Crown Crafts, Inc.

Hello, ladies and gentlemen, and welcome to the Crown Crafts Incorporated Investor Conference Call. Your host for today's call is Mr. Randall Chestnut, Chairman and Chief Executive Officer. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. 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, February 10th, 2021. At this time, I would now like to turn the call over to Ms. Olivia Elliott, President and Chief Operating Officer, who will begin the call. Please go ahead.

Thank you. Welcome to the Crown Crafts Investor Conference call for the third quarter of fiscal 2021. With me today is Randall Chestnut, the company's Chief Executive Officer.

Hi, good afternoon.

A telephone replay of this call will be available one hour after the end of the call through 4 p.m. Central Standard Time on May 11, 2021. 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 calls. Also, in regard to comments made in today's conference call that are related to the company's recently announced dividend and its history of paying dividends, 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 dividends. I will now turn the call over to Randall.

Randall Stevens Olivia, thank you, and good afternoon again to everyone. Access is the first investor conference call since the promotion of Olivia Elliott to President and Chief Operating Officer. I'd like to call special attention to this event, which occurred January the 4th of this year, with the beginning of this quarter. Olivia joined the company in 2001 and has spent the past 20 years learning the financial and operations of the company. Her knowledge makes her the best executive to tackle this important role. We're pleased that we could promote from within. Soon, we hope to announce the appointment of someone as Vice President and Chief Financial Officer to relieve Olivia of that direct responsibility. As investors, I would ask when you get an opportunity, please join me in congratulating Olivia on her new role. Okay, for the third quarter, and that's the only, I'm gonna address only the third quarter. Olivia will address the year to date when she makes her presentation. Net sales for the third quarter were 19.5 million this year as opposed to 18.8 last year, or an increase of 889,000, or 4.8%. Net income for the quarter, was $2,141,000 as opposed to $2,095,000 or an increase of $46,000 or 2.2% over last year's same quarter. Diluted earnings per share was $0.21 this year as well as $0.21 last year. And as I said, Olivia will address the year-to-date numbers a little later in the call. The third quarter performance was an improvement in net sales and net income over the previous year, which we're very pleased with. The effect of certain tax credits were included in this year's third quarter of 74,000 or one cents per diluted share, and last year's third quarter of 274,000 or three cents per diluted share. If you exclude the effects of these tax credits, this year's quarter diluted earnings per share would have been two cents higher than last year's third quarter diluted earnings per share. Gross profit for the quarter improved to 31.6% this year as opposed to 31.3% in the same quarter last year. For the last quarter and the last nine months, we, along with everyone else, have been impacted by COVID-19. By remaining flexible and with the help of our entire staff, we've continued to shift through the entire period. And for that, we owe a debt of gratitude to all of our employees. Turning to the balance sheet, we remain strong with a paid off revolver and a cash balance of $3.7 million and availability on the revolver of $26 million as of December 27, 2020, which was the end of the quarter. Today, we announced that the company's board of directors declared quarterly cash dividend of the company's Series A common stock of $0.08 per year per share based on today's closing price or yesterday's closing price per share of the company's stock. This represents an annualized yield of 4%. The dividend will be paid April 2, 2021 to shareholders of record of the close of business March the 12th, 2021. Once again, we're pleased to offer this dividend payment that reflects the Board's confidence in the business and the ongoing commitment to provide value to our shareholders. Olivia?

