Crown Crafts' (CRWS) CEO Randall Chestnut on Q2 2017 Results - Earnings Call Transcript

| About: Crown Crafts, (CRWS)

Crown Crafts, Inc. (NASDAQ:CRWS)

Q2 2017 Earnings Conference Call

November 16, 2016 02:00 PM ET

Executives

Randall Chestnut - Chairman of the Board, President, Chief Executive Officer

Olivia Elliott - Chief Financial Officer, Vice President

Analysts

Nick Meyers - ROTH Capital Partners

Brian Coroni - 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. Currently, 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, November 16, 2016.

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

Olivia Elliott

Thank you. Good afternoon and welcome to the Crown Crafts investor conference call for the second quarter of fiscal 2017. With me today is Randall Chestnut, the Company's President and Chief Executive Officer.

Randall Chestnut

Good afternoon.

Olivia Elliott

A telephone replay of this call will be available one hour after the end of the call through 4 o'clock P.M. Central Time on November 23, 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 common 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.

Randall Chestnut

Olivia, thank you very much, and good afternoon again. Before the market open this morning and we released the earnings for our second quarter FY '17 which ended October 2, 2016. And I'll make a few comments, Olivia will come back and have more to it and then we'll open it up any questions that anyone might have.

For the quarter, net sales were 15.8 million as opposed to 20.7 million in the same quarter in the prior year or down 4.9% or 23.7%. Net income was 999,000 as opposed form 1.565 million last year or down 566 million or 36.2%. Diluted earnings per share declined from $0.16 last year to $0.10 this year. from a year-to-date basis for the per six months of a year, net sales were 31.4 as opposed to 38.6 last year or down 7.2% or 18.6%.

Net income was 2.102 million as opposed to 2.492 million or down $390,000 or 15.7% and diluted earnings per share decline from $0.25 last year to $0.21, this year. Turning to the review of the operations, let me start by saying that our position in the industry remains strong and we are confident at our prospects for the long-term sales growth and profitability of the Company.

As we continue to adapt the changes in the market place to offer new products that are designed to meet the demands of today's joint families. As you may know many today's new parents were favoring something called the naked crib for their babies. This means we're seeing less demand for such items as bumpers and comforters that are included in full bedding sets.

This also has lowered the average price point of our products in the infant bedding business. We are working hard to offset this trend by expanding our product offering in other areas such as separates infant bedroom decor and we have been encouraged by the results and placements form some new products.

Our toddler business remained strong and we look for products to help parents with the transaction from bedded to toddler offering additional items that complement the infant nursery and grow as the baby grows out of the nursery and into the toddler room. And the bed and disposal side of the business, we continue to be a dominant market leader with strong placement in all retail customers.

In addition, we're seeing continued progress in our licensing program and Internet sales. Other factors affecting second quarter included the strength of the U.S. dollars, which is led to price reduction from our global suppliers and some of these reductions have partially been passed onto our customers. We've also reduced product shipments to a major customer that is having credit problem. That had an effect almost sales in the quarter.

It is also important to note that the timing of shipments for both initial sets and replenishments can cause comparable between quarters to be very difficult. All these factors along with overall sluggish conditions in the retail market have contributed to our sales results in the second quarter and the first half of the year. Touching on the gross profit, the gross profit for the current quarter was 27.3% of net sales down slightly from 27.5% in the prior year quarter. For the six months period, gross profit increased 27.2% of net sales a year ago to 27.4% this year.

Looking at the balance sheet very briefly, we continue to be debt free and we ended the quarter with a cash balance of 10.2 million. As noted in today's press release, we've announced the special cash dividend of the Company's Series A common stock of $0.40 per share, along with a quarterly cash dividend of $0.08 per share. This $0.08 without the special dividend represents a 3.3% annualized yield based on yesterday's closed price. Both dividends will be paid off January 6, 2017 to shareholders of record at the close of business on December 16, 2016.

We're pleased to announce a special dividend along with the quarterly dividend. Both actions confirmed the ongoing confidence of our Board that our Board has in our long-term strength of the Company and our commitment to returning value to the shareholders. One very important note, upon payment of this special dividend, Crown Crafts will have distributed $28.9 million in total dividends since we began paying dividends again in 2010, again 28.9 million.

Olivia, I'll turn it over to you.

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-Q filed with the Securities and Exchange Commission this morning.

Net sales were 15.8 million for the second quarter of fiscal 2012, compared with 20.7 million for the second quarter of the prior year, a decrease of 4.9 million or 23.7%. For the six months period, net sales were 31.4 million, down $7.2 million or 18.6% from 38.6 million in the prior year. The decrease in sales is related to the continuing overall sluggish environment in addition to several other factors.

As Randall mentioned, the infant bedding marketplace is experiencing a change in which parents are purchasing fewer bedding sets and fewer separates, resulting in a lower average price point for the Company's products in this business. This trend has been partially offset by the Company's expanded offerings in separates and infant bedroom decor.

