Crown Crafts, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended October 2, 2022, in fiscal 2023. Crown Crafts sells infant, toddler and juvenile products, including bedding, blankets, accessories, bibs, toys and disposable products, through its NoJo Baby & Kids and Sassy Baby subsidiaries. Its products are sold under company-owned and licensed brands and as private-label goods. The company reports one principal business segment.
Financial performance
| Metric | Three months ended Oct. 2, 2022 | Six months ended Oct. 2, 2022 |
|---|---|---|
| Net sales | $18.7 million | $34.4 million |
| Gross profit / margin | $5.4 million / 29.1% | $10.6 million / 30.8% |
| Operating income | $2.7 million | $4.5 million |
| Net income | $2.0 million | $3.5 million |
| Diluted EPS | $0.20 | $0.34 |
| Operating cash flow | Not separately provided for the quarter | $2.7 million |
For the six-month period, capital expenditures were $0.2 million, net cash used in investing activities was $0.2 million, and dividends paid were $1.6 million. Cash increased by $0.7 million to $2.3 million from fiscal year-end.
At October 2, 2022, current assets were $48.8 million and current liabilities were $10.7 million. Inventory was $27.7 million, up from $20.7 million at April 3, 2022. The company had no borrowings or outstanding letters of credit under its revolving facility, with $26.0 million available subject to eligible receivables and inventory. Total assets were $61.4 million and shareholders’ equity was $48.2 million. The filing reports no outstanding debt under the revolver; operating lease liabilities totaled $1.9 million.
Changes versus the prior comparable periods
- Quarterly sales fell 7.4% year over year, to $18.7 million; six-month sales fell 11.5%, to $34.4 million.
- Bedding, blankets and accessories drove most of the decline: down 14.4% for the quarter and 19.3% for the six months. Bibs, toys and disposable products rose 1.1% in the quarter but declined 2.5% for the six months.
- Quarterly gross margin declined to 29.1% from 30.0%; six-month gross margin improved to 30.8% from 27.5%. Management cited some stabilization in input costs and noted prior-year results included Carousel’s closure-related losses.
- Quarterly net income decreased 14.5% to $2.0 million. Six-month net income decreased 31.2% to $3.5 million, partly because the prior-year period included a $2.0 million gain from forgiveness of the PPP loan.
- Six-month operating cash flow declined to $2.7 million from $3.2 million. Higher inventory investment and lower net income were offset in part by collections of receivables.
Outlook, risks and unusual items
- Management attributed weaker sales mainly to lower retailer replenishment orders and customers reducing purchases after building excess inventory amid macroeconomic pressures. It expects to benefit in future periods from recent product price increases and reported some stabilization in input costs. No quantitative revenue or earnings guidance was provided.
- Management believes operating cash flow and available credit are adequate for working capital and capital expenditures for at least the next 12 months.
- Risks include changing consumer spending and retail conditions; raw-material, labor, freight and currency costs; reliance on foreign contract manufacturers, especially in China; shipping disruptions; and uncertainty related to COVID-19.
- Customer and licensing concentration is significant: the top two customers represented approximately 73% of fiscal 2022 gross sales, and licensed products represented 40%. Disney-affiliated licenses accounted for 33% of gross sales; losing one or more key licenses could materially affect results.
- CIT factors substantially all trade receivables and bears credit losses on approved shipments within credit limits. The company remains responsible for customer returns, allowances, claims and discounts; CIT may limit or end approval for a customer.
- California state and federal tax examinations remain possible sources of adjustments. Management considers its tax positions reasonable, but outcomes are uncertain. The filing says ordinary-course legal proceedings are not expected to have a material adverse effect.
- The prior-year comparable period included Carousel operating losses and closure charges; Carousel ceased operations in May 2021. The prior-year six-month period also included the PPP loan forgiveness gain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material subsequent events were disclosed.
Important facts for investors to verify
- Whether retailer inventory reductions and lower replenishment orders persist, and how they affect sales by product category.
- Whether price increases and input-cost stabilization improve gross margins as management expects.
- Inventory levels, cash conversion and operating cash flow, particularly given the rise in inventory to $27.7 million.
- Exposure to the top two customers, Disney-related licenses and CIT factoring arrangements, including any changes to customer credit approvals.
- Potential outcomes of tax examinations and the effect of macroeconomic, supply-chain and China-related risks on costs and product availability.