Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 29, 2019; comparisons are with the periods ended September 30, 2018. Amounts are in thousands of dollars except per-share data. Crown Crafts sells infant, toddler and juvenile products through retailers and directly to consumers.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $18,560, down 9.6% | $34,502, down 4.2% |
| Gross profit / margin | $5,869 / 31.6% (prior: 31.0%) | $10,420 / 30.2% (prior: 29.2%) |
| Operating income | $2,393 | $3,492 |
| Net income | $1,779, down 1.7% | $2,858, up 37.9% |
| Diluted earnings per share | $0.18 | $0.28 (prior: $0.21) |
For the quarter, bedding, blankets and accessories sales fell 10.2% to $10,364; other product-category sales fell 8.9% to $8,196. For the six months, bedding sales declined 9.9% to $18,077, while sales of bibs, bath, developmental toys, feeding, baby care and disposable products increased 3.0% to $16,425.
Six-month operating cash flow was $6,393, versus $7,133 a year earlier. Investing cash outflow was $215, mainly capital expenditures; financing cash outflow was $6,121, including $1,619 of dividends paid. Cash at period-end was $200. The company declared dividends of $0.08 per share for the quarter and $0.16 per share for the six months.
At September 29, 2019, total assets were $54,051 and shareholders’ equity was $42,747. The company had no revolving-credit balance, with $21,100 available under its $26,000 facility subject to eligible receivables and inventory. Current liabilities were $9,679; operating lease liabilities totaled $1,337. The facility matures July 11, 2022, is secured by company assets, and the company reported compliance with its covenants.
Changes and notable items
- Quarterly sales fell primarily because of shipment timing at certain retailers and a discontinued program. Management attributed lower six-month sales mainly to the bedding category.
- Gross margin improved year over year in both comparison periods despite lower sales. Marketing and administrative expenses declined; six-month costs benefited from the absence of $210 in prior-year Sassy inventory-transfer charges and lower outside-services and advertising costs.
- Six-month net income included a $232 discrete tax benefit after California’s Franchise Tax Board ended review of certain prior-year tax claims, plus a $78 credit to interest expense from reversal of related accrued interest and penalties. The fiscal-year-to-date overall tax provision rate was 18.8%, compared with 26.0% a year earlier.
- Operating lease accounting was adopted April 1, 2019, adding right-of-use assets and lease liabilities; initial recognized balances were $1,900.
Outlook, risks and contingencies
No specific revenue, earnings or margin guidance is provided. Management said operating cash flow and available revolving-credit capacity should meet liquidity needs at current operating levels and did not anticipate a material change in the estimated tax rate for the balance of fiscal 2020, while noting that pre-tax income could affect it.
Risks identified include retailer order levels and customer concentration, competition and consumer spending, supplier and shipping disruption, input-cost and currency movements, and dependence on third-party product licenses. The top three customers represented about 67% of fiscal 2019 gross sales; licensed products represented 41%, including 29% associated with Walt Disney-affiliated licenses. CIT bears credit losses on approved factored receivables, but may limit or terminate customer approvals. A California refund claim for fiscal 2014 remained unresolved as of October 25, 2019; management warned an adverse tax resolution could affect future results. The filing reports no legal proceeding expected to have a material adverse effect and no material subsequent event.
Investor verification priorities
- Assess whether shipment timing and the discontinued program explain the quarterly sales decline, and whether the bedding-category weakness persists.
- Separate recurring earnings from the $232 tax benefit and $78 interest credit; monitor the unresolved California tax matter and remaining tax reserves.
- Review inventory growth to $21,941 from $19,534 and its impact on cash conversion and potential obsolescence reserves.
- Confirm borrowing availability under the asset-based facility and monitor dependence on CIT factoring and customer approvals.
- Track concentration in major customers and licensed products, including Disney-affiliated licenses, as well as sourcing and input-cost risks.