Crown Crafts Inc (CRWS) 2018 Q2 法說會逐字稿

Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc. Investors Conference Call.

Your host for today's call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer.

(Operator Instructions) 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, November 9, 2017.

At this time, I would now like to turn the call over to Ms. Olivia Elliott, Vice President and CFO, who will begin the call. Please go ahead.

Thank you. Welcome to the Crown Crafts investor conference call for the second quarter of fiscal 2018.

With me today is a Randall Chestnut, the company's President and Chief Executive Officer.

Good afternoon.

A telephone replay of this call will be available 1 hour after the end of the call through 4:00 p.m. Central Time on November 16, 2017. 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.

During the call, we may refer to the presentation of what the company's net income and diluted earnings per share would have been if certain of the company's expenses incurred in the period presented were excluded. Although the exclusion of these expenses does not conform with accounting principles generally accepted in the United States, we believe that such exclusion may provide a more meaningful understanding of the company's results of operation.

Also, in regard to comments made in today's conference call that are related to the company's recently announced dividend, its history of paying dividends and the annualized yield on the company's common stock, we remind listeners that the declaration of each dividend is at the discretion of the company's Board of Directors, and the company expressly disclaims any assurances as to the frequency and amount of any future dividend.

I will now turn the call over to Randall.

Olivia, thank you, and good afternoon again to everyone. Welcome to the Crown Crafts, Inc. investor conference call for the second quarter, which ended October 1 of this year.

We -- these earnings were released before the market opened this morning. And I'm going to address the results for the quarter. Olivia will touch on more for the quarter and also the year-to-date. And then, at the conclusion of my comments and Olivia's, we'll bring it back up to anyone that has questions.

Net sales for the second quarter of 2018 were $16.5 million as opposed to $15.8 million, or up $700,000 or 4.1% from the same quarter last year.

Net income was $727,000, as opposed to $999,000 in the previous year same quarter, are down 27.4%. Likewise, diluted earnings per share were $0.07 this year and they were $0.10 last year.

In the second quarter of FY '18, we recorded some expenses that were not incurred in the previous year FY '17. After taxes, these expenses totaled $405,000 and were for credit coverage fees on a retailer that filed for bankruptcy during the quarter and costs associated with the acquisition of Carousel Designs, which we completed in the quarter.

Adding these numbers to the net income and earnings per share, the numbers would be as follows: obviously, the sales numbers would be the same, but the net income numbers, if you add it back, for FY '18, would be $1,130,000, as opposed to the previous year of $999,000, or an increase of $131,000 or 13.1%.

Diluted earnings per share would have been $0.11 per share as opposed to $0.10 in the previous year same quarter.

We're pleased with the help of Carousel Designs for 2 months during the quarter to have posted a 4.1% sales increase in this quarter versus the prior year quarter. During the quarter, we weathered the storm of our second largest customer filing for bankruptcy protection, and our core business, even with that, was only down slightly. As we have stated in earlier calls, we feel that the programs and products we have in place point to a bright future for the company.

We remain excited about the Carousel Designs acquisition, this direct-to-consumer model shows great potential for the future.

On the gross profit side, the gross profit for the current year quarter was 30.5% of net sales, up from 27.3% in the prior year same quarter. For 6 months, on a year-to-date basis, the gross profit increased from 27.4% last year to 28.6% this year.

On the balance sheet side of the business, we continue to be debt-free and we ended the quarter with a cash balance of $3.2 million, and should be noted that this balance is after paying for the acquisition of Carousel Designs, which was completely funded by cash on hand.

Today, we announced the company's Board of Directors declared a quarterly cash dividend of the company's Series A common stock of $0.08 per share. This represents an annualized yield of 5.4% based on yesterday's stock closing price. This dividend will be paid on January 5, 2018, to shareholders of record as of the close of business on December 15, 2017.

Once again, we're pleased to offer a dividend payment that reflects the board's confidence in the business and our ongoing commitment to provide shareholders -- value to the shareholders.

With that, I'll turn it over to Olivia to add more color.

I'm only going to give financial highlights. For more details, please refer to the company's Form 10-Q filed with the Securities and Exchange Commission this morning.

Net sales were $16.5 million for the second quarter of fiscal 2018, compared with $15.8 million for the second quarter of the prior year, an increase of $652,000 or 4.1%.

For the 6-month period, net sales were $30.1 million, which is down $1.3 million or 4.1% from $31.4 million in the prior year. The increase mainly results from the acquisition of Carousel Designs in August.

