Crown Crafts (NASDAQ:CRWS) Q2 2021 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. And as a reminder, this conference is being recorded today, November 11, 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.

0:45 Thank you. Welcome to the Crown Crafts Investor Conference call for the second quarter of fiscal 2021. With me today is Randall Chestnut, the company's president and chief executive officer. Good afternoon. A telephone replay of the call will be available one hour after the end of the call through 4 p.m. Central Standard Time on November 18, 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 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.

1:52 Olivia, thank you and thanks everyone for joining today. And we'll give a few comments. Olivia will come back and add to it. And as we said earlier, then we'll open it up for any questions that anyone may have. I'm only going to address the quarter. which ended on September the 27th of 2020 of which we reported the earnings yesterday afternoon after the market closed. Net sales for FY 2021, the current year, were 21,659,000 as opposed to the previous year, FY 2020 of 18,560,000 are an increase of $3,099,000 or 16.7% increase.

2:43 Net income this year was $2,487,000 as opposed to net income last year of $1,779,000 or an increase of $708,000 or a percentage of 39.8%. Deluded earnings per share this year were 24 cents, and last year they were 18 cents. Gross margin for the current year quarter was 32.8% of net sales, up from 31.6% in the prior year quarter.

3:33 Q2 was a record quarter in terms of net income. It was the best second quarter that we posted since 2002. It was also the best quarter we posted any quarter in over a decade. A little over 10 years ago, we had one quarter, fourth quarter, that was slightly better. But other than that, it was the second best. So in all respects, it's a quarter that we're very proud of and we're very pleased with. Sales for the quarter were primarily up due to strong sales to internet retailers and internet shipments directly to consumers.

4:22 Demand for our products remained high during the COVID-19 pandemic. Our product development teams are focused on developing products that meet the high standard of our parents, which also led to our SASE Stack Up Circles Ring Stackers being awarded Newsweek's Best in STEM 2021 for all age groups, which is an award that we're very pleased to be honored to receive. Turning to the balance sheet, we finished the quarter with 6.8 million of cash and no balance due on our revolving line of credit.

5:11 Late yesterday, when we made the announcement, we announced that the company's board of directors had declared a cash dividend of the company's Series A common stock of 25 cents per share, a one-time dividend, and a quarterly cash dividend and Mary Jean Bush. Both of these dividends will be paid on December 31, 2020 to shareholders of record as of the close of business on December 11, 2020. The company's financial health and exceptional cash flow allows us to once again reward our shareholders with a return on their investment.

6:03 Upon payment of the special dividend and quarterly cash dividend, Crown Crafts will have distributed more than $46 million in total dividends to shareholders since 2010. We remain committed to delivering value by operating the business in a disciplined manner while continuing to invest in growth strategies. We're pleased to announce this special dividend, which attests to the Board's ongoing confidence in the future of Crown credits. Okay, I'll turn it over to Olivia for additional comments.

6:48 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 yesterday afternoon. Net sales were $21.7 million for the second quarter of fiscal 2021, compared with $18.6 million for the second quarter of the prior year, an increase of $3.1 million, or 16.7%. Net sales were $37.9 million for the first six months of fiscal 2021, compared with $34.5 million for the same period of the prior year, an increase of $3.4 million, or 9.7%. The increase in sales is due at a higher sell-through at major retailers, which has been partially offset by declines at certain retailers that have been impacted by the COVID-19 pandemic, particularly one customer that has remained closed throughout the entire six-month period of the current year.

7:47 Gross profit increased by $1.2 million and increased from 31.6% of net sales for the prior year quarter to 32.8% of net sales for the current year quarter. Gross profit increased by $1.7 million and increased from 30.2% of net sales for the prior year six-month period to 32% of net sales for the same period in the current year. The increase in gross profit is due to the increase in net sales as well as a more favorable customer and product mix. Marketing and administrative expenses increased by $326,000 but decreased from 18.7% of net sales for the prior year quarter to 17.6% of net sales for the current year quarter. Marketing and administrative expenses increased by 254,000 but decreased from 20.1% of net sales for the prior year six-month period to 19% of net sales for the same period in the current year.

8:45 The increase in amount for the current year-to-date period is primarily the result of higher outside services of 201,000 and higher advertising of 115,000 partially offset by lower travel expenses of $67,000. The current year-to-date provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 24.2% compared to 24% in the prior year. During the prior year's six-month period, 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.

