Q1 2025 Crown Crafts Inc Earnings Call
Speaker Change: To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to John Beisler, Investor Relations. Please go ahead.
Speaker Change: and
John Beisler: Thank you, Dave, and good morning, everyone. We appreciate you joining us for the Crown Crafts first quarter fiscal 2025 conference call.
Speaker Change: Joining me this morning are Crown Cross President and CEO Olivia Elliott and the company's CFO Craig Demarest.
Speaker Change: Crown Crafts issued a press release yesterday afternoon regarding their first quarter 2025 financial results. The copy of this release is available on the company's website crowncrafts.com
Speaker Change: The company's form 10-Q was also filed yesterday.
Speaker Change: During today's call the company will make certain forward-looking statements and actual results may differ materially from those expressed or implied. These statements are subject to risks and uncertainties that may be beyond Crowncraft's control. The company is under no obligation to update these statements.
Speaker Change: For more information about the company's risk factors and other uncertainties, please refer to the company's filings with the Securities and Exchange Commission.
Speaker Change: Finally I would like to remind you today's call is being recorded and a replay will be available through the company's investor relations page.
Speaker Change: Now I'd like to turn the call over to President and CEO, Olivia Elliott.
Olivia Elliott: Thank you, John. Good morning, everyone. Our first quarter fiscal 25 results were impacted by the prolonged inflationary pressures facing consumers limiting their discretionary income.
Speaker Change: Excluding the costs related to the closure of our UK subsidiary and acquisition related costs, our performance for the quarter was generally break-even.
Speaker Change: The most recent consumer survey provided a mixed outlook, with consumers feeling slightly more confident about near-term prospects with concerns about inflation, the job market, and a potential recession ahead.
Speaker Change: There is growing sentiment about potential rate cuts from the Fed in the remainder of the year and into 2025, which would bring some measure of relief to consumers through lower credit card interest rates, which impact our lower income customers the most.
Speaker Change: We did see some encouraging developments in the quarter, including the performance of our betting business and the reduction of our debt levels with cash provided by operations.
Speaker Change: Finally, we purchased the assets of Baby Boom Consumer Products last month. This is a very exciting opportunity for the company and I will speak more about this later in the call. With that, I'd like to turn it over to Craig to cover the financials in more detail.
Craig Demarest: Thank you, Olivia, and good morning, everyone. Net sales for the first quarter of 2025 were $16.2 million, compared with $17.1 million in the prior year quarter. The decrease is primarily due to a major retailer reducing inventory levels and the loss of a program at another major retailer.
Craig Demarest: Gross profit for the quarter was 24.5% of net sales, compared with 27.7%.
Craig Demarest: in the first quarter of fiscal 2024. The decrease in growth profit is primarily related to increased warehouse costs and the timing of purchases, which caused an unfavorable change in the absorption of costs into inventory.
Craig Demarest: Marketing and administrative expenses were $4.3 million compared to $4 million in the prior year quarter. Thank you for watching.
Craig Demarest: The current year quarter includes $244,000 for the closing of Manhattan Toys UK subsidiary and $116,000 in costs associated with the Baby Boom acquisition.
Craig Demarest: Net loss for the quarter was $322,000, or $0.03 per share, compared with net income of $366,000, or $0.04 per share in the prior year.
Craig Demarest: Turning now to our balance sheet, cash and cash equivalents at June 30th totaled $1.1 million compared with $829,000 at the end of fiscal 24.
Craig Demarest: Inventories at the end of the quarter were $30.6 million compared to $29.7 million at the end of fiscal 24 and $37.7 million at the end of the first quarter of the prior year.
Craig Demarest: Our long-term debt at the end of the first quarter of Fiscal 25 was $1.5 million compared to $8.1 million at the end of Fiscal 24. This decrease is primarily related to the collection of fourth quarter Fiscal 24 receivables coupled with lower than planned inventory purchases during the current year quarter.
Craig Demarest: Regarding the acquisition of Baby Boom, we paid $18 million to the assets of the company, subject to customary working capital adjustments.
Craig Demarest: We finance the transaction through a combination of an eight million dollar term loan Repayable monthly over four years and additional borrowings under our revolving line of credit
Craig Demarest: The term of the line of credit was extended by one year to July 2029, and we increased its borrowing capacity from $35 million to $40 million.
