Crown Crafts Inc (CRWS) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Crown Crafts, Inc second quarter investor conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Olivia Elliott, the Company's Vice President and Chief Financial Officer. Please go ahead.

Thank you, Katie. Welcome to the Crown Craft investor conference call for the second quarter of fiscal year 2010. With me today is Randall Chestnut, President and Chief Executive Officer of Crown Crafts.

Good afternoon.

A telephone replay of this call will be available after 2:30 p.m. central standard time today through the end of the day on November 18th. A web replay of this call will be available for 60 days. You can access it by visiting our website at www.CrownCrafts.com. Before we begin, I would like to remind everyone 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.

Olivia, thank you and good afternoon again. Late yesterday afternoon after the market closed we released the earnings for our second quarter FY 2010 for the quarter that ended September the 27th of 2009. And I am going to touch on a few of the numbers and talk about a little bit and then Olivia will go through in more detail and as -- at the end we will open it up for questions. Net sales for the second quarter of FY 2010, the current year, with $21.7 million as opposed to $23.7 million in the previous year or a decline of $2 million or 8.6%. Net income for the quarter this year was $803,000 as opposed to $1.035 million last year, a decline of $232,000 or 22.4%. EBITDA followed a similar trend. This year was $2 million, last year was $2.5 million, a decline of $0.5 million or 20%. The sales decline is a result of the softness in the retail sales of bedding and blanket products at two major retailers due to the economy.

In addition, the retailers are -- retailers are continuing to maintain tight inventory controls over their inventory and keep reducing inventory levels and keeping a tight squeeze on it. Early in the quarter we completed the acquisition of Neat Solutions and we rec -- we acted very rapidly to integrate this into our system. And we are pleased with the progress we have made with the integration. We have integrated product development, sourcing and distribution of the product into the Company's existing operation. And during the quarter, as we disclosed in the Q, the net sales for the Neat Solution products were $1.1 million accretive to the -- to the revenue. We've reported in a number of calls and we continue to be pleased with the strong performance of our NoJo product line. During the quarter we experienced a 5% increase in sales for the second quarter as opposed to the same quarter in the previous year. We continue to gain market share in the blankets and accessories as a result of our outstanding designs.

And for those of you who don't know, accessories to this include blankets, highchair pads, head supports, secure me seat shopping cart covers and a few other items that are under the NoJo brand. Our gross margin also improved from 24 -- 20.4% of net sales for FY '09 to 20.8% of net sales for the current year. Our balance sheet continues to remain very, very strong. As noted in the Press Release, we actually reduced our inventories during the quarter by $2.9 million. When -- when the economy is tough and sales are tough, we take a very tight stand on our inventory and we are pleased with the fact that we were absolutely able to reduce the inventory and keep -- and keep that in check. Our total debt at the end of the quarter, net of cash which I will talk about in just a moment, at the end of the quarter was $11.1 million. As most of you are aware, our lending and factoring arrangements are with CIT. Recently CIT filed for bankruptcy protection. We have done an extensive review and the potential impact on our operations.

As most of you are aware, for the past 18 or so months we have been fully drawn on our revolver and at the end of Q2 we had approximately $12 million in cash and that is why I said a moment ago, it was $11.1 million net of cash, was our debt. Our debt is higher than that, but we have $12 million cash invested in a third party bank. And we did this for protection and we ran a scenario that said with the $12 million arsenal of cash we have got, even if CIT did not come out of bankruptcy and went into liquidation, we are still solid. We are in discussions with other lenders and are actively in discussions as our facility with CIT expires in July of 2010 anyway. So we are having conversations with a number of lenders to talk about that. We feel very, very strong that our Company's well positioned to rebound from the economy. We are well positioned in the marketplace and we are pleased with our -- with our point.

We are disappointed with the performance because of the economy and we are struggling with that somewhat. But we are keeping the operations in check. With that I will give it back to Olivia to touch on the numbers a little more.

I am only going to give financial highlights for the quarter and year-to-date. For more detailed analysis, please refer to the Company's Form 10-Q filed with the Securities and Exchange Commission yesterday afternoon. Sales of bedding, blankets and accessories decreased $3.8 million for the three month period of fiscal year 2010 as compared to the same period in fiscal year 2009. A decrease of $8.7 million due to discontinued programs and lower replenishment orders was offset by an increase of $4.9 million in shipments of new bedding and blanket programs. Bib and bath sales increased $1.8 million for the current year quarter as compared to the prior year quarter. We experienced increase sales of $1.1 million related to Neat Solutions products, as well as a $1 million increase in sales of core products, as a result of new designs and promotions and higher holiday shipments.

