Crown Crafts, Inc. (CRWS) on Q2 2021 Results - Earnings Call Transcript
Operator: Hello, ladies and gentlemen, and welcome to the Crown Crafts, Incorporated Investor Conference Call. Your host for today's call is Mr. Randall Chestnut, Chairman and CEO Joining Mr. Chestnut on the call will be Ms. Olivia Elliott, President & Chief Operating Officer; Mr. Craig Demarest, Vice President and Chief Financial 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 11, 2021. At this time, I would now like to turn the call over to Mr. Craig Demarest, who will begin the call. Please go ahead.
Craig Demarest: Welcome to the Crown Crafts investor conference call for the first quarter of fiscal year 2022. With me today are Randall Chestnut, the company's Chief Executive Officer and Olivia Elliott, company’s President and Chief Operating Officer. A telephone replay of this call will be available one hour after the end of the call through 4:00 p.m. Central Time on November 11. 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. I will now turn the call over to Randall.
Randall Chestnut: Craig, thank you very much and good morning to everyone and thanks for joining us on our first quarter fiscal year 2022 conference call. We are very happy with the results of the quarter. One disappointment with -- in May of this year, we announced that we had made the difficult decision to close Carousel Designs effective May the 21, 2021. The financial impact of Carousel and the forgiveness of the Paycheck Protection loan during the quarter has caused the comparisons between this year and last year to be a little difficult. But when you separate the impacts from the results of the operate -- continued operations, which are no job baby and kids and Sassy baby. These subsidiaries had a great quarter. Now I'll give it to Olivia and Craig to discuss the quarter in more detail. And we'll be back at the end to take any questions. Thank you.
Olivia Elliott: Thank you, Randall. I'm just going to touch on the first quarter highlights at a very high level and then I'm going to turn the call over to Craig and he'll go into more detail. First quarter net sales were $18.7 million compared with $16.2 million last year, which was an increase of 15.5%. If you split Carousel from both quarters, the increase in net sales for our continuing operations of NoJo and Sassy was 22.9%. While we've seen a shift in sales due to consumers starting to shop in brick-and-mortar locations again, if you exclude Carousel’s direct-to-consumer sales, internet based sales still represent approximately 30% of our sales. During the quarter, we were also happy to have a slight increase in international sales, which were hard hit during the height of the pandemic. First quarter net income was $2.7 million compared with $1.2 million last year. As Randall mentioned, there were quite a few gains and losses associated with Carousel and the Paycheck Protection loan forgiveness. When you exclude the impact of both of these, net income would have been $1.5 million in the current year compared with $1.2 million last year, an increase of 19.5%. We continue to feel the impact of rising freight costs which impacted our gross margin this quarter. Craig will address this in a little more detail later on in the call. On the balance sheet side, we finished the quarter with $4.7 million in cash and no debt. The Company's Board of Directors declared an $0.08 per share cash dividend on the company's common stock that will be paid on October 1 of 2021 to stockholders of record at the close of business on September 10, 2021. This represents a 4.3% yield based on yesterday's closing price per share. We're very pleased that our financial strength allows us to pay this dividend. Overall, this was a very good quarter for us. And I'll now turn it over to Craig.
