Crown Crafts Inc (CRWS) 2012 Q2 法說會逐字稿

Welcome to the Crown Crafts Incorporated second quarter investor conference call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Olivia Elliott, Vice President and Chief Financial Officer. Please go ahead.

Thanks, Denise. Welcome to the Crown Crafts' investor conference call for the second quarter of fiscal year 2012. With me today is Randall Chestnut, the Company's President and Chief Executive Officer.

Good afternoon.

A telephone replay of this call will be available one hour after the end of the call through 8.00 AM Central Standard Time on November 24, 2011. A web replay of the call will be available for 90 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 to everyone. Welcome to our second quarter investor conference call. Earlier today, before the market opened, we released our earnings for our second quarter which ended October 2, 2011. I'll make a few comments about the results that we posted this morning.

Net sales for the second quarter of '12 were $21.3 million as opposed to $23.7 million same quarter previous year, or a decline of $2.4 million, or just over 10%. Net sales year-to-date were $38.8 million, as opposed to $40.9 million in the previous year, or a decline of $2.1 million, or 5%. Net income for the second quarter was a $1.067 million, as opposed to $1.214 million, or a decline of $147,000, or 12.1%. Net income year-to-date is $1.597 million, as opposed to $1.940 million, or a decline of $343,000, or 17.7%.

In the second quarter of this year, we continued to experience high costs from our Asian suppliers due to the labor and raw material increases that have been taking place in Asia, particularly in China. Costs in Asia and China have begun to stabilize. However, we're moving through some of the merchandise in the pipeline that was purchased at higher prices, and that's continuing to have a depressing effect on our gross margin.

Some products we re-engineered the construction to lower cost instead of raising the prices. And, some of these products have not flushed through the system entirely. We assessed every product on its own, one-by-one, and determined if it were better to re-engineer it or to increase prices. And, we're still working through some of that merchandise as we speak.

Our business has been impacted by the economy, as sell-through at retail remains weak for many of our customers. For the quarter, the sales decline was primarily due to lower in-store sales at one major retailer, and their point of sale was down, thus, resulting in lower replenishment orders to our Company. In addition, we have felt the decline in the birth rate which has declined 7% since 2007 through the end of 2011, the latest published numbers.

Moving on to another area, our method of accounting for overhead expense played a large part in the decline in the gross profit. We allocate overhead as a percentage that's based on budgeted purchases. The gross profit in the second quarter of the prior year was favorably impacted by overabsorption of $293,000 in overhead expense, but in the current year, we experienced an unfavorable impact of $331,000. The change between the two years impacted the quarter negatively by $624,000.

During the second quarter, fiscal 2012, the Company improved its balance sheet by paying off the final $2 million owed on subordinated notes that were payable and originated over 10 years ago. We are proud of the history of our strong operating cash flow that we've experienced for the last 10 years which has been the primary source of the reduction of the debt from $47 million to the end of the quarter which just ended to $1.2 million. And, we've created -- which has created significant financial flexibility for the Company going forward.

The Company previously announced that its Board of Directors had declared a quarterly cash dividend of $0.04 per share on the Company's Series A common stock which represents the eighth consecutive quarterly dividend since early 2010. And, it's an increase of $0.01 per share over the preceding quarterly dividend. The dividend will be paid on January 6, 2012, to shareholders of record as of December 16, 2011.

The Board's decision to increase the dividend payment for the second time in this calendar quarter is further evidence of its confidence in the Company's financial strength, long range business focus, growth strategy, and profitability.

The Company maintains a very strong position in the marketplace. We have very strong designs that puts our Company in a strong position going forward. With that, I'll turn it over to Olivia to make additional comments, and then, we'll come back for questions. Thank you.

I'm only going to give financial highlights. For a more detailed analysis, please refer to the Company's Form 10-Q filed with the Securities and Exchange Commission this morning. As compared to the prior year, sales of bedding, blankets, and accessories decreased by $1.9 million in the second quarter, and by $1.5 million year-to-date for fiscal 2012, while sales of bib, bath, and disposable products decreased by $0.5 million for both the second quarter and year-to-date for fiscal 2012.

