before, and I'll repeat this again. Your company is very solid, financially and sound. We'd 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.

19:22 Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. Thank you.