Q1 2020 Earnings Call
First quarter earnings Conference call with management, who will review financial results for the quarter ended March 31, 2020 Jacks issued its earnings press release earlier today the earnings release and presentation slides for today's call are available in the company's website any investor section on the call. This afternoon, our Stephen Berman.
Chairman and Chief Executive Officer, and John Campbell, Chief Financial Officer, Mr. Berman will provide an overview of the quarter along with highlights of product lines and current business trends and a discussion of the impact of KOVA 19, then mr. can will provide detailed comments regarding Jack specifics financial and operational results. Mr. Berman will then turn.
Return with additional comments and some closing remarks prior to opening up the call for questions.
Your line will be placed on mucosa first portion of the call. If he would like to be placed in the queue to ask a question. Please press star one on your telephone keypad before we begin the company would like to point out that any comments made about Jack specifics future performance events or circumstances, including the estimates of sales and or adjusted EBITDA and.
2020, as well as any other forward looking statements concerning 2020 and beyond our subject to Safe Harbor protection under Federal security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ.
Clearly from those projected in forward looking statements.
For details concerning these and other such risks and uncertainties you should consult jacks. Most recent 10-K and 10-Q filings with the FCC.
As well as the company's other reports Subsys subsequently filed with the FCC from time to time. In addition, today's comments by management will refer to non-GAAP financial measure measures such as adjusted EBITDA unless stated otherwise the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure.
Your within the Companys earnings press release issued today or previously as a reminder, this conference is being recorded with that I would like to turn the call with the seamless Stephen Berman.
Thank you and good afternoon, everyone and thank you for joining us today.
I want to start by saying that we recognize that everyone. In the world is managing through a difficult time, something we've never seen before and we're doing everything we can to keep our people save our business intact and our prospects right.
We have an incredible team at jacks. During this time, a tremendous change our employees have done an incredible job to create opportunities preserve our resources and keep the company on track.
Before covert 19 was even identified as a pandemic we've been taking steps to keep our employees save our supplies lines open and our business running as smoothly as it can with everything is changing by the hour.
Obviously, we're all experiencing fluctuations, which bring great uncertainty Jack specific was founded 25 years ago and I can say that we have never operated in an environment that has changed so rapidly.
When I have never been so proud of our people for all they're doing to find ways to preserve and excel.
It has been less than three months since our last conference call at that time. The Big question was when will our Asian suppliers be back to normal production.
Now, we're all asking ourselves when we'll anything be normal.
While in many ways everything is different in some ways. They are the same Jackson has been built on the idea that a strong collections evergreen products and brands supplemented by opportunistic promotional initiatives can do well and we continue to see that.
Our sales were down a modest 6% in the quarter compared to last year, but we see several areas of strength and our retail Pos remains encouraging led by frozen too and Disney Princess role play dolls and play environments. Our girls toys are up 35% year over year in the quarter.
Our boys tours were down but excluding the declines in some entertainment properties, we saw strength in intended and Socs the hedgehog.
Seasonal products My kids furniture have been very strong at retail and our disguise business was up nicely year over year.
Clearly the retail landscape has changed quickly and dramatically the kids still like to play and parents still want to give their children good products to play with.
That being said the ability to go to stores to interact with other kids and to consume New entertainment content has change Jackson has been diligently working to adapt to the new patterns of consumer behaviors and we believe we have some strategic advantages.
With kids fitted much more time at home away from social studies and traditional playgroups products, such as activity tables video games and fantasy and roll plate always have performed well, whereas action figures and some dolls and some collectibles have now performed as well Fortunately for jacks with it.
Very strong position in a wide range of categories like ball pits and activity tables. In addition, our foot to floor ride ons, our steady sellers and acute grows hairstyle as a new activity line for us.
And the dolls and have done well are tied to high quality entertainment content with strong brand recognition such as the likes of frozen to at Disney Princess.
In addition to key business focus continues to be reducing costs and preserving cash.
As John will discuss later, our gross margin showed a nice increase year over year, while we have simultaneously reduce our operating expenses.
Last year, we exited some low margin product categories like fundamentals and we have worked to cut cost by downsizing.
In addition to reducing our workforce with layoffs. This quarter. We also asked all employees to take a temporary reduction and pay including new the executive team.
