Crown Crafts, Inc.
Fiscal 2022 Second Quarter Conference Call
Wednesday, November 10, 2021, 02:00 P.M. Eastern
CORPORATE PARTICIPANTS
Randall Chestnut – Chairman and Chief Executive Officer Olivia Elliott – President and Chief Operating Officer Craig Demarest – Vice President and Chief Financial Officer
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PRESENTATION
Operator
Ladies and gentlemen, thank you for joining today’s Crown Crafts, Inc. Investor Conference Call. The call will begin momentarily. Once again, we do thank you for attending. The call will begin in about 60 seconds. If anyone should need assistance while you are waiting, please press star
(*) zero (0) to signal an operator. Thank you.
Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc. Investor Conference Call. Your host for today’s call is Mr. Randall Chestnut, Chairman and Chief Executive Officer. Joining Mr. Chestnut on the call will be Ms. Olivia Elliott, President and Chief Operating Officer, and Mr. Craig Demarest, Vice President and Chief Financial 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. As a reminder, today’s conference call is being recorded today, November 10, 2021.
At this time, I would like to turn the conference call over to Mr. Craig Demarest, who will begin the conference. Please go ahead.
Craig Demarest
Thank you, Jamie. Welcome to the Crown Crafts Investor Conference Call for the second quarter of fiscal year 2022. With me today are Randall Chestnut, the Company’s Chief Executive Officer, and Olivia Elliott, the Company’s President and Chief Operating Officer.
A telephone replay of this call will be available one hour after the end of the call through 4:00 p.m. Central Standard Time on February 8, 2022. Also, a web replay of this call will be available for 90 days and can be accessed by visiting our website at www.crowncrafts.com.
Before we begin, I’d 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 call.
I will now turn the call over to Randall.
Randall Chestnut
Thank you, Craig. Good afternoon to everyone, and thanks for joining us for our second quarter fiscal 2022 conference call. We’re happy with the results of the quarter. However, we did confront several notable challenges during the quarter.
In the early part of August, we implemented a new warehouse management system, which is intended to streamline our warehouse operations in Compton, California. However, it took almost two weeks to get the system up to speed, and during this two-week period of time, we were void of shipments almost entirely.
At the end of August, Southeast Louisiana was impacted by Hurricane Ida, and our offices here in Gonzales, Louisiana, were significantly impacted by the storm. The roof of the building was destroyed, and water leaked into the building, requiring us to close the office for several weeks and have employees work from home, which in itself was a challenge as they were experiencing power and internet outages to most of their homes at the same time that we were closed.
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Along with many other U.S. companies, we’re also experiencing delays and extra costs associated with the importation of goods from Asia. Fortunately, we have a contract with the freight forwarder that has somewhat protected us with slightly better rates than other importers are getting. We’re passing along increases to our customers wherever we possibly can to offset these charges.
Labor has also been very tight. We’ve experienced higher turnover rates in our warehouse operation in Compton during the past few months. We’re working with our employees and human resources to hire and retain a quality workforce, but that in itself has been somewhat problematic.
Turning to the balance sheet and dividends. Our Board of Directors today declared a special dividend of the Company’s Series A common stock of $0.35 per share along with a quarterly cash dividend of $0.08 per share. Both of these dividends will be paid on December 31, 2021, to shareholders of record as of the close of business on December 10, 2021.
After the payment of these dividends, we will have distributed $52.9 million back to the shareholders since we began paying dividends again in 2010. That warrants repeating itself. Since 2010, we will have distributed back to the shareholders almost $53 million.
The normal dividend that we usually pay of $0.08 per share per quarter, or $0.32 annually, equates to a 4.3% annualized yield based on yesterday’s close price. We’re very pleased with the financial strength of the Company that allows us to pay these dividends.
Now I’ll turn it over to Olivia and Craig to discuss the quarter in more details and then at the end, we’ll take questions from anyone who may have questions on the line. Thank you.
Olivia Elliott
Thank you, Randall, and good afternoon, everybody. I’m going to touch on the second quarter results at a very high level and then I’ll turn the call over to Craig, and he’s going to go into more detail.
Second quarter net sales were $20.2 million compared with $21.7 million last year, but if you include Carousel Designs, which ceased operations in May of 2021, from both quarters, second quarter sales for both years would have been $20.2 million.
Net sales for the first six months of fiscal year 2022 were $38.9 million compared with $37.9 million last year and once again if you exclude Carousel from both years, net sales for the current year-to-date period would have been $38.3 million compared with $34.9 million last year, which represents an increase of 9.8% for NoJo and Sassy.
We continue to see a shift in sales due to consumers starting to shop in Brick-and-mortar locations again, but internet-based sales still represent more than 25% of our sales. We’ve also continued to see higher international sales this year, with those sales representing almost 5% of year-to- date sales.
Second quarter net income was $2.4 million compared with $2.5 million last year. When you exclude the impact of Carousel from both quarters, net income would have been $2.4 million for both quarters, or $0.24 per diluted share this year compared with $0.23 last year. Net income for the first six months of fiscal year 2022 was $5.1 million compared with $3.7 million last year.