A portion of the decrease for the 6-month period results from reduced product shipments in the current year to a customer that experienced credit problem. Also affecting sales is the continuing overall sluggish retail environment, coupled with a change in the infant bedding marketplace, in which parents were purchasing fewer bedding sets in favor of separates, leading to lower average price point for the company infant bedding product.

Gross profit increased by $713,000, an increase from 27.3% of net sales for the prior year quarter to 30.5% of net sales for the current year quarter. Year-to-date, gross profit increased by $28,000, an increase from 27.4% of net sales for the prior year to 28.6% of net sales for the current year.

The increase for the 3-month period is mainly the result of gross margin attributed to Carousel Designs.

Marketing and administrative expenses increased by $1 million for the current year quarter compared with the prior year quarter as a result of credit coverage fees of $427,000 that were associated with the bankruptcy of a major customer and $212,000 in cost that were associated with the acquisition of Carousel Designs.

For the 6-month period, marketing and administrative expenses increased by $1.1 million compared with the prior year, due to $491,000 in credit coverage fees, $264,000 in acquisition-related cost and $90,000 audit fees associated with the company's transition from a smaller reporting company to an accelerated filer.

Additionally, the company recorded $52,000 in amortization expense in the current year, associated with the intangible assets acquired from Carousel Designs.

The company's provision for income taxes is based upon an estimated annual effective tax rate from continuing operations for the current year of 36%.

During the 3 and 6 months ended October 1, 2017, the company recorded a discrete income tax charge of $37,000 and a discrete income tax benefit of $60,000 to reflect the effect of the tax shortfall and the excess tax benefit arising from divesting of non-vested stock during the period.

The recognition of the tax shortfall charge was the primary factor in the increase in the overall provision for income taxes to 40.8% for the current year quarter.

Although the company does not anticipate a material change to the effective tax rate from continuing operations for the balance of fiscal year 2018, several factors could impact the effective tax rate, including variations from the company's estimates of the amount and source of its pretax income and the amount of certain tax credits.

Net income for the second quarter of fiscal 2018 was $725,000 or $0.07 per diluted share, compared to net income of $999,000 or $0.10 per diluted share in the second quarter of fiscal 2017.

Excluding the previously discussed costs associated with credit coverage fees and acquisition costs, net income for the current year quarter would have been $1.1 million, and diluted earnings per share would have been $0.11.

Net income for the first 6 months of fiscal 2018 was $1.2 million or $0.12 per diluted share compared to net income of $2.1 million or $0.21 per diluted share for the same period in fiscal 2017.

Excluding the previously discussed cost associated with credit coverage fees, acquisition costs and audit fees associated with the company's transition from a smaller reporting company to an accelerated filer, net income for the current year-to-date period would have been $1.8 million, and diluted earnings per share would have been $0.18.

I will now return the call to Randall.

Olivia, thank you very much. Okay, Brandon, if you'll come back and open it up, we'll take any questions that anyone may have on the call.

(Operator Instructions) Our first question comes from Dave King with Roth Capital.

I guess, first off, it looks like Carousel added $1.2 million of revenue or so, so the rest of the business was down a bit year-on-year. I'm sure BRU didn't help. I guess, the question is, do you think you still hit the trough for that side of the business? And I guess, what's the general sort of outlook on that front?

Dave, it did have an impact in the quarter. When the bankruptcy occurred, we had a break in shipment for, I don't know, 1 week or 1.5 weeks by the time we got back on the track. So that did -- and that was right at the end of the quarter. So obviously, that did not help, okay? But yes, we feel that the core business is on track and we feel we're encouraged by it.

Great. That's good to hear. And it sounds like the shipments have been resumed after that last week to BRU?

We did. We were able to get some coverage back in place, and we resumed shipments. Really, it resumed within a week, but because you had to get the orders changed and so forth, it started off very slow. After we started shipping again, it took a while to ramp up and get back to normal.

Okay. It helps. And then, how soon do you expect to be able to start ramping Carousel and getting revenue synergies there? Do you expect -- when do you expect to leverage them to have a website for the legacy Crown products? I guess, more broadly, what products from Hamco and CCIP could be transitioned to the customizable model? I guess, I would think it would make sense for toddler bedding, make a ton of sense, could you do that sooner than later? And then, are there other products that will make sense more?