The increase was offset by a decrease of $300,000 in core product sales due to programs that were discontinued or had lower replenishment orders. Year-to-date sales of bedding, blankets and accessories have decreased $5.6 million compared to the prior year due to $14.4 million of discontinued programs and lower replenishment orders, offset by $8.8 million in shipments of new bedding and blanket programs. For the year, bib and bath sales increased $1.5 million compared to the same period in fiscal year 2009. $1.1 million of the increase was related to the Neat Solutions acquisition, with the remaining $400,000 increase coming from sales of core products. Gross profit increased as a percentage of net sales for both the three and six month periods of fiscal year 2010 as compared to the same periods of fiscal year 2009.

The increase in the gross profit percentage is due to lower product development costs and lower costs to operate the Company's foreign representative office in China, offset by increased testing costs. Also contributing to the increase for the six month period is the absence in the current year of $243,000 in charges incurred in the prior year related to transitioning away from the warehousing and shared services agreement entered into in conjunction with the Company's acquisition of the baby products line of Springs Global in November, 2007. Marketing and administrative expenses for the three month period of fiscal year 2010 increased slightly in amount as compared to the prior year and were unchanged for the six month period. The Company incurred costs related to the Neat Solutions acquisition and related integration of $389,000 in the current year quarter and $431,000 year-to-date.

These increases were offset by the Company's avoidance in the six month period of the current year of $194,000 of costs that were incurred in the prior year associated with the Governance and Standstill Agreement entered into in July, 2008 with Winfield Capital. I will now return the call back to Randall.

Olivia, thank you again. With that, Katie, we will call you back up and you can open it up for any questions from any of the investors.

(Operator Instructions). And our first question comes from the line of Bobby Melnick from Terrier Partners. Please go ahead.

Hi, Randall. It is Bobby from Terrier.

Hi, Bobby, how are you.

Okay. A couple quick questions. Could you explain the acceleration of the maturities of long-term debt, is that related to CIT.

It really -- it really isn't, Bobby. The way the long-term debt, and Olivia is more of an expert, but let me take a layman's stab at it. If it comes under a year it is considered a short-term. So our facility with CIT does expire next July. So in this quarter it came under the year. The only thing that's considered long-term is we have a $4 million interest free note from the old lenders, the legacy lenders, and $2 million of that is due in July of 2011. That's still classified as long-term. The rest of it is short-term until we refinance.

Okay. So -- so the intention, obviously -- it is obvious. The intention is that you refinance that and reconvert it or convert it back to long-term.

We will either with CIT, if they're healthy, or with another lender, no question about it. Before July, we will refinance.

Okay. Just a second factual question, could you explain factually what was the genesis and the purpose behind the acceleration of divesting of options for you personally.

The genesis behind that, Bobby, was the Board looked at it and to -- to get a tax benefit, because if it is over a certain level of compensation in a 12 month period, and it was not at my request, that the Company would have to pay more taxes. And -- .

We would get less of a deduction.

We get less of a deduction.

So a straight DCF analysis, in other words.

Yes.

Okay.

By accelerating it, it -- it avoided that issue.

Okay. I mean, there are other people in the queue and I don't want to dominate. I do have a -- a topic that I want to discuss with you on this call regarding the unsatisfactory level of performance, which you have acknowledged, and how that affects how you assess the viability of this Company as an independent entity. So maybe if you will just sort of file that away, let some of the other people, because I -- I dislike when other people dominate calls on which I am on, so let other people ask some questions, but I would like to return to that and requeue momentarily. Thanks.

You are welcome to come back.

And our next question comes from the line of Arnold Brief from Goldsmith and Harris. Please go ahead.

Yes, two questions. One, if you look at the July through October period, do you see any change in direction in terms of consumer spending for your category of goods and do you see any change in the direction of inventory destocking or stocking by either the two major retailers that you serve?

Arnold, through the quarter that just ended, no, we did not see any change in the -- in the consumer buying patterns. They were still very soft and the retailer sales were off and we also did not see any change in the retailers stocking up on inventory again. They were still maintaining very tight controls over there in the door.

I asked the question from July through October. I'm not sure that -- did you see any change in the month of October, let me put it that way.

Again, that sort of go -- that sort of leaning towards a forward-looking statement and we try to avoid that. So we are addressing it really through the end of September, Arnold.

