Crown Crafts, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended April 2, 2017 (52 weeks), compared with the 53-week fiscal year ended April 3, 2016. This is an annual filing, not a standalone 2016 fourth-quarter report. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Crown Crafts designs and markets infant and toddler bedding, blankets, bibs, bath goods, disposable products and accessories. Products are primarily manufactured in Asia, especially China, and sold mainly to retailers. Wal-Mart represented 42% of gross sales and Toys R Us 19% in FY2017. Licensed products contributed 62% of gross sales, including 43% associated with Disney licenses expiring December 31, 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $65.978 | $84.342 | Down 21.8% |
| Gross profit / margin | $19.411 / 29.4% | $23.813 / 28.2% | Profit down 18.5%; margin up 1.2 percentage points |
| Operating income | $8.700 | $10.788 | Down 19.4% |
| Net income / net margin | $5.572 / 8.4% | $6.829 / 8.1% | Down 18.4% |
| Diluted earnings per share | $0.55 | $0.68 | Down $0.13 |
| Operating cash flow | $10.389 | $11.016 | Down $0.627 |
| Capital expenditures | $0.191 | $0.355 | Lower year over year |
Bedding, blankets and accessories sales fell 28.2% to $42.381 million; bibs, bath and disposable products fell 6.8% to $23.597 million. Gross margin improved despite lower sales, primarily from lower product costs associated with favorable currency movements and supplier cost reductions. Marketing and administrative expenses declined 17.8% to $10.711 million, including lower compensation costs.
At year-end, cash was $7.892 million, inventory $15.821 million and total current assets $41.110 million versus current liabilities of $7.573 million. The company had no balance drawn on its $26 million revolving facility and no letters of credit outstanding; $21.4 million was available subject to eligible receivables and inventory. The facility matures July 11, 2019 and is secured by company assets. Management said operating cash flow and revolver availability should meet liquidity needs. Total assets were $47.184 million and shareholders’ equity $38.923 million.
Financing cash use was $9.880 million, principally reflecting $9.719 million of dividends paid; investing cash use was $0.191 million. Dividends declared were $0.72 per share, including a $0.40 special dividend, compared with $0.57 per share, including a $0.25 special dividend, in FY2016.
Changes, outlook and material risks
- Sales fell partly because a prior-year Black Friday promotion was not repeated and shipments to a customer with credit problems declined. Management also cited a sluggish retail environment and a shift toward “naked cribs,” reducing demand for bedding sets and lowering average selling prices. Expanded separates and bedroom décor offerings partly offset this trend.
- The prior year included an additional fiscal week, which is relevant to the year-over-year comparison; the filing does not quantify its standalone sales impact.
- FY2017 income tax expense included a $248,000 benefit from early adoption of stock-compensation accounting rules. The effective tax rate was 36.7%, versus 36.4% in FY2016. The company reported $688,000 in reserves for unrecognized tax benefits and disclosed a California examination of earlier tax years.
- Customer and licensing concentration are significant: the top two customers generated approximately 61% of gross sales, and Disney-related products generated 43%. Customer purchase agreements are not long-term. The approaching Disney license expiration is a key renewal and revenue risk.
- Other principal risks include product safety claims or recalls, changing consumer preferences and birth rates, competitive and customer pricing pressure, inventory obsolescence, higher material, labor, freight or foreign-exchange costs, and sourcing or shipping disruptions involving China and the Port of Long Beach. CIT may also limit credit approval for shipments to customers.
- Minimum guaranteed royalty commitments totaled $5.3 million as of year-end, including $4.4 million due in FY2018. Management provided no specific revenue or earnings guidance.
- KPMG issued an unqualified opinion on the financial statements and internal controls; management concluded disclosure controls and internal control over financial reporting were effective. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Investor verification points
- Confirm the renewal, replacement or termination terms and expected sales impact of Disney licenses expiring December 31, 2017.
- Track customer concentration, especially Wal-Mart and Toys R Us orders, and the credit-related shipment situation.
- Assess whether the bedding-category shift and lower average selling prices persist, and whether new product categories can offset them.
- Review inventory growth, obsolescence allowances, supplier cost trends and the company’s ability to maintain gross margin.
- Verify dividend sustainability against operating cash flow, the absence of revolver borrowings, borrowing-base availability and covenant requirements.
- Monitor resolution of the California tax examination and the adequacy of the tax reserve.