Gross profit decreased in amount and as a percentage of net sales for both the second quarter and year-to-date fiscal year 2012, as compared to the same periods of fiscal year 2011, primarily as a result of higher raw material and labor costs which began to increase in later quarters of fiscal year 2011. In connection with the Company's allocation of indirect costs related to inventory, the Company recognized in the current year an unfavorable burden variance of $331,000 in the second quarter, and $351,000 year-to-date for fiscal 2012 as a result of lower levels of actual inventory purchases than were planned.

In fiscal 2011, the Company recognized a favorable burden variance of $293,000 in the second quarter, and $626,000 year-to-date, as a result of actual inventory purchases that exceeded planned purchases. The aggregate change in the burden variance had a negative impact on gross margin, amounting to $624,000 in the second quarter, and $977,000 year-to-date. Consistent with prior years, the Company does not expect a material burden variance by the end of fiscal year 2012.

Marketing and administrative expenses decreased for the second quarter and year-to-date periods of the current year, as compared to the same periods of the prior year, due to lower overall compensation costs and factoring fees which were partially offset by higher advertising costs. Also, the Company incurred lower costs in the current year in connection with the settlement agreement with Wynnefield Capital related to the 2011 annual meeting compared to the cost incurred in fiscal 2011 for the proxy contest related to the 2010 annual meeting.

The decrease in interest expense for the current year compared to the prior year is due to lower balances on the Company's credit facility. In July 2011, the Company paid its final $2 million installment on the non-interest-bearing legacy debt leaving a total debt balance at the end of the second quarter of slightly less than $1.2 million.

Net income for the second quarter of fiscal year 2012 was $1.1 million, or $0.11 per diluted share, compared to net income of $1.2 million, or $0.12 per diluted share, in the second quarter of fiscal year 2011. For the first six months of fiscal year 2012, net income was $1.6 million, or $0.16 per diluted share, compared to net income of $1.9 million, or $0.20 per diluted share for the same period in fiscal year 2011. I will now turn the call back to Randall.

Olivia, thank you very much. And, with that, Denise, we'll bring you back and you can make the introduction for the Q&A.

Thank you, Mr. Chestnut. We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from Gary Steiner of Huber Capital Management. Please go ahead, sir.

Hi, good morning.

Hello, Gary. How are you?

Great. I had a question on the gross profit margin, maybe for Olivia. If I add back the burden deferral year over year, I calculate that your gross margin percent was roughly flat? Does that sound right?

That's probably accurate.

Yes, that is accurate, Gary.

If you add back the -- if you subtract the negative from last year and add back the -- if you subtract out the favorable burden variance from last year and add back the unfavorable for this year.

That's correct. So, I guess the question is -- you talked about, Randall, higher costs and not being able to pass those through. So, how have you been able to maintain a flat gross profit margin on an apples-to-apples basis, notwithstanding those higher costs?

Gary, we have, by reengineering product in many cases, it has flushed through, but it's been a mixed bag. Let me give an example. One of the items that is very price-sensitive that we make is toddler bedding. If you raise it above a certain price point, it's not a necessity for the mother. They can bypass it and go straight from the crib to the infant -- to the -- excuse me, to the juvenile bed. So, it is very price sensitive. So, in that particular case, we reengineered the product, and we changed it to a less expensive fabric from what was predominantly cotton, when cotton went to $2 a pound.

So, we had a mixed bag in the quarter with some of that. We had some of it was less price and some at more. This is a quarter that has to be looked at as a transitional quarter because we had some with higher prices -- price increases in there that we did pass through. And we had some that we had passed -- that we had reengineered the product to lower the cost that affected some of it. But it still is not all an effect.

Do you have a sense, overall, of what your average pricing was in the period? And are you able to look at an average pricing given what you just described?

You really aren't, Gary. We have so many SKUs. An average pricing would not -- it wouldn't really tell the story.

