Crown Crafts, Inc.

Good day and welcome to the Crown Craft Incorporated second quarter fiscal 2025 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to John Beisler with Three Part Advisors, the company's investor relations firm. Please go ahead.

Thank you, Cindy, and good morning, everyone. We appreciate you for joining us for the Crown Craft's second quarter fiscal 2025 conference call. Joining me today are Crown Crafts President and CEO, Olivia Elliott, and the company's CFO, Craig Demarest. Earlier this morning, Crown Crafts filed a 10-Q and issued a press release regarding their second quarter fiscal 25 financial results. A copy of the release is available on the company's website, crowncrafts.com. During today's call, the company will make certain forward-looking statements, and actual results may differ materially from those expressed or implied. These statements are subject to risks and uncertainties that may be beyond Crowncraft's control, and the company is under no obligation to update these statements. For more information about the company's risk factors and other uncertainties, please refer to the company's filings with the Securities and Exchange Commission. Finally, I would like to remind you today's call is being recorded, and a replay will be available through the company's investor relations page. Now I would like to turn the call over to the President and CEO, Olivia Elliott.

Thank you, John, and good morning, everyone. We're pleased to report our second quarter results, which reflect a favorable contribution from our recent acquisition of Baby Boom assets, a solid overall gross profit and continued strong execution as we await a stronger macro environment. The highlight of the quarter was our purchase of the assets of Baby Boom consumer products, which positively contributed to our bottom line. We're excited about the addition of Baby Boom's portfolio of branded and licensed products that enhances our presence in the toddler segment and further extends our product offerings with the addition of diaper bags. The Baby Boom acquisition comes at a potential positive inflection point for customer demand, just as we head into our most important selling season. Interest rate cuts and lower inflation are adding to consumer purchasing power, And just this past Friday, the University of Michigan's Consumer Sentiment Index climbed to its highest level since April. Looking ahead, we're confident in our forward trajectory. Before I share more on our strategy and outlook, I'll turn it over to Craig to cover our solid second quarter results in more detail.

Thank you, Lydia. Good morning, everyone. Net sales for the second quarter of fiscal 25 were $24.5 million. up from 24.1 million in the prior year quarter. The increase is primarily attributable to the addition of Baby Boom, which added 3.4 million of net sales in the current year quarter and was largely offset by declines in our legacy businesses, including the previously discussed loss of a bid program and a major retailer. Broke's profit for the quarter was 28.4 percent, improved from 27.3 percent a year earlier. the profit increase reflects a slight change in product mix, partially offset by higher lease costs for our warehouse in California. We're actively evaluating our footprint and look to reduce the associated expense through strategic consolidation in fiscal 2026. Our second quarter marketing and administrative expenses were $5.4 million, up $1.4 million from the prior year quarter, an increase from 16.7 percent of net sales in the prior year quarter to 22.3 percent. More than half of the increase, or 788,000, relates to costs associated with the Baby Boom acquisition. Net income for the quarter was 860,000, or 8 cents per diluted share, compared to net income of 1.8 million, or 18 cents per diluted share in the prior year quarter. Turning now to our balance sheet, we remain in a strong financial position as cash and cash equivalents at the end of the second quarter were $2 million, up from $1.1 million at the end of the first quarter and $829,000 at the end of fiscal 24. Borrowings on our revolver at the end of the quarter were $20.8 million compared to $8.1 million at the end of fiscal 24, reflecting amounts borrowed in the second quarter to fund the Baby Boom acquisition. The acquisition closed on July 19th for a total purchase price of 18 million or 16.4 million after adjustments for working capital at closing. We funded the purchase through an $8 million four-year term loan and available borrowings under our revolving line of credit, which was increased from 35 to 40 million. We expect to use our cash flow to rapidly repay our borrowings. However, as always, our debt balance may fluctuate from quarter to quarter due to the timing of inventory purchases and other working capital needs. Finally, we paid our longstanding regular dividend of $0.08 per share and declared our next dividend, which will be paid in January. Now I'll turn the call back over to Olivia for additional comments.

