Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended September 26, 2021; comparisons are with periods ended September 27, 2020. Amounts below are in millions except per-share data. The interim financial statements are unaudited.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $20.22; down 6.6% | $38.93; up 2.8% |
| Gross profit / margin | $6.07 / 30.0%, versus $7.09 / 32.8% | $10.72 / 27.5%, versus $12.12 / 32.0% |
| Operating income | $2.90, versus $3.29 | $4.19, versus $4.94 |
| Net income | $2.39, versus $2.49; $0.24 per diluted share in both periods | $5.05, versus $3.70; $0.50 versus $0.36 per diluted share |
| Operating cash flow | Not separately reported for the quarter | $3.19, versus $8.29 |
For the six months, results included a $1.985 million gain from forgiveness of the Paycheck Protection Program (PPP) loan. Excluding that gain, reported net income was not adjusted by the filing into a separate non-GAAP measure.
Financial position and liquidity
- At September 26, cash was $1.90 million, current assets were $45.34 million, and current liabilities were $12.54 million.
- Inventory was $24.23 million, up from $20.34 million at fiscal year-end. Stock was predominantly finished goods.
- No revolving credit balance or letters of credit were outstanding. The company reported $26.0 million available under its CIT facility, subject to eligible receivables and inventory.
- The credit facility was amended to extend maturity to July 11, 2025. The company reported compliance with its covenants. Long-term debt was zero after PPP forgiveness; operating lease liabilities totaled $3.53 million.
- Six-month investing cash use was $0.25 million; financing cash use was $1.65 million, including $1.60 million of dividends paid. Cash increased by $1.29 million to $1.90 million.
Changes versus prior period
- Quarterly sales fell primarily because bedding, blankets and accessories sales declined $1.94 million; the company attributed $1.5 million of that decline to Carousel Designs’ closure. Other product-category sales increased $0.50 million.
- Six-month sales rose $1.07 million: bibs, bath, toys, feeding, baby care and disposable products increased $3.07 million, partly offset by a $2.00 million bedding-category decline. Management cited a strong new modular set and higher replenishment orders at a major retailer.
- Gross margin weakened in both periods. Management cited higher ocean freight costs and the Carousel closure. Six-month Carousel-related costs included inventory sold below cost, a $0.334 million supplier settlement and $0.265 million of inventory liquidation charges.
- Marketing and administrative expenses declined, partly reflecting lower Carousel costs. Six-month operating cash flow was lower, with management citing inventory growth, a smaller increase in accounts payable than a year earlier, and the noncash PPP forgiveness gain.
Outlook, commentary and risks
- Management said operating cash flow and available credit were expected to fund working capital and capital expenditures for at least the next 12 months. No specific sales or earnings guidance was provided.
- Carousel, an online infant-bedding business, ceased operations on May 21, 2021 after management cited high costs, declining sales, and operating and cash-flow losses expected to continue.
- Management continues to monitor COVID-19 effects and said its duration and financial impact cannot be predicted. Risks include supply-chain and shipping disruption, consumer demand, raw-material and freight costs, and dependence on third-party suppliers, including manufacturers concentrated in China.
- Customer and licensing concentration is significant: the top two customers represented approximately 68% of fiscal 2021 gross sales; licensed products were 41%, including 34% associated with Disney-affiliated licenses. The filing warns that loss of major customers or licenses could materially affect results.
- California and federal tax examinations were disclosed; management said their outcomes could result in adjustments. The company reported no legal proceedings expected to have a material adverse effect and no material changes to the risk factors in its latest 10-K.
Important facts for investors to verify
- Whether lower gross margins persist as freight costs and other input costs evolve.
- Whether sales growth in non-bedding categories and replenishment orders at the major retailer continue.
- How the Carousel closure affects future sales, expenses, and cash flow after the reported closure-related charges.
- Customer and licensed-brand concentration, including renewal terms and exposure to major customers and Disney-affiliated licenses.
- Inventory levels and the availability of the full $26.0 million credit facility under its borrowing-base requirements.
- The eventual outcome of the disclosed tax examinations and any resulting liability.