Craig Demarest: Finally, our quarterly dividend of eight cents per share offers an annualized yield of 6.7% based on yesterday's closing price per share. We continue to believe our dividend is a key component towards offering long-term returns to our shareholders.
Craig Demarest: Now I'll turn the call back over to Olivia for additional comments. Thank you, Craig. Before I get into our purchase of Baby Boom, let me provide an update on a few other matters.
Olivia Elliott: We continue to receive positive feedback on new product development at Manhattan Toy, which acquisition in March 2023 expanded our distribution channels and cross selling opportunities.
Olivia Elliott: As part of continuous management of our cost structure, we decided to close its UK subsidiary at the end of June 2024.
Olivia Elliott: We continue to evaluate options for a future warehouse location to reduce our lease expense. This effort likely will continue through the rest of fiscal 2025 and into next fiscal year.
Olivia Elliott: Now let me turn to our acquisition of Baby Boom. We're very excited about the opportunity to add Baby Boom's products and licenses to our lineup. The acquisition enhances our toddler bedding business with some very popular licensed brands, including Bluey, Miss Rachel, and Paw Patrol.
Olivia Elliott: It also adds diaper bags to our product offering. The diaper bags are sold under both company brands and under a license from Eddie Bauer.
Olivia Elliott: There will be some expenses in the near term as we move the Bading Boom inventory from a 3PL in Ontario, California to our existing warehouse in Compton.
Olivia Elliott: Rent additional storage space in a temporary facility and move some SASE inventory from California to our Eden Valley, Minnesota warehouse, but the acquisition is expected to be immediately accretive to earnings.
Olivia Elliott: As we work through the remainder of calendar 2024 and into 2025, we will continue to focus on optimizing our cost structure and developing products that position our brands to capitalize when the overall macroeconomic picture improves.
Speaker Change: I'd like to thank our team for their efforts and our customers for their continuing support. We look forward to updating you on our progress throughout the year and thank you, our shareholders, for your continued support.
Speaker Change: With that, I'd like to open up the line for questions. Dave.
Speaker Change: We will now begin the question and answer session to ask a question.
Speaker Change: You may press star, then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question comes from Doug Roth.
Doug Roth: with Lenox Financial. Please go ahead.
Doug Roth: Good morning. I appreciate the details that you provided. With the the Baby Boom toddler bedding, which of the brands do you think he has the most opportunity and maybe to tell us why?
Speaker Change: Meaning the licenses? Yeah, so it's a license with the batting.
Speaker Change: They have some very popular licenses right now. They have Bluey, which is a really, really popular, probably the most popular one right now. Cocoa Melon, which has been popular for quite some time.
Speaker Change: And then we're really excited about some of the YouTube brands. We think Ms. Rachel has a good opportunity. The inventory is not in yet. It's a new license that had been signed right before we did the acquisition. And so we're waiting on the inventory to come in, but we think that's going to be a hit.
Speaker Change: And what makes Bluey popular?
Speaker Change: It's a television show that today's kids are just very excited about.
Speaker Change: He's a cute little puppy dog.
Speaker Change: Okay, very good. And then could you talk about the diaper bag and how big of an opportunity you think it might be?
Speaker Change: So right now diaper bags are probably about 40% of the acquisition sales.
Speaker Change: We do think that we have an opportunity to grow diaper bags in some other, right now it's mainly in Walmart and Target. We think we have an opportunity to grow that across other retailers and we also think that we have an opportunity maybe in specialty stores and to take that internationally.
Speaker Change: Okay, and then could you give us a little bit more detail about the feedback that you're receiving about the product development with the Manhattan toy?
Speaker Change: were the men there had been twice? Yeah.
Speaker Change: So,
Speaker Change: The big product launches happen at some of the gift shows that primarily happen during the summer.
Speaker Change: And so in June , we showed at one of the major gift shows, and we introduced the new line of Wimmer, which is the baby, the true infant, zero to kind of
Speaker Change: 9 to 12 month products and they were just really excited about those and the specialty stores are really pushing us to go ahead and get that inventory in so that they can start purchasing it.
