Crown Crafts, Inc. — Q3 FY2024 Form 10-Q
Business and period: Crown Crafts designs and markets infant, toddler and juvenile products, including bedding, blankets, bibs, toys, feeding and disposable products. This unaudited report covers the three and nine months ended December 31, 2023; comparisons are with periods ended January 1, 2023. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net sales | $23.8 | $19.0 | $65.1 | $53.4 |
| Gross profit | $6.4 | $4.5 | $17.8 | $15.1 |
| Gross margin | 27.0% | 23.7% | 27.3% | 28.3% |
| Operating income | $2.3 | $1.8 | $5.6 | $6.2 |
| Net income | $1.7 | $1.3 | $3.9 | $4.8 |
| Diluted EPS | $0.17 | $0.13 | $0.38 | $0.48 |
- Q3 sales rose 25.2%; bibs, toys and disposable products increased 48.1%, while bedding, blankets and accessories were essentially flat. The Manhattan acquisition contributed $6.0 million of Q3 sales.
- Nine-month sales rose 21.7%, primarily reflecting the acquisition; bedding, blankets and accessories declined 6.4%. Management cited retailer inventory management, inflation-related consumer spending pressure and softness in the bedding and blankets market.
- Q3 gross margin improved year over year, but nine-month margin declined. Marketing and administrative expense increased 49.8% in Q3 and 37.1% year to date, with Manhattan and MTE accounting for most of the reported increases. Nine-month operating income fell 10.2% and net income fell 19.3% despite higher sales.
- Nine-month net cash from operations was $4.1 million, versus $4.4 million; investing used $0.1 million, versus $0.4 million; financing used $5.1 million, versus $2.5 million. Cash ended at $0.7 million, down from $1.7 million at fiscal year-end.
Financial position and liquidity
- At December 31, 2023, revolving debt was $10.0 million, down from $12.7 million at April 2, 2023. The $35 million facility had $19.8 million available under its borrowing-base limits; no letters of credit were outstanding. The facility matures July 11, 2028, and the company reported compliance with its covenants.
- Borrowings were at a variable rate; the selected SOFR rate was 6.9%. Management estimated that a one-percentage-point rate increase would reduce annual net income by about $79,000.
- Current assets were $60.4 million and current liabilities $14.6 million. Inventory was $34.9 million, nearly all finished goods. The company factors most trade receivables through CIT and reported $17.6 million due from CIT, the stated maximum exposure if CIT failed to perform.
- The company declared dividends of $0.08 per share in the quarter; $0.8 million was payable at period-end. Management said operating cash flow and available credit should meet liquidity needs at current activity levels.
Outlook, risks and notable items
- No quantified sales or earnings guidance was provided. Management said results for the nine-month period are not necessarily indicative of the full fiscal year ending March 31, 2024; it did not anticipate a material change in its estimated effective tax rate for the remainder of the year, while noting the rate could differ from estimates.
- Key risks include consumer spending and retail conditions, raw-material and labor costs, interest rates, foreign sourcing and shipping disruptions, supplier dependence, competition, and successful integration of acquisitions. Products are sourced primarily from foreign contract manufacturers, with the largest concentration in China.
- Customer and licensing concentration is significant: the top two customers represented approximately 71% of fiscal 2023 gross sales, and licensed products represented 40%, including 29% associated with Disney affiliates. As of January 30, 2024, three Disney licenses expiring December 31, 2023 had been renewed; the parties continued operating under the expired agreement for one other license pending renewal.
- The Manhattan acquisition purchase-price allocation remains preliminary. Goodwill was $0.749 million at December 31, 2023 after acquisition-related adjustments; the company expected to complete the allocation within the measurement period. A $0.488 million cash receipt in investing activities reflected settlement of the acquisition working-capital adjustment.
- The company settled a California tax examination for $442,000, including interest, in May 2023. Other tax examinations or adjustments could affect future results; the company reported a $0.379 million reserve for unrecognized tax liabilities.
- No material legal proceedings, material changes to previously disclosed risk factors, or material subsequent events were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Manhattan sales and integration can support sustainable earnings, given higher marketing and administrative costs and weaker year-to-date operating income.
- Renewal status and economics of the remaining Disney license, and any changes in major-customer concentration or orders.
- Borrowing-base availability, variable-rate exposure and cash generation, particularly with low reported cash and significant inventory.
- Final acquisition purchase-price allocation and any resulting changes to goodwill, intangible assets or amortization.
- Trends in bedding demand, consumer spending, sourcing costs and the adequacy of tax reserves.