Crown Crafts (NASDAQ:CRWS) Q3 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. And as a reminder, this conference is being recorded today, February 12, 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 third quarter of fiscal 2020. With me today is Randall Chestnut, the company's president and chief executive officer. Good afternoon, everyone. 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 February 19, 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.

1:32 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, and good afternoon again. Before the market opened this morning, we announced our earnings for our third quarter that ended December 29, 2019. and I will address a little information about the quarter. Net sales for the quarter were $18.6 million or down just slightly from last year at $18.7 million.

2:26 But net income was $2,095,000 up from last year of $1,554,000 or an increase of $541,000 or 34.8%. Deluded earnings per share were 21 cents a share, and they were 15 cents per share last year. Olivia will address the year-to-date numbers a little bit later in the call. We're very proud of our third quarter performance. In spite of having flat sales, we were able to post a sizable gain in net income. Net income was aided by a tax credit for increased research activity and Olivia will address that later in the call as well.

3:12 Gross profit for the quarter improved to 31.3% of net sales this year versus 30.0% same quarter last year. For the last few months, we have been challenged by the issues from the tariffs that were imposed and goods coming out of Asia, particularly China. We took numerous actions to address these. One of the ones, we were granted an exclusion on one of our products called Table Toppers, which is a disposable product, and we were fortunate to get that excluded from the Paris.

4:00 We've also worked with our suppliers as the exchange rate became more favorable and we got better prices from some of our suppliers. In addition, where we could, we passed price increases on to our customers. Hopefully, this issue is behind us now and we can move forward. One other issue that we're dealing with is the coronavirus, and I'll address that briefly. We're monitoring that very closely. The escalation of the outbreak occurred during Chinese New Year, and the factories are just now returning to work. At this point, it's still too early to determine the effect that the coronavirus will have on our deliveries coming out of Asia.

4:53 On the balance sheet side, we remain strong, and we have a revolver that was paid off, and we have a small cash balance. at the end of the quarter. And we had availability on the revolver of $23.7 million as of December 29, 2019. In the press release this morning, we announced that the board directors had declared a quarterly cash dividend of the company's Series A common stock of $0.08 per share. Based on yesterday's closed price of the company's stock, This represents an annualized yield of 5.1%.

5:38 The dividend will be paid on April 3, 2020 to shareholders of record as of the close of business on March 13, 2020. Once again, we're pleased to offer this dividend that reflects the Board's confidence in the business and our ongoing commitment to provide value to our shareholders. I'll give it back to Olivia for additional comments. Thank you. I'm only going to give financial highlights. For more detailed analysis, please refer to the company's Form 10Q filed with the Securities and Exchange Commission this morning. Net sales were $18.6 million for the third quarter of fiscal 2020, compared with $18.7 million for the third quarter of the prior year, a slight decrease of $81,000, or 0.4%.

6:28 Net sales were $53.1 million for the first nine months of fiscal 2020, compared with $54.7 million for the same period of the prior year, a decrease of $1.6 million or 2.9%. Sales of bibs, baths, developmental toys, feeding, baby care, and disposable products increased by $616,000 in the current year, while sales of bedding, blankets, and accessories decreased by $2.2 million in the current year. The decrease in sales was primarily due to timing of shipments to certain retailers as well as a program that was discontinued during the second quarter of the current year. Gross profit for the quarter increased by $224,000 and increased from 30% of net sales for the prior year quarter to 31.3% of net sales for the current year quarter.

7:22 Gross profits for the year-to-date period increased by $146,000 and increased from 29.4% of net sales in the prior year to 30.6% of net sales for the current year. Marketing and administrative expenses for the quarter were flat at $3.4 million and decreased slightly from 18.5% of net sales in the prior year quarter to 18.4% of net sales in the current year quarter. Year-to-date, marketing and administrative expenses decreased in amount by $614,000 and decreased from 20% of net sales for the prior year to 19.5% of net sales for the current year. Prior year included $210,000 in expenses to transfer the SASE inventory from Grand Rapids, Michigan to the company's distribution facility in Compton, California.

8:15 In addition, outside services decreased by $264,000 in the current year. The current year provision for income taxes is based upon an estimated annual effective tax rate for continuing operations of 23.3% compared to 24.2% 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 the discrete income tax benefit of $232,000. During the third quarter of the current year, the company recorded a discrete income tax benefit of $276,000 to reflect the aggregate effect of certain tax credits.

