Crown Crafts Inc (CRWS) 2018 Q4 法說會逐字稿

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

investor's 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, today's conference call is being recorded today, June 13, 2018.

At this time, I'd like to turn the conference call over to Ms. Olivia Elliott, Vice President and Chief Financial Officer, who will begin the call.

Ma'am, please go ahead

Thank you.

Welcome to the Crown Crafts Investor Conference Call for the Fourth Quarter and Full Fiscal Year 2018.

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

Good morning.

A telephone replay of the call will be available 1 hour after the end of the call through 4:00 p.m.

Central Daylight Time on June 20, 2018.

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.

Also, in regard to comments made in today's conference call that are related to the company's recently announced dividends, 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 morning again.

And before the market opened this morning, we released our earnings for the fourth quarter and full year -- fiscal year 2018, which ended April 1, 2018, and we'll talk about the details for the quarter and the year -- the full year.

Net sales for the quarter were $22,686,000 as opposed to $17,308,000 in the previous year, same quarter, or an increase of $5,378,000 or 31.1%.

Net income on the other side was $1,247,000 as opposed to $1,609,000, or down $362,000 or 22.5%.

We'll touch on that again in just a moment.

Diluted earnings per share were also down from $0.16 per share last year to $0.12 per share this year.

Turning to the full year.

Net sales were $70,270,000 as opposed to last year's $65,978,000, or an increase of $4,292,000 or 6.5%.

Net income for the full year was $3,021,000 as opposed to $5,572,000, or a decrease of $2,551,000, or 45.8%, and again, we will touch on that in a moment.

And diluted earnings per share were down from $0.55 last year to $0.30 this year.

Fiscal year '18 -- 2018, was an exciting year but also one that offered many challenges for the company.

It was exciting because we completed 2 acquisitions: Carousel Designs and the development toy business of Sassy.

With the help of these 2 acquisitions, sales were up 31.1% in the fourth quarter and 6.5% for the full year.

Carousel Designs is a new and exciting opportunity for the company.

It's a direct-to-consumer Internet-based channel of distribution.

Sassy offers the company a new product line, developmental toys, to expand our reach into the traditional retailers.

Sassy also offers the company the opportunity to expand this international presence.

Sassy currently has 20 distributors located around the world.

On the challenging side, with the bankruptcy and subsequent liquidation of Toys "R" Us or Babies"R"Us.

Babies"R"Us was formerly our second largest customer, and we can assure you that this customer will be missed in the future.

The year-to-date net income was impacted by $2.4 million and numerous nonrecurring charges, of which, $785,000 affected the fourth quarter.

These costs included acquisition cost of Carousel Designs and Sassy; the Toys "R" Us bankruptcy and subsequent liquidation; and royalty shortfall on certain licenses that relied heavily on Toys "R" Us.

We also recorded a large deferred tax asset revaluation when the Tax Cuts and Jobs Act was enacted in December of 2017.

Excluding the impact of these nonrecurring cost, the year would have looked much different.

The full year net income for fiscal 2018 would have been $4.5 million versus $5.6 million in the previous year -- $5.4 million, I'm sorry.

I called it, $5.4 million versus $5.6 million in the previous year or slightly under by $200,000.

The fourth quarter net income in the current year would have been $2 million versus $1.6 million in the previous year fourth quarter.

In addition to the loss of Babies"R"Us, we also stopped shipping during the year, Kmart, due to credit problems.

So not only did we lose a Babies"R"Us, we lost Kmart as well.

FY 2018 was a very challenging year but because we covered the majority of our credit risks associated with Babies"R"Us and Toys "R" Us, we were able to minimize the impact of the bankruptcy and subsequent liquidation.

We strongly believe in the future of the company and are proud of the fact that the company remains very healthy.

Turning to the dividend or the balance sheet side of the business including the dividends.

The dividends on April 30, 2018, we announced a quarterly dividend of $0.08 per share.

This represents a 5.7% annualized yield based on yesterday's close price per share of the company's common stock.

This quarterly dividend will be paid on July 6 to shareholders of record of June 15, 2018.

We're proud of the track record and continue to operate our business in a manner that generates strong cash flow and delivers substantial value to our shareholders.

I'll turn it over to Olivia.

So now, we're going to give financial highlights.

For a more detailed analysis, please refer to the company's Form 10-K filed with the Securities and Exchange Commission this morning.

Net sales were $22.7 million for the fourth quarter of fiscal 2018 compared with $17.3 million for the fourth quarter of the prior year, an increase of $5.4 million or 31.1%.

Net sales for the full fiscal year 2018 were $70.3 million, up $4.3 million or 6.5% from $66 million in the prior year.

Sales increased by $7.5 million due to sales that resulted from the Carousel and Sassy acquisitions during the year.

The increase was offset by reduced product shipments in the current year to 2 customers that experienced credit problems throughout the year, along with a continuing change in the infant bedding marketplace, in which parents are purchasing fewer bedding sets in favor of separates, leading to a lower average price point for the company's infant bedding product.

