Crown Crafts' (CRWS) CEO Randall Chestnut on Q4 2016 Results - Earnings Call Transcript

| About: Crown Crafts, (CRWS)

Crown Crafts, Inc. (NASDAQ:CRWS)

Q4 2016 Earnings Conference Call

June 09, 2016 14:00 P.M. ET

Executives

E. Randall Chestnut - Chairman, President, and CEO

Olivia Elliott - VP and CFO

Analysts

David King - ROTH Capital Partners

Eric Beder - Wunderlich Securities

Operator

Hello, ladies and gentlemen and welcome to the Crown Crafts Incorporated Investors Conference Call. Your host for today’s call is Mr. Randall Chestnut, Chairman, President, 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 Incorporated. And as a reminder, this conference is being recorded today, June 09, 2016.

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

Olivia Elliott

Thank you. Welcome to the Crown Crafts investor conference call for the fourth quarter and full fiscal year 2016. With me today is Randall Chestnut, the Company’s President and Chief Executive Officer.

E. Randall Chestnut

Good afternoon.

Olivia Elliott

A telephone replay of this call will be available one hour after the end of the call through 8 AM Central Time on June 16, 2016. 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 everyone 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, it’s history of paying dividends, and the annualized yield on the Company’s stock, we would like to remind everyone 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.

E. Randall Chestnut

Olivia, thank you and again good afternoon and welcome to our investor conference call for the fourth quarter and full year FY2016 which ended April 3, 2016. And I will go with this information, Olivia will come back and add some more information to it and then we’ll give the investors a chance to any questions they might have towards the end of the call. Net sales for FY16 were 25.077 million as opposed to FY15 for the quarter. This is for the fourth quarter of 26.090 or a decline of just over $1 million or 3.9%.

Net income for 2016 was 2.194 million versus 2.139 million or an increase of 55,000 or 2.6%. Diluted earnings per share increased from $0.21 to $0.22 in the current year versus the prior year. For the full 12 months ending April 3, 2016 net sales were 84.342 million as opposed to 85.978 million or a decline of 1.636 million or 1.9%. Net income for the full year was 6.829 million as opposed to 5.718 in the prior year or an increase of 1.111 million or 19.4%. I will address that a little more in a moment. And diluted earnings per share increased from $0.57 last year to $0.68 in the current year for the full 12 months.

FY2016 versus 2015, in 2015 we had a legal settlement for $776,000 which was adjusted to the net income that related to legal fees and settlement cost associated with the patent infringement lawsuit that was settled in 2015. 767, I am sorry 767. If you add that back to 2015 to get a more favorable or get a better comparable then the numbers would look as follows. Adjusted net income for FY16 still 6.829 million but it would bring up FY15 to 6.485 million or we would still have an increase by adding the settlement and the legal cost back up $344,000 or 5.3% increase for the full year-over-year. And the diluted earnings per share would have gone from $0.64 to $0.68 in the current year. So even with the add back it’s still increased by $0.04 per diluted share.

FY16 was another great year for the company. While sales were down slightly, we improved the net income. We are very pleased and proud of the results that we posted this year and for the past decade. Gross profit increased as a percent of net sales from 27.4 to 28.2 for the current year. The increase in gross profit can be attributed to improved product cost from China and the company's continued cost controls.

Turning to the balance sheet, as we have done every quarter and year-end since 2011 we again finished the year with no debt on the balance sheet and a cash balance of $7.6 million. Also on May 17 of this year we announced a quarterly dividend of $0.08 per share. This represents a 3.3% annualized yield based on yesterday's closing price per share of the company's common stock. The quarterly dividend will be paid on July 8 to shareholders of record on June 17, 2016. One note, once this dividend is paid we will have returned more than $23.3 million to the shareholders since the company resumed paying dividends in 2010. Again we are very proud of our track record with our cash and our earnings and we continue to operate our business in manner that generate strong cash flow and deliver substantial value to our shareholders. I will give it back to Olivia to add some more information on the financials.

Olivia Elliott

Thank you. I am only 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 for the fourth quarter of fiscal 2016 was 25.1 million compared to 26.1 million for the fourth quarter of the prior year, a decrease of $1 million or 3.9%. Fiscal 2016 net sales were 84.3 million compared with 86 million for fiscal 2015, a decrease of $1.6 million or 1.9%. The majority of the sales decrease was due to initial placements of new programs in the prior year that had previously been placed with a competitor that exited the business. These initial shipments were not repeated in the current year.

