Educational Development Corporation (EDUC) Q3 2023 Results - Earnings Call Transcript

Educational Development Corporation (NASDAQ:EDUC) Q3 2023 Earnings Conference Call January 5, 2023 4:30 PM ET

Company Participants

Steven Hooser - Investor Relations

Craig White - President and Chief Executive Officer

Dan O'Keefe - Chief Financial Officer

Heather Cobb - Chief Sales & Marketing Officer

Conference Call Participants

John Bair - Ascend Wealth Advisors

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation’s Financial and Operating Results for its Fiscal Third Quarter and Fiscal 2023 Year-to-date Results. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Steven Hooser, Investor Relations.

Steven Hooser

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation’s third quarter and fiscal 2023 year-to-date earnings call.

On the call with me today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer.

After the market closed this afternoon, the company issued a press release announcing its results for the third quarter and fiscal 2023 year-to-date. The release is available on the company's website at www.edcpub.com.

Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition.

With that, I would now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Craig White

Thank you, Steven, and welcome everyone to the call.

I will start today's call with some general comments in regard to the quarter, then I will pass the call off to Dan and Heather to run through the financials and provide an update on our sales and marketing. Finally, I will wrap up the call with some comments and strategy and 2023 outlook.

We are pleased with our sales for the third quarter, especially when compared to the previous quarter. We continue to face macroeconomic pressures from record inflation, resulting in high food and fuel costs that have hit the pockets of our target customers, which are families with young children. To combat these continued pressures like many retailers, we offered additional discounts to support our customers and additional incentives to energize our sales force. These market decisions allowed us to generate over $30 million in net sales, but did impact our ability to drive the bottom-line. Having said that, I am pleased by our ability to remain profitable for the quarter.

With that, I will turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan?

Dan O'Keefe

Thank you, Craig.

Turning to the third quarter, net revenues were $30.3 million, a decrease of $14.8 million or 32.8% compared to $45.1 million in the third quarter last year, or an increase of 56.2% as compared to $19.4 million during the previous quarter. The annual decrease is due to the positive benefit we saw a year ago driven by the pandemic. The quarter-over-quarter increase is primarily due to the seasonality and also included some promotions and incentives.

Average active UBAM sales consultants totaled 27,100 compared to 41,500 in the same period a year ago, and 26,800 in the previous quarter of this year. During the third quarter, we saw stabilization in the average active number of consultants. We've seen our active consultant levels begin to rebound while our leader level consultants remain at historically high numbers.

Earnings before income taxes for the third quarter was $0.0 million, a decrease of $3.6 million compared to $3.6 million recorded in the third quarter of last year.

Net earnings for the quarter also totaled zero compared to $2.6 million, a decrease of $2.6 million. Earnings per share totaled zero compared to $0.31 on a fully diluted basis.

Now turning to our year-to-date highlights. We recorded net revenues of $72.8 million, a decrease of $46.1 million or 38.8% compared to $118.9 million during the same period of 2022. The decline was primarily due to lower active consultant count coupled with rising inflation, especially during the first and second quarters this year.

Average active UBAM sales consultants totaled 28,700 compared to 47,300 for the first three quarters of 2022. Last year, we saw inflated numbers continuing from the pandemic when school closures continued and many family members worked from home. This year as schools remained open and families returned to work, we've seen our sales consultant levels start to normalize.

Year-to-date loss for income taxes was $800,000, a decrease of $11.7 million compared to $10.9 million during the same time last year. Net year-to-date loss totaled $600,000, compared to $8.6 million for the first half of last year -- for the first three quarters of last year, a decrease of $8.6 million.

Year-to-date loss totaled $0.07 compared to earnings per share of $0.94 from the first three quarters of fiscal 2022, down 107.4% on a fully diluted basis.

To update everyone on our working capital levels, inventory levels decreased from $67.6 million at the end of the second quarter to $64.3 million as of November 30, 2022. Cash generated from our reduced inventory was primarily used to pay down our working capital line, which ended the quarter at $9 million. We continue to expect further inventory reductions and working capital line paydowns during our fiscal fourth quarter and throughout fiscal 2024 as we normalize our inventory levels.

Lastly, our longstanding dividend program remains paused as part of the strategic decision to preserve cash, which improves cash flows by approximately $1 million per quarter.

This concludes the financial update. I will now turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?

Heather Cobb

Thank you, Dan.

As Craig mentioned earlier, we continue to evaluate market conditions and make changes we feel are needed to motivate our sales force and engage our customers. We ran several customer discount promotions and sales incentives during the quarter to ensure strong results during our peak seasonal selling period. These market decisions not only helped us normalize our working capital, but also keep our commission-based salesforce engaged.