Craig Demarest: Thanks, Olivia. I'll give the financial highlights for more detailed analysis. Please refer to the company's form 10-Q filed with the SEC this morning. As Olivia mentioned net sales were $18.7 million for the first quarter of fiscal 2022 compared with $16.2 million for the first quarter of the prior year for an increase of $2.5 million or 15.5%. The increase in sales is primarily due to the higher sales of bibs, toys and disposables, offset by lower sales of bedding and blankets. The decline in sales of bedding and blankets is primarily the result of an $863,000 decrease in sales at Carousel Design, which ceased operations during the current year quarter. Overall sales have been higher at brick-and-mortar retailers and lower at online retailers, as consumers have begun to return to stores that previously had been impacted by the COVID-19 pandemic. Gross profit decreased by $367,000 and decreased from 31% of net sales in the prior year quarter to 24.9% of net sales in the current year quarter. The gross profit dollars in the current year quarter decreased as compared to that at the same quarter in the prior year, because the gross loss of $647,000 experienced by Carousel in the current year quarter was only partially offset by increased gross profit from higher net sales over the same comparable periods. The loss from Carousel in the current year quarter is the result of the sale of inventory below cost and the recognition of charges of $344,000 associated with the settlement, with a supplier of a commitment to purchase fabric and $265,000 associated with the liquidation of Carousel’s remaining inventory upon the closure of the business. The current quarter gross profit dollars and gross profit percentage are also adversely impacted by continuing increases in the cost of ocean-going freight. Marketing and administrative expenses were flat at $3.4 million for both the current and prior year quarters, but decreased from 20.9% of net sales in the prior year quarter to 18% of net sales in the current year quarter. As compared with the prior year quarter, the company incurred in the current year quarter, higher overall compensation cost of $154,000 and higher costs for outside services the $47,000 which were offset by lower costs or Carousel including lower advertising costs of $149,000 and the elimination of $64,000 in amortization costs. Other items in the quarter include a $1.985 million gain from the forgiveness of the PPP loan that Olivia mentioned earlier. The current quarter provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 19.2% compared with 25.1% in the prior year quarter. The current year quarter estimated annual effective tax rate includes no tax expense from the gain on extinguishment of debt, which will be permitted to be excluded from taxable income the effective which is expected to lower the effective tax rate for fiscal year 2022 by approximately 4 percentage points. During both the current and prior year quarters, the company recorded discrete tax benefits and or credits to adjust reserves for unrecognized tax liabilities. And the aggregate effect of excess tax benefits arising from the vesting of non-vested stock and the exercise of stock options. 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 18.6% for the current year quarter and 25.9% for the prior year quarter. Net income for the first quarter of fiscal 2022 was $2.7 million or $0.27 per diluted share, compared to net income of $1.2 million or $0.12 per diluted share for the prior year quarter. And with that, I'll return the call back to Randall.
Randall Chestnut: Okay, Craig, thank you very much. And Carrie, I'll call you back up and you can open it up any questions that anyone might have.
Operator: We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. First question is from Linda Bolton Weiser of D.A. Davidson. Please go ahead.
Linda Bolton Weiser: Yes, hello. How are you doing?
Randall Chestnut: Hey, Linda good. And you?
Olivia Elliott: Hi, Linda.
Craig Demarest: Hello.
Linda Bolton Weiser: Yes, good. So -- yes, congratulations on the good sales in the quarter. And I'm just trying to figure out on the gross margin, Craig if I ask you to repeat it sounds like there were two special items that maybe I would want to exclude $344,000 and $265,000. Is that correct? Since those were kind of special items?
Craig Demarest: Yes, the prior -- the Carousel gross loss was $647,000 in the current year quarter, and it included the two items, you're referring to the $344,000 and the $265,000.
Linda Bolton Weiser: Okay. So then if I exclude those items from gross margin, I would get to some kind of normalized level. Do you happen to know that off the top of your head or I guess I could do the calculation? I'm just trying to figure out how much the gross margin was down excluding those items?
Craig Demarest: I don't have that handy.
Olivia Elliott: If you look at the press release, we closed the sale. If you excluded both Carousel -- the Carousel from both quarters as well as the PPP loans we included what net sales, gross margin or gross margin and net income would have been. So let me get to that. The quarter would have had $18.1 million in sales, net sales 29.3% of the gross margin and $1.5 million as your net income. If you exclude both of the gross one-time events.
Linda Bolton Weiser: Okay, so I guess that would make the gross margin down about like 200 basis points or so not quite. So I mean -- so maybe a 29% gross margin. I know you don't want to give guidance, but maybe that's a decent level going forward. If one more challenge assume the freight inflation pressures were to continue.
Randall Chestnut: You've got to figure that Linda. I'm sorry.
Olivia Elliott: I think we've done all we can…
Randall Chestnut: We're not going to help you with that. You know that.
Linda Bolton Weiser: Okay.
Randall Chestnut: Right.
Linda Bolton Weiser: Well, are you -- you had talked about I believe some price increases on the last call. What's the status of taking some pricing increases?
Craig Demarest: Linda, we are and where we can and we analyze our business very carefully. And where the items are price sensitive. And we think that a price increase is going to --- might that not get out of the market or might get too high. We have avoided those other places we have been fairly consistent and insisting on price increases. So we have been -- we've had some success. The one thing before you ask the question that we have not been able to cover with price increases is the freight costs? Because the freight cost keeps changing faster than we can increase prices. I mean, it almost changes every day. So it's a roller coaster.
Linda Bolton Weiser: Okay. So in terms of the Carousel, I think you said that the bedding and blankets segment was down $163,000 because of Carousel closing down. But Carousel was in there for about two months of the quarter. So I'm just trying to figure out, like the $863,000 of sales losses, just for one month of the quarter, it seems very large.