Thank you, Craig. We're optimistic about the upcoming holiday season and the opportunity to drive higher revenues. For one, we've now owned Baby Boom for approximately four months and have made significant progress integrating the brand into NoJo. In addition, we have several Manhattan Toy products in Walmart and will continue to pursue additional cross-selling opportunities among Manhattan Toy, Baby Boom, and our legacy brands. As Craig mentioned, we continue to strategically evaluate warehouse options and expect we can achieve consolidation sometime in fiscal 2026. Overall, while driving top-line growth, we will continue to actively manage our cost structure and position our business to profitably capture market share as the macro environment improves. We're as optimistic as ever about our long-term prospects and look forward to updating you on our progress next quarter. With that, I would like to open up the line for questions. Cindy?

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 are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time we will pause momentarily to assemble our roster. Our first question comes from Doug Ruth of Lenox Financial Services. Go ahead, please.

Congratulations on the higher revenue and the improved gross margin.

Thank you, Doug.

You're welcome. And then I wanted to ask some questions about the warehouse first. Could you tell us the status of where you are? And you had previously told us that you thought you might be able to narrow down the choices from maybe 3 to 1 to 2 by 3-31-25. Just curious, any kind of update on that?

I think that's still a probability. We're currently at three locations that we're considering. We're going to go do some site visits before the holidays, well, before the Christmas holidays, and hopefully we'll have it narrowed down to a to at least two, hopefully one, by the end of the fiscal year.

Okay, that sounds positive. And then I had some questions about Manhattan Toy. You noted that you have some of the products in at Walmart, and is there any feedback about the sell-through and how that's been going?

Yes. So we have some of the Manhattan Toy products in what kind of Walmart considers their better area or their better stores. And so far the sell through is doing well. I think the products are popular and they're doing very well.

Okay. And then previously you had told us about the trying to improve the Manhattan toy margins and how has that been working?

They're improving. You know, it takes a little bit of time because if you've already got something placed or you already have the product in the warehouse, it's hard to do that. But as we're developing new products and as we're switching manufacturers for some other products and doing new pricing, we're definitely getting improved profitability.

And then is there any feedback on the new Manhattan Toy website? I thought it looked really great. I thought that the company did a wonderful job with that.

Thank you. Yes. We think it's very good. It flows better. And we do think that we have a little bit more engagement when somebody comes to our website looking for products.

Okay. And then what about the using your Sassy toy distributor in Europe to distribute some of the Manhattan toys in Europe? Is there any progress on that?

Yes, and so we had both lines together in the same booth in Germany in September, and so we're already making some progress on getting the Manhattan Toy products sold through those distributors.

Wow, very good. And then what about the product development team? You seem to be very encouraged with what your team there was doing with developing new toys for Manhattan Toy. Yes.

Yes, and so we're utilizing kind of crossing the Manhattan Toy and Sassy team, so they're working on all of the products, and we think that we're getting some very good new products being developed.

Okay, then shifting to the baby boom, can you give us some feedback? You know, we have these, you have the four licenses, Bluey, Cocomelon, Miss Rachel, and Paw Patrol. Is there any one that seems to be doing quite a bit better than another?

So all of the licenses are doing well. I mean, clearly Bluey is one of the most popular licenses around right now, so it's on fire. Ms. Rachel is extremely popular. That product had just started coming in after we did the acquisition, but I think it looks really good and has a lot of prospects.

What is the product for Ms. Rachel?

It's the toddler bedding.

Oh, okay.

The little bedding sets and some blankets, squishy pillows, that type of thing.

Yeah. So the consumer brands did not have that or was in the process of developing it, and now you folks have continued on with that. Is that what happened there?

Correct. I mean, it was already on order. It may have just started coming in, but it had not hit any shelves yet. And so we should be shipping that now.

And then can you talk a little bit about the diaper bags and what's specifically happening with that business?

So diaper bags is new for us. We retained the design team in New Jersey and are in process of moving them to a permanent office. They were still still residing in the Batesh Group's offices in kind of a little carved-out area. And so that team came with the acquisition, and we're focusing heavily on growing that product line. It had shrunk a little bit prior to the acquisition, and so we want to put a lot of focus on it. It's a category that has always interested us, and so we think there's a lot of opportunity there.

And are you pleased with the efforts of the people there and what they're doing for the company?

Yes, absolutely.

Okay. And then Legoland, you told us previously that you thought that there would be an opportunity to expand that business. Is there any update with that?

Yes, and so, I mean, we've expanded not only our product, the number of products that we sell to Legoland, but we also are looking forward to, I believe it starts in 2025, they are building some new parks that should open sometime in the summer of 2025.

