Crown Crafts, Inc. — Q3 FY2020 Form 10-Q
Business and period: The quarter ended December 29, 2019; comparisons are with the quarter ended December 30, 2018. The filing also reports the nine months ended December 29, 2019. Crown Crafts sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, toys and accessories, through retailers and direct-to-consumer channels. Most products are made by third-party manufacturers, with the largest sourcing concentration in China. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $18.587 | $18.668 | $53.089 | $54.664 |
| Gross profit / gross margin | $5.821 / 31.3% | $5.597 / 30.0% | $16.241 / 30.6% | $16.095 / 29.4% |
| Operating income | $2.405 | $2.151 | $5.897 | $5.137 |
| Net income / diluted EPS | $2.095 / $0.21 | $1.554 / $0.15 | $4.953 / $0.49 | $3.627 / $0.36 |
| Operating cash flow | Not separately reported | Not separately reported | $7.187 | $10.515 |
- Q3 sales decreased 0.4%; nine-month sales decreased 2.9%. For nine months, bedding, blankets and accessories sales fell 7.3% to $27.682 million, while other product-category sales rose 2.5% to $25.407 million.
- Gross margin improved in both comparison periods. Marketing and administrative expenses were $3.416 million in Q3 and $10.344 million for nine months, down 0.9% and 5.6%, respectively.
- At December 29, 2019, cash was $41,000, current assets were $41.564 million and current liabilities were $14.019 million. Inventories were $23.640 million, up from $19.534 million at March 31, 2019.
- No revolving credit balance or letters of credit were outstanding. The company reported $23.7 million available under its $26.0 million CIT facility, subject to eligible receivables and inventory. Long-term debt was zero, compared with $4.486 million at March 31, 2019. The facility matures July 11, 2022; the company said it was covenant-compliant.
- Nine-month investing cash outflow was $0.352 million, mainly capital expenditures; financing cash outflow was $6.937 million, including net revolver repayments and $2.432 million of dividends paid. Cash declined $102,000 to $41,000.
- Shareholders’ equity was $41.563 million at December 29, 2019. The company declared dividends of $0.33 per share in Q3 and $0.49 per share for the nine-month period.
Changes, management commentary and outlook
- Management attributed the small Q3 sales decline mainly to shipment timing at certain retailers and a program discontinued in Q2. The nine-month sales reduction was concentrated in bedding, blankets and accessories.
- Management cited improved gross margins and lower marketing and administrative expenses. Nine-month expenses included $210,000 of prior-year costs related to moving Sassy product inventory and a $264,000 reduction in outside services.
- Nine-month operating cash flow declined to $7.187 million from $10.515 million, primarily reflecting a larger inventory increase and a smaller accounts-receivable decrease than in the prior year. Management believed operating cash flow and available credit would meet liquidity needs.
- No quantified sales or earnings guidance was provided. Management did not anticipate a material change in the estimated 23.3% annual effective tax rate for the remainder of FY2020, but noted actual results could differ.
- Tax items affected reported earnings: the company recorded a $232,000 discrete tax benefit and a $78,000 interest-expense credit after California ended review of three tax years. Certain tax credits provided a further $276,000 discrete tax benefit in the three- and nine-month periods. A separate California tax refund matter remained unresolved as of January 30, 2020. Following a subsequent event, the company expected a $212,000 tax benefit and $84,000 interest credit in the quarter ending March 29, 2020.
- Operating lease liabilities were $5.551 million at quarter-end following adoption of lease accounting on April 1, 2019; the company reported no opening retained-earnings adjustment.
- The filing highlighted coronavirus-related uncertainty in China, including potential factory and shipping interruptions around the Lunar New Year. The company said it had increased certain purchases in advance, but could not predict disruption or its impact. Other stated exposures include tariffs and trade restrictions, Chinese currency movements, input costs, supplier dependence, customer concentration and licensed-product dependence.
- The three largest customers represented approximately 67% of FY2019 gross sales; licensed products represented 41%, including 29% associated with Walt Disney-affiliated licenses. The company reported no legal proceedings expected to have a material adverse effect.
Key facts for investors to verify
- Whether the sales decline in bedding and accessories continues, and whether retailer shipment timing or discontinued programs affect subsequent quarters.
- Inventory levels, sell-through and reserve adequacy, given the increase to $23.640 million and management’s stated inventory-valuation estimates.
- Actual cash generation and borrowing availability, particularly given the $41,000 cash balance and receivables/inventory-based facility availability.
- Developments in China-related manufacturing, freight, tariff and coronavirus risks, including the effect on product availability and costs.
- Customer and licensing concentration, and the unresolved California tax matter and expected subsequent-period tax benefits.