Crown Crafts Inc (CRWS) 2021 Q4 法說會逐字稿

Welcome to the Crown Crafts, Inc. Fourth Quarter Fiscal Year 2021 Conference Call. Your host for today's call is Randall Chestnut, Chairman and CEO. (Operator Instructions) Any reproduction of this call in whole or in part is not permitted without prior written authorization of Crown Crafts, Inc. And as a reminder, this conference is being recorded today, June 9, 2021.

At this time, I'd like to turn the call over to Craig Demarest, Vice President and CFO, who will begin the call. Please go ahead.

Thank you, Cole. Welcome to the Crown Crafts Investor Conference Call for the Fourth Quarter and Full Fiscal Year 2021. With me today are Randall Chestnut, the company's Chief Executive Officer; and Olivia Elliott, our President and Chief Operating Officer. A telephone replay of this call will be available 1 hour after the end of the call through 4:00 p.m. Central Daylight Time on September 9. 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 Randall.

Craig, thank you very much, and good morning to everyone. And we're doing a little bit different this time. I'll make a few housekeeping comments and a few general comments, and Olivia and Craig will take it from there.

First of all, I'd like to welcome, because this is the first time he's been on the conference call, Craig Demarest, to our team. He joined the company in February as Vice President and CFO. Also, Olivia, who is with us and has been with us for many years, was promoted to President and Chief Operating Officer in January after 19 years with the company. I'll make a few remarks, then I'll turn it back over to Olivia and Craig to report on the operations.

FY '21 full year, excluding the impact of the closure of Carousel Designs, was the best diluted earnings per share in over a decade. We will discuss the Carousel portion later in the call. Internet sales, excluding Carousel, were approximately 40% for both the fourth quarter and full year FY '21. As we had reported and discussed in earlier calls, we continued operating our warehouse as many of our competitors moved to third-party models many years ago, commonly known as 3PLs. By operating our own distribution center, we were able to drop-ship direct to consumers for most of our large customers. This has helped us tremendously during the past year during the pandemic and the closure of a lot of stores.

FY '21 was a great year, and we're proud of the results. It's with great regret and disappointment that we announced earlier the closure of Carousel Designs effective May 21. Olivia and Craig will discuss the impact of this closure. For many of our shareholders who have been with us for a number of years, you know that we'll make the tough decisions to adjust our operations when it becomes necessary. And unfortunately, this was one of those.

With that, Olivia, I'll turn it over to you.

Thank you, Randall, and good morning, everyone. I'm going to start out by touching on the fourth quarter and full fiscal year 2021 results at a very high level. Then I'll turn the call over to Craig to go into a lot more detail. Fourth quarter net sales were $21.8 million compared with $20.3 million in the prior year, an increase of $1.5 million or 7.5%. For the full fiscal year 2021, net sales were $79.2 million compared with $73.4 million in the prior year, an increase of $5.8 million or 7.9%.

On May 11, we announced that we've made the very difficult decision to close Carousel Designs. Associated with that closure, the company recorded a pretax $2.2 million impairment charge on Carousel's long-lived assets in the fourth quarter, which was $1.7 million after tax. If you exclude the after tax charge, fourth quarter net income for the current year would have been $1.9 million or $0.19 per diluted share compared with $1.6 million or $0.16 per diluted share in the prior year. And fiscal year 2021 net income would have been $7.8 million or $0.76 per diluted share compared with $6.6 million or $0.65 per diluted share.

On the balance sheet side, we finished the fiscal year with $613,000 in cash and no borrowings on our revolving line of credit. At year-end, our balance sheet included our Paycheck Protection Program loan of almost $2 million, and it was classified as current. However, subsequent to year-end, we were notified by the FDA that they had fully forgiven our loan. On May 13, we announced that the company's Board of Directors had declared an $0.08 per share cash dividend on the company's common stock that will be paid on July 2, 2021, to stockholders of record as of the close of business on June 11, 2021. As Randall mentioned earlier, fiscal year 2021 was a very good year for us, and we're very proud of all of our employees who stepped up to the plate to make sure that we were able to continue to operate during the COVID-19 pandemic.

And now I'll turn the call over to Craig to go into a lot more detail.

Thanks, Olivia. I'm only going to give financial highlights. For a more detailed analysis, please refer to the company's 10-K filed with the SEC this morning. As Olivia noted, net sales were $21.8 million for the fourth quarter fiscal 2021 compared with $20.3 million for the fourth quarter of the prior year, an increase of $1.5 million or 7.5%. For the year, net sales were $79.2 million for fiscal 2021 compared with $73.4 million for the prior year, an increase of $5.8 million or 7.9%. The increase in sales is primarily due to higher sell-through at major retailers, which was partially offset by declines at certain customers that were impacted by the COVID-19 pandemic, particularly one customer that has remained closed throughout the entire year.