Okay, got two more questions. How about the direct-to-consumer business? Is there any update on that?

Yes, and so we're hoping to have NoJo's website up and running, selling direct to consumer before the holidays, and then we're working fast and furiously to get Sassy Babies up and running and ready to go.

Okay. And then the last thing was sort of your last comment was what does this strategic process that you're talking about for 2026, could you offer any additional comments there?

I mean, really, we're focusing heavily on just integrating the acquisitions, cost control, the warehouse. We're really not looking right now at any additional acquisitions because we need to take the time to absorb what we've already done. That being said, I mean, it wouldn't mean that we wouldn't do something possibly if it came along and we couldn't say no, but that's not our focus right now.

Okay. Well, thank you very much for answering my questions, and congratulations to to you and to the team for what you're doing for the shareholders. Thank you.

Our next question comes from Don Dasher of Pinnacle. Go ahead, please.

Good morning, Solid Quarter.

Good morning.

Good morning. A couple of questions. One, Baby Boom, you said in the press release when you bought it that you expected sales to be about $20 million. Are you still tracking that way? I know you've only owned it for four months, but do you still expect $20 million in sales per year?

I think that's a good estimate. I mean, it won't happen in fiscal 2025 because we'll only have them eight months. That's more of an annual run rate.

Okay. You're so confident there. And on the marketing and administration side, If we take out the acquisition costs, it looks like it was about 19% of sales. Is that a reasonable run rate to use going forward, or how should we think about that?

I mean, if you take out the acquisition cost, it's probably not a bad number. I mean, there was nothing else in there that was one time.

Okay, so 19% of sales, that's reasonable. That's good. In terms, just to make sure I understand where we are with the real estate consolidation, you're suggesting that by the time we have the fourth quarter call next year, we'll have a better idea as to what the footprint looks like?

Yes, I think that's a likely option.

Okay. All right, good. I think that does it for me. Thank you very much. Thank you.

The next question comes from Dennis Scannell of Rutabaga Capital. Go ahead, please.

Yes, good morning, Olivia and Craig. Just a couple quick things for me. Good morning. So just a couple quick things for me. So Baby Boom, you know, contributed $3.4 million in sales, so that's about you know, 14% of your sales growth, so core legacy sales down around 13%. It gets a little less than 13%. So about how much of that was that bib program that, you know, one of your retail customers decided to insource versus just kind of legacy products?

That was about $600,000. Okay.

Okay, so portion of it, but not all. Anything else you can say about the sales decline? I definitely hear the note of optimism with, you know, the rate decreases and perhaps a turn in consumer confidence. But anything else going on in that sales decline, either in terms of particular customers destocking or, you know, losing shelf space, anything of that nature?

Other than the bibs, we really haven't lost any other shelf space. It's just that we're seeing weak point of sale kind of across the board. There is one major retailer that is worse than others right now, but for the most part, it was across the board and almost across the board retailers and across the board subsidiaries and product lines.

Yep. Okay. Thank you. One other quick thing with the change in administration, again, it's a little early to tell exactly what the new administration will be doing, but at least on the campaign trail, there was a lot of talk about tariffs, particularly high tariffs in China. Can you talk a little bit about your sourcing strategy, kind of how much of your product does come from China and how you're looking at that going forward?

Almost everything comes from China. We've looked at other countries. We've tried to move some products, but at the end of the day, it is so far still been very much better costing coming from China. The costs are better. The infrastructure is better. We go to some countries and they say that they're going to give you your product and hand it off on X day and it gets handed off three weeks later. So China is still the better option. That being said, we continue to look at other places and be ready just in case there are higher tariffs that we can't pass along and other countries become more viable.

Yeah, right. And just naively, it's not like your competitors are sourcing anywhere differently, right? Or is there some manufacturing here in the U.S. or Mexico or something that other competitors accessed?

If there's any in the U.S., it is very little. I mean, we have explored Mexico. I think there's probably some of our competitors doing a little bit there. At the end of the day, we just haven't pulled the trigger and moved anything to Mexico because it's still better in China.

Yep, fair enough. Great. Okay, thanks a lot. Good luck.

Thank you. Thanks.

Again, if you have a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Olivia Elliott for any closing remarks.

Thank you for your continued interest in our company. We will be participating in the three-part Advisors' Ideas Conference in Dallas on November 19th, and we look forward to speaking with you again when we report our third quarter results in February. Thank you.

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