Speaker Change: We also are working on a new, updating the Stella doll collection, and so the initial feedback on that is very good.
Speaker Change: Very good. And then how about, can you explain a little bit more about what happened in the United Kingdom and the decision to close the Manhattan Toy subsidiary there?
Speaker Change: And so Sassy Baby already had international distribution and they do primarily through distributors, whereas the Manhattan Toy kind of handled those, those retailers direct. And so, as we, we.
Speaker Change: As we looked at those two models, it feels like the distributorship model works the best. And so we were able to close that office, cut down those expenses, and we had three employees there and we're replacing it with two employees in the U.S.
Speaker Change: Okay.
Speaker Change: and then...
Speaker Change: Are you thinking that the final decision about the warehouse, do you think that that would be made in, would that be made in, is it possible still for fiscal 2025 or do you think that would be made sometime in fiscal 2026?
Speaker Change: I think we will have narrowed down to one or two locations or at least...
Speaker Change: Yeah, not necessarily the exact address, but I think we'll have narrowed down to the city location by the end of fiscal twenty five. Oh, that's encouraging.
Speaker Change: and I just want to say that I'm you know I'm optimistic about the future of the company and I want to thank you for answering my questions.
Doug Roth: Thank you, Doug.
Speaker Change: And the next question comes from Josh Peters with Morgan Dempsey. Please go ahead.
Speaker Change: Good morning, Craig. Good morning, Olivia. Hi, John .
Speaker Change: Yeah, I too am very excited about the baby boom acquisition and since I still have relatively young children in the house, I kind of get the bluey thing compared to some of what I've seen over the last 15 years.
Speaker Change: Small child entertainment, Bluey is much less likely to drive its parents absolutely insane through repeated exposure. I realize we're not the target audience there, that's always an important point.
Speaker Change: I have just a couple of questions. One, I was very happy to see the betting line items start to turn around.
Speaker Change: in the quarter, and obviously you've talked about some very promising feedback and potential growth for Manhattan Toy.
Speaker Change: I am curious about what, if you're able to give me some sense of what the Manhattan Toy contribution to sales in the quarter was, because the quarter was pretty soft on that light item.
Speaker Change: Unknown Speaker Um,
Speaker Change: Actually I don't have that number broken out right now. I can tell you that where it was soft was in the bib side of the business. We mentioned that there was a loss program that impacted the sales and that was
Speaker Change: The Big Program at Target because Target decided to take that entire program direct source. So they're sourcing that themselves.
Speaker Change: Okay, so, but that affects more your pre-existing business than Manhattan Toy, is that a fair characterization?
Speaker Change: Correct.
Speaker Change: And you mentioned also a major retailer reducing inventory.
Speaker Change: That's been a story here for a while. Do you feel like the customer is now comfortable with their level of inventory and we're going to at least get the benefit of what's actually being sold at the cash registers?
Speaker Change: Well, we know what's being sold at the cash registers, and we can see that this particular inventory isn't, I mean, this particular customer is not buying to the POS.
Speaker Change: You know, just when we think the wheels are on the bus and the inventory levels are back to normal, this happens. And so I would like to say that we're
Speaker Change: We're that they're purchasing back to to the POS, but I'm not sure that they are it seems very erratic right now One week they're purchasing to POS and the next week. They're not
Speaker Change: Okay, well, I suppose everybody's still dealing with the volatility.
Speaker Change: associated with the interesting things of the last, you know, three, four years here.
Speaker Change: On a gross margin.
Speaker Change: I see the pressure there and just trying to get a little bit better handle on how that is working its way through. So when you refer to timing of purchases, is this...
Speaker Change: a disproportionate piece of high-cost inventory from perhaps a year or two ago when shipping costs were really high, and obviously we've had the increase in the rent in the Compton facility.
Speaker Change: Just trying to get a sense of are we absorbing those costs now finally through the P&L and we can see some margin improvement from here.
Speaker Change: Yeah, the margins are mostly impacted by the additional warehousing costs.
Speaker Change: and the allocation of overhead between inventory and cost of sales. And all of that is kind of based on purchases. And we had a lower than we planned or lower than expected purchases during the first quarter, which wound up with a.