Additionally, due to the strength of the U.S. dollar, we have received price reductions from our global suppliers, which we've partially passed onto our customers. We also have reduced product shipments to a customer that is experiencing credit problems; also the timing of shipments, for both initial sets and replenishment can cause comparisons between quarters to be difficult.

Gross profit for the second quarter decreased by $1.4 million from the year ago from 27.5% of net sales for the second quarter of fiscal 2015 to 27.3% of net sales for this year's second quarter. For the six month period, gross profit decreased in amount by $1.9 million but increased from 27.2% of net sales last year to 27.4% of net sales this year. This slight increased in the gross profit percentage for the first half of this year is primarily due to the Company's overall tight cost control combined with improved product cost in China, resulting from favorable exchange rate fluctuation.

Marketing and administrative expenses decreased by $347,000 for the second quarter and $769,000 for the first six months, compared with the same period last year. The decrease is primarily related to lower overall compensation in advertising of cost along with lower miscellaneous cost for outside services. For the current year, the Company's provision for income taxes is based on an estimated annual effective tax rate from continuing operation of 37.3%.

The Company elected to early adopt Accounting Standards Update Number 2016-09, effective as of April 4, 2016. This resulted in the recognition of discrete income tax benefits amounted to $43,000 for the second quarter and $242,000 for the first six month of 2016. These amounts reflect the effect of net excess tax benefit arising from the exercise of stock option and divesting of non-vested during the period. The recognition of this benefit was the primary factor in the lowering of the overall provision from income taxes to 35.9% and 31% for the second quarter and six months period respectively.

Although, the Company does not anticipate a material change to the effective tax rate from continuing operation for the balance of fiscal 2017, several factors could impact the effective tax rate including variation from the Company's estimates of the amount and source of its pretax income and the amount of certain tax credit.

Net income for the second quarter of fiscal 2017 was $999,000 or $0.10 per diluted share compared to net income of $1.565 million or $0.16 per diluted share in the second quarter of fiscal 2016. Net income for the first six months of fiscal 2017 was 2.1 million or $0.21 per diluted share compared with net income of 2.5 million or $0.25 per diluted share for the same period in fiscal 2016.

I will now return the call to Randall.

Randall Chestnut

Olivia, thank you again and when if you come back up and prompt, we will see if anyone on the line has any questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And the first question of today is Dave King with ROTH Capital Partners. Please go ahead.

Nick Meyers

This is a Nick Meyers on for Dave King. So, first off, you've touched already a little bit on the trends in bedding in your remarks. Can you talk a little bit about the trends driving did impact during the quarter?

Randall Chestnut

Our bibs and beds position during the quarter remain very solid, but one of the comments that I made is very difficult to do comparisons from quarter-to-quarter. Okay, Hamco's position in the market is still very strong and very secured, but we do have some shifts from quarter-to-quarter and our business sets side. Our initial sale replacement, if it shifts from one quarter to the next can have a big effect on it.

Nick Meyers

And then I guess next inventory days were up again during the quarter, can you talk a little bit about what's driving this?

Randall Chestnut

The inventory days would have been up slightly and part of that a reflection, we brought in some programs of anticipation to shift that got pushed to later in the year, that's one. Two, we've had some programs of sell through at retail, which I alluded to has been softer than what we had anticipated. So, the retailers have to pull out the inventory at the speed at which we had anticipated when we placed the additional orders.

Nick Meyers

And then, yes, little bit on the reduced shipments onto certain customer. Can you talk about, how this is going to affect your top line for the second half of the year? And also in regards to the timing of certain shipments which you just mentioned, any way to quantify exactly on how revenue was pulled forward into third quarter?

Randall Chestnut

No, there's really -- I mean we don't like forward-looking projections and forward-looking comments. And so therefore, what I will tell you is the trends that we've seen that I alluded to i.e. naked crib where a lot of parents are opting for less rather than more and buying separates and buying -- not buying sets, and buying components, and not using things like bumpers and comforters. I don't see that trend changing anytime in the near future. So that we expect to continue and that's why we're working as hard as we can to do additional items such as room decor and [indiscernible] and things of that nature. We designed special sets that we're selling strictly to the Internet sales and doing a lot of different things to offset some of that business, but I see that continuing.

Nick Meyers

Well last one and then I'll step back. It appears currency is still benefitting supplier costs. Can you talk about to what extent you've having to pass these savings on in terms of lower prices to retail?

Randall Chestnut

We don't publish that and but we've had to pass on, not the majority of it, but some. But it's not the majority we've had the pass on a fair amount.

Operator

Our next questioner today is Eric Beder with Wunderlich Securities. Please go ahead.