During the second and third quarters, our sales and marketing teams internally spent significant efforts executing a rebranding directive for our direct sales division. We announced the rebranding efforts in June, engaged a Tier-1 rebranding firm to assist us and completed and announced the new name of our direct sales division PaperPie in December. This new name allows us to better showcase our full product offering: Kane Miller Books, Usborne Books, SmartLab Toys and Learning Wrap-Ups.

PaperPie also allows us to build a recognizable name unique to our company. Our rebranding process was completed earlier this week when we transitioned our customer facing ecommerce and brand partner facing back office to the new paperpie.com. We are extremely excited about our new name, PaperPie, as it does allow us to build a recognizable brand, encompassing all of our wonderful products and people. There's a lot of meaning behind the name. But overall, we wanted our brand to represent our mission of gathering for good around literacy and learning. This is a newly-formed compound word which we will be defining ourselves.

At PaperPie, paper is our medium of communication, whether it's a board book, game pieces, a series of chapter books or creative activity. As the world continues to fight for our children's attention through screens and devices, it has never felt more important for tangible literacy and learning tools that will feed the imagination, grow the emotions and nourish the mind of our children.

And when you think of pie, you think of something to be gathered around something to be shared an experience worth savoring. That's exactly what we believe our products are made for, literacy and learning as a lifestyle. PaperPie is for memory making, creative learning and unlimited possibilities, all within the context of togetherness.

Along with this strategic rebranding, starting this week, we rolled out our SmartLab Toys product line. These award-winning theme-based products, including squishy human body, laboratory toys, science lab toys and our tiny series offer children ages eight and up hands-on learning opportunities. We expect our initial launch of 10 products to have an immediate sales impact and we plan to follow that up with additional product releases mid-season this spring and another significant release this summer.

This concludes our sales and marketing update. I'll turn the call back over to Craig for closing remarks. Craig?

Craig White

Thank you both Heather and Dan.

EDC has decades long history of profitability. We have been profitable during recessions and other challenging times. During this past year, our product costs and sales commissions have remained unchanged, but other costs have increased, especially in the areas of inbound and outbound freight.

As our earnings have been impacted, we have made recent changes to improve profitability, including increasing the freight we charge our customers. This was done late in the quarter, so had a small impact so far. We have also made changes to reduce our operating expenses, and we are seeing inbound freight rates come down and are taking advantage of better spot rates. We expect these changes will yield profitable results even on reduced sales volumes.

As we return to higher profitability, we plan to reinstate our longstanding practice of paying quarterly dividends to our shareholders. This has been and continues to be a top priority for myself and our shareholders.

Turning to future expectations, I want to highlight some exciting changes happening at EDC. First, I want to thank Heather and our sales and marketing team for the successful rebranding. Launching PaperPie was a great accomplishment. I expect not only short-term benefits from the excitement surrounding our new name, but a positive momentum building trend in our PaperPie brand partner count as we rally around our new names, our improving and diversified line of products and our improved IT systems.

We recently hired a new Chief Information Officer John Leach that brings 30 years of IT experience and 20 years of IT experience in the direct sales industry. His guidance and leadership supporting our PaperPie launch was a key to its success and the additional resource library that was added to our brand partner success platform. He has taken the lead on several IT projects, and we have new products and system enhancements that will not only make our existing PaperPie sales brand partners more successful, but offer new brand partners a shorter path to financial success selling our products. We will be rolling out several system improvements over the next few months.

Lastly, I'd like to talk about our new product line SmartLab Toys. This product line has a long history of sales success, but has never had a marketing and sales engine like PaperPie, where we have a much broader reach. Also, our trade retail division has outside sales groups who have represented the product line in the past and are ecstatic to get the line back.

SmartLab Toys' most recent year sales was $7.5 million and we feel very good about being able to exceed that. We do not need to acquire companies to continue to diversify the product lines. We have been working with existing vendors to provide more educational games and toys, and we begin selling some of those this week. We will continue to look for opportunities with our existing vendors as well as outside opportunities.

Now that we have provided a summary of some of our recent activity, I'll now turn the call back over to the operator for question and answer.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Craig White

Hello, Alan.

Unidentified Analyst

Hello?

Craig White

Hello. Is it Alan?

Unidentified Analyst

Yes, it is.

Craig White

Shoot.

Unidentified Analyst

Sorry. Ask the questions?

Heather Cobb

Do you have a question?

