Business context and reporting period
Crown Crafts, Inc. designs, sources and sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, disposable products and accessories. This unaudited Form 10-Q covers the three months ended July 2, 2017, the first quarter of fiscal 2018; comparisons are with the three months ended July 3, 2016. Amounts below are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $13.647 | $15.599 | Down 12.5% |
| Gross profit | $3.602 | $4.287 | Down 16.0% |
| Gross margin | 26.4% | 27.5% | Down 1.1 percentage points |
| Marketing and administrative expenses | $2.901 | $2.839 | Up 2.2% |
| Operating income | $0.701 | $1.448 | Down 51.6% |
| Net income | $0.518 | $1.103 | Down 53.0% |
| Diluted EPS | $0.05 | $0.11 | Down $0.06 |
| Operating cash flow | $4.926 | $8.298 | Down $3.372 |
Cash and cash equivalents were $11.903 million at July 2, 2017, versus $7.892 million at April 2, 2017. Current assets were $42.349 million and current liabilities $8.658 million. The company had no balance outstanding on its revolving credit line and no letters of credit; $17.3 million was available under the facility based on eligible receivables and inventory. The $26 million facility matures July 11, 2019 and is secured by company assets. The company reported compliance with its covenants.
Operating cash flow was supported by a $2.528 million reduction in accounts receivable and a $0.263 million reduction in inventory. Investing activities used $0.056 million, primarily for capital expenditures. Financing activities used $0.859 million, including $0.803 million of dividends paid. The company declared dividends of $0.08 per share, unchanged from the prior-year quarter.
Material changes and management commentary
- Sales fell $1.952 million. Bedding, blankets and accessories declined 18.3% to $8.424 million; bibs, bath and disposable products declined 1.2% to $5.223 million.
- Management attributed weaker sales to delayed replenishment related to a major retailer’s modular-set rollout, reduced shipments to a customer with credit problems, a sluggish retail environment, and consumer movement toward “naked crib” practices. The latter has reduced bedding-set purchases in favor of separates and lowered average selling prices.
- Gross margin declined partly because lower sales reduced gross profit and inventory indirect-cost allocation adversely affected gross profit by $0.398 million, versus $0.099 million in the prior-year quarter.
- Marketing and administrative expenses increased $0.062 million. Current-quarter items included $0.090 million of audit fees related to the company’s transition to accelerated-filer status, $0.064 million in fees for a customer receivables-protection agreement with JPMorgan Chase, and $0.052 million in Carousel Designs acquisition-related charges. Lower advertising and factoring fees partly offset the increases.
- The effective tax rate was 28.2% for the quarter, including a $0.060 million discrete tax benefit from excess tax benefits on vesting stock awards. Management estimated a 35.0% annual effective tax rate and did not anticipate a material change for the rest of fiscal 2018, while noting that income mix and tax credits could affect it.
Outlook, risks and unusual items
No specific sales or earnings guidance was provided. Management said cash flow from operations and revolving-credit availability should meet liquidity needs, despite stating that the August acquisition depleted nearly all cash balances. On August 4, 2017, a wholly owned subsidiary acquired substantially all assets of Carousel Designs, a premium infant and toddler bedding and nursery décor business, for a preliminary purchase price of $8.8 million and assumed certain specified liabilities. The final price is subject to working-capital adjustment.
Key risks discussed include reliance on major customers and licensed products, retailer order levels, intense competition, changing consumer preferences, dependence on third-party suppliers (particularly in China), and potential increases in cotton, oil, labor or foreign-exchange-related costs. For fiscal 2017, the top two customers accounted for 61% of gross sales; licensed products were 62% of gross sales, including 43% associated with Disney-affiliated licenses. CIT bears qualifying credit losses on factored receivables, but can limit customer approvals; the company also disclosed $22.3 million of combined exposure to CIT nonperformance under factoring and its revolving-line arrangements at July 2, 2017. The company reported no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
The quarter is not necessarily indicative of full-year results. Management identified estimates involving customer allowances, inventory reserves and income taxes as significant. It was evaluating the new revenue-recognition standard and had not determined its adoption method; adoption of the inventory standard had no material effect. The company also was evaluating the future lease-accounting and credit-loss standards.
Important facts for investors to verify
- Whether the delayed retailer rollout and reduced shipments to the credit-impaired customer have normalized, and the pace of replenishment orders.
- Whether consumer preference shifts in infant bedding continue to pressure category sales, pricing and gross margins.
- The final Carousel Designs purchase price, working-capital adjustment, integration costs and post-acquisition liquidity; the acquisition occurred after quarter-end.
- The company’s remaining cash and borrowing availability after the acquisition, and continuing compliance with credit-facility covenants.
- Customer and licensing concentration, including renewal and performance of major licenses and the company’s exposure if CIT changes customer credit approvals.
- Whether inventory burden variances, tax-rate assumptions and other estimates develop in line with management’s expectations.