Okay. Just one other question. In terms of the revenues in the period, do you have a sense, when you look at the revenue decline, how that breaks out between the end market demand? How much of that reflects the actual point of sale, lower purchases you were referring to before versus lower inventory at your customer?

We think the majority of it, Gary, and I don't know the exact percentage -- but, by far, the overwhelming majority was softness at the retail, on the retail shelf, rather than adjusting inventories. We think that had taken place earlier in the year.

Okay.

It's almost [entirely related to] softness at retail.

Okay. That's a pretty big -- your sales, I think, were down about 10% in the quarter. That seems like a pretty big decline, particularly as you've described in the past, categories that you participate in as being relatively stable.

Well, but, again, we point, Gary, to the fact that over three years the birth rate's down 7% -- one. Two, we've had a bad economy. And the consumer has been buying down, meaning buying less-priced goods, and so we've seen a lot of tradedown. One of the largest sales increases that offset some of the decreases in the quarter would have been the dollar store market. That one was an increase for us, a substantial increase, as a matter of fact. So, we're seeing the softness because of the birth rate decline and the economy, attributed to the sales decline.

Okay. Thank you. I'll let some other people go.

Thank you.

(Operator Instructions) And our next question will come from Arnold Brief of Goldsmith & Harris, First Manhattan. I'm sorry, Goldsmith & Harris.

Just definitionally, you said the birth rate was down 7%. I think that -- at one point in the conference call, I think you said it was down 7% through 2011.

No.

I think the numbers are 2010.

It is. If I said '11, Arnold, I was wrong. I misspoke. It's from 2007 through 2010.

Yes.

Because 7 rhymes with '11, I may have said '11. Sorry about that.

I think the birth rate -- there was some numbers that indicated the birth rate stabilized in the fourth quarter of 2010, but I don't know how good those numbers are.

I haven't seen them by the quarter, but we're quoting just over a three-year period.

Right. Secondly, in the past, I think you've given percentage changes in the sales of your brands -- or your brand names? Am I mistaken? And you didn't do that this time?

We didn't this time, Arnold. We didn't break it out because it was a muddy quarter to break all that out because there was some price increases built into it. So, it's very difficult to identify, and I know what you're talking about. You're talking about the NoJo sales. But it was up; that particular retailer was up in the quarter.

NoJo sales at that retailer were up, you're saying?

Yes, sir.

Okay. And finally, this is subjective, but I'm just curious -- if I'm walking through the store, it looks to me like they're putting more and more emphasis on a few leading brands and maybe a few leading licenses? And then, putting more emphasis on their own private label? Do you see that as well?

I've seen a little bit of it, Arnold, but not a great, great deal. I know exactly what you're talking about, but we haven't seen a huge shift towards the private label. And we do participate in the private label -- I think at the retailer you're talking about. So, we watch that pretty closely. But I've seen fewer brands being emphasized, that I'll agree with you.

Okay.

And in some cases, fewer licenses, yes.

And then, finally, last question. One of the companies in the industry has gotten a major shelf space with a new line of soft goods. Does that impact you at all? Do you have product line that competes with them? If you don't know what I'm talking about, I can be more specific.

I think you need to be a little more specific.

Summer Infant has got a big shelf space now with a line called SwaddleMe, which is soft goods.

Oh, I do know what you -- .

I don't know if you have product in that area or not?

We don't do the swaddle blankets as of this point. We have one that is going to be forthcoming in the future, next quarter. But we have not really been in the swaddle blanket to any large degree to this point.

Okay.

Summer did that through the acquisition of Kiddopotamus, which is a good brand, and I do know what you're talking about now, yes.

Okay.

That hasn't impacted us.

No impact on you at this point since you're not there.

No, sir.

Thank you very much.

Next question will come from Ralph Marish of First Manhattan Company. Please go ahead.

Hi, Randall and Olivia.

Hello, Ralph.

Hello, Ralph, how are you?

Okay, how are you?

Good.

Good. If I look at year over year -- so, second quarter versus second quarter on the balance sheet, both accounts receivable and inventories. And then, compare that to the cash flow statement with the investment in inventories for the first six months of each year. Would I be correct in saying that you're cautiously pessimistic about the next couple of months of sales?

