Crown Crafts Q2 2025 Earnings Call Transcript

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November 12, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Crown Craft Incorporated Second Quarter Fiscal 2025 Conference Call. All participants will be in listen only Please note this event is being recorded. I would now like to turn the conference over to John Beisler with 3 Park Advisors, the company's Investor Relations firm. Please go ahead.

Speaker 1

Thank you, Cindy, and good morning, everyone. We appreciate you for joining us for the Crown Craft's Q2 fiscal 2025 conference call. Joining me today are Crown Craft's President and CEO, Olivia Elliott and the company's CFO, Craig Demarest. Earlier this morning, Crown Crafts filed its 10 Q and issued a press release regarding their Q2 fiscal 'twenty five financial results. A copy of the release is available on the company's website, crowncrafts.com.

Speaker 1

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 Crown control, and the company is under no obligation to update these statements. 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. 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. Now, I would like to turn the call over to the President and CEO, Olivia Elliott.

Speaker 2

Thank you, John, and good morning, everyone. We're pleased to report our 2nd quarter results, which reflect a favorable contribution from our recent acquisition of Baby Boom Assets, a solid overall gross profit and continued strong execution as we await a stronger macro environment. The highlight of the quarter was our purchase of the assets of Baby Boom! Consumer products, which positively contributed to our bottom line. We're excited about the addition of Baby Boom!'s portfolio of branded and licensed products that enhances our presence in the toddler segment and further extends our product offerings with the addition of diaper bags.

Speaker 2

The Baby Boom acquisition comes at a potential positive inflection point for customer demand just as we head into our most important selling season. Interest rate cuts and lower inflation are adding to consumer purchasing power. And just this past Friday, the University of Michigan's Consumer Sentiment Index climbed to its highest level since April. Looking ahead, we're confident in our forward trajectory. Before I share more on our strategy and outlook, I'll turn it over to Craig to cover our solid second quarter results in more detail.

Speaker 3

Thank you, Olivia, and good morning, everyone. Net sales for the Q2 of fiscal 'twenty five were $24,500,000 up from $24,100,000 in the prior year quarter. The increase is primarily attributable to the addition of Baby Boom, which added $3,400,000 of net sales in the current year quarter and was largely offset by declines in our legacy businesses, including the previously discussed loss of a bid program at a major retailer. Gross profit for the quarter was 28.4%, improved from 27.3% a year earlier. The profit increase reflects a slight change in product mix, partially offset by higher lease costs for our warehouse in California.

Speaker 3

We're actively evaluating our footprint and look to reduce the associated expense through strategic consolidation in fiscal 2026. Our 2nd quarter marketing and administrative expenses were $5,400,000 up $1,400,000 from the prior year quarter and increased from 16.7% of net sales in the prior year quarter to 22.3%. More than half of the increase or $788,000 relates to costs associated with the Baby Boom acquisition. Net income for the quarter was $860,000 or $0.08 per diluted share compared to net income of $1,800,000 or $0.18 per diluted share in the prior year quarter. Turning now to our balance sheet.

Speaker 3

We remain in a strong financial position as cash and cash equivalents at the end of the second quarter were $2,000,000 up from $1,100,000 at the end of the Q1 $829,000 at the end of fiscal 'twenty four. Borrowings on our revolver at the end of the quarter were $20,800,000 compared to $8,100,000 at the end of fiscal 'twenty four, reflecting amounts borrowed in the second quarter to fund the Baby Boom acquisition. The acquisition closed on July 19 for a total purchase price of $18,000,000 or $16,400,000 after adjustments for working capital at closing. We funded the purchase through an $8,000,000 4 year term loan available borrowings under our revolving line of credit, which was increased from $35,000,000 to $40,000,000 We expect to use our cash flow to rapidly repay our borrowings. However, as always, our debt balance may fluctuate from quarter to quarter due to the timing of inventory purchases and other working capital needs.

Speaker 3

Finally, we paid our long standing regular dividend of $0.08 per share and declared our next dividend, which will be paid in January. Now, I'll turn the call back over to Olivia for additional comments.

Speaker 2

Thank you, Craig. We're optimistic about the upcoming holiday season and the opportunity to drive higher revenues. For 1, we've now owned Baby Boom! For approximately 4 months and have made significant progress integrating the brand into NoJo. In addition, we have several Manhattan Toy products in Walmart and will continue to pursue additional cross selling opportunities among Manhattan Toy, Baby Boom!

Speaker 2

And our legacy brands. As Craig mentioned, we continue to strategically evaluate warehouse options and expect we can achieve consolidation sometime in fiscal 2026. Overall, while driving top line growth, we will continue to actively manage our cost structure and position our business to profitably capture market share as the macro environment improves. We're as optimistic as ever about our long term prospects and look forward to updating you on our progress next quarter. With that, I would like to open up the line for questions.