There are a lot of products, Dave, that we're working on. That -- some licensed products that we've been able to trade off of CCIP, Crown Crafts Infant Products, and take over to Carousel. None of those have actually made it through the pipeline yet and hit the Web pages, but they shouldn't be before long. But to answer your question, Olivia and I were there yesterday, we are pressing as hard as we can and pedaling as fast as we can to get as many products through there as we possibly can. And we've got some pretty exciting things on the horizon.

Great. And then, one last one for me. Just on the gross margin. How much of the -- I don't know the right way to look at it is, but the 120 basis points or so sequential improvement, how much of that was Carousel? Was it all of it, or more of it, more than all of that? I mean, were there offsets to it or savings in other areas?

Dave, I would say, the way you should look at the contribution from Carousel in the quarter, and I'm answering this for Olivia because she's shaking her head, no. It was -- Carousel, you should look at for the quarter as being neutral to it, okay? And one of the things that affected Carousel in the quarter a little bit is their largest market happens to be Houston. And Houston happened to be hit by a big storm right at the end of September. And since our sales are live, so to speak, that did have an effect on them. But -- so there was not a lot of contribution in the margin improvement from Carousel during the quarter. There was a little, but we also had some effect of the burden that we keep talking about from time to time, which had some positive effect, too.

Okay. So it sounds then -- I mean, I don't want -- I know you don't want to say it, and Olivia, you don't want to say then, but it sounds to me then that given that Carousel is higher-margin business, theoretically, someone like me might want to assume that, that contribute more going forward. Okay.

As I said, Dave, we -- obviously, we're pretty darn excited about Carousel and what it can bring to the table. And that platform, the direct-to-consumer, is a good platform and we're excited about it.

(Operator Instructions) Our next question comes from Eric Beder with B. Riley FBR.

When you look, if you take out the -- the Toys "R" Us situation impacted you, you still were barely negative in the sales, if I take out -- I mean, apples-to-apples basis. Are you seeing kind of a receding impact from this shift to a lighter -- less product in the crib? And how are you responding to that?

Yes. Eric, the way we've been looking at it, and we've been saying this now for a while, is we've circled around to a year, 1 year plus, where the effect of some things that we've talked about the naked crib, et cetera, have taken place. So we've circled around that year and, hopefully, we have that behind us, the majority of it. So that's the way we're looking at that. But you are right, if you take Carousel out and you take the effect Babies"R"Us out of it, it was flat.

Okay. So you're making progress on that?

And our -- a company our size, or the second largest customer that we have to file bankruptcy in the quarter, and remained flat is pretty darn good.

I agree. When you look at -- so if we think about Carousel, you had the first 2 months of the Carousel in the acquisition here, the numbers were somewhat impacted, I guess, by the hurricanes, how should we be thinking? Is Carousel going to have the same seasonality the rest of your business has? And how should we be thinking about this business going forward?

Well, I mean, and again, Eric, you know from many conversations we don't forecast. They do have some seasonality. Their seasonality does not always follow our seasonality because they're closer to the consumer than we are. We're 1 step removed, we sell to the retailer, the retailer sells to the consumer. In the case of Carousel, it's live, the order -- the consumer places the order, comes in, it goes out, it's shipped. But the way you should be looking at Carousel is from a very positive effect from the future or for the future in both gross margin and in sales impact. And as we said on the -- to Dave King a moment ago, we're pedaling as fast as we can to get as much product out there as we possibly can.

Okay. The $1.2 million, is that -- where is that -- is that hitting entirely on the -- are they only bedding and blankets.

Yes. They're in the -- it's combined in the bedding and blankets category.

Okay. What drove the growth in the bibs business this quarter?

I'm sorry, you kind of cut out a little bit.

What drove the bibs business? It was up almost, I don't know, 4%, 5% here?

We're having a strong year, you're right about that. We gained some placements at some fairly major retailers where, at one point, we had 90% of the shelf space, now we're close to 100%. So we've got some gains that were -- we feel really good about. And you'd know from previous experience, our business in the bib area is we control about 50% of the U.S. marketplace. So we're a very strong player in that area.

This concludes our question-and-answer session. I would like to turn the conference back over to Randall Chestnut for any closing remarks.

Brandon, thank you very much. And thanks to everyone that was on the call. Thanks to Dave and Eric for the questions. Just wrapping up, we're pleased with our overall financial position and our ability to pay a strong dividend. We're also excited about the addition of a platform to offer a direct-to-consumer sales through Carousel Designs. Period.

The company is solid and we feel very encouraged about the future. We'd like to thank all of our employees, suppliers, customers and shareholders for their continued support and we look forward to speaking with you next quarter.

Have a good day. Thank you.

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