Well, to some degree -- no, that's not the correct assumption -- .

Okay.

-- entirely, Ralph. We are cautious on buying inventory, I will tell you that. The economy has been so soft. We strive very hard to turn inventory, and we do watch our inventory levels very carefully.

Okay. But given the performance of mass merchants and the current outlook, I wouldn't think anybody in your space is expecting to set the world afire. So, essentially -- yes, I guess I'll leave it at that.

And, Ralph, one of the things that's very difficult to see in our business, we do, with the mass merchants -- the ones you're talking about, we do, not all, but a fair amount of our business -- a little bit -- is direct imports. So, it never really shows in inventory, except for just a few days.

Right.

Because they take ownership in Shanghai. So, we only own it from the factory to Shanghai. And then, it's transferred to that particular retailer. And this is the time of the year when some of those blanket programs take -- they're affected that way.

I understand. But six months versus six months on cash flow, your investment in inventory is less than half than what it was last year. The cash flow -- the cash that you've paid -- the outflow for inventory build-up essentially is half of what it was a year ago.

Timing.

Olivia's looking at it now, Ralph, and all we can say is it's timing. Okay? Because Chinese New Year this year -- I'm trying to think versus last year. It came earlier this year. So, some of it may have been in last year's fourth quarter, and it really -- I think it's all timing. It's not that much difference, I promise you.

In other words, it's not seasonal timing, it's calendar timing?

It's not.

I'm reading more into it than I should?

You're reading more into it than you should, that I will agree. Yes, sir.

Thank you. I will sleep tonight. (laughter)

Okay. Thank you.

Our next question will come from Bobby Melnick of Terrier Partners. Please go ahead.

Thank you. Olivia, I wondered if you could elaborate a little bit about this -- what you referred to as the variance. If I'm the only one on the call who doesn't fully comprehend it, then shame on me; I suspect that's not the case.

I suspect it's not the case.

Maybe it would be helpful -- and I'm not here to instruct, but customarily, we as investors consider inventory to be your materials that we make or buy, and then we sell to our retailers. And so, it's certainly accepted under GAAP to make various estimates about other components that go into cost of goods sold. But I think it would be helpful, for me anyway, if you could give some specific illustrations of the sort of things that Crown Crafts has chosen to estimate, and then allocate to [CVS] that accounted for what you referred to as this burden year over year, please. Thanks.

Bobby, this is Randall. How are you? Bobby, let me take the first stab at it, and then Olivia can bring in more. Because we've been -- I've been dealing with this in this life and previous lives for many years. Burden deferral came about many, many years ago because domestic manufacturers -- and the best example I can give you is, I used to be the CEO of a blanket company which was very seasonal. In some parts of the year, you needed to run the factory one day a week, and other parts of the year you needed to run it eight days a week, or nine days a week. That's not feasible. You ran it on a four- to five- or six-day basis, and then you would take overhead and you would allocate it to certain inventory, or hang it up and then bring it back out as you rolled the turns back out of your inventory.

Well, this Company, Crown Crafts, grew up as a manufacturing company. So, its costing system from many, many years ago was devised the same way because it was a manufacturing company. So, you had the overhead burden that was hung up based on the amount of the manufacturing that you did each one of the 12 months, and then it would roll out accordingly. As we phased out of all domestic manufacturing, and converted it to offshore, we were left with a quandary -- what do we do? To go back and just redo the method of accounting is a pretty big job. Because you have to go back and restate previous years, et cetera, et cetera, and it's not uncomplicated. We've consulted with public accountants -- KPMG, Deloitte -- and it's very, very, very complicated. So, what we elected to do is to do it on purchases, which basically is the same thing as manufacturing, okay? But it's a catch-22. Like it is this year, if your business is down and you're buying less, you get caught with that particular situation where you've got big plus or minus deferrals. And we're trying our best to narrow this down going forward to where it's not as big a swing, Bobby.

Let me respond. Give me an illustration, please, or three illustrations of the sort of costs that you're specifically referencing, please.