Prior to the pandemic, we implemented a multi tier development program focused on designing and developing products specific to the following retail channels mass, which is including of Walmart target Amazon Tesco, either and Aldi to name a few.
Specialty, including TJ Maxx, Ross, Gamestop, and others Big box, which includes Cosco Sam's club and B-j's.
Dollar trade, including family dollar five below and others.
This development initiative with stratified price points has allowed Jackson pivot accordingly into opportunities and segments. During this disruptive time, where other companies have been more drastically affected by retail store closures.
We also know we have many strategic strengths, most notably our strong licensing partnerships, our longstanding manufacturing relationships and great partnerships with our retail customers.
POS sales at our largest customers was positive in Q1 and as we do more positive in April.
Our China manufacturing partners have returned to near normal levels of production and we believe that are many stable at evergreen product lines can do well and any economic environment and we remain confident that we will emerge from this even stronger than we were before the pandemic began.
After John gives an update on our financial performance I will return with some brief comments about our major product categories and what we're doing for the balance of 2020.
With that I will turn the call over to John.
Thank you Steven and good afternoon, everyone.
Net sales for the 2021st quarter were $66.6 million down 6% compared to 70.8 million last year reported net loss attributable to common stockholders for the first quarter was $12.3 million were 41 cents per basic and diluted share compared to a net loss of $29.2 million or $1.20.
For in the first quarter of last year.
As a reminder, certain elements of our capital structure, our mark to market quarterly based on a few factors inclusive of our share price.
The net loss in Q1, 2020 includes noncash gains totaling $9.8 million, reflecting changes in the fair value of our convertible senior notes and the derivative liability associated with our preferred stock.
By comparison, the net loss in the first quarter of 2019 also included changes in the fair value of our 2020 convertible senior notes, but also a number of charges related to our 2019 recapitalization process.
Excluding the impact of such charges as well as stock compensation expense.
Adjusted net loss attributable to common stockholders in the first quarter of 2020 was $21.9 million or 72 cents per basic and diluted share compared to a loss of $23 million or 98 cents per basic and diluted share in the first quarter of 2019 and improvement of 26 cents.
Adjusted EBITDA for the 2021st quarter was negative $13.9 million compared to a negative $17.1 million in the first quarter of 2019.
Our girls targeted business was strongest during the quarter inclusive of dolls role play in dress up toys girls toys was $39.2 million in Q1 up 35% compared to $29 million in the first quarter of last year.
As was the case in the fourth quarter. The Big driver was frozen both toys related to frozen to which was released in theaters late in Q4 2019, but also for toys tied to the original frozen.
Other girls toys that were strong included kit Kat Fay our own Aspirationally doll and collectible world of cap say inspired surprises as well as our new many mouse fashion doll line launched in partnership with Disney which began shipping last quarter.
Those sales more than offset some of the anticipated declines and various other product lines, particularly those related to older Entertainment properties, such as marijuana 11, and fancy Nancy as well as our own squished delicious line.
Sales of action figures vehicles role play in electronics products in our boys category for 2021st quarter were $9.7 million down, 36% compared to 15.1 million last year.
Positive contributions from our Flywheels line of proprietary action vehicles, Sonic the Hedgehog and Nintendo Super Mario products are more than offset by declines in entertainment driven properties, such as Godzilla, Harry Potter and Incredibles too as well some non interest payment properties, such as our TP Blaster brand.
Sales of seasonal products, including license ride ons ball pits plate structures kids activity tables, and more boards were $12.9 million in the 2021st quarter down 42% from $22.2 million in the first quarter 2019, and strong sales of ride ons offset declines in more forward in Maui outdoor toys.
The biggest decline in Maui is the result of the discontinuation of fund noodles low margin category, we exited last year and referenced last quarter. When we took an impairment charge against the intangibles associated with that acquisition.
Sales and our Halloween category increased about 10% to $4 million in the first quarter 2020 compared to $3.6 million last year.
Sales of baby doll accessories figures plush and games in our preschool and activity category were zero point $8 million in the first quarter 2020 down from zero point $9 million in the same quarter 2019. The decrease was driven by lower sales of Daniel Tigers neighborhood as well as declines in our pull my finger game, which offset the contribution of checking into.
For us, which was launched last year.
Looking at sales by business segment sales in our toys and consumer products segment, which includes all markets around the world were down 6.8% to $62.6 million compared to $67.2 million in the first quarter of last year.
