Crown Crafts Inc (CRWS) 2019 Q1 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, August 9, 2018.

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 first quarter of 2019.

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

Good afternoon, everyone.

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 August 16, 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 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 call -- turn the call over to Randall.

Olivia, thank you, and good afternoon again to everyone on the call.

Before the market opened this morning, we released our earnings for the first quarter of FY 2019, which ended July 1, 2018.

And we'll -- I'll go through some information, Olivia will do a follow up, and then after that, anyone that has questions, we will invite back.

Net sales for the quarter for 2019 were $15,460,000 as opposed to $13,647,000 in the same quarter of last year, are an increase of $1,813,000 or 13.3%.

Net income for the same period was $264,000 as opposed to $518,000 in the quarter last year, are a decrease of $254,000 or 49%.

Diluted earnings per share were $0.03 this year and $0.05 last year.

Addressing the net income.

As we announced when we made the Sassy acquisition last December, we incurred $210,000 of expense in April of this year, April 2018, to move the Sassy inventory from Grand Rapids, Michigan to Compton, California.

This had a negative impact on the net income of $161,000 or -- and diluted earnings per share of $0.02 for the quarter.

Q1 FY '13 was the first quarter -- excuse me, Q1 FY 2018 was the first quarter that we were completely void of any shipments to Toys "R" Us or Babies"R"Us, which represented $3.4 million net sales in Q1 of last year.

At the end of Q1, very little of this business had been replaced by other customers because Toys "R" Us/Babies"R"Us became a major competitor to us in this quarter through their store liquidations, which included deep discounts on inline merchandise.

In addition, the Crown Crafts Infant Products and Hamco, the subsidiaries impacted by the loss of Babies"R"Us, the lower sales volume made it difficult for us to cover our fixed costs in this quarter.

Once the Babies"R"Us, Toys "R" Us product is sold through to the consumer, we anticipate replacing a portion of the sales volume through reallocation to other customers later in the year.

The gross profit for the year increased slightly to 26.7% of net sales from 26.4% of net sales in the same quarter last year.

On the balance sheet side, we finished the quarter with a balance on our revolving line of credit of $3.8 million, and had unused borrowing capability or availability of $17.9 million.

After the end of the quarter, before we made the quarterly announcement, we executed a 3-year extension for our revolving line of credit with CIT, which includes an immediate reduction of the interest rate from LIBOR plus 2 to LIBOR plus 1.75.

We're pleased to get that extension done.

The company also announced this morning that its Board of Directors declared a quarterly cash dividend on the company's Series A common stock of $0.08 per share, which will be paid on October 5, 2018, to shareholders of record at the close of business on September 14, 2018.

This represents an annualized yield of 5.9% based on yesterday's stock closing price.

We're pleased to be able to continue to reward our shareholders with cash dividends.

One of the opportunities that we have with the acquisition of Sassy, we now have a network of 20 international distributors.

We plan to show at the K + J trade show in Cologne, Germany in September of 2018.

We, as a company, have never shown at this show before.

It's an international show, and is well regarded in the industry.

We will be showing products from Crown Crafts Infant Products, Hamco, Neat Solutions and Sassy.

Internationally, at this show, all products will be branded Sassy, so it will be a consistent statement for the international market.

We're looking forward to that.

I'll turn it back over to Olivia, and then we'll come back.

Thank you.

I'm going to only [point] to give financial highlights.

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

Net sales were $15.5 million for the first quarter of fiscal 2019 compared with $13.6 million for the first quarter of the prior year, an increase of $1.8 million or 13.3%.

The acquisitions of Carousel Designs and Sassy added $4 million.

However, the -- this increase was offset by decreased sales due to the liquidation of one of our largest customers, which represented $3.4 million in sales in the prior year quarter.

Although we anticipate replacing a portion of the Babies"R"Us sales volume through reallocation to existing customers in the latter half of the year, the Babies"R"Us' deeply discounted liquidation sale activity competed against our core business this quarter.

Gross profit increased by $526,000, an increase from 26.4% of net sales in the prior year to 26.7% of net sales for the current year.