Speaker Change: like we said, an unfavorable absorption of the cost into the balance sheet that has to run through the P&L. So that can fluctuate from quarter to quarter. If you look at the prior year first quarter, it was a favorable impact to margin. So the combination of the the two from prior year and the current year made it look a little more pronounced than maybe it really is.
Speaker Change: Okay, well that's really good perspective just to understand the accounting process associated with some of that.
Speaker Change: Last question relating, well, there's a couple I suppose in here questions.
Speaker Change: relating to the baby boom acquisition. Are you expecting to file...
Speaker Change: that will have some financial history for Baby Boom and the Proforma financial statements. Pardon? Yes, we will. We'll file their one-year historical financial statements accompanied by Proforma financial information.
Speaker Change: Okay, do you have a sense of when that's likely to to be filed? I suppose there's you know delays associated with actual accounting. I would look for it around the 1st of October.
Speaker Change: Okay.
Speaker Change: And from that, I'll certainly look forward to actually getting the filing, but
Speaker Change: who paid $18 million for the business, you know, in very rough terms, are you able to break that down between net physical assets associated with the business as opposed to what you're paying for goodwill and intangibles?
Speaker Change: Yeah, I mean, we disclosed in the press release that it's going to be adjusted to the extent that the working capital differs from the $6.5 million.
Speaker Change: and we're not buying the underlying equity of the company. So, and we're not buying a whole lot of, you know, PP&E or a plant facility or anything like that. So, it'll be the difference between what we paid and the working capital.
Speaker Change: And that'll that'll be allocated over the next month. We have a third party who does evaluation of the intangibles licenses and brands and the like.
Speaker Change: Okay, so subject to adjustments as the business continues to operate here six and a half million dollars is the net tangible asset bogey so to speak.
Speaker Change: That was the estimate at the acquisition date. We still have a, I don't know, maybe another week or two before the seller has to provide us with a close, you know, an actual close, accounting close, as of the acquisition date, but that should be coming in the next week or so.
Speaker Change: Okay.
Speaker Change: All right, well, I'm sorry to be getting into some pretty small board things there. But, you know, you've already given me quite a good education over the years on the big picture for the business and really looking forward to seeing the growth of the business with this latest acquisition. Very optimistic. Thanks.
Speaker Change: Thank you.
Speaker Change: And the next question comes from Doug Ruth with Lenox Financial. Please go ahead. I wanted to ask a follow-up to sort of Josh's question. With the sales from Manhattan Toy,
Speaker Change: Unknown Speaker 08.
Speaker Change: It seemed like when you did the last earnings call you indicated that perhaps
Doug Ruth: The revenue might grow 7.5% to 10% in this fiscal year. I was wondering, do you have an update, do you have a projection as far as what kind of growth you might get from Manhattan Toy this fiscal year?
Speaker Change: We do not.
Speaker Change: And I guess I don't recall. We typically don't provide forecast. So I'm trying to figure out where the 7 to 10% came from. While you had said that the initially you thought that the revenue would be higher.
Speaker Change: what in the first year of operation, and then what you you made some projections as far as how long it might take for you to get back to the the original projection.
Speaker Change: I think that time frame is two to three years out before you get to what we initially forecasted.
Speaker Change: Yes, so I took your took out that number and then I just calculated it and that's what it appeared to be to be seven and a half to ten percent growth per year for the next like three years.
Speaker Change: So I was just wondering, do you think there will be revenue growth for Manhattan Toy in this fiscal year?
Speaker Change: We really don't make those forecasts. You know, I hate to do that. No, I understand. It's a question I thought should be asked, and I appreciate you considering it.
Speaker Change: Alright, thank you. Thank you.
Speaker Change: And then.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Olivia Elliott for any closing remarks.
Olivia Elliott: Thanks, Dave.
Speaker Change: Thank you for your continued interest in our company. We will participate in the three-part Advisors' Ideas Conference on August 28, and our presentation will be available on our website. We look forward to speaking with you again when we record our second quarter results in November.
Speaker Change: John Demarest, Unknown Executive, John Beisler, Olivia Elliott
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: John Deysher, John Beisler, Unknown Executive,
Speaker Change: John Deysher, John Beisler, Unknown Executive, Crown Crafts John Deysher, John Beisler, Unknown Executive, Crown Crafts