Crown Crafts (NASDAQ:CRWS) Q2 2022 Earnings Call

0:00 Good morning, and welcome to the Crown Crafts second quarter fiscal year 2023 conference call. All participants will be in a listen-only mode. Should you need any assistance today, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw a question, please press star, then two. Please note this event is being recorded. I would now like to return the conference over to Craig Demarest, Vice President and Chief Financial Officer. Please go ahead, sir. Thank you, Joe. Welcome to the Crown Crafts Investor Conference call for the second quarter of fiscal year 2023.

0:47 With me today is Olivia Elliott, the company's President and Chief Executive Officer. A telephone replay of this call will be available one hour after the end of the call through 4 p.m. Central Time on February 16th. 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 morning and thank you for joining us for our second quarter fiscal year 2023 conference call. As expected, the current macroeconomic challenges related to inflation and excess inventories at our retailers continue to impact us in the second quarter. However, our balance sheet remains strong and we believe that we are well positioned to withstand the current headwinds and take advantage of future growth opportunities when the markets return to more normal conditions.

1:56 Looking at the second quarter results at a high level, second quarter net sales were 18.7 million, down from 20.2 million last year. Year-to-date net sales were 34.4 million, down from 38.9 million last year. Multiple forces in the marketplace have contributed to the sales decline. After experiencing empty shelves during the 2021 holiday season due to port congestion, Retailers responded by building up their inventory levels during the first calendar quarter of 2022, resulting in an over inventory situation by late spring. This situation has been exacerbated by a change in consumer buying patterns, whereby many consumers are now trading down to lower priced items, buying fewer items, or foregoing some items altogether due to inflationary concerns.

2:47 It's important to note that we have maintained our overall shelf space at our retailers, and our partnerships with them remain strong. Second quarter net income was $2 million or 20 cents per diluted share compared with $2.4 million or 24 cents per diluted share last year. Year-to-date net income was $3.5 million or 34 cents per diluted share compared with $5.1 million or 50 cents per diluted share last year. Prior year-to-date net income included an almost $2 million gain of forgiveness of our Paycheck Protection Program loan and a $795,000 net loss related to carousel designs. Excluding the impact of the loan forgiveness and carousel designs, prior year-to-date net income would have been $3.9 million or $0.38 per diluted share.

3:38 For the current year, we continue to see increased costs throughout the supply chain, which we pass along to our customers whenever we can. The good news is that these costs have somewhat stabilized over the past several months. On the balance sheet side, we finished the quarter with $2.3 million in cash and no borrowings on our revolving line of credit. Our inventory remains high at $27.7 million at the end of the quarter, compared with $24.2 million at the end of September 2021. This is due primarily to the market trends mentioned earlier. We continue to be diligent in managing inventory, which is mostly current in-line products. However, in order to move some inventory to make room for some new programs, we may need to provide higher than normal discounts to retailers.

4:23 We hope to see closer to normal levels by the end of the fiscal year. We also announced that our Board of Directors declared an $0.08 per share cash dividend on the company's common stock that will be paid on January 6, 2023 to shareholders of record at the close of business on December 16, 2022. This represents an annualized yield of 5.4% based on yesterday's closing price. We're very pleased that our balance sheet remains strong and we can continue to reward our stockholders with an attractive dividend. As I mentioned during last quarter's conference call, we're excited about our long-term opportunities and we're moving forward with our strategic plan, which includes expanding in the toy category, growing our product offerings both organically and through acquisition, increasing our direct sales to consumers, and making further investments to enhance our technology and improve our organizational structure.

5:18 At the same time, we're managing our business to maximize profitability in the face of current challenges. I'll now turn the call over to Craig. Thanks, Olivia. I'm only going to give financial highlights. For more detailed analysis, please refer to the company's form 10Q filed with the SEC this morning. As Olivia mentioned, net sales were $18.7 million for the second quarter of fiscal 23, compared with $20.2 million for the second quarter of the prior year, a decrease of $1.5 million or 7.4%. Sales of bedding, blankets, and accessories decreased by $1.6 million, which was offset by an increase in sales of bibs, toys, and disposable products of $104,000. Sales decreased to $34.4 million for the first six months of fiscal 23 compared with $38.9 million for the same period the prior year.

6:13 and many more. Sales of bedding, blankets and accessories decreased by 4.1 million and sales of bibs, toys and disposable products decreased by 439,000. The decreases in sales are primarily due to lower replenishment orders at retailers as the company's customers began to reduce their purchases because their inventories increased. which we believe resulted from customers' excessive inventory purchases during the first quarter of calendar 2022 and consumers' response to macroeconomic conditions. Gross profit decreased by $622,000 and decreased from 30% of net sales for the prior year quarter to 29.1% of net sales for the current year quarter.

7:03 and the rest. Gross profit decreased by $125,000 but increased from 27.5% of net sales for the prior year six-month period to 30.8% of net sales for the same period in the current year. The decrease in the gross profit amount is net of the positive impact of the closure of Carousel, which in the prior year recognized losses from the sale of inventory below cost and the recognition of charges of $334,000 associated with the settlement with the supplier of a commitment to purchase fabric, and $265,000 associated with the liquidation of Carousell's remaining inventory upon the closure of the business. Although the gross profit in the prior year period was impacted by increases in costs across the entire supply chain, the company in the current year has realized some stabilization in its input costs. Finally, we are also beginning to see the benefit from recent increases in the selling prices of our products.

8:04 Marketing and administrative expenses decreased by $428,000 and decreased from 15.6% of net sales for the prior year quarter to 14.6% of net sales for the current year quarter. The prior year quarter included $85,000 of charges incurred by Carousell. Marketing and administrative expenses decreased by $381,000 but increased from 16.8% of net sales for the prior year six-month period to 17.9% of net sales for the same period in the current year. The prior year six-month period includes $495,000 for charges incurred by Carousell. Other items in the prior year six-month period include a just under $2 million gain recognized from the forgiveness of our PPP loan.

8:56 The current year-to-date provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 23.5% as compared with an estimated annual effective tax rate from continuing operations of 19.6% for the prior year. The gain on the extinguishment of debt associated with the forgiveness of the PPP loan was permitted to be excluded from taxable income. the effect of which lowered the effective tax rate for the prior year period by approximately four percentage points. During both the current and prior year quarters, the company recorded discrete reserves for unrecognized tax liabilities as well as adjustments to income tax expense associated with excess tax benefits or shortfalls arising from the vesting of non-vested stock and the exercise of stock options. and the rest.

9:48 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 24.7% for the current year six month period and 19.2% for the comparable prior year period. Net income for the second quarter of fiscal 23 was 2 million or 20 cents for diluted share compared to net income of 2.4 million or 24 cents for the second quarter of fiscal 22. Net income for the first six months of fiscal 23 was $3.5 million or $0.34 per diluted share compared to net income of $5.1 million or $0.50 per diluted share for the same period in fiscal 22.

10:35 And with that, I will turn the call back over to Olivia. Thank you, Craig. Joe will now open up the line for questions. 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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, you may press star, then 2. At this time, we will pause just momentarily to assemble our roster. And as a reminder, you may press star then 1 to join the question queue. And with no questions, we will conclude our question and answer session.

11:29 I'd like to turn the conference back over to Olivia Elliott for closing remarks. Thank you, Joe. Thank you to everyone for your continued support and interest in our company. And special thanks to all of our employees, suppliers, and customers. We look forward to talking with you again in mid-February when we release our third quarter earnings. The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.