Speaker 2

Cindy?

Operator

Our first question comes from Doug Ruth of Lennox Financial Services. Go ahead please.

Speaker 4

Congratulations on the higher revenue and the improved gross margin.

Speaker 2

Thank you, Doug.

Speaker 4

You're welcome. And then I wanted to ask some questions about the warehouse first. Could you tell us the status of where you are? And you had previously told us that you thought you might be able to narrow down the choices from maybe 3 to 1 to 2 by threethirtyone-twenty five. Just curious, any kind of update on that?

Speaker 2

I think that's still a probability. We're currently at 3 locations that we're considering. We're going to go do some site visits before the holidays well, before the Christmas holidays. And hopefully, we'll have it narrowed down to at least 2, hopefully 1, by the end of the fiscal year.

Speaker 4

Okay. That sounds positive. And then I had some questions about Manhattan Toy. You noted that you have some of the products in at Walmart. And is there any feedback about the sell through and how that's been going?

Speaker 2

Yes. So we have some of the Manhattan toy products and what kind of Walmart considers their better area or their better stores. And so far, the sell through is doing well. So I think the products are popular and they're doing very well.

Speaker 4

Okay. And then previously, you had told us about the trying to improve the Manhattan toy margins and how has that been working?

Speaker 2

They're improving. It takes a little bit of time because if you've already got something placed or you already have the product in the warehouse, it's hard to do that. But as we're developing new products and as we're switching manufacturers for some other products and doing new pricing, we're definitely getting improved profitability.

Speaker 4

And then is there any feedback on the new Manhattan Toy website? I thought it looked really great. I thought that the company did a wonderful job with that.

Speaker 2

Thank you. Yes. And we think it's very good. It slows better. And we do think that we have a little bit more engagement when somebody comes to our website looking for products.

Speaker 4

Okay. And then what about the using your Sassy toy distributor in Europe to distribute some of the Manhattan toys in Europe? Is there any progress on that?

Speaker 2

Yes. And so we had both lines together in the same booth in Germany in September. And so we're already making some progress on getting the Manhattan toy products sold through those distributors.

Speaker 4

Wow, very good. And then what about the product development team? You seem to be very encouraged with what your team there was doing with developing new toys for Manhattan Toy?

Speaker 2

Yes. And so, we're utilizing kind of crossing the Manhattan Toy and Sassy team. So they're working on all of the products and we think that we're getting some very good new products being developed.

Speaker 4

Okay. Then shifting to the baby boom, can you give us some feedback? We have these you have the 4 licenses, Bluey, Kokomela and Ms. Rachel and PAW Patrol. Is there any one that seems to be doing quite a bit better than another?

Speaker 2

So all of the licenses are doing well. I mean, clearly, Bluey is one of the most popular licenses around right now. So it's on fire. Ms. Rachel is extremely popular.

Speaker 2

That product had just started coming in after we did the acquisition, but I think it looks really good and has a lot of process.

Speaker 4

What is the product for Ms. Rachel?

Speaker 2

It's the toddler bedding. Little bedding sets and some blankets, squishy pillows, that type of thing.

Speaker 4

Yes. So the consumer brands did not have that or was in the process of developing it and now you folks have continued on with that. Is that what happened?

Speaker 2

Correct. I mean, it was already on order. It may have just started coming in, but it had not hit any shelves yet. And so we should be shipping that now.

Speaker 4

And then can you talk a little bit about the diaper bags and what's specifically happening with that business?

Speaker 2

So diaper bags is new for us. We retained the design team in New Jersey and are in process of moving them to a permanent office. They were still residing in the Bitesh Group's offices and kind of a little carved out area. And so that team came with the acquisition, and we're focusing heavily on growing that product line. It had shrunk a little bit prior to the acquisition, and so we want to put a lot of focus on, and it's a category that has always interested us.

Speaker 2

And so we think there's a lot of opportunity there.

Speaker 4

And are you pleased with the efforts of the people there and what they're doing for the company?

Speaker 2

Yes, absolutely.

Speaker 4

Okay. And then LEGOLAND, you told us previously that you thought that there would be an opportunity to expand that business. Is there any update with that?

Speaker 2

Yes. And so I mean, we've expanded not only our product, the number of products that we sell to LEGOLAND, but we also are looking forward to I believe it starts in 2025. They are building some new parks that should open sometime in the summer of 'twenty five.

Speaker 4

Okay. Got 2 more questions. How about the direct to consumer business? Is there any update on that?