Gross profit increased by $477,000 and increased from 26.3% of net sales in the prior year quarter to 26.7% of net sales in the current year quarter. Gross profit increased by $2.5 million and increased from 29.4% of net sales for the prior year to 30.4% of net sales for the current year. The increase in gross profit is primarily due to the increase in net sales as well as a more favorable customer and product mix.

Marketing and administrative expenses increased from $3.5 million in the prior year quarter to $3.6 million in the current year quarter but decreased from 17.3% of net sales to 16.6% of net sales over the same period. Marketing and administrative expenses increased by $365,000, but decreased from 18.9% of net sales for the prior year to 18% of net sales for the current year. The increase in amount for the current full year period is primarily the result of higher outside services of $336,000 and higher overall compensation cost of $236,000, partially offset by lower travel expenses of $117,000.

The provision for income taxes is based upon an annual effective tax rate on continuing operations of 24% for both the current and prior year. The recognition of certain tax credits favorably impacted the current year by $74,000 and the prior year by $274,000. The current year quarter and current full year were impacted favorably by $320,000 due to the reversal of a portion of reserves for unrecognized tax liabilities and the related interest and penalties that had previously recorded. The quarter and the year ended March 29, 2020, were impacted favorably by $276,000 and $568,000, respectively, due to the reversal of a portion of reserves for unrecognized tax liabilities and the related interest and penalties that had been previously recorded.

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 21.3% for the current year and 15.5% for the prior year. Net income for the fourth quarter of fiscal 2021 was $238,000 or $0.02 per share compared to net income of $1.6 million or $0.16 per share for the fourth quarter of fiscal 2020. Net income for fiscal 2021 was $6.1 million or $0.60 per diluted share compared to net income of $6.6 million or $0.65 per diluted share for fiscal 2020.

Included in net income for the current quarter and current year is a $2.2 million impairment loss, which is $1.7 million after tax or $0.17 per diluted share related to the impairment of the long-lived assets of Carousel Designs. The tax credits previously mentioned favorably impacted the current year quarter and current year by $0.03 per diluted share and $0.04 per diluted share, respectively. The prior year quarter was favorably impacted by $0.03 per diluted share, and the prior year was favorably impacted by $0.09 per diluted share.

And with that, I'll turn the call back over to Randall.

Okay. Craig, thank you very much. And Cole, I'll ask you to come back up and open it up to any questions that anyone on the line may have.

(Operator Instructions) Our first question today will come from Linda Bolton-Weiser with D.A. Davidson.

Congratulations to everybody on their new roles, and welcome to the new CFO.

Thank you.

So can I just start out by asking about Carousel Designs? Can you remind me -- I was under the impression that, that was an e-commerce business. Is that correct? Can you just describe what that business was a little bit?

Linda, it was and remained through the whole time we owned it an e-commerce business, yes, that made goods in the United States in Douglasville, Georgia and sold it on its own website and through some other websites, very prominent websites. But it was all e-commerce, yes. And it just got to the point that with diminishing sales, the pandemic, et cetera, that the company was not very prosperous anymore. And we realized that and knew that, and we made the tough decision to move forward with the closure.

Okay. So the thing I just -- I'm confused about is during the pandemic, e-commerce businesses have generally thrived. And I think you've even talked about the advantages to your business, and you've talked about the drop-ship, which I assume is shipping directly to customers that have ordered through e-commerce. So I'm just confused about is that operating separately from Carousel and you're thriving on the rest of the e-commerce and it was just Carousel that had the problems? Or can you just explain that?

Yes. I can't explain it. I mean, the one I'm talking about -- there's 2 separate businesses, Linda. The one I keep referring to that's done so well during the pandemic is our NoJo and Sassy business, which is all imported, okay? And it's imported from Asia mostly and warehoused in Southern California. And there, we have established and do drop-ship to our customers and consumer. Unlike Carousel Designs, Carousel Designs was made in the U.S.A., which made the price point considerably higher. And therefore, we ran into, especially during the pandemic when prices were so sensitive, that the only way to generate sales were to give substantial discounts off of the everyday price at Carousel. That coupled with the high advertising cost that we had to pay to get moved up on to the pecking order on the website made it -- when you add those 2 together it made it unprofitable.

Okay. Now I understand. So should we -- I mean, when I'm thinking about my model, like are those considered to be kind of going forward lost sales? Or do you think the sales will be made up through more sales in your other channels of distribution?

I mean it's hard to say, Linda. Who knows, okay? I mean, it's like when you take out anything, it spreads around to other places. Will we get it all? I doubt it, okay? Will we get a portion of it? Yes. But it's going to spread around. So I can't quantify it.

Okay.

And Linda, let me say this. It's a different product. It was a very high-end product that had a very high end ticket price and in many cases and some of the simpler items sold for twice what the import product so far.