Gross profit increased in amount by $710,000 but decreased from 29.9% of net sales for the prior year quarter to 25.9% of net sales for the current year quarter.

Gross profit increased in amount by $368,000 but decreased from 29.4% of net sales for fiscal 2017 to 28.1% of net sales for fiscal 2018.

The increase in amount was due to higher sales from Carousel and Sassy, which was offset by a higher level of sales of closeout inventory in the current year, which was at lower margin.

Also, sales to Toys "R" Us during the current fiscal year, leading up to and continuing through the bankruptcy and liquidation, resulted in a shift to a less profitable product mix and shortfalls of minimum guaranteed royalty which contributed to the decrease in the gross profit percentage.

Marketing and administrative expenses increased by $3.6 million in fiscal year 2018 compared with fiscal year 2017.

The increase is the result of credit coverage fees of $653,000, and bad debt of $218,000 that did not occur in the prior year and that were associated with the bankruptcy and liquidation of a major retail customer.

The company also incurred $516,000 in acquisition-related costs and $239,000 in amortization expense during the current year that were associated with the Carousel and Sassy acquisitions.

The current year also included an increase over the prior year of $90,000 in audit fees associated with the company's transition from a smaller reporting company to an accelerated filer for SEC purposes.

The company's overall provisions for incomes taxes increased to 44.3% during 2018 from 36.7% in 2017.

Recent tax legislation includes the provision to lower the federal corporate income tax rate to 21% effective January 1, 2018.

As the company's fiscal year 2018 ended on April 1, 2018, the lower corporate income tax rate was phased in, resulting in a blended federal statutory rate of 30.75% for fiscal year 2018.

The company provides for deferred income taxes based on the differences between the financial statement and tax basis of the company's assets and liabilities.

The company's net deferred income tax assets had previously been reported based upon the enacted composite federal state and foreign income tax rate of approximately 37.5% that would have been applied if the financial statement tax differences began to reverse.

Because these differences are now expected to reverse at a composite rate of approximately 24.5%, the company was required to revalue its net deferred income tax assets.

This revaluation resulted in a discrete charge to income tax expense of $377,000 during fiscal year 2018.

Additionally, because the company's measurement regarding the tax impact of certain state apportionment percentages are measured net of federal income taxes, the company also revalued its reserve for unrecognized tax benefit, which resulted in a net discrete charge to income tax expense of $120,000 during the current year.

Income tax expense for fiscal year 2018 included 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 benefits arising from the vesting of nonvested stock as compared with $248,000 of net income tax benefit arising from the effect of such items during fiscal year 2017.

Net income for the fourth quarter of fiscal 2018 was $1.2 million or $0.12 per diluted share compared with net income of $1.6 million or $0.16 per diluted share in the fourth quarter of fiscal 2017.

Excluding nonrecurring expenses totaling $785,000, net income and diluted earnings per share would have been $2 million and $0.20, respectively.

Net income for the full fiscal year 2018 was $3 million or $0.30 per diluted share compared with net income of $5.6 million or $0.55 per diluted share for fiscal 2017.

Excluding nonrecurring expenses totaling $2.4 million, net income and diluted earnings per share would have been $5.4 million and $0.53, respectively.

I'll now turn the call back to Randall

Olivia, thank you very much, and we'll open it up now, Jamie, if you'll come back, for anyone on the line that may have any questions.

(Operator Instructions) And our first question today comes from Dave King from Roth Capital.

So a couple of questions.

I guess, first, on the revenue.

I was kind of curious about the puts and takes there.

How much did the acquisitions of Carousel and Sassy contribute?

How significant was Babies"R"Us in the quarter?

Were you still generating any revenue there, and how does that compare for the prior year?

And then where are we in this naked crib trend?

Did we turn the corner, or is that still weighing?

For the fiscal year, Carousel and Sassy contributed $7.5 million.

I'm not -- I don't have the numbers with me for exactly what they contributed for the quarter but we'll keep talking about the rest of your questions, and I will go back and look and see if I can figure the quarter out.

Okay, no problem.

I think I've got the prior quarters anyway so I can figure it out, so don't worry.

Okay.

Great.

(Operator Instructions)

Jamie, I don't think that Dave was finished.

He may...

I do apologize.

Mr. King, please go ahead.

Okay, is my line open again?

Sorry, Dave.

No problem, no problem.

So then yes, the other parts of that, I think, were on the TRU impact during the quarter, either how much they contributed for the quarter or for the year; and how much was that down versus prior?

And then there's the naked crib part of that.

Dave, I don't have the numbers right in front of me on how much TRU was down for the quarter but it was down appreciably because we actually stopped shipping in early March as we saw the liquidation starting to come.

And even before that, with some of the store closings, the revenue was down quarter-over-quarter as they started to close stores and move goods around.

So I don't have the exact number but it was down appreciably for the quarter.