The decrease was driven by the same factors noted above the product discussion.
I was really in New Zealand Asia Latin America in Europe are all stronger, while the U.S. and Canada were down 11% year over year.
And as we already noted above our Halloween segment was up around 10%.
Looking at the rest of the piano reported gross margin in the 2021st quarter was 24.6% compared to 20.2% into 2019 first quarter.
Steady improvements in our product margins and lower obsolescence reserves outpaced higher royalty charges incurred in the quarter sharply lower spend for SGN expenses, including direct selling expenses and depreciation and amortization in the 2021st quarter totaled $32.3 million or 48.6% of net sales compared to.
$38.4 million or 54.1% of net sales in the first quarter of 2019.
Net cash used in operating activities was $18.9 million for the first quarter of 2020 compared to net cash used in operating activities of 1.9 million in the first quarter of 2019, primarily due to higher media and warehouse costs incurred in Q4, as well as higher royalty payments year over year.
Free cash flow was negative 20.5 million into 2021st quarter in a negative 4.4 million in the 2019 first quarter.
As of March 30, Onest, 2020, our cash and cash equivalents, including restricted cash totaled $44 million compared to $66.3 million at the end of 2019.
And $47.4 million as of March 30, Onest 2019.
As of April Thirtyth 2020, the company had $42 million of cash on hand, and $36 million of availability on its revolving credit facility, resulting in total liquidity of over $78 million.
Accounts receivable as of March 30, Onest 2020 were $64.8 million down from 117.9 million as of December 30, Onest 2019, and $67.8 million at March 31st 2019.
Dsos for the 2021st quarter increased to 89 days from 86 days reported in the 2019 first quarter.
Inventory as of March 30, Onest, 2020 was $48.2 million versus $54.3 million Decemberthirty, one 2019 and $44.7 million as of March 31st 2019.
DS eyes in the 2021st quarter were 116 days compared to 89 days in the 2019 first quarter in looking at Dsaas on our trailing 12 month basis, we were at 52 days for both periods.
As of December 30, Onest 2019, the company's debt includes $1.9 million of convertible senior notes due June 2020, $37.6 million of recapitalize convertible senior notes due July 2023, and a $134.8 million owed under our term loan due February 2023, we intend to pay off.
The $1.9 million worth of notes this quarter on schedule. We currently have no outstanding balance under our credit facility.
Capital expenditures during the first quarter of 2020 were $1.6 million compared to $2.5 million in the first quarter of 2019.
The diluted loss per share calculation for the first quarter of 2020 was based on a weighted average of 30.2 million common shares outstanding.
And with that I'll now hand, the call back over to Steven for some additional remarks.
Thank you John looking towards the second half of the year, there's obviously a lot of uncertainty about the state of the economies around the world.
How quickly retailers will bounce back once they reopen what effect the current high levels of unemployment will have on the consumer spending is people started going back to work very soon and how long the changes in consumer buying behavior will persist.
That said, we're managing our inventory positions tightly we are working harder than ever on enescu efficiencies and managing tooling and product development spending.
We remain laser focused on staying flexible and adaptable to changing market conditions around the world while being good long term stewards of our investors capital at the same time, we have spent considerable time and energy over the past quarter staying connected with our network of suppliers customers license or is it.
Their business partners to be helpful, where we can and remind them that were there to be problem solvers for them, particularly during this unusual time.
What we have in our favor our evergreen product based on established play patterns strong relationships with the world's best kids intellectual property companies retail customers that are strong enough to survive. These challenges.
Manufacturing partners that are some of the best in the World and a single site US distribution facility that was built to meet the challenge of getting goods to retailers and individual customers rapidly.
To elaborate.
Number one relevant lasting play patterns. Our products are based on play patterns that had been proven over many decades to be fundamental activities for kids around the world role play dress up Dol clay vehicle play collecting.
Plush and otherwise outdoor fun and activity Arts and crafts.
Number two powerful licenses our licensing partners are responsible for some of the most popular intellectual properties in the world, including the Walt Disney Company, Marvel Pixar DC Comics Warner Brothers, Nbcuniversal and so many others, we even have.
Licensing deals with some of our bigger friendly competitors like Lego Hasbro and Mattel. We're also in the process I'm discussing some new and exciting licenses.