9:31 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 24.9% for the current year-to-date period and 18.8% for the prior year. Net income for the second quarter of fiscal 2021 was $2.5 million or $0.24 per diluted share. Net income for the second quarter of fiscal 2020 was $1.8 million or $0.18 per diluted share. Net income for the first six months of fiscal 2021 was $3.7 million, or $0.36 per diluted share, compared to net income of $2.9 million, or $0.28 per diluted share, for the same period in fiscal 2020, which included $0.03 associated with the reversal of the discrete income tax benefit and the associated interest and penalty. And I'll now return the call to Randall.

10:44 Randall Delaney Olivia, thank you very much. And Andrea, if you'll come back on. will open it up to any questions which anyone might have. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speaker phone, 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 will pause momentarily to assemble the roster. and the first question comes from Linda Bolton-Weiser of VA Davidson.

11:29 Please go ahead. Hi. Congratulations on a great quarter. Hi, Linda. Hi. So, you know, I was wondering if you could just give a little bit more color on the demand for your products because I guess I'm used to having it rely more on birth rates and things like that, but I mean, do you have any insight into what is going on? I mean, are people just redoing their nurseries and buying things for their infants? What color can you give us on the demand? Well, I mean, Linda, our demand, and we track point of sale, our demand for orders coming in and our POS for sell-through at the retailers and we tracked the major ones, probably 80% of the retailers, 80% of the retail volume we tracked the POS has remained extremely high throughout this entire period.

12:37 And we think that it's been helped by people staying at home, having more time to shop the internet, which our internet business is up. and having more time on their hands which is good and they're spending money. We also think early on the stimulus checks helped and that did help move some goods through. But even beyond that, our product has remained extremely strong and that's with what Olivia referred to as one account which has been totally zero for our first and second quarter. and it's a sizable customer and we still overcame it. The demand has been very high. We're pleased with it.

13:34 Was there anything in the quarter that you could call out as unusual? Any shifting of sales from prior quarter or anything of that nature? Linda, no. Not at all. There's nothing unusual that shifted from quarter to quarter. I hate to say it, it was just a good quarter. And we're proud of it. Right. So can I just ask about your marketing and administrative expenses? If you exclude the advertising, that crept up a little bit from $3 million to $3.4 million from the last quarter sequentially. Is that like a permanent new level or did you have some special costs that were in the quarter?

14:31 It's normal expenses. Some of it may be a little bit of timing here or there, but for the most part, other than advertising, it was just some outside services that is normal expenses. Okay, and last quarter you mentioned the gross margin was helped by certain retailers and being closed. The lower margin channels were closed. You still had really good growth margin expansion.

15:17 Did those retailers, some of those lower discount retailers, did they reopen back up in the quarter? They did. Some of them did. Not all of them. And not all of them to the full degree that we'd like to see them. But they're still... some improvement in our gross margin by the fact that some of the people that normally buy with lesser gross margins have not had an opportunity to buy because their doors remain closed. But that's not a big degree. Okay. And then finally, I guess on your Your cash flows are obviously very strong.

16:11 Do you foresee keeping the little bit of debt that you have on the balance sheet for the remainder of the year, or do you think you'll pay that off in the second half of the fiscal year? The debt that's on the books right now is the PPP loan, which we have now filed for forgiveness to request that forgiveness, but we have not heard back yet. That all depends on when we, you know, get word as to whether that's forgiven and we need to either repay it or, you know, move it off of the balance sheet into a gain. Okay. Gotcha. Okay. I guess that's really all for now for me. Thank you very much.

16:56 Thank you, Linda. Take care. Again, if anyone would like to ask a question, please press star, then one on your touch-tone phone. This concludes our question and answer session. I would like to turn the conference back over to Mr. Randall Chestnut for any closing remarks. Andrea, thank you very much. And we appreciate everyone's attention. and many, many more. And to close, I'd like to say that management and the board remains optimistic about the future.

17:45 And as we have said many times on these conference calls and I'll say again, your company remains solid. Let me repeat that. Your company is solid. We'd like to thank all of our employees, suppliers, customers, and shareholders for their continued support and we look forward to speaking with you at the end of next quarter. This concludes our presentation. Thank you very much. Have a good day. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.