Olivia Elliott: Hold on. The $853,000 is the difference between last year and this year.
Craig Demarest: And this year, right.
Randall Chestnut: Including the month in the June quarter this year where Carousel was…
Olivia Elliott: So there were some sales -- And there were some sales in last year that we also did that math in the press release where we took those not what -- the impact of Carousel out of last year and compared it to this year. As Randall said in -- earlier in the call it’s definitely a tough quarter to be able to compare. So we tried to do what we could in the press release to make it a little bit clearer.
Linda Bolton Weiser: Okay. Can you give us -- remind me the full year amount of Carousel sales and profit or something in 2020 I mean, FY ’21?
Olivia Elliott: I will -- keep asking your questions and we'll look at -- we'll refresh ourselves on that. That number while you're asking.
Linda Bolton Weiser: Okay.
Randall Chestnut: -- the profit was just for sales.
Craig Demarest: just the sales.
Linda Bolton Weiser: That’s right?
Craig Demarest: We'll give you that in a minute Linda.
Linda Bolton Weiser: Okay, I think it was around 4, somewhere in the area of $4 million to $5 million. What I think they have here.
Olivia Elliott: That's close. I'm just going to get the exact amount.
Linda Bolton Weiser: Okay. And so you're -- so in other words, your sales increase. It's even when the discontinuation of Carousel’s are part of the quarter. So it's very strong. What -- to what do you attribute the strength of the sales performance? Just generally people going back to stores?
Randall Chestnut: Yes, Linda. People -- I mean, even through the pandemic, we stayed fairly strong, because we had changed our business model where we could serve as dropship and shut must direct to the retailers to the internet retailers, but then as the pandemic came to an end, people going to get out of the house and go back to shopping. So we've seen a resurgence, a heavy resurgence in brick-and-mortar sales. And that has helped us, okay. And that's through all not just one retailer, but through several other retailers. Now, obviously, that doesn't affect Amazon, because I don't have a brick-and-mortar, but it does affect our other retailers. And that, has been a strength that we've been able to regain a lot of that through people getting out and going back into the brick-and-mortar.
Linda Bolton Weiser: Okay.
Randall Chestnut: Maybe if you exclude and don't get me wrong, excluding the Payroll Protection Program is just to clarify numbers. I mean, we're happy that we got forgiveness on loan, very pleased. But if you exclude Carousel, and then you have to exclude the Payroll Protection gain if you exclude those, as I said in the opening remarks, the strength of no job, baby and kids, and Sassy baby is very strong. I mean, we -- It was good. It was very good. And on…
Linda Bolton Weiser: Okay.
Randall Chestnut: On we've had -- we've said it many times before. That's with , one particular retailer that, it is a specialty retailer that we sell or Sassy does sells placements that had zero in the corner. That's even overcome on that.
Linda Bolton Weiser: Right. When is the retail going to come back to purchasing do you think?
Randall Chestnut: Well, with -- it is starting to come back a little bit last year a little bit very little bit. And not -- at one end of the quarter, we just reported that would be in the current quarter that we're in now. But I think we've gotten a few. But it's just starting to dribble back in.
Linda Bolton Weiser: Okay.
Olivia Elliott: So Linda just a follow up on the question about Carousel sales, we actually never have reported the fiscal ‘21 sales. But in fiscal ‘20, the sales were $4.8 million. And it's safe to say that it wasn't far off from that number in 2021. Maybe a little higher.
Linda Bolton Weiser: Okay.
Randall Chestnut: So we've never recorded for net income. But it's also safe to assume that if it were profitable, we wouldn't have ever cancelled or closed the operation. So you got to assume it was not profitable.
Linda Bolton Weiser: Okay. All right. I think that's all the questions for me right now. Thank you very much and take care.
Randall Chestnut: Thank you Linda.
Olivia Elliott: Thanks, Linda.
Craig Demarest: Take care, have a good day.
Operator: Seeing no further questions, I'll turn the call back over to Mr. Chestnut for any closing remarks.
Randall Chestnut: Carrie, thank you very much. And again, I'd like to say thanks to all who participated in today's call. We repeat, we're very happy with the results of the quarter. And we want to thank everyone for their continued support and interest in the company. We'd like to thank all of our employees, suppliers and customers. And we'll talk to you again in mid-November when we release our second quarter results. Thank you very much. This concludes our conference for today. Have a good day.
Operator: And the conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.