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When you exclude the impact of the forgiveness of the Paycheck Protection Program loan from the current year and Carousel from both years, net income for the six months period of the current year would have been $3.9 million or $0.38 per diluted share, compared with $3.6 million or $0.36 per diluted share last year.
As Randall mentioned, we continued to feel the impact of rising freight costs, which impacted our gross margin this quarter. On the balance sheet side, we finished the quarter with $1.9 million in cash and no debt. So overall, this was a very good quarter for us.
I’m now going to turn it over to Craig for more details.
Craig Demarest
Thanks, Olivia. I’m going to give financial highlights. For a more detailed analysis, please refer to the Company’s Form 10-Q filed with the SEC this morning.
As Olivia mentioned, net sales were $20.2 million for the second quarter of fiscal 2022 compared with $21.7 million for the second quarter of the prior year, a decrease of $1.4 million or 6.6%. Sales of bedding, blankets and accessories decreased by $1.9 million, which included a decrease of $1.5 million due to the closure of Carousel Designs in the first quarter of this year. This decrease was partially offset by an increase of $502,000 in sales of bibs, toys and disposables.
Net sales were $38.9 million for the first six months of fiscal 2022 compared with $37.9 million for the same period of the prior year, an increase of $1.1 million or 2.8%. The increase in sales is primarily due to $3.1 million higher sales of bibs, toys and disposables, partially offset by lower sales of bedding and blankets, including a decrease of $2.3 million due to the closure of Carousel. The increases in sales during the comparable six-month period are due to a strong new modular set and higher replenishment orders at a major retailer.
Gross profit decreased by $1 million and decreased by 32.8% of net sales in the prior year quarter, to 30% of net sales in the current year quarter. The decrease in gross profit includes the effect of the closure of Carousel, which recognized a gross profit of $629,000 in the prior year quarter. Gross profit decreased by $1.4 million and decreased from 32% of net sales for the prior year six- month period, to 27.5% of net sales for the same period in the current year.
The closure of Carousel resulted in a $1.9 million decrease in gross profit, which in the current year six-month period included the sale of inventory below cost and the recognition of charges of $334,000 associated with the settlement with the supplier of a commitment to purchase fabric and $265,000 associated with the liquidation of Carousel’s remaining inventory upon the closure of the business. The Company’s gross profit has also been adversely impacted in both three- and six-month periods of the current year by continuing increases in the cost of ocean-going freight.
Marketing and administrative expenses decreased by $638,000 and decreased from 17.6% of net sales in the prior year quarter to 15.6% of net sales in the current year quarter. Marketing and administrative expenses decreased by $652,000 and decreased from 19% of net sales for the prior year six-month period to 16.8% of net sales for the same period in the current year. The decrease in amounts for the current year period includes lower charges incurred by Carousel of $547,000 for the three-month period and $807,000 for the six-month period.
Other items in the six-month period ended September 26, 2021, include a $1.985 million gain from the forgiveness of the PPP loan. The current year-to-date provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 19.6% compared
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with 24.2% in the prior year. The current year-to-date provision includes no tax expense from the gain on extinguishment of debt, which will be permitted to be excluded from taxable income, the effect of which is expected to lower the effective tax rate for fiscal year 2022 by approximately 4%.
During the current and prior year six-month period, the Company recorded discrete reserves for unrecognized tax liabilities as well as entries associated with excess tax benefits or shortfalls arising from the vesting of non-vested stock and the exercise of stock options. The effective tax rate from continuing operations, combined with the effect of the discrete income tax items, resulted in an overall provision for income taxes of 19.2% for the current year-to-date period and 24.9% for the prior year.
Net income for the second quarter of fiscal 2022 was $2.4 million or $0.24 per diluted share compared to net income of $2.5 million or $0.24 per diluted share for the second quarter of fiscal 2021. Net income for the first six months of fiscal 2022 was $5.1 million or $0.50 per diluted share compared to net income of $3.7 million or $0.36 per diluted share for the same period in fiscal 2021.
I will now turn the call back over to Randall.
Randall Chestnut
Craig, Olivia, thank you very much. Jamie, if you come back on, we’ll open it up to anyone who may ask questions that’s on the call.
QUESTIONS AND ANSWERS
Operator
Ladies and gentlemen, at this time, if you would like to ask a question, you may press star (*), then one (1) using a touchtone telephone. To withdraw your question, you may press star (*) and two (2). If you are using a speakerphone, we do ask that you please pick up your handset before pressing the numbers to ensure the best sound quality. Once again, that is star (*) and then one
(1) to join the question queue.
Our first question today comes from Linda Bolton Weiser from D.A. Davidson. Please go ahead with your question.
Linda Bolton Weiser
Yes, hi, how are you? I’m sorry to hear about all the issues with the hurricane impact.
Randall Chestnut
Hey, Linda. How are you?
Olivia Elliott
Hey, Linda. We are good. How are you?
Linda Bolton Weiser
Good, good. So, do you have your building now fixed in terms of the damage? Has it been repaired from the hurricanes?
Randall Chestnut
Crown Crafts, Inc.
Wednesday, November 10, 2021, 02:00 P.M. Eastern
