Crown Crafts, Inc. — Q3 FY2021 Form 10-Q
Business context and period. The unaudited quarter ended December 27, 2020, with comparative results for the quarter ended December 29, 2019; year-to-date figures cover nine months. Crown Crafts sells infant and toddler bedding, blankets, bibs, bath products, toys and related goods through retailers and direct-to-consumer channels. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $19.48 vs. $18.59; +4.8% | $57.34 vs. $53.09; +8.0% |
| Gross profit / margin | $6.15 / 31.6% vs. $5.82 / 31.3% | $18.27 / 31.9% vs. $16.24 / 30.6% |
| Operating income | $2.73 vs. $2.41 | $7.67 vs. $5.90 |
| Net income / diluted EPS | $2.14 / $0.21 vs. $2.10 / $0.21 | $5.84 / $0.57 vs. $4.95 / $0.49 |
| Operating cash flow | Not presented quarterly | $8.08 vs. $7.19 |
Quarter net margin was 11.0% versus 11.3%; nine-month net margin was 10.2% versus 9.3%. Marketing and administrative expense was $3.42 million in the quarter, nearly flat year over year, and $10.60 million year to date, up 2.5%; as a share of sales it declined to 17.6% and 18.5%, respectively.
At December 27, 2020, cash was $3.66 million, current assets $46.94 million and current liabilities $17.19 million. Inventory was $22.84 million, up from $17.73 million at fiscal year-end. There was no revolving-credit balance; the $26.0 million facility was available subject to eligible receivables and inventory, and the company reported compliance with its covenants. The facility matures July 2022. PPP debt was $1.96 million at 1% interest, presented as $1.44 million current and $0.52 million long-term; the company had applied for full forgiveness but had not assumed forgiveness in its accounts. Total operating lease liabilities were $4.90 million.
Nine-month investing cash use was $0.53 million, mainly capital expenditures; financing cash use was $4.18 million. Cash increased $3.38 million from $0.28 million at the start of the fiscal year. The company declared dividends of $0.41 per share during the nine months. Treasury stock purchases included 250,000 shares bought from CEO E. Randall Chestnut on December 16 at $7.5435 per share.
Changes versus prior comparable periods
- Sales growth was led by bedding, blankets and accessories: up 19.0% for the quarter and 24.6% year to date. Other product categories declined 10.4% and 10.1%, respectively.
- Management attributed higher sales to improved sell-through at major retailers, partly offset by declines at certain retailers affected by COVID-19, including one customer that remained closed throughout the nine-month period.
- Gross margin improved, which management attributed to higher sales and a more favorable customer and product mix.
- Year-to-date net income increased 18.0%; the prior-year comparison included a $232,000 discrete tax benefit and a $78,000 interest-expense credit related to California tax reserves. Current-year tax expense was also higher. The estimated year-to-date effective tax rate was 23.7%, versus a prior-year overall provision rate of 16.0%.
- Year-to-date operating cash flow rose $0.89 million. Higher net income and increases in accounts payable and accrued liabilities were partly offset by inventory growth and the change in receivables.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said operating cash flow and available revolving-credit capacity should meet working-capital, capital-expenditure and debt-service needs for at least the next 12 months.
- Management said COVID-19’s longer-term impact could not be predicted. Risks include effects on customers, retail traffic, consumer sentiment, employees, suppliers and transportation; possible responses could include furloughs, facility closures, expense reductions or pricing discounts.
- Other stated risks include reliance on foreign contract manufacturers, particularly in China; changes in cotton, oil, labor, freight and currency costs; competition; and dependence on customer orders and third-party licenses. The two largest customers represented approximately 62% of FY2020 gross sales; licensed products represented 40%, including 30% associated with Walt Disney Company affiliates.
- California tax matters remained unresolved at the filing date. A subsequent event noted that a fiscal 2016 California return closed to examination on January 10, 2021; the company expected to reverse a $233,000 tax reserve and $107,000 of accrued interest and penalties in the quarter ending March 28, 2021.
- Management reported effective disclosure controls and no material adverse legal proceeding. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the sales gains and margin improvement persist, particularly given divergent trends between bedding and other product categories and the closed customer.
- The outcome and timing of PPP loan forgiveness, and the status of remaining California tax examinations and refund claims.
- How inventory growth, customer concentration, factoring arrangements and the $26.0 million borrowing-base facility affect liquidity and credit exposure.
- Whether COVID-19, supplier and shipping disruptions, input-cost inflation, or loss of a major customer or license materially affect future results.
- The impact of the CEO share purchase and ongoing dividends and repurchases on capital allocation and shareholder returns.