The increase in amount is primarily due to the higher sales in the current year quarter.

Marketing and administrative expenses increased in amount by $784,000, an increase from 21.3% of net sales in the prior year to 23.8% of net sales this year.

Contributing to the increase in amount was $904,000 in costs during the current year quarter that were associated with Carousel Designs, which were not incurred in the prior year.

The current year quarter also included $210,000 in expenses to move the Sassy inventory from Grand Rapids, Michigan to the company's distribution facility in Compton, California.

Offsetting these increases was $163,000 in lower advertising and costs incurred by CPSE and Hamco in the current year quarter as compared to the prior year.

The current year provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 24%.

Recent tax legislation includes a provision to lower the federal corporate income tax rate from 34% to 21%, effective as of 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.

Because the legislation had not yet been acted -- enacted, the company's provision for income taxes for the prior year quarter was based upon an estimated effective tax rate from continuing operations of 35%.

During the first quarter of fiscal 2019, the company recorded a discrete income tax benefit of $5,000 to reflect the effect of excess tax benefits arising from the vesting of nonvested stock during the period.

The benefit recorded in the first quarter of the prior year was $60,000.

The company also recorded a reserve of unrecognized tax benefits of $3,000 in the current year and $11,000 in the prior year.

The effective tax rate of continuing operations, combined with these discrete income tax charges and benefits, resulted in an overall provision for income taxes of 23.3% for the current year quarter and 28.2% for the prior year quarter.

Net income for the first quarter of fiscal 2019 was $264,000 or $0.03 per diluted share compared to net income of $518,000 or $0.05 per diluted share in the first quarter of fiscal 2018.

I will now return the call to Randall.

Olivia, thank you very much, and that concludes our remarks.

And we'll now -- Andrea, if you will come back, and we'll open it up for any questions that anyone on the line may have.

(Operator Instructions) Our first question comes from David King of Roth Capital.

I guess, first off, as you look to replace some of this lost revenue from BRU, how much of it do you think you'll be able to replace sort of over the near term?

And then what sort of visibility do you have into that?

Have Target and Buy Buy Baby, et cetera, begun to offer incremental replacements?

And how soon should we start to see that?

It sounds like it's back half mainly.

Dave, you're exactly right, it's a back half phenomena.

Through the quarter, as we said in the remarks, Babies"R"Us, Toys "R" Us actually became our competitor.

They were selling current merchandise, which we had just shipped just prior to the liquidation announcement, at deeply discounted prices, and towards the end, some of them were as much as 70%, 75% off of the original retail price.

We are -- after that ended, we did see some uptick in a number of accounts.

There's still some residual where individuals purchased merchandise, we think, from the stores, and they're selling it through certain websites that -- they're reselling them.

But that is not as big an impact as it was with the liquidation going on at Toys "R" Us in the store.

So it's going to be a -- spread out over the next 3 quarters.

And then in terms of the others starting to pick up the slack, it sounds like you do have orders for incremental placements then, Target and Buy Buy Baby?

As you well know, it's difficult anymore because you get projections and then you don't get firm orders until just before ship dates, but we have some good projections for the remainder of the year that we're pretty excited about.

Okay.

That's great to hear.

And then switching gears, given the environment, following up on Sassy and Carousel, what's your outlook on the potential for further acquisitions at this point?

And how are the asks compared to the bids -- potential bids at this point?

Well, as we said in the remarks, we are -- we're capitalizing on Sassy and their presence in the international market, and we're expanding that into our core businesses with Sassy-branded product that will show in Cologne in September.

So we're pretty excited about that.

Carousel is doing well, and we've got a lot of initiatives going on there for new product development, et cetera.

As far as other acquisitions on the horizon, I mean, we did 2 in a relatively short period of time, so we're sort of trying to digest that at the moment.

We're still looking all the time, but we're sort of taking a break and trying to digest what we've got.

Yes, and that makes sense.

I don't -- and at least these 2 deals are -- sounds like going well for you, so that's great.

I think that does it for me.

Nice job in managing expenses, and good luck with the rest of the year.

