Crown Crafts (NASDAQ:CRWS) Q1 2021 Earnings Call

0:00 Thank you, gentlemen, and welcome to the Crown Crafts, Inc. Investors Conference Call. Your host for today's call is Mr. Richard 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., and as a reminder, this conference is being recorded today, August the 12th, 2020. 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. Please go ahead. Thank you. Good afternoon and welcome to the Crown Crafts Investor Conference call for the first quarter of fiscal 2021. With me today is Randall Chestnut, the company's President and Chief Executive Officer.

0:55 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 13, 2020. 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 regard 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 stocks, 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.

1:53 I will now turn the call over to Randall. Thank you, Olivia, and welcome to everyone on today's conference call. We appreciate your time and interest. Before the market opened this morning, we released our earnings for our first quarter, which ended June 26, 2020. And we're going to discuss the first quarter results and I'll take you through a brief overview of it and then Olivia will give you a little more details. Net sales for the quarter this year was $16,205,000 as opposed to the same quarter last year of $15,942 or an increase of $263,000 or 1.6%.

2:51 Net income for the same period this year was $1,215,000 as opposed to last year of $1,079,000 or an increase of $136,000 or 12.6%. Diluted earnings per share were $0.12 this year versus $0.11 in the same quarter last year. As we began the quarter, we were at the height of the Corona 19 pandemic. During the quarter, our internet business, both direct to consumer and through e-commerce retailers, grew very nicely.

3:37 As we had previously reported, we set up our warehouse in Compton, California to be able to drop ship direct to consumer. We do this for the majority of our retailers, and this has served us very well during this period as many brick-and-mortar retailers were actually closed. We have seen a big increase in consumer demand for our products. As always, we continue to maintain tight cost control and once again, it proved that our company's ability to react swiftly to changing market conditions.

4:24 In the press release this morning, we also announced that the company's board of directors has declared a quarterly cash dividend on the company's Series A common stock of eight cents per share, which will be paid October the 2nd Thank you for joining us. of 6.5%.

5:15 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 $16.2 million for the first quarter of fiscal 2021, compared with $15.9 million for the first quarter of the prior year. an increase of $263,000, or 1.6%. The increase in sales is primarily due to higher sell-through of bedding and blankets at major retailers, offset by lower sales of beds, toys, and disposables. Gross profit increased by $472,000, an increase from 28.5% of net sales in the prior year to 31% of net sales for the current year.

6:06 The increase in amount is primarily due to the higher sales as well as a more favorable customer and product mix in the current year quarter. Marketing and administrative expenses decreased slightly in amount and were 20.9% of net sales for the current year quarter compared with 21.7% of net sales in the prior year. The decrease in amount for the current year period is primarily the result of lower overall compensation costs of $175,000 partially offset by higher outside services of $98,000. The current year provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 25.1% compared with 24.3% in the prior year quarter.

6:53 During the prior 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. 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 25.9% for the current year and 5% for the prior year. Net income for the first quarter of fiscal 2021 was $1.2 million or $0.12 per diluted share.

7:42 Net income for the first quarter of fiscal 2020 was $1.1 million or $0.11 per diluted share. which included three cents associated with the reversal of the discrete income tax benefit and the associated interest and penalty. And I'll now give the call back to Randall. Okay, Olivia, thank you very much. And Chad, if you'll come back on, we'll open it up for any questions that anyone on the line may have. Certainly. Thank you, sir. We will now begin the question and answer session. to ask a question, you may press star then one on your telephone keypad.

8:27 If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question will be from Linda Bolton Wiser with DA Davidson. Please go ahead. Hi, how are you? Hi, Linda. We're good. How are you? Good, good. So, good quarter. Congratulations. Thank you. I was wondering, I was looking at the segment results and seeing that bedding, blankets, and accessories was up about 30%, whereas bibs, et cetera, was down 25%.

9:16 so is there anything unusual going on with regard to timing of certain orders or shipments or anything like that that made one segment so different from the other in terms of performance? Yeah, Linda, there was in the bib and bath segment, the sassy segment, there was a couple of things going on that depressed the sales. One, as you know from following us for a while, we have a very nice business with Chick-fil-A and their restaurants. And their restaurants were closed, and we sell them the placemat that they give out to kids when they visit.

10:04 They go inside their restaurants, and the inside's been closed, so therefore they have not been ordering goods during this quarter. that had depressed the sales for that segment of the business. And the other one, which has now been fixed, is the material that we use to make our bibsters, which is our disposable bib in China, that material got diverted to make face masks. And we had a hard time finding materials. we have since now found a substitute material and we have goods on order and we should be back to shipping I'm going to say probably late August or September.

11:02 Okay, thanks for that explanation. And then the 30% growth in bedding, is that just the strength of the DTC and the e-commerce or is there anything special going on there? Linda, that's pretty much 100% attributable to the e-commerce and the direct-to-consumer piece, which is our carousel designs, that was up. But then also our retailers who have websites, their business was up appreciably. And as I said earlier, When there was a movement with many of our competitors a number of years ago to go to outsourcing and go into third-party warehouses or 3PLs, we resisted that. And we said, no, we're going to control our own destiny.