And then pretty much for the month of March, it was 0. We shipped a little bit in early March, and then we stopped shipping just before the liquidation occurred.

Okay.

And then in terms of the naked crib trends?

Where are we in that and is that still kind of weighing on trends or do you think we've turned the corner in terms of that side of it?

You're talking about the effect of the liquidation of Toys "R" Us?

Naked crib.

Naked crib.

Naked crib, okay.

Okay.

Yes.

No, we think that the naked crib, we hope we're at the bottom of the trough, okay?

And we've shuffled around on that for a year, and so we think we've felt the full effect of that, okay?

What we haven't felt the full effect of, and I thought you were alluding to and I'll go in and address it, is TRU, Toys "R" Us, Babies "R" Us is still in liquidation mode.

They're still liquidating inventory through their stores.

So to some degree, they are a competitor now of ours because they're selling goods and competing with us, which we don't have the opportunity to resell into it.

So we're still -- we're feeling the effect of that still but we think we're at the bottom of the trough on the naked crib.

Okay.

And then as you think about the year ahead then, do you think it's -- how far away do you think we are given the TRU, BRU pressure?

How far away do you think we might be from sort of a bottom in the legacy business?

Are any other retailers trying to capture that share?

And do you see any orders there to help kind of drive that or are we still ways off from seeing that bottom?

We're still a little ways off from seeing that bottom, Dave.

The last court hearing that we listened to, they said that they thought the liquidation would be finished by the end of June, this month, okay?

And we don't know.

That's the latest we've heard from the courts.

Whether they're going to just close it down and then hire a liquidator to liquidate the last inventory, we don't know the answer to that.

But right now, it's still going on, we know it's going to go through the end of June, and there's going to be some residual left over.

And so we're still not -- we're not at the end of that tunnel yet.

Okay.

Okay, that helps.

That's good color.

And then on the expense front, the control there I thought was pretty impressive.

I would think -- I understand it was up probably due to some of the acquisitions but even on a core basis, I think it was managed pretty well.

Was some of that sort of synergies on some of this stuff rolling into that?

Or what are the puts and takes to the expenses in the quarter?

And then how are you thinking about the outlooks for that going forward?

I mean, Dave, the expenses, as you well know, is just ongoing cost control.

And we are tenacious with controlling our cost and not letting it get out of line.

We expended a lot of money during the quarter and during the year to buy coverage for Babies"R"Us and Toys "R" Us outside of our normal traditional coverage -- financial coverage that we had, and we spent a lot of money doing that.

So we had to be tenacious on controlling other costs to hold it down to offset some of it.

And so it's nothing in particular, it's just that that's our mode.

Okay.

Okay.

But nothing in terms of synergies and is there an opportunity for synergies on some of these deals, these acquisitions that you've had thus far?

There is a big opportunity from what you see.

It's occurred already, it occurred in April, but it's not in the quarter.

When we purchased Sassy, Sassy's distribution center was in Grand Rapids in a public warehouse and which was quite expensive.

We moved all of that inventory from Grand Rapids to our facility in Compton, California during the month of April, and we didn't begin it until we -- because it was the end of our fiscal year, we waited until our inventory period, so we started moving it and moved it the first and second weeks of April, so none of that effect was in the fourth quarter, it was occurred in the first quarter this year.

But as of mid-April until the end of April, all the inventory is in our Compton facility and within our control and within what we shipped along with our regular merchandise for our other subsidiaries, except for Carousel Designs, which shipped out of our own facility in Douglasville, Georgia.

Okay.

That's great to hear.

And forgive all the background noise, but one more question for me.

Given all the challenges that are out there with TRU, and solving the whole Kmart situation, what's the current outlook on M&A?

Are there any opportunities that are starting to -- further opportunities that are starting to pop up?

I guess, just what's your view there, Randall?

We're -- yes, Dave, we're seeing opportunities.

But, I mean, we -- there's -- how do I say this?

There's probably a lot of unhealthy opportunities out there, people that have struggled because of the demise of some of these retailers and I'm not so sure that we're that interested in unhealthy acquisitions.

Sometimes, the energy it takes to bring them -- make them healthy again is not worth the return.

But we are seeing some out there and we're seeing quite a bit.

(Operator Instructions) And in showing no additional questions at this time, I'd like to turn the conference call back over to Mr. Chestnut for any closing remarks.

Jamie, thank you very much and thanks to everyone on the call today and thanks for your interest in the company.

We're pleased with our position in the market.

Our designs and products are well positioned for the future.

We'd like to thank all of our customers, employees, suppliers and shareholders for their continued interest and support in our company.

2018 was a difficult year; we're not going to make any bones about it.

And quite candidly, we're happy to see it in the rearview mirror.

And we turn our attention to 2019, and we hope that we can make that a better year.

We thank you very much for your time.

Have a good day.

Thank you.

Ladies and gentlemen, the conference has now concluded.

We do thank you for attending today's presentation.

You may now disconnect your lines.