Gross profit for the fourth quarter increased an amount by $280,000, an increase as a percentage of net sales from 26% for the fourth quarter of fiscal 2015 to 28.2% for the fourth quarter of fiscal 2016. For the year gross profit increased an amount by $263,000, an increase as a percentage of net sales from 27.4% for fiscal 2015 to 28.2% for fiscal 2016. The increases are primarily due to improved product cost in China which were the result of favorable exchange rate fluctuations. These increases were partially offset by decreases resulting from the assumption of new business from a former competitor with lower pretax prices.

Legal expense for both the quarter and fiscal 2016 decreased compared with the same periods of the prior year. Legal expense for fiscal 2015 included a charge of $850,000 related to the settlement of litigation as well as legal fees of $380,000 incurred in connection with the settlement negotiations.

Other marketing and administrative expenses for fiscal 2016 increased -- experienced a slight decrease sorry, of $44,000 as compared with fiscal 2015. The company’s provision for income tax has decreased to 36.4% during fiscal 2016 from 37.6% in fiscal 2015. The company's effective tax rate from continuing operations for the current year was 38.9%. The company recorded during the current year a discrete net income tax benefit of approximately 260,000 primarily resulting from the application of more favorable State tax, apportionment percentages.

Net income for the fourth quarter of fiscal 2016 was $2.2 million or $0.22 per diluted share compared with net income of $2.1 million or $0.21 per diluted share for the fourth quarter of fiscal 2015. Net income for fiscal 2016 was $6.8 million or $0.68 per diluted share compared with net income of $5.7 million or $0.57 per diluted share for fiscal 2015. Net income for fiscal 2016 was favorably affected by $260,000 or $0.03 per diluted share, due to a change in the company's calculation of the state portion of its income tax provision. While last year's year-to-date net income was adversely impacted by the previously mentioned legal settlement and associated fee totaling $767,000 after taxes.

I will now return the call to Randall.

E. Randall Chestnut

Olivia, thank you very much. And Aaron, if you come back up, we will see if anyone has any questions they would like to address to Olivia and I.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions]. Our first question comes from Dave King of ROTH Capital Partners. Please go ahead.

David King

Thanks, good afternoon Randall and Olivia.

E. Randall Chestnut

Hey, Dave, how are you?

Olivia Elliott

Hey.

David King

Good, congrats on another year of core earnings growth and strong cash flow. I guess first off on the gross margin, up nicely again this quarter. You touched on what was driving that in terms of the currency. I guess and an offset being the lower business with lower preset prices, I guess as I think about that going forward how much longer should we be thinking about that flow through from currency benefits and then how should we be thinking about the anniversary or remind us again when will you anniversary the loss of that business that you inherited from competitor? Thank you.

E. Randall Chestnut

Dave, the anniversary -- the gain of that business so we are circling around the full year is going to be probably at least one more quarter, maybe two more quarters before you completely portion that out, okay. The gross margin improvement has definitely looked for more favorable exchange rates out of China but part of that has been offset by these lower margins for the business that we took from a former competitor and we are also receiving some pressure from retailers because for better pricing and we are having to give a little of that away. So, it is not just a complete one sided part of the equation.

David King

Okay, that helps, good color. And then maybe turning to the expense line and Olivia you may have touched on this but forgive me if I missed it, and those are up a little bit more than I would have expected even with the lower legal cost, was there something driving that and just how should we be thinking about expenses moving forward?

Olivia Elliott

I mean, outside of the legal cost for the year it was really pretty flat dollar wise right.

David King

Okay, yes but I am talking about the fourth quarter in particular, it seemed like it was up a little bit but maybe I…

Olivia Elliott

Yes, from time to time there is fluctuations. I mean there is some small part of it related to sales. So, the rest of it is just kind of a flat line expense. So, I think it is probably just because there were some higher sales in the fourth quarter so that variable is just hitting the sales expenses at that time.

David King

Okay, so nothing outsized then.

Olivia Elliott

No.

E. Randall Chestnut

No.

David King

Okay, and then lastly Randall you touched on it a little bit in terms of the retail environment and perhaps having to get a little bit up on price. I guess just how are you feeling about the retail environment currently given everything we’re seeing and all the press reports and everything else and how negative it is out there, how is sell through trending in the categories, how are your large retail customers managing their inventory, is the pricing just that you alluded to previously, is that a couple of customers, a lot of your customers and I am just some over arching thought I think would be helpful?