9:04 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 16% for the current year and 25.8% for the prior year. Subsequent to the end of the quarter, the company's California Consolidated Income Tax Return for the fiscal year ended March 29, 2015, became closed for examination or other adjustments. Accordingly, during the fourth quarter, the company intends to reverse the reserve for the unrecognized tax liability for that fiscal year, which will result in the recognition of a discrete income tax benefit of $212,000 in the fourth quarter. The company also intends to reverse the related accrued accumulated interest and penalties, which will result in the recognition of a credit-to-interest expense of $84,000 during the fourth quarter.

10:17 Net income for the third quarter of fiscal 2020 was $2.1 million or $0.21 per diluted share, up from net income of $1.6 million or $0.15 per diluted share for the third quarter of fiscal 2019. Net income for the first nine months of fiscal 2020 was $5 million or $0.49 per diluted share, up from net income of $3.6 million or $0.36 per diluted share for the same period in fiscal 2019. and I'll now give the call back to Rachel. Olivia, thank you very much and Jerry, I'll call you to come back in and open it up to any questions that anyone may have on the line. We will now begin the question and answer session.

11:03 To ask a question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. The first question is from Linda Bolton-Weiser with D.A. Davidson. Please go ahead. Hi. How are you? Hey, Linda. Good. How are you? Good. Hey, Linda. Hi. So your gross margin performance has been really good all the fiscal year, and it was good again in this quarter. It looks like, depending on how you do in the fourth quarter, it could be 30% or even higher for the year, for the fiscal year. Is this a level, roughly, that you think is sustainable going forward, or is – There's some reversal of your growth margin level that you foresee.

12:14 Well, Linda, I hate to answer that question, and you're not going to like my answer, but that's a forward-looking assumption, and we try very hard not to give forward-looking statements. And so, therefore, I'm going to back off and say that, you know, we can't answer that. Okay, but, I mean, you've talked about you've done some particular cost reduction measures that have helped your growth margin. Is that really the explanation for the good performance? It is, Linda, and we've said that repeatedly over the years that we don't do it just, you know, when times are good.

12:59 We maintain tight cost controls year-round, and we do that on an ongoing basis. and that does help to protect our gross margin. And during these past few months with the tariffs, it was even more critical that we do that. And so we tried to use a balancing act of reduced prices out of China, increased prices to the customer, you know, and to offset the tariff increases. So we're pleased with the fact that we were able Maneuver through the landmines and come out with a good quarter. Okay, thanks. And then thanks for talking about the coronavirus situation in China.

13:50 Can you give a little more specifics, like how numerous are the numbers of different outsourced plants that you use? Like do you use just 10 or 100 or – and have the plants that are used to make your products, have some of those gone back to work already or are they all still out of work in terms of going back to the factory? Yeah, Linda, I'll give you the information that we know as of, you know, today. We use, I don't know, the count is numerous, but as the rule goes, you know, 80 or 90% of our volume comes out of 10 factories or so. So, of those factories, we do know that if the workers live in the province where the factory is located, they can come back to work and go straight into the factory and start to work.

14:50 We do know that some of our factories have a few people back at work. We also know that if they live in neighboring and others, and they come back to work, which they are trying to, then the government requires that they go into quarantine for 14 days. And that quarantine can either be in the local dormitories or it can be in local hotels that the government provides for them. So with that said, it's a mixed bag. We have factories that have people working. and we have factories that have people that are in quarantine that should be back.

15:36 You know, they're about a week into the 14-day quarantine now and another week or so. So, you know, we're hoping and they want to go back to work. I mean, they need to work. So, you know, we're watching it daily. Our own office in Shanghai is open. We're open for business. We're taking it very careful. We're rotating staff in. We're not bringing all of them in. It's not that many people, eight or so. And we're letting some work from home and rotate in and out. So they work in a big office building, which has a lot of people, so we're trying not to overexpose. So we're in hopes that, you know, this thing is starting to get under control, we hope.

16:30 Thank you. That's a very good explanation. That's about all I can give you. Yeah. No, thank you. That's very helpful. And can I just ask you about your cash flow performance? I mean, it's been pretty solid, and you've continued to pay your dividend. Although year-to-date, your operating cash flow is down a couple million, and it's usually negative in the fourth quarter. So are you – am I – I'm kind of thinking that you might have to put a little more debt back on the balance sheet to pay the dividend in the fourth quarter, or how is that going to work exactly with your cash flow? Again, that's a forward-looking statement, but I will give you that answer because I think it deserves an answer. We think By the end of the fourth quarter, Linda, it will have to be in the revolver, not to a big degree, but to a slight degree, because we paid the special dividend.