Thank you, Randall. I'm only going 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 $19.5 million for the third quarter of fiscal 2021 compared with $18.6 million for the third quarter of the prior year, an increase of $889,000 or 4.8%. Net sales were $57.3 million for the first nine months of fiscal 2021 compared with $53.1 million for the same period of the prior year, an increase of $4.2 million or 8%. The increase in sales is due to higher sell-through at major retailers, which has been partially offset by declines at certain customers that have been impacted by the COVID-19 pandemic, particularly one customer that has remained closed throughout the entire nine-month period of the current year. Growth profit increased by $332,000 and increased from 31.3% of net sales for the prior year quarter to 31.6% of net sales for the current year quarter. Gross profit increased by $2 million and increased from 30.6% of net sales for the prior year nine-month period to 31.9% of net sales for the same period in the current year. The increase in gross profit is due to the increase in net sales as well as a more favorable customer and product mix. Marketing and administrative expenses were flat at $3.4 million for both the current and prior year quarters. but decreased from 18.4% of net sales for the prior year quarter to 17.6% of net sales for the current year quarter. Marketing and administrative expenses increased by $258,000, but decreased from 19.5% of net sales for the prior year nine-month period to 18.5% of net sales for the current year nine-month period. The increase in amount for the current year-to-date period is primarily the result of higher outside services of 318,000 and higher advertising of 138,000, partially offset by lower travel expenses of 120,000 and lower amortization of 45,000. The current year-to-date provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 23.7% compared to 23.3% in the prior year. The recognition of certain tax credits favorably impacted the current year quarter and year-to-date periods by $74,000 and the prior year quarter and year-to-date periods by $274,000. Prior year net income for the year-to-date period was also impacted favorably by $292,000 due to the reversal of a portion of reserves for unrecognized tax benefits and the related interest and penalties that had previously been recorded. The effective tax rate from continuing operations, combined with the effect of the discrete income tax charges and benefits, resulted in an overall provision for income taxes of 23.7% for the current year-to-date period and 16% for the prior year. Net income for the third quarter of both fiscal 2021 and fiscal 2020 was $2.1 million, or 21 cents per diluted share. Net income for the first nine months of fiscal 2021 was 5.8 million or 57 cents per diluted share compared to net income of 5 million or 49 cents per diluted share for the same period in fiscal 2020. The tax credits previously mentioned favorably impacted the current year quarter and year-to-date periods by one cent per diluted share. The prior year quarter was favorably impacted by three cents per diluted share And the prior year-to-date period was favorably impacted by 6 cents per diluted chair. I will now return the call to Randall.

Olivia, thank you very much. And Chad, if you'll come back up, we'll open it up to any questions that anyone may have on the line.

Certainly. Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question will be from Linda Bolton-Weiser with DA Davidson. Please go ahead.

Hi, Randall and Olivia. How are you? Hey, Linda. We're good.

How are you? Hey, Linda. Good.

Good, good. Congratulations, Olivia, on your promotion. Thanks very much. I was curious, when you're talking about bringing somebody into the CFO role, do you think you'll promote from within or are you looking at outside candidates?

At this point, we prefer not to say, Linda. We're still, you know, It's still being ironed out.

Okay. And congratulations on the quarter. I mean, it was really good profit growth, and you're seeing some nice leverage because of your sales growth. In looking at your segments, I did notice that the bibs, bath, toy, feeding segment was down year-over-year, whereas it was up last quarter. Is there something that changed there or why was it down whereas it was up in the second quarter?

No, Linda, nothing really changed. The biggest thing that changed probably was we had an upcoming reset which we've now implemented and we're almost through it at one of our major customers. And when they start doing that, they start paring down on the existing inventory and meaning paring down meaning they slow down buying of inventory. But nothing has changed except basically that.

Okay. And your growth continues to be really good overall, though, especially on the bedding, blankets, and accessories side. I mentioned that's driven by e-commerce. Are you able to tell us how much your e-commerce sales were up in the quarter versus your brick-and-mortar sales?

We don't disclose those numbers, Linda, but it was up appreciably. It really was. And we don't disclose them, and therein lies a little bit of a fallacy when you compare SASE, the bibs, to NoJo because... The bibs at SASE, the price point of the bibs, don't lend themselves very well for Internet sales because, in many cases, the price of the merchandise would not be as big as the freight would be. So, therefore, it makes it difficult, a little bit difficult, unless you bundle them, which we do, but we can and ship multiple units. So we don't break those numbers out.

Okay. So overall, I mean, your growth, you know, it does seem to have picked up here during the pandemic. Do you think it's just that consumers have more time to think about decorating their child's bedroom or buying new things for their child or infant? Or is there something else that you can point to that has actually changed consumer buying behavior here during the pandemic?

No, not really. I mean, we're hearing from a lot of different, not just in our category, but in other categories, unrelated to baby, that because people are staying home, they're buying more for the home to fix the home up and take pride in that. So we're hearing that from a lot of different sectors, and I'm sure you are too. But that would be the biggest thing. I mean, that has helped. There's no question about it. It's hurt the American economy, but nevertheless it's helped our business. And also the stimulus checks did too.