E. Randall Chestnut

Dave, the retail environment in general is still sluggish at best, okay. We’re still experiencing some sell through at retail with a number of our customers and that’s not just brick and mortar but it’s online as well. So it’s pretty much universal. As far as the push back we’re getting on prices it is not a major effect but it is an effect, okay. And we deal with it one by one.

David King

That’s good color. Good luck and that does help and thanks for the color there and good luck with managing through it, and continue to manage through it as well as you have in the coming year. Thanks.

E. Randall Chestnut

Thank you, Dave. Have a good day.

Operator

Our next question comes from Eric Beder of Wunderlich Securities. Please go ahead.

Eric Beder

Good afternoon, congratulations on a solid year.

E. Randall Chestnut

Thank you Eric, how are you?

Eric Beder

I am good. Could you talk a little bit about the licensing business, what are some of the major positives you are seeing there and what kind of comparisons are you seeing. I know that there are some other movies that came through, how do you see licensing business, what's in the math there?

E. Randall Chestnut

Eric licensing is a very important part of our business and has been for the past 20 years. You get some movies that come in and that drives a certain portion of our business. The biggest part of our business that is driven by that is really not the infant business but the toddler business. That’s where the major driver is because that’s for the child that is 2 to 4 years old and they are the ones seeing the movies and the DVDs, etc and they are telling their parents that’s what -- how they want to decorate their nursery, when they graduate from the crib to a toddler bed. So that’s where you see that not as much in infant.

It still is an important part of our business. There has been some weakening of the just general license business, for character license going more towards lifestyle brands. We have seen some of that in the past years especially in the infant area where the mother is decorating the nursery without the influence of the child and she is going for more of a general lifestyle decoration since she has a character decoration. But still licensing is a big piece of our business and we tell people in the toddler side of the business which is a huge portion of our business that it is probably 98% license driven and that maybe more like 99% or 100%. It is almost 100% license driven. It is still very important to us.

Eric Beder

Sure and we have seen Chipotle [ph] expand into the Northeast now with stores in your New York City. I know that it is one of your clients, how is kind of the restaurant business doing for you and do you see that kind of as a growth driver going forward?

E. Randall Chestnut

We do Dave and we have seen it as a growth opportunity since we bought Neat Solutions in 2009 and that’s one of the reasons we did the acquisition because we saw that with Chipotle and we thought we could expand it into some other fast food or casual dining restaurants. And it has been very difficult. Because of the economy it has been very difficult to convince restaurants to put something in that’s a giveaway item, that’s free. With that said [indiscernible] we’ve got a few opportunities that are presenting themselves that we hope to see come about in the next 12 to 18 months. But it has been tough.

Eric Beder

Okay and what are you seeing in terms of competitors coming in and out of your group, are you still placing pretty much meeting the same group of people, you had the opportunity last year with Chipotle replace competitor who left. How are you seeing in terms of people rushing in and out of your sector?

E. Randall Chestnut

We see too much activity. We would like to see less so it would make life a whole lot easier. But we do see competitors getting into the business that saw an opportunity whenever we had a major competitor that had two divisions and bedding that went in a very difficult manner, went into the maze [ph]. And we have seen quite a few competitors come in and try to take some of that place. So it is not without its competitors, I promise you, there is enough to go around.

Eric Beder

And finally what should we think about the tax rate going forward, you mentioned about the State tax has changed a little bit, what should be the tax rate for the company going forward?

Olivia Elliott

The tax rate for continuing operations for the year was 38.9%. So that is probably a good indicator of what you should view as going forward.

Eric Beder

Okay, alright guys congrats and good luck on this fiscal year.

E. Randall Chestnut

Dave, excuse me, I am sorry. Eric thank you very much, okay, have a good day.

Operator

[Operator Instructions]. It seems that we have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chestnut for any closing remarks.

E. Randall Chestnut

Thank you very much and I'd like to thank all the participants on today's call and we thank you for your interest in the company. I would like to thank all of our shareholders, our customers, employees, suppliers, and everyone that has an interest and effect in the company. We are very pleased with our position in the market, we are pleased with our designs and our product and we think we’re well positioned for the future. To wrap it up FY 2016 at $0.68 per diluted share was a successful year and we’re very pleased with that and we will speak to you again at the end of the first quarter which would be sometime in August. So thank you and have a good day.

Olivia Elliott

Thank you.

Operator

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

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