Our next question comes from Josh Peters of Zenith Sterling Advisers.

Would like to congratulate you.

I feel like you're managing the business very well for the factors that are within your control here.

Yes, I've got a couple of questions.

The first one is on Sassy, where you disclosed the amount of sales that Sassy contributed to this quarter.

I think it was $2.2 million.

And it was a similar figure in the first calendar quarter.

The press release that you put out when you announced the transaction late last year was -- indicated about an $11 million run rate for that business.

I'm wondering if that's still a good number to use in terms of its contribution to sales over the longer term?

Or is it coming up a little bit shorter of that $11 million run rate?

Dave -- excuse me, Josh, that would be making a forward-looking statement in which we try very hard not to do.

But for modeling purposes, I would use that same number.

Okay, that's very good.

I appreciate that.

And then the other question I have -- and unfortunately, this is taking me into a topic I would really rather not get into, which is politics, geopolitics, but since you do source the overwhelming proportion of your merchandise from China, I was wondering if you could give us an update on the state of any potential tariff impacts.

Are there any products that you're importing from China that have already been affected by any tariffs orders?

And whether that has been the case or not, what would be your plan for addressing a threat like that should it come to pass?

Josh, it's a good question.

And I'll answer it in parts.

Has anything been affected up to this point?

The answer is no.

We do have 1 category that we know is going to have a new tariff go into effect the latter part of August.

And we have another one that is going to be effective sometime in September.

It's in the -- like the third round, and we don't know the exact date for that one.

We have analyzed this every way that we can, and we have a few million dollars that could be affected by this.

When I say a few, it's a small -- it's on the small side of a few, that could be affected by the tariffs.

And 90% of that is really related to 2 products.

So there's a 10% factor out there that's not major, and we'll deal with those either by changing the product, discontinuing the products or raising the price on that 10%.

So the 90% that's affected is really 2 categories.

One is an item that we call table toppers, which is a disposable place mat.

And for some reason, it's caught up in the tariff for round 1 -- or round 2, I'm sorry, but it goes into effect at the end of August.

Our intent there is we have a very large market share, and we intend to increase the price and pass on the tariff, which we're in the process of finalizing and doing as we speak.

The other one is a bib that is made of a certain fabrication that lends itself to be caught up in the tariffs, and we have one major user and everybody else combined, they're really small besides that one major user, and we're going to pass that price increase on, and we've already had that conversation with the retailer, and they're going to accept it.

So it really boils down, unfortunately, knock on wood, and we hope that it doesn't get too crazy beyond that, really 2 items that has an impact on our business.

And so we can address those, it's not like across the board.

Beyond that, the other small percentage beyond that is relatively small.

And in varying degree, some of them will just discontinue the business because it's so small.

And the rest of them will either increase prices and pass it through.

That's very helpful.

At least in terms of the impact of the things that have been announced so far.

But if we were to game out a scenario where a 25% tariff gets applied to every Chinese import, is that a case where you think you could recover that through pricing?

Or would you have to suck some of that up while you had to resource perhaps from some other countries?

Again, I'm just trying to get a little insight here.

I'm sure you've gamed out a lot of scenarios with this, kind of the big, uncertain cloud on the horizon right now.

Well, let me first say I hope you're not right, okay?

And that there's going to be a tariff unilaterally on everything coming in, and it could be 25%.

We don't think that's the case.

But again, we don't know.

But if that's the case, our intent is to either pass it on.

We are looking at other countries, but quite candidly for the products that we make, the textile products especially, it's very difficult to find it in other countries (inaudible).

And so we are looking at other countries, but nevertheless, we are prepared to pass it on if we have to.

(Operator Instructions) This concludes our question-and-answer session.

I would like to turn the conference back over to Mr. Randall Chestnut for any closing remarks.

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

If you look at the numbers, Q1 was a challenging quarter.

And -- but we're -- if you set that aside, we, as management of the company that are very close to what's going on, we're excited and optimistic about the future, and we think we have a bright future in front of us.

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

And we'll speak to you again next quarter.

Have a good day.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.