Craig White

Do you have a question for us Alan? Sorry.

Unidentified Analyst

Yes, I do. Sorry, I wasn't sure if I was on or if I was holding there.

Craig White

We weren't sure either.

Unidentified Analyst

Okay. So, how about I'll ask my three questions, and then I'll hang up and listen to your response. First, UBAM's net sales per average consultant this quarter was $941, down 6% from the same quarter last year and down 17% from the same quarter just before COVID. In fact, this is the fourth year in a row that Q3 sales per consultant fell. Are your consultants selling less each year or is your definition of active consultant becoming more liberal?

Secondly, this past June, Usborne Publishing Limited in U.K. applied with the U.S. Patent and Trademark Office to register the UBAM trademark and expressly stated that it intends on using this trademark in commerce. Is Usborne planning on launching its own MLM business to compete directly with PaperPie?

And finally, your Usborne distribution agreement specifies minimum revenue targets that you must order from Usborne. What are these amounts? Thanks for your time.

Craig White

Thanks, Alan. Sure. Let me address the -- well, I will address all of them. But our sales per consultant going down has mostly to do with the economic factors. But I will say the new distribution agreement that we signed with Usborne this summer caused a great deal of confusion and chaos and wondering what the future was going to look like as we had to get to this major rebrand.

So, I think that's a lot of it. I won't say we're necessarily on a downward trend. I think there's a great deal of excitement around the new brand. It's very exciting that PaperPie, as Heather mentioned, is in a very clean URL and social media space. So, they are really rallying around the new name. And so, I don't anticipate that trend will continue, but that remains to be seen.

Also, with Usborne trademarking, the myubam.com…

Heather Cobb

Just UBAM.

Craig White

UBAM, they are not launching their own MLM division. The whole idea around this rebrand is that they're trying to protect their global brand. And that's what caused us to need to rebrand. As you know, Usborne Books more has the word Usborne in it, and they want us to rebrand. So, they're just trying to protect it, so that doesn't get taken going forward. But we have no indication that they're going to compete with us in a multi-level marketing division.

And then…

Dan O'Keefe

Minimum revenue target -- minimum purchase target.

Craig White

Yes, we had minimum -- we have not published the minimum purchase agreements. They're working with this. They know this is a difficult economic time, and we fell just short of it. But again, they're working with this.

So, anyway, thank you for the question.

Operator

[Operator Instructions] Next question, we have [Jim MacMurray] (ph). Jim, your line is open.

Unidentified Analyst

Thanks a lot. I'm curious about the impact of inflation on your year-over-year and quarter-over-quarter growth. In the release, you talked about how inflation has an impact. I'm just hoping you could quantify that, or put it in a range of how much inflation contributed to the quarter-over-quarter growth for the year -- for the quarter, excuse me?

Craig White

I don't think we can quantify inflation's impact. It's just that whether we like to believe it or not, children's educational products are a discretionary purchase for young families. I don't think there's any way we can quantify that.

Dan O'Keefe

No, I mean -- so the key thing we look at, and we -- as we said in the call, we make market decisions based upon sales activities, and we are constantly looking at what we need to do to capture sales and grow sales. And so, we ran some promotions this quarter and offered some additional incentives just to make sure that we were capturing as much of the business as we could.

Unidentified Analyst

And that was my second question, the release also talked about discounts and incentives. Are those expected to continue for the next couple of quarters? Or is this a one-time thing?

Craig White

Like Dan just said, we always try to react to sales and marketing conditions at the time. We don't expect -- it's not a company-wide decision to discount or do any of those kind of things, but we kind of spur and try to ignite the salesforce whenever we see it's necessary.

Unidentified Analyst

Okay. Thank you.

Craig White

Thank you.

Operator

Thank you. [Operator Instructions] Next question, we have [Christy Johnson] (ph) with Educational Development. Actually, Christy, disconnected her line.

[Operator Instructions] Next question, we have [Cliff Morton] (ph), a private investor. Cliff Morton, please ask your question. Cliff Morton has disconnected his line.

[Operator Instructions] Your next question comes from John Bair with Ascend Wealth Advisors. John Bair, your line is open.

John Bair

Thank you. Good afternoon, Craig and Heather and Dan. Question, are there any other lines that you might add in addition to the squishy skeleton? In other words, any other kind of theme that you might be able to add to that product line or those offerings, I guess?