Number three new IP, we continue to develop our own IP, which serves a purpose of rounding out a balanced portfolio. While also building long term value for jacks and our partners.
Number four stable retail customers, our top retail customers are Walmart target Amazon Cosco, Tesco and Smith to name a few.
Amazon is obviously ideally positioned for an environment like this.
And Walmart and target have both done an excellent job of capturing sales both in stores and online.
We are fortunate to have such great relationships with most of these healthy retailers.
Established and reliable supply chain.
Our manufacturing partners once again through during the first quarter how quickly they could rebound we are grateful for those relationships, which we have built and maintained for more than 25 years.
Our distribution facility is operated by an experienced professional and smart staff and is able to meet the demands of just in time inventory logistics as well as overnight shipments to individual customers.
In fact, our direct to consumer business is thriving and our order volume for spring has been close to what we experienced during November and December last year.
From a product standpoint, we have several items, we expect to do well in 2020.
From the Girls Division, we expect good sales from frozen to cafe, which has their own proprietary product and cute eurs hairstyle, which is supported by a popular Youtube channel of the same name.
From boys, we continue to see good sales from Flywheels and we expect continued strong sales of Nintendo base toys.
And then tend to switch is the best selling video game system right now and its newly released animal crossings has been a smash hit among gamers have all ages. We also expect good sales from toys based on last kids on Earth, and our proprietary brand of extreme powered dump truck.
And seasonal toys are reduced skateboards have done well and should continue to be strong through the year and we expect our reintroduction of I crops to be a strong seller as an activity to end this year.
Finally, we have a great lineup of license costumes this year for Halloween, including frozen too.
Billy Irish Milan, Charles Harry Potter and backlog on to name a few.
At this point, it's unclear how different Halloween will be this year, but we expect consumers will insist on dressing up even if it's just to show off on social digital platforms video calls.
Small school events.
As well as small parties.
We know there are challenges ahead and the Jack's team has been doing a great job of working from home and we've been diligently striving to get our offices ready and safe so that our employees vendors and customers can return.
We are working to stay ahead of the curve. We were founded with a very entrepreneurial mindset focus in on speed to market and adapting to all types of retail environments and changes in consumer behavior, which allows us to provide the products needed for the times, we are and whether it's a pandemic or just the.
Normal vagaries of the kids consumer business.
For the reasons I just outlined we're confident that we can emerge from these times in a strong position.
With that we'll now take questions operator.
As a reminder, task of question you will need to press star one on your telephone to withdraw your question Chris The bounty. Please stand by what we compile the Q in a roster.
Our first question comes from the line of Stephanie with Nick from Jefferies. Your line is now open.
Hi, This is actually how again bumper stuff. Thanks for taking your question.
Actually we don't want Hi, clear wondering if you could break down the gross margin improvement how much was related to cost restructuring and how much related to product mix benefit.
Yes.
Sure, it's John ill take that.
You're looking at it year over year is your question.
Yes.
Because we did roll backwards, a little bit from last quarter.
I mean really from a.
Overall point of view it was really much more driven by.
Product cost.
More so than anything in our restructuring program.
The royalties or.
Up a bit year over year in that area.
We still had good expansion from a product margin point of view as it relates especially to our newer product part of our slipping back from where we were last quarter was moving out some of that older product at a more discounted rate.
Okay, great. Thank you and see then if I could just have one for you you mentioned you heard potential for new licenses.
Are you seeing some opportunities for many companies who will make it through this disruption.
Thank you actually it goes both ways, where we've been very opportunistic and entrepreneurial working with our retailers and with our license doors.
You do.
This disruptive period, there's many companies that are having some major issues, whether teetering bankruptcy or already are in that process of being bankrupt. So.
We've been working diligently and daily an hourly on many new opportunities that's out there. So we're excited about that and during these unprecedented times, even though it's a very sad and.
Disheartening time window for families and the world There is opportunity there if you're staying nimble and ahead of things and we seem that we are and license stores and retailers have been backing some hopeful new opportunities going forward. So yeah, we've been very aggressive on that.
Okay, great. Thanks, so much of the color and I'll pass it off to thank you and stay healthy.
Thank you.
Thank you as a reminder, Casco question, you will need to press star one on your telephone so as the draw your question press the pound key.