Right. Okay. I guess I'm a little curious about a couple, some of my companies have been talking about starting to face some commodity cost pressures and Are you starting to see that or do you expect that in coming periods?

We do, Linda. There's no question about it. The US dollar to the RMB has fallen roughly 10% since last May. So Chinese suppliers are starting to come forth and say, you know, we've got to have And we've taken a posture with it. You know, we know they do. And in some cases, many cases, we will grant some increases. But we've also taken a very tough approach that if we grant an increase, we're going to pass it on to the retailer. Because the RMB change of the dollar has nothing to do with our business. It's all related to... The amount of, you know, the stimulus and the amount of money that the U.S. government has printed to afford these stimulus checks, so it's devalued the dollar. And that's without our, that's out of our control. So, as we did with tariffs, we're going to bite the bullet and do what we have to do and pass it on.

Okay. I'm just wondering, in looking at my fourth quarter projections, I know you don't give guidance or anything, but in the prior year fourth quarter, there did seem to be a little bit of an escalation in advertising expense. Is that something that the ratio spending increases always in the fourth quarter, or was there something special last year? I'm just thinking how I should think about that comparison in the fourth quarter.

I'm not recalling anything that was special in the fourth quarter. I think advertising will stay fairly steady when you look at this year. I don't recall anything special, but I also don't think it's going to happen this year, anything extraordinarily compared to the first three quarters.

And except for Carousel, our advertising, Linda, is more support for the retailers. through their advertising campaigns. I mean, we really don't go out in the market and buy advertising except for carousel.

Okay. So I'm just curious. I know this happened a long time ago, but in terms of the Toys R Us bankruptcy, and you actually managed through that pretty well. Have you found that your products have found new homes in terms of new distribution in some cases or expanded distribution? Are there any other changes that have been like permanent changes that have taken place since that time? And have you kept all that new distribution that you gained after the Toys R Us bankruptcy?

Well, I mean, I can't sit here and say that dollar for dollar we have, but You know, we took a lick and then kept on going, and I think, yes, we've overcome that, okay? It took a few quarters to do it. You don't lose that kind of business. They were our second largest retailer without feeling the impact of it, and we did feel the impact of it. But, yeah, I think we're pretty much over that, and we don't want to do it again. Let's put it that way.

Are you experiencing any issues with having supplied retailers that have gone under here during the pandemic, or is that relatively small impact?

For us, it's relatively small impact, Linda. We don't sell a whole lot of the independent retailers. We do a little in the toy side of the business. But keep in mind, those impacts... don't really affect us. We factor everything we do, pretty much. I say pretty much. 99.8%. We factor, so we're covered. And, you know, from a credit standpoint. So we don't take the risk. And, you know, but there's been, to my knowledge, very few. And no, it's not had an impact on us.

Okay. And lastly, I guess I would just like to ask about some of your international growth opportunities and progress. You had been talking about some opportunities. How is that progressing? Are you continuing to further penetrate the international markets?

We are, Linda. Honestly, the pandemic slowed it down. There's no question about it because, you know, trying to get – merchandise out of Asia into other countries has been a little bit of a difficulty. But we're still pursuing it. We've got a conference call with a person on Friday that, you know, we're starting to ramp it back up and try to build that business as much as we can. We had a good momentum going, and it just, the pandemic did slow it down. We're still doing a fair business, but it's loaded down.

Okay. Well, I guess that's all the questions I had for you today. So thank you for taking the time.

You're quite welcome. Thank you. Thank you.

Once again, if you have a question, please press star then 1. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Randall Chestnut for any closing remarks.

Chad, thank you very much, and thanks to everybody that was on the call today. As we said in the early opening, we're very proud of the performance of the quarter and the year-to-date period. When we started this year out, there was a lot of uncertainty and a cloud hanging over, and we came out with, you know, three quarters. Knock on wood, we've got one more to go, but we came out with three quarters that were phenomenal. We'd like, for that, we'd like to thank all of our employees, suppliers, customers, shareholders for their continued support, and we look forward to speaking with you after we close our year end, which will be sometime in Mid-June. Mid-June. Thank you very much, and this concludes our conference. Have a good day. Thank you.

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