Anything that goes into designing the product, sourcing the product, and holding the product up until the time of sale.

So, let me give this a recommendation or a solution, which companies do all the time. Which is that what you've just described in English, whether by GAAP or not, what you've just described are expense items.

Yes.

Why don't you just flow them through SG&A? Expense them?

That, Bobby, is the simple solution, but in the accounting world -- in the GAAP world -- it's very complicated.

It's all GAAP. The problem with changing the method of accounting is exactly that -- it's considered a change in accounting principle, and it's a very expensive and time-consuming effort. And as we've talked to our auditors -- both the current auditor and the previous auditor -- it just hasn't been what we've chosen to do.

Well, everybody on this call will tell you -- we see companies do that all the time, where they issue a release in which they've said -- due to a change in our manufacturing policy and the strategy of a corporation, we've elected to reallocate certain of our costs from SG&A to cost of goods sold, and from costs of good sold to SG&A. Randall, I strongly suggest, just to avoid the complication, stick a boot up your auditor's (expletive) and tell them that these are really expense items, and that's where they ought to go. (laughter)

I'll have him call you, Bobby.

Because the reality is, what you're doing is -- respectfully, okay -- you guys are profitable. You've cleaned up your balance sheet, and this is not a critique. I came to praise not bury. But the truth of the matter is that this has not been a Company that's exactly lighting the world on fire -- or an industry that's been lighting the world on fire. Again, I'm not trying to make this to be a personal attack. When you issue releases such as the one you did today -- and people like me -- small cap, micro cap investors, the first thing we do is we go to the 10-Q for an explanation of something that we don't fully understand. And the truth is that the 10-Q is no more helpful and no more opaque. In fact, it's more obfuscatory than the press release.

When you're growing 50% a year, and you're putting up great numbers, then you can put out these sort of things, and maybe people will buy off on it. But when you're struggling and you're fighting for every dollar of sales, and you're fighting to keep the shareholder constituents happy, when you put out what you know to be a confusing press release and an equally confusing 10-Q, it doesn't help your cause. It doesn't make value investors want to say -- I want to buy this stock now because this is only a function of the burden variance. And then, the junior analyst says -- by the way, what's a burden variance? And he says -- uh, uh, uh, uh, uh. So, clean it up; make it simple.

Noted. Bobby, we have something that we're working on now with our outside auditors that should narrow this down in the future. Okay? I'll talk with you more offline about it.

Okay.

Seriously, I hear you loud and clear, and I hear your frustration. And, candidly, I share that frustration. I don't deny it. Okay?

Okay. Thanks.

Next question will come from Michael Bernstein, a private investor. Please go ahead, sir.

Good afternoon. Or good morning, wherever you are.

Afternoon, Michael.

For me, it's morning still. Just one quick question. How has Disney's Cars done?

It's still the number one selling toddler bed pattern in pretty much every retailer in the US. We have a new Cars pattern for infant, and it's doing very well. It's not doing the same numbers as some of the other characters, but it's doing better than some of the previous ones we have used. It's really been surprising. It's done quite well. But in the case of the toddler bedding, it's still the number one toddler license in the US, as of this moment.

And then, second, just product question -- is Winnie the Pooh dead for you? Is there any possibility of bringing that back in a meaningful way?

No, we do Winnie the Pooh. He's at Walmart. He's alive and healthy and doing well.

He is doing well?

Yes. No, he is, in the toddler area.

How about in the infant area?

Excuse me; I said that backwards. In the infant area. He is not in the toddler area. It really is not a toddler license; it's in the infant area.

Thank you very much.

Thank you.

I'm showing no further questions in the queue at this time. This will conclude the question-and-answer session. I would like to turn the conference back over to Mr. Chestnut for any closing remarks.

Denise, thank you very much. We want to thank everyone that was on the call today for your interest in the Company. We appreciate it very much. In the meantime, if you have questions, feel free to contact either Olivia or myself, and we'll be happy to discuss those with you. And we'll talk to you again after the first of the year when we report our third quarter earnings. Thank you very much. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.