Our next question comes from the line of Gerrick Johnson from BMO capital markets. Your line is now open.
Thank you Hey, good afternoon Steven.
Hello, Good hope you all of your family we're doing okay. Thank you.
Just wondering how.
The conversations are going right now with the retailers.
As a plan for the fall.
Are they.
Think about pushing back set dates or what kind of conversation to have any at this point I know there's lot of uncertainty, but right now are they feeling about the back half and holiday.
So for the ones that are currently called the the retailers that are out there that have groceries are necessities, such as the Amazon to walmarts the Walgreens the man the Myers the cost business and so forth CV. After the so on their planning as normal the set dates.
That the normal steps that we normally have for fall are still planned as set dates what has changed our different dates that were four movie launches that are either been pushed out or delayed. So those dates have either been canceled or changed appropriately based off of.
Movies I move wants coming out I believe it's in July now so it was or is it coming out in the first quarter and we changed for those appropriate timetables, but for the call to Halloween set dates that we have.
Those are all been still set and then place people are just taking a more cautious view.
View on ensuring that.
That they have the right inventory.
And I've been focused on caught the real selling patterns and selling properties versus taking risk on items that may not.
Have a.
Oh, a win to it they've got to take a conservative approach. So the basic businesses that were and and all the platforms of the outdoor furniture the foot the floor right on the ball pits. The evergreen areas are consistent with the normal set dates that we've had and that anything new as just being moved.
Around and dealt with by individual retailers the ones that are changing are the ones that have been closed.
During this period of time.
Called the specialty retailers you know throughout the the U.S. and around the World you have Smith and the UK that close down August six at OKS opens up again in July you've added rock there that TJ Max So those ones are just adapting as getting ready for back to school and they have planned everything as normal for the holiday season, but.
Also taking a cautious.
Approach and being very.
Opportunistic of positive initiatives, if theres opportunity they want more good if things aren't are slowing they want to be able to back off of goods.
So so is this expediting that that shift to domestic that we've been seeing over the last couple of years are we going to be even more domestic fulfillment. This year is fob dad or how do we look about that kind of fulfillment.
Well for Jacks Fob is alive and well it I think we maybe even picked up slightly on a percentage basis have been more fob on a percentage basis. This year than we did last year.
It's up to that we've started since inception for the major customer or major manufacturers that do domestic inventory, it's going to be much more of a domestic focus but specifically for for us like Jack's our Halloween businesses at least 70% plus fob and that hasn't changed and our our third quarter, which is an fob quarter.
Majority is still our largest quarter so for Jack specific it's really and Fob business. This year as it always has but we trying to turn it much more on an fob. So we have less liability going into the fourth quarter and having inventory needs domestically for the retailers, Okay and then at retail.
Seen strength, the newest specific categories and other categories have been rather weak.
Are you now seeing as we progress along or we see more broadening of retail performance.
In other categories.
Certainly I think it's consistent to what happened during the first four months of the air it's the areas that have done well.
The games of puzzles the activities the I'd like our ball pits are tables and chairs our daily role play business has been very solid.
But.
I think we're going to need to wait till the hot summer time, when birthdays come about and we're out of this this very dis dipped. This this.
Depressing environment at home when people start celebrating a little bit more with birthdays and and little bit more of these events, you'll see that some of the normal toy business come into effect.
But I do believe the medium price equates to lower price points. During this time as much more feasible to consumers versus the higher price point that we've seen in the past so were seeing a at least for us a much better uptick under lower price points or average price points versus a higher price point product.
Okay and retail inventory, how does your inventory liggett retail right now.
Im going to that John I don't have the data in front of me.
At retail.
I don't know if we have I don't have that right and inventory right now it's down I don't have the exact percentages if you need.
All right, our Walmart inventories down, 60% and target 41% on on now.
At our boys business. This is all I have right now in front of me Garik, but have you can get back to me I can get back to you or we can do it offline call and give you much more detail.
Okay. Okay.
Thats good for me right now because she has a thank you very much. Please stay healthy. Thank you.
Okay.
At this time showing no further question.
Everybody. Thank you for the call today no no we have offline calls with several people that have been scheduled and book, but please everyone. That's on the cost a healthy and well and look forward to having our call in July for our second quarter earnings and focusing on the second half of 2020, everyone. Please stay healthy and well and thank you very much.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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