Second question and my last one, if I look at our results, trying to put them in perspective, your sales of bedding accessories were down over 19%, which indicates that you did not gain market share, NoJo may have gained market share, but overall your bedding accessories probably lost some market share, number one. Number two, your -- your major retailers that you serve, I believe, were cutting inventories in this quarter. Number three, your gross margins were maintained. Given your sales performance and the inventory destocking that was going on and your inventory cut backs, I am -- even allowing for some of those smaller nonrecurring factors, it seems to me that the gross margins -- seems to me you made a decision to hold margins rather than market share.

Not really. Arnold, we were -- we have been tenacious on costs and we've watched costs and we've cut costs and we've reduced some staff and overhead and we have kept a very tight control on it. We didn't -- we didn't walk away from business and as far as the market share, I don't think we lost market share, because I think what we did lose is that the -- the whole pie shrank and so therefore, I think we mained our -- we maintained our piece of the pie, but the pie shrink.

Shrank 19%.

I am not sure that it declined the whole 19%. Well, your bedding accessories, I'm talking about.

It was a -- it was -- it was sizable. It was sizable, no question about it.

I am --

Would it be normal when your -- your customers are cutting inventories substantially and the category is down substantially to sort of participate in that with some markdowns and price cutting and promotion. I mean, over 19% you had to lose market share, nobody cut inventories that much.

We don't think we did. And in our particular category, the bedding is not really a direct promotional item, okay. It is sort of a planned item for the first birth and the second birth, et cetera. And just by cutting costs is not going to make it walk off the shelf. You only got so many people shopping for the product. We know we've had people that are -- some of the accessories, we know for a fact that the consumers will buy some of the basics, but not buy the accessories that go with it. And so they -- because of the economy and the unemployment they have cut back and we know in some particular cases they buy the bedding sets and that's it. They don't buy the decor for the -- for the -- for the nursery.

Okay.

And our next question. I'm sorry, did that answer your question, Mr Brief?

I guess it is the best I am going to get.

Thank you.

And our next question or I'm sorry. (Operator Instructions). And our next question comes from the line of Nelson Obus from Wynnefield Partners. Please go ahead.

How much, just remind me, how -- for how long in the quarter did you have Neat Solutions.

We bought it right at the beginning of the quarter, the first or second day of the July quarter.

Okay. Has the -- has the restructure -- has the restructuring of the Wal-Marts buying structure had any effect on inventory or your relationship with Wal-Mart.

No, it really hasn't. It has had no affect whatsoever and what you are referring to is the relocation from Bentonville to New York of some of the buying staff, I assume.

Yeah.

Okay. No that has not had an effect.

I still -- I mean I am not sure if I got a straight answer for Arnie's comments because it does seem like there's a disconnect. If bedding is down 19, I did not get a sense that the -- that the entire bedding category went down 19. Is that -- is that kind of what you're -- you are maintaining in regard to at least -- .

At some of the retailers, Nelson, it was down and close to those percentages at retail, yes. At some major retailers.

In terms of sellthrough. So then the -- so the remaining was -- was inventory drawdown.

The -- the remainer was -- the remainder was inventory draw back.

Okay.

Or drawdown.

And we have a follow-up question from the line of Bobby Melnick from Terrier Partners. Please go ahead.

Thanks and thanks for taking the follow-up. We're a small Company that's selling to gigantic international retailers that have -- have capitalized on the shift in power. And you guys have done a good job on sourcing and -- and finding ways to stay a step ahead of some of your peers, because we are quick and nimble. But it is hard to reach any conclusion other than the one that our core business is struggling and difficult and under pressure, short, intermediate, and probably long-term. And we are trying to out race that by making acquisitions to spread overhead, contribute gross margin, and keep the Company at a certain size of revenues and profitability.

The issue, of course, with that is that these acquisitions aren't free. They come from either debt or equity and increase the capitalization and increase the risk to the investors. And I just -- it is -- it's hard to see how a $70 million or $80 million or $90 million or $100 million Company in this realm under this kind of sales and gross margin pressure can go it alone, Randall. And I just -- I'd like to hear your thoughts. We have periodically revisited this and you have been -- you have been very rigid in your belief that -- that Crown Crafts can continue independently and it just seems with each incremental data point that that's a tougher, harder position to espouse.

Bobby, I appreciate your comments and it is a -- we --we are -- we are nimble and that helps in many cases. And we can move quicker than some of our competitors. We can -- we can maneuver on a dime and we think that helps us. But -- and we do believe that we have done the right things for the future and w We are well positioned when the economy does recover. We are at the right retailers with the right product with the right design and with the right brands. And we think -- like in our NoJo, I said we gained 5% even though, as Arnold pointed out, the business, the bedding business was down high -- at 15% to 19%. So in that particular case, we gained market share. And we think we are positioned well to do so. And that is our -- that's our position at this point.