17:35 Now, keep in mind, the special dividend was not on the third quarter. It was actually paid at the beginning of the fourth quarter. So, it didn't come out of the cash flow numbers until Q4, the quarter we're in right now. To answer your question, we think we'll have to go back into the Revolver, but not a large amount, but for an amount of money. Don't worry, it won't be anywhere close to stretching the limit. Okay. Yeah, that's what it looked like, so thank you for that. I guess that would be all of my questions for right now. Thank you. I really appreciate it, and we'll see you in a few weeks.

18:22 You're quite welcome, Linda. Thank you very much. Have a good day. Thanks. Again, if you have a question, please press star, then 1. Please stand by as we poll for questions. The next question is from Ralph Marash with First Manhattan. Please go ahead. Good afternoon. Hey, Ralph. How are you? I'm okay, thanks. I hope you're both well, sound well. We're good, thank you. Great. A couple questions. I noticed the advertising spend for the year is down on a percentage basis in a good amount. Just curious if you have an explanation for that.

19:21 It's just timing, I think. I mean, the main advertising that we have is with our direct-to-consumer business, and so that's kind of ebb and flow. Okay. And the higher inventories year over year? That's a combination, Ralph. One of them, we purchase extra inventory on certain items, that were expected to have the tariff increase effective December the 15th. Well, obviously, as you know, that tariff increase did not go into effect. But it was an item that, you know, it doesn't go stale.

20:07 So we've got good inventory. And thank goodness with the coronavirus pending right now, I'm sort of glad we got it. But we did purchase extra inventory. Plus, Chinese New Year came a little bit earlier, so we purchased inventory in anticipation of Chinese New Year as well. So those two items contribute to the inventory increase. Thanks for that explanation. On margin, maybe to follow up a little on what Linda was saying about gross margins, So the fact that you are a public company and your customers obviously have sharp pencils and green eye shades and they follow your profitability and they understand that some of the explanation is from the tariff dislocation and anticipation and so on. Is it conceivable that you'll have to give back some of your selling price gains?

21:12 Well, I mean, Ralph, the short answer is we think we've already done that. And we had to negotiate with every major customer to delay, postpone some of the tariffs, to get price increases, et cetera. So with the majors, we struck a deal with all of them. Now, that's not to say that Ralph, they can't come back and open the can of worms, but I don't foresee it right now. Okay. I'll do my part and encourage them not to pester you. Yeah, please do. They always listen to me.

21:58 Thanks. That's it. Thanks, Ralph. Thank you, Ralph. Appreciate it. The next question is from Tony Chiarenza with Key Equity Investors. Please go ahead. Good afternoon. I hope you're both doing well. Hey, Tony. We're doing fine. Thank you. My question is can you give me a little bit better perspective on what demand conditions look like as you see them right now? Are things kind of just stable or do you see things kind of slowing down a little bit because of whether it's corona or whether it's been concern about the economy, et cetera? That would be helpful. I would say, Tony, that it's more in the line of being stable than it is up or down.

22:50 As Olivia alluded to, you know, in the third quarter, we had promotions that were not repeated at certain retailers that we had last year, plus we had one program that was discontinued that we suffered the loss of. But You know, retailers, you know, they sell as long as they've got customers coming into the store or to their websites. So right now, I would say it's more of a steady state than it is up or down. Okay, good. So you don't see any evidence of a recession or a slowdown or anything like that, and neither do you see a boom is basically the bottom line.

23:35 We don't at this point, no. Okay, good. Okay, that's very helpful. I thank you for your answer. You're quite welcome. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Randall Chestnut for any closing remarks. All right, Jerry, thank you very much. Olivia, thank you. And thanks for everybody on the call and the questions. And I remind her that we are a March-ending fiscal year, so Our next conference call will be mid-June, which will be for our physical year-end FY21, which will end the end of March this year. So we'll speak to you again at that time. We are very proud of the performance of the quarter and the year-to-date periods.

24:37 We have thought through some of the challenges, and we're very encouraged by it. 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 after we close our year-end. Thank you very much, and have a good afternoon. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.