12:01 And we did. And we set up a drop ship within our own facility in Compton, California, which we have now been in since 1996. So that gave us the flexibility, and we have the flexibility, to ship direct to consumer. So we set it up so e-tailers can place the orders and we have the capability to drop ship. So that was one of the biggest increases. Okay, so it sounds like that's something that can continue, you know, to the extent that e-commerce continues to be strong, maybe you'll continue to benefit. Is that correct?

12:50 Well, I mean, again, that's a forward-looking statement, but you can rest assured that we're not going to shut down that line that does the dropshipping, okay? Okay. I think you frequently note how good you are at cost control. It did look like the marketing and admin expenses, if you exclude the advertising, it was about $3.0 million, a little bit lower than maybe what I would have thought. is that sustainable or is that, did you do some unusual cost cutting or is that a sustainable level of SG&A expense?

13:44 We think that that is sustainable for the future. Okay. And then I think that you had talked about that you got a $2 million grant PPP loan. Is that something that you have to pay back and what's the timing of repayment of that? Well, Linda, the timing is a little bit uncertain right now. The SBA announced that they were going to open up to receive applications for forgiveness Monday of this week, but our lender has not opened up their portal We're ready. We can do it, okay? Then once we file, then the bank has 60 days, I think it is, to get it submitted to SBA, and then SBA has 90 days to look at it and decide if they're going to forgive it or not or if they're going to require repayment.

14:53 If they require repayment, we don't start until early next year. Right. So if they require repayment, it would be paid off gradually? It would be paid off over 24 months, yes. Okay. But that would not start until sometime after the first of the year, based on the 60 days and 90 days. Now, it could be sooner. That would be the requirement to start it, We could get an answer sooner than that if the bank does their work and submits it sooner and then if the SBA does theirs and approves or denies it sooner.

15:47 Okay. And if the loan was forgiven, would there be any special use for that cash or just leave it on the balance sheet or...? It would stay on the balance sheet, Linda. Okay. We used the money, okay, because whenever we applied for the SBA loan, we agreed that we would keep everybody employed through the 60-day period of the pandemic. And we did that. We did that 100%. I mean, and so we kept everybody employed. and that's the biggest portion of what the money was used for.

16:34 Right. Okay. And then can I ask you, your gross margin performance was quite good in the quarter. You mentioned that there was favorable mix. Can you just repeat what mix was that? Was that product mix or channel mix or can you give a little more color on that? It's both. Okay? Product mix shifted to, you know, a more favorable margin slightly than historical. And channel blending or channel mixing, some of the major closeout customers, the TJ Maxx, the Marshalls, the HomeGoods, Ross Storrs Tuesday morning were closed during most of the quarter.

17:34 So they were not taking any closeouts, okay? So that has a way of improving our margin as well. Okay, gotcha. And then finally, I think that we read that you have maybe one Disney license expiring at the end of the calendar year 2020. Is that correct? And how significant is that license? Is that a big one? Linda, I don't have that information right in front of me. But I think you're right. There is one expiring. But it's not a huge one. And it's not and danger of not being renewed.

18:25 Okay. And then, well, let me just ask one more if I could. In looking at your margins over time, you did have a peak operating margin of about 13.3% a couple years ago in FY17. Is that a margin level that can be achievable someday in the future? I'm not putting any timeframe on it, but Is there anything structurally that has changed? I mean, I guess we've had the tariffs since then, but is there anything that's changed that would make that margin structure unachievable in the future? Linda, again, I hate to say this, but you're asking for forward-looking information, which, as you well know, we try very hard not to share that information on a forward-looking basis.

19:20 But, you know, I mean, one thing that has helped us improve our gross margin, and we've said this before and I'll say it again, the baby's rust going out of business, going into bankruptcy and ultimately liquidation, had a good and bad effect. The bad effect is we lost that revenue. The good effect was because of all the advertising and promotion required for that account, it was probably the lowest margin account we had. So that has had a positive spin on our gross margin going forward. Okay. That's very helpful, Randall. Thank you very much.

20:09 You're quite welcome. Thank you, Linda. Thank you. Once again, if you have a question, please press star then 1. And the next question will come from Michael Bernstein with Moral Crust. Please go ahead. Hey, great quarter. Hey, Michael. Hi, how are you? We're good. How are you? At home, locked up. But in any event, a question. How is the PPP loan carried on your balance sheet?

20:57 Until we're granted forgiveness, it's carried as debt. So there's a piece of it in the current maturities, and then there's a bigger piece in the long-term debt line. Okay, and if it's forgiven, which it's highly likely that it will be or a large portion will be, will that become income? It will. It would be a gain. It would be below operating income. Okay, and the size of that loan was a little over $2 million? No, a little under $2 million. A little under $2 million. A million and nine and change. Okay, that's within my 5% error factor. Thank you very much.

21:43 You're quite welcome. Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Randall Chestnut for any closing remarks. Chad, thank you very much. Again, I'd like to remind everybody that these past three months has been a very difficult time, but your company has done well and prospered through this difficult quarter, and we're very proud of that. We think it's a phenomenal accomplishment. We'd like to thank all of our customers, employees, suppliers, and shareholders for their continued interest and support in crime crafts.

22:36 Q1 FY21 was a solid quarter, and we're very proud of it. Thank you very much. Have a good day. And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.