The core business is in a perpetual state of decline.

Bobby -- Bobby, we have declined for two quarters, okay.

Oh, Randall. Stop it. If you ex out acquisitions this business has been declining for years. Come on. We can look at the numbers If you take out the acquisitions this Company has made in the couple years, the Company would be substantially smaller. I am not focus -- I am the last guy on this phone call and you know that so you take that back. I am the last guy on this phone call to put undue emphasis on short-term performance.

I know -- I mean -- but, Bobby, this year we have struggled through two quarters. There's no question about that. And -- but the economy has been down and -- and we are not the only one that's struggle through this particular timeframe and is being affected by -- other companies are being affected by it similarly as well. There's no question about that. But Bobby, it is something that we assess on an ongoing basis and I am not at liberty to say at this particular point on this call anymore than that, is that it is something that we are constantly assessing. And I hope you respect that. Bobby.

Yes, I hear you.

That's really all I can say about it, Bobby, at this point. Please respect that, okay.

And we have a follow-up question from the line of Arnold Brief from Goldsmith & Harris. Please go ahead.

How much of your product line, particularly in NoJo, measured in SKUs or sales or whatever, would be gender neutral as opposed to the -- the more normal pink and blue kind of thing.

I mean,, Arnold we do -- we do gender specific, obviously. We do some. We do boy, we do girl and then we do gender neutral. God, without -- and I am taking a swipe at this, but I am going to say it is probably 50% that is close to gender neutral.

Mostly in NoJo.

Gender neutral. In NoJo, yes.

Heavier in NoJo than the other-- the other lines.

I would say it is heavier in NOJO than it is in the other lines and I am trying in my mind, Arnold, to run through the other SKUs in the other lines.

Would it be fair to say, or do you think there's other factors involved, that some of NOJO's success was being early on in the gender neutral trend and -- and is benefiting from that exposure.

It could be. I don't know. I mean I really don't know. You bring up a very interesting point. It could be, but I don't know that. If we could do some research and I would be happy to talk with you offline about it.

I -- I still like to go back to the other question. Maybe you can just sort of flesh this out a little bit. We're all using numbers that as guide lines which are not very specific. As an example, Babes R -- Toys "R" Us reports sales numbers and comp store numbers and inventory numbers. But their quarter doesn't overlap yours and it's mixed with toys and you can't separate Babes R' Us, but through the July quarter their inventory reductions were down under 2%. I don't know what they did in the October quarter yet. Wal-Mart looked like they cut inventories about 10%. It doesn't look like the category is 19% plus weak if -- we don't know. I mean, again, I am looking at rough numbers that don't completely correlate with what you are doing.

No.

Either on a quarterly basis or on a sales mix basis. But there at least some indications is all we've got to go on. And then with NOJO up in addition, it looks like -- I mean it certainly looks like the rest of your product line has taken a beating and could you discuss this a little bit, just to -- .

And Arnold I didn't give you a straight answer before and I didn't mean to dodge an answer, but I am trying to be as honest as I can be. And I think everybody on the call knows that we have one major retailer that -- that is in the discount trade. And their business in the bedding side of the business has been off appreciably. And it has been off appreciably in the quarter and -- and in the six months and it is not that there has been any loss of SKUs, any loss of sales. There's been some less promotions, no question about it, but their business in total has been off. They did some price increases, that slowed the business down. They have done some rollbacks now to try to recover it. So that business has been off. Okay.

And if the business is off that much, why didn't it put some pressure on gross margins? I am not sure I get the disconnect. I mean any time sales are off, I follow, obviously, another competitor, and they're gross margins took a hit because sales were off for the reasons you are talking about. Consumers spent less, your major retailers were de-stocking, and it put pressure on gross margin. But it didn't in your case and I am not sure I understand why.

I mean, Arnold, one thing that Bobby alluded to and I think we are pretty darn good at and that's sourcing, okay. When we see that we are getting pressures, we source. We -- we -- it backs down. It runs downhill, okay. And so we are not always going to be able to do it, but in this quarter we could push, we could adjust some costs and squeeze it tighter and tighter to protect the gross margin. That's what we did. We eliminated staff during -- .

Let me just --

We cut -- we cut staff, We -- we laid people off, okay. We did what we had to do. And we will continue. I mean, let take a shot at another, maybe another side of it.

Are NOJO's margins better than the other product lines and is there a mix shift here going on with nojo's higher margins offsetting the -- .