Okay. I got you. So are we -- should we assume that the benefit to your bottom line from closing the business would be reflected in your ongoing results? Or do you think you'll take that benefit and somehow reinvest in the rest of the business?

Well, I mean, Linda, again, that's a forward-looking question, and you know we shy away from those as much as we possibly can. No, we shy away from them, period. So unfortunately, you've got to sort that out on your own, okay? But we gave the readers the information, and it has been unprofitable and has been unprofitable for a while.

In the press release that we put out when we closed Carousel, we did put the historical losses that were associated with it.

Yes. So I did see that. Is there any way you can say what the sales and profitability was for FY '21?

We -- what did we put in the press release? Hold on there.

I think we put a range.

We put a range. Let me pull it back up.

Well, we put the '20 in there.

Yes, we put the last -- the previous reported year, which was net of $4.8 million.

$4.8 million in 2020, yes.

That's the last full reported year, Linda. So we haven't -- we didn't break down '20 -- excuse me '21.

'21.

Yes. Okay. But I would assume it would -- it declined further.

That's probably a fair assumption.

Okay. Got you. All right. And then when you talked about -- I mean, your gross margin was up year-over-year in the quarter, so that's good. I think you mentioned in the press release favorable customer and product mix. Can you elaborate on what does that mean? What customers and products, in particular, are most favorable for gross margin?

I mean, it's a combination of a lot of different products, a lot of different shifts over the customers. It's not one particular product that you can report and point to. It's a combination. And Linda, let me go back and correct what I said. The Carousel sales for FY '21, which we did not report, were actually up a slight bit.

Mainly because of the first quarter, and then it declined afterwards.

And also, it was up a little bit because of the continuing promotion off of regular price that we generated extra sales, but did not produce profit. But Linda, going back at to try to answer that question, it's hard to say. I mean it's a combination of a lot of different things that improve the gross margin. It's not one item that we can point to.

I mean, many of your products are sold like on Amazon, correct? Would Amazon and e-commerce channels be higher or lower gross margin for you?

We don't -- Linda, we don't report margins by customer, okay? And we definitely shy away from that. But Amazon should be in the range of all of our other customers.

Okay. And then I think you mentioned -- well, have you reported anywhere or mentioned to investors, what percentage now of revenue is through all e-commerce channels?

Well, in the remarks that I made, we said that in the fourth quarter...

And in the year.

And in the year, that 40% was through e-commerce...

When you exclude Carousel.

When you exclude Carousel. So it's a huge percentage. It's still 40%.

Okay. That's really high. Yes. And I mean that must have increased in the pandemic. Do you have a number like how does that compare to FY '20?

We may have that, Linda. Now that would include Carousel.

No. This does not.

That doesn't.

So last year, that number was closer to, say, the lower 30%.

So it picked up 10 points.

Yes. Okay. Well, that's -- we've seen that for many companies during the pandemic. So you also mentioned one customer that's been closed for pretty much the whole year. Are you referring to a certain restaurant chain where you provide some products? Or are you talking about something else?

No, that's the one we're talking about. And we say that they were closed. They were closed. As far as we're concerned, the restaurant chain remained open, but they just didn't have inside dining, so they didn't use our product.

Right. And that should change pretty soon, though, with the reopening of everything, correct?

We hope so. We have seen a little bit of some of the stores, Linda, reopening. But it's sort of -- it's just starting to take place, and it's few and far between right now.

I mean was there a loss of -- was that material? I mean, was that a loss of a couple of percentage points of your sales, would you say?

Yes, it was material. You're close.

Okay. Okay. And...

It was enough that we -- it made us cry.

Yes. And then on your -- I mean, your revenue growth has been very good. And many companies have seen a lift during the pandemic, especially in the home goods areas. Is there any -- I know you don't want to talk forward-looking, but I'm just trying to gauge what your view of the consumer behavior is. I mean, do you think things will kind of change a lot once reopening occurs? Or like have they redone their babies rooms and their furnishings, and they've done it. And so that's demand that will taper off? Or do you have any viewpoint on this?

We really don't make speculation on our part, and we don't have enough information to where we could nail that down. My gut instinct tells me the trend towards shopping online is not going to reverse itself. Even as stores open back up, I still think there's going to be a heavy shift towards online shopping.

Okay. And then your PPP loan, you said you were forgiven on that. So how does that get classified? That just goes out of -- we won't see that as debt anymore? Or how does that work on the balance sheet?

That will no longer be debt, and it will be a gain on the income statement, but it will be a nonoperating gain.

Okay. And then just, finally, a lot of the companies have been talking about various cost pressures, shipping and freight delays. Are you experiencing any sort of delays getting product from Asia? What are you seeing in terms of the cost inflation side?