Speaker 2

Yes. And so we're hoping to have No Joe's website up and running selling direct to consumer before the holidays. And then we're working fast and furiously to get Sassy Babies up and running and ready to go.

Speaker 4

Okay. And then the last thing was sort of your last comment was what does the strategic process that you're talking about for 2026? Could you offer any additional comments there?

Speaker 2

I mean, really, we're focusing heavily on just integrating the acquisitions, cost control, the warehouse. We're really not looking right now at any additional acquisitions because we need to take the time to absorb what we've already done. That being said, I mean, it wouldn't mean that we wouldn't do something possibly if it came along and we couldn't say no, but that's not our focus right now.

Speaker 4

Okay. Well, thank you very much for answering my questions and congratulations to you and to the team for what you're doing for the shareholders.

Speaker 2

Thank you. Thank you, guys.

Operator

Our next question comes from Don Dasher of Pinnacle. Go ahead, please.

Speaker 5

Good morning. Solid quarter.

Speaker 3

Good morning. Good morning.

Speaker 5

A couple of questions. 1, Baby Boom! You said in the press release when you bought it that you expected sales to be about $20,000,000 Are you still tracking that way? I know you've only owned it for 4 months, but do you still expect $20,000,000 in sales per year?

Speaker 2

I think that's a good estimate. I mean, it won't happen in fiscal 2025 because we'll only have them 8 months. That's more of an annual run rate.

Speaker 5

Okay. Good. So you're still confident there. And on the marketing and administration, if we take out the acquisition costs, it looks like it was about 19% of sales. Is that a reasonable run rate to use going forward or how should we think about that?

Speaker 2

If you take out the acquisition cost, it's probably not a bad number. I mean, there was nothing else in there that was one time.

Speaker 5

Okay. So 19% of sales, that's reasonable. That's good. And then in terms just to make sure I understand where we are with the real estate consolidation, you're suggesting that by the time we have the Q4 call next year, we'll have a better idea as to what the footprint looks like?

Speaker 2

Yes. I think that's a likely option.

Speaker 5

Okay. So okay. All right, good. I think that does it for me. Thank you very much.

Speaker 2

Thank you.

Operator

The next question comes from Dennis Scannell of Rutabaga Capital. Go ahead please.

Speaker 6

Yes, good morning Olivia and Craig. Just a couple of quick things for me. So, Baby Boom! Contributed $3,400,000 in sales, so that's about 14% of your sales growth. So core legacy sales down around 13%, it gets a little less than 13%.

Speaker 6

So about how much of that was that, BIB program that one of your retail customers decided to in source versus just kind of legacy products?

Speaker 2

That was about $600,000

Speaker 6

Okay. So a portion of it, but not all. Anything else you can say about the sales decline? I definitely hear the note of optimism with the rate decreases and perhaps a turn in consumer confidence. But anything else going on in that sales decline either in terms of particular customers destocking or losing shelf space, anything of that nature?

Speaker 2

Other than the bibs, we really haven't lost any other shelf space. It's just that we're seeing weak point of sale kind of across the board. It's there is one major retailer that is worse than others right now. But for the most part, it was across the board and almost across the board retailers and across the board, subsidiaries and product lines.

Speaker 6

Yes. Okay. One other quick thing with the change in administration, again, it's early to a little early to tell exactly what the new administration will be doing. But at least on the campaign trail, there was a lot of talk about tariffs, particularly high tariffs in China. Are you all can you talk a little bit about your sourcing strategy, kind of how much of your product does come from China and you're looking at that going forward?

Speaker 2

Almost everything comes from China. And we've looked at other countries. We've tried to move some products. But at the end of the day, it is so far still been very much better costing coming from China. It's the costs are better, the infrastructure is better.

Speaker 2

We go to some countries and they say that they're going to give you your product and hand it off on X day and it gets handed off 3 weeks later. So it's just China is still the better option. That being said, we continue to look at other places and be ready just in case there are higher tariffs that we can't pass along and other countries become more viable.

Speaker 6

Yes, right. And just naively, it's not like your competitors are sourcing anywhere differently, right? Or is there some manufacturing here in the U. S. Or Mexico or something that other competitors access?

Speaker 2

If there's any in the U. S, it is very little. I mean, we have explored Mexico. I think there's probably some of our competitors doing a little bit there. At the end of the day, we just haven't pulled the trigger and moved anything to Mexico because it's still better in China.

Speaker 2

Yes, fair enough. Great. Okay.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Olivia Elliott for any closing remarks.

Speaker 2

Thank you for your continued interest in our company. We will be participating in the 3 part Advisors Ideas Conference in Dallas on November 19, and we look forward to speaking with you again when we report our Q3 results in February. Thank you.

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