A slight bit. A slight bit. I mean, that's not the major reason, but there's a slight dip. We did look at that, but it is -- it is not as major as you would think. It is a slight contributor.

All right. Thank you.

Thank you.

Thank you. And next we will go to the line of Charles levy at Morgan Stanley. Please go ahead.

Randall, could you give us any color on the Pampers situation.

Hi, Charles. We signed that license just recently. We made the announcement. We are excited about it. We -- we -- we're designing product now that we will be showing and it is a mass market license situation. The place that we -- the big reason that we signed the license and the driver behind it is our bib business has basically become all private label with very little licensed. And we were looking for brand that we could -- that was recognized by the mom and the consumer that we could put back on bibs to rejuvenate a branded bib and to do -- to replace some of the private label business that we have been doing. So the big driver behind that is to put a brand on the bib products. We will do some blankets, we will do some bedding, but the big driver is the bibs.

Is there any kind of brand extension possible into any of your other product lines?

Well, I mean -- as I say, the license covers -- it covers bibs, it covers bath, and it covers bedding and blankets. It covers all the major categories we are in.

Okay. Fine. And I got one balance sheet item I maybe just touched on before. In the limited balance sheet that was in the Press Release, the current maturity of the long-term debt, which you touched on, is $21.320 million and the total current liability is just $27.870 million. I am not sure where that came from. Was there an offset? I know there's one offset. But --

Not sure the offset?

Well, the current liability jumped $17 million and the current maturities jumped $20 million, but the long-term debt went down, I believe, so there was an offset there.

I am not sure of the question.

Olivia? Say it again, Charles,Olivia's not quite sure.

Let me just see -- (multiple speakers). Well, if I add up on the March 29th limited balance sheet, the current is $1.6 million, then the current maturities -- current liability is $10.5 million, long-term debt $23.5 million, so that is roughly $35 million if you add them all up together. You go to the new balance sheet you have got $21.3 million and $27.8 million and $17 million. That works out to about $50 million.

Actually total liabilities are going be not quite $30 million for the September period and in the neighbor of $34 million for the March period.

Okay. Fine. Thank you.

Okay. Thanks.

(Operator Instructions). And we have a follow-up from the line of Nelson Obus at Wynnefield Capital. Please go ahead.

Yes, how much cash savings was involved in the acceleration of the stock options?

Nelson, not sure I know the answer right now.

Cash savings.

There was no cash savings, okay. It was a convertible tax.

Well, I mean -- I mean cash taxes.

Yes, okay. Cash taxes. Olivia?

Our tax rate -- .

Because that's a pretty -- that's a -- that's a very unusual step to take, I must tell you, in the public companies. Those things are put invested for a purpose and they're usually retention type things that vest over a period as their supposed to. So I would like to know that.

The -- our tax rate is a little under 40%.

Right.

Nelson, we can get the number.

Okay, well -- .

I will have to go.

I don't want to studder and -- and not have the number.

And I'm a large holder in this and I do get a lot of calls. I must say that Bobby Melnick described the situation for the shareholders about as succinctly as I have every heard anybody do it. We simply aren't getting any benefit. Are you willing to look -- you seem to be basing the future on some kind of upturn which may or may not occur. Personally I think it won't. The consumer is pretty taxed out and I think you will see major changes in buying patterns. Are you willing to address the entire overhead element of the Board, including salaries and board -- board comp and the whole thing, because certainly I can't -- I can't defend it when people -- when people ask me what I think about it.

Nelson, I think -- I think history has proven itself that we will do whatever we have to do to maintain profitability. And we did that in this quarter, too.

It is not -- it is not just a question of maintaining profitability, Randall. You have got to create -- if you can't grow this Company without making acquisitions, then essentially you owe it to the outside shareholders to take the Company private at a fair -- at a fair price and take on that risk and take on the leverage. That's how it works. And I have no doubt you can keep this profitable indefinitely, but it can't be a piggy bank for management.

It is not a piggy bank for management. Nelson, I appreciate your comments and as I told Bobby -- .

Look, it is not just me. You should understand that. I will leave it at that.

I do. Any other questions?

There are no further questions at this time, sir.

Okay. Katie, I will wrap it up and you have got some comments to make at the end, but we appreciate everyone's time and attention and thank you for your interest in the Company. Katie.

Thank you. Ladies and gentlemen, this conference will be available for replay after 2:30 p.m. today through November 18th at midnight. You may access the AT&T Executive Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code of 117978. Those numbers again are 1-800-475-6701 with the access code of 117978. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.