Linda, we are seeing -- yes, we are seeing and feeling the effects of the cost increases coming out of Asia, mostly -- particularly as it relates to freight rates. Freight rates are up appreciably. We had done as much as we possibly could by enduring ourselves to a couple of major carriers that we get a little better rate. So we're not as bad as some are, but it's still affecting us. We have seen some price increases coming out of Asia, and it's sort of a mixed bag. But yes, we are seeing, as pretty much everybody is, on goods coming out of Asia, seeing freight increases and seeing raw material and price increases on purchased product.

And are you thinking that you'll try to pass that along to retailers and consumers? Or are you looking at cost reduction initiatives? Or what -- how are you thinking to offset?

I mean, Linda, where we can, and we've always done this, we've passed as much along as we can. And we're pretty tenacious on that. Will we get it all pass-through? Probably not. But we will -- it will be our mission to recover as much as we possibly can.

Have you already taken price increases?

On some people we have, yes.

Okay. A couple of my companies have actually stepped up and had some M&A activity recently. And with all these stacks in the marketplace, there's been a lot of deals in that area. Have you thought about looking at any additional acquisitions since you just finished up such a strong year, and you're in a good position? Are you kind of considering anything on that front?

We -- Linda, we stay and have an appetite continually for looking at acquisitions, and we continue to look at acquisitions on a regular basis. And our balance sheet, as you well know, is pristine to where we can afford to avail ourselves to the opportunity that they might -- that might present themselves. So yes, we're always looking. And we -- that's where I'll stop. We're always looking.

What would be the highest level you would take leverage up to do a deal?

I don't want to go there. I mean, I don't know. If it were the right deal, we would do some leverage. But it would have to be -- we're not going to bet the whole company on one acquisition, which a lot of people do. And if they fail, the whole thing fails. We're not going to do that, but we would have an appetite to put some leverage on the company.

Okay. And then, sorry to have so many, but just one last one for me. I know that you had talked a while ago about kind of ramping up some of the efforts internationally. With your good sales growth that you had in the fiscal year, did international grow kind of in line with the company or higher or lower on the sales line?

International went up a slight bit, but it was also affected by the pandemic. And we -- so therefore, we -- it didn't do as well as we had expected. But -- so we think that's going to correct itself too going forward in the future. We still have an effort to do that, and we plan to keep doing that.

And as your international sales, are they in just brick and mortar? Or are you doing some e-commerce internationally as well?

No, we're doing both. We're doing both. We're doing both.

And our next question will come from John Deysher with Pinnacle.

I was just curious -- thanks for the color on Carousel. It's good to know what actually happened there. Are there any legacy assets there that you might be able to exploit going forward? You still own the brand. There's probably a detailed customer list with emails. Are there any fixed assets that you might be able to do something with?

Well, I mean, yes, John. Most notably, we still own the brand. We still own the website. We still own the library of artwork, which is pretty large, okay, which is transferable to some of our other products and divisions. So yes, there are some assets. The hard assets, the PP&E, the answer to that is pretty much no because we don't do domestic manufacturing anywhere else in the company. So those are not transferable. And those we are disposing of. But the other soft assets, yes, they are transferable.

Is there any initiative to cross-sell e-mail addresses with your other brands?

Well, I mean, the e-mail addresses are direct-to-consumer, and those we don't do in our other divisions, sales direct-to-consumer. We sell through retailers and drop-ship for the retailers. So the e-mail addresses aren't transferable, so to speak.

Okay. You're right. I understand. Has your experience with Carousel done anything for your appetite for additional direct-to-consumer businesses going forward?

I would say yes, it has, no question. We've learned a lot, and what we did learn is made-in-the-USA is quite expensive, one. Two, the consumer doesn't want to pay the price of a made-in-the-USA product. So three, you wind up having to discount it. And four, the cost of getting up on the top position on the Internet is quite expensive. So it's somewhat of a -- it is not as attractive as most people think.

Right. Okay. Well, I mean, I guess, hindsight is always 20, and you're probably glad you did it. You learned a lot, and it will help your business going forward.

Well, I mean, we regret that we had to make the decision. But John, again, we're a company, and we've proved this over the years. We'll make those tough decisions when we have to.

(Operator Instructions) And this will conclude the question-and-answer session. I'd like to turn the conference back over to Randall Chestnut for any closing remarks.

Cole, thank you very much, and thanks to everyone that was on the call today. Just a few quick closing comments. As we begin FY '21, there was a lot of concern about the year due to the COVID-19, and we were part of that concern. With the quick response of our staff, we adjusted accordingly, thereby leading to a huge increase in Internet sales, as we alluded to earlier. We'd like to thank all of our employees, suppliers, customers and our valued shareholders to make FY '21 a good year. And I repeat. FY '21 was a great year. Again, thank you very much. We look forward to speaking with you at the end of Q1. Have a good day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.