Craig White

Yes, good question. So, SmartLab Toys over their history have introduced 40 or 50 products. And some of them have been discontinued, but we're looking at bringing back any or all or any combination thereof. So, they had several basic category groups, I would say. They had a circuits group of products. They have the Chinese. They have the squishies, which there's a squishy brain. And they have a new product that they actually never sold before we acquired them, which is the ultimate squishy human body, which is much more integrated with electronics. I mean, you can put organs on this little electronic pad and you can do quizzes on that organ, you can keep track of the quizzes. And so that's another product in that line. But like I said -- and then there's science labs and some of those things.

So, we have a wealth of products that we can bring out. We didn't want to overwhelm and bring out 20 or 30 all at once. So, we're kind of spacing those releases out, but yes, there are further products.

John Bair

So, might an approach be to inquire of your consultant lines of inquiries about some of those products that you haven't introduced yet? In other words, rather than human anatomy type products, maybe cats, dogs, that kind of thing?

Heather Cobb

Yes. This is Heather, John. How are you?

John Bair

Yes, I'm fine. Thanks.

Heather Cobb

As Craig mentioned, they have a catalogue of products for us to continue to pull from. But in addition to that, we also kept on staff one of their creators and developers, who is responsible for the creation of these products. And we have already been in conversations and brainstorm sessions about what's next as far as the creation process.

So, we have the best of both worlds. We can pull from the back list of their catalogue, and we also are planning to create some of our own things to follow up with.

John Bair

Okay. Well, I'm just wondering that if you question those in the consultant line and get their feedback of any interest about certain products from their downline or whatever the people that are having at their parties and whatever, and kind of query them as to what's going on or that might give you a better idea of what the public wants, so to speak, is that an approach you're considering?

Heather Cobb

It's actually approach that we already use. We have constant interaction with our field to receive feedback, to get ideas. We have an entire section of our back-office support ticket category to take recommendations and suggestions. And so that's what we've already been doing with our product lines, is taking the temperature of our field as well as the customers' watching trends and seeing where we can fill gaps that we currently aren't offering or isn't available in the market otherwise.

John Bair

Great. Very good. Thanks for taking my questions.

Heather Cobb

Absolutely.

Craig White

Thank you.

Unidentified Analyst

Hello?

Craig White

Christy, are you there?

Unidentified Analyst

Yes. My question is, since I had difficulty logging on and missed the part that I wanted to learn about was the price of stock. Where would I access the recording of this?

Craig White

Following our call today, we will get a recording and put it on our Investor page of our edcpub.com website. So, if you go…

Unidentified Analyst

Where and under what -- I looked there when I was trying to log on. So, what's it going to be under, Welcome Corporate Filings, Governance or FAQ?

Craig White

Hold on just a second. We'll pull it up right now. And I can direct you there. You can find them under Investors, in Corporate Filings and then there's Earnings Calls.

Dan O'Keefe

Yes, under Corporate Filings, yes.

Unidentified Analyst

Okay. There's nothing under Corporate Filings at this point, right. It's Earnings Call option. Okay, with the press releases, would I've been able to get the phone number to call in online, because I couldn't find it and the receptionist couldn't get it for me?

Craig White

Yes. So, we filed an 8-K couple of weeks ago that gave the earnings call information. It was an earnings call announcement. And then, we also filed an 8-K and a press release today that both included the earnings call number.

Unidentified Analyst

Okay. Is it online?

Craig White

Yes. All of our filings are online.

Unidentified Analyst

Is it on your website? Under SEC filings?

Dan O'Keefe

Yes. We'll put them on after the call.

Craig White

Yes.

Unidentified Analyst

If that's where it was today, I should have been able to find it under SEC filings, the phone number.

Craig White

Yes. If you go to that SEC filings and open up that first 8-K, and then you can walk through that 8-K announcement, and at the bottom, there's a third quarter earnings call information.

Unidentified Analyst

Okay. I can't, but I got to EDGAR's search results -- but that's all right, I can get a recording later someplace.

Craig White

Yes. The EDGAR search results are correct. And then if you click on that 8-K, under the EDGAR search results, it'll open up our press release.

Unidentified Analyst

Okay. And 8-K means what? I mean, I'm at search results, and I see filing type. Do I type in 8-K there?

Craig White

Yes. I'll tell you what, so, why don't you -- you've got our office number.

Unidentified Analyst

I will view this later. All right. Goodbye. That's fine.

Craig White

Yes, great. Then call, and I'll be happy to help you.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions] And there are no further questions at this time. Mr. Craig, do you have any closing remarks?

Craig White

Yes, thank you. Thanks, everyone, for joining us on our call today. We appreciate your continued support and look forward to providing you additional update when we report Q4 in May. So, again, appreciate your support. Reach out anytime, and thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.