Brian Coroni

This is Brian Coroni for Eric. So, the first question we had and I guess somewhat jumping off of the last question, that was asked; in terms of the competitive environment in your key -- within your key retail partners and obviously you had touched on your retail partners being a little more conservative and a little more diligent in terms of they are protecting their own margins, could you kind of expand on how that might sort of be manifesting? Is it coming from your manufacturing and distribution? Competitors who are undercutting traditional margins, is there a greater focus on specific brands or specific products or is just coming out of retailers just traditionally trying to maintain the level of margin that they believe to be prudent to them? Or I guess even on the consumer side of things whether consumer headwinds are sort of forcing them to place a little bit more pressure back to you?

Randall Chestnut

Brian you've asked a lot of questions. I'll roll into one, and I'll see if I can sort out some of them. The competitive headwinds had been around by long time that has changed the depreciably. There have been a couple of smaller competitors that we would call competitors that have going out of business over the last year to 18 months, but we don’t wish that on anyone, but that has happened. But you know the retailers do try to maintain their margins and therefore they apply competitive pressure to us to help us help them maintain the margins that they want to do by partner and by the product category.

But what we have been talking about earlier is because of the RMB versus the dollar, we have been able to achieve some savings out of Asia, and some retailers have come to us and insisted and asked that we pay us some of those savings onto them, and that has had an effect. But our gross margin as Olivia and I reported has helped fairly consisted for the six months, it's up slightly. For the quarter, it's down a little bit. But still when compare to previous gross margins, it's still holding very good. Did I answer your question or just confusion?

Brian Coroni

No certainly, thank you, I appreciate the color. Then to move on and perhaps as this would be a question now, its sort to be tackled by both of you, looking at your capital utilization obviously you had concurrently currently announced the special dividend. But on the other hand, if I am reading and had gone through your 10-Q correctly, you didn't have any material capital expenditures during the quarter, so I certainly didn't ask about that. And then perhaps on more as a long-term or overarching perspective, what are your thoughts on obviously you have a very strong net cash position and no debt in terms of looking at acquisitions in terms of adding to your brand and product portfolio? And how you could see that playing out over the balance of the year and over the longer term?

Randall Chestnut

Okay again, I'll break those down, one at the time. The first one is the cash that's needed for CapEx, capital expenditures. We tell people in presentation that we make that we anticipate about a $0.5 million a year in capital expenditures. And in the last 10 years, we have not spent a $0.5 million in any give year. It's always been below a $0.5 million a year. So, you're safe to assume Brian that it's going to be a $0.5 million or under. And most of our CapEx is related to software and computer related areas, keeping everything up-to-date throughout the Company.

And acquisitions, okay, I'll turn to that. We're actively engaged in conversations almost on steady ongoing basis with potential companies that we're looking to acquire, and we do have a strong balance sheet. We do have cash, and if we could find the right acquisition with the right fit at the right price, we will do that and that's what we'd like to do, okay. And in the meantime, we're not a greedy company. We believe in giving back to the shareholders. And that's why, we're pretty proud of the fact that we've given back almost $29 million in the last six years. So, if we decide to do an acquisition, we've got cash and borrowing availability that we can do an acquisition.

Brian Coroni

And then if I could add one more in that, I guess, again a little bit more long-term bird's eye view of the business. In terms of your overall focus on what your areas of growth are going to be certainly over the next 12 months or even longer than that over the longer term, perhaps something related to international expansion and then perhaps in the past you had conversations about a greater focus on perhaps swaddle products rather than complete bed sets, so just where overall do you think are the real avenues of growth that you see playing out over the next 12 to 24 months, if not longer?

Randall Chestnut

Brian, I can talk about things that have happened or that we've alluded to before. We've gotten into the swaddle business and we've a swaddle placement with a fairly major retailer that's going very well. We're negotiating new license deals that should come forth in the next few months and we're excited about that. We have made the first shipment of rugs, but we're actually now getting into the bedroom decor, the nursery decor on the floor; and we're selling rugs that coordinate with the nursery decor. So, growth is coming from a multitude of things. We sat down earlier this week and we said okay, what are projects that we're working out. I don't think [indiscernible], but new things that we're working now and we came up with 13 that are actively going on right now. And that's a multitude of things that we're working on.

Operator

Looks like, we have no further questions. So, this will conclude the question-and-answer session. I would like to turn the conference back over to Randall Chestnut for any closing remarks.

Randall Chestnut

William, thank you very much. We'd like to thank all the participants on today's phone call, and as we've discussed through this conference, we remain confident in our long term perspective of the business. Although, consumer demands are always evolving, we continue to expand and develop new product offerings in line with the changing marketplace. One thing that we are very proud out that not everyone can say, actual position remained very strong. We'd also like to thank our employees, suppliers, customers and of course shareholder for their continued support; and we look forward to talking with you next quarter. Thank you very much and have a good day.

Operator

The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.

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