Jewett-Cameron Trading Company Ltd. — Q1 FY2023 10-Q
Reporting period: Three months ended November 30, 2022, compared with the three months ended November 30, 2021. Unaudited consolidated financial statements are presented in U.S. dollars. The company sells lawn, garden and pet products, industrial wood products, and agricultural seed products, primarily in the United States. Management notes that the first half of its fiscal year is historically slower than the second half.
Financial results and liquidity
- Sales: $12.58 million, down 3% from $12.92 million.
- Gross profit and margin: Gross profit rose 16% to $2.86 million; gross margin improved to 22.7% from 19.1%. Management attributed the improvement mainly to lower freight costs and a more favorable product mix, while higher-cost inventory continued to constrain margins.
- Operating results and earnings: Operating loss was $6,798, versus an operating loss of $467,181. Net loss narrowed to $73,760, or $0.02 per share, from $391,141, or $0.11 per share. Interest expense increased to $86,552 from $20,276.
- Cash flow: Operating activities provided $694,242, compared with $1.36 million used in the prior-year quarter. Investing activities used $36,223, and financing activities provided $600,000 from additional line-of-credit borrowing. Cash increased by $1.26 million to $1.74 million.
- Balance sheet and liquidity: Working capital was $19.21 million, essentially unchanged from August 31, 2022. Current assets were $29.82 million and current liabilities were $10.60 million. Inventory was $22.00 million, up $1.37 million from fiscal year-end; accounts receivable fell to $5.24 million from $7.19 million.
- Debt: Borrowings under the $10 million secured line of credit increased to $7.60 million, leaving $2.40 million available. The variable rate was 5.39% at November 30, 2022, based on one-month SOFR plus 157 basis points. The company reported compliance with its financial covenants.
Changes versus the prior-year quarter
- Sales declined $340,224, but gross profit increased $394,837 as freight costs eased and sales mix improved.
- Lawn, garden, pet and other sales decreased 2% to $11.62 million; the segment’s pre-tax loss narrowed to $156,651 from $699,697. A temporary major-customer issue reduced sales of some kennels and crates and was reported resolved.
- Industrial wood product sales increased 14% to $606,909, but the segment moved from $69,950 of pre-tax income to a $44,246 loss.
- Seed sales fell to $351,509 from $537,729. Management cited lower prices for grass seed and red clover and said it was holding inventory rather than selling at depressed prices.
- Operating expenses decreased slightly to $2.87 million. SG&A declined, while wages and benefits and depreciation and amortization increased.
- Cash from operations improved from a prior-year outflow, helped by collections of receivables and lower cash use for inventory than in the prior-year quarter. Inventory nevertheless increased during the current quarter.
Outlook, management commentary and risks
- Management expects available liquidity, including the line of credit, to meet working-capital needs for the remainder of fiscal 2023. It expects to use some available credit to build inventory for a new cedar-fencing consignment arrangement with a major retailer. The filing does not provide quantified earnings or revenue guidance.
- The consignment agreement makes the company the retailer’s preferred cedar-fencing supplier in covered stores and requires additional inventory placement. Management expects the arrangement to reduce warehouse inventory and improve visibility into store-level demand.
- The company signed an exclusive U.S. and Canadian distribution agreement for SECOS Group’s MyEcoWorld sustainable bag products. Marketing was planned to begin in Q3 FY2023; exclusivity requires minimum sales of $2.8 million by March 31, 2024.
- Management expects economic conditions, consumer pressure from higher living costs, inflation and the company’s existing higher-cost inventory to challenge sales and margins. It cautioned that price increases may not keep pace with cost increases. Lower freight costs are expected to help, but the timing of margin recovery depends on cycling through older inventory.
- Key exposures include customer concentration (top ten customers represented 89% of quarterly sales), concentration of receivables among a small number of customers, supplier concentration, tariffs on certain China-sourced products, potential supply-chain disruption, and variable-rate interest costs. The company also described COVID-related uncertainty and risks from cyber incidents.
- Legal matters: A $300,000 settlement fine related to environmental labeling of dog-waste bags was paid over four months, without admission of guilt. A Pennsylvania product-liability case was settled within insurance limits in FY2022. Arbitration against a former distributor was heard in December 2022; the outcome and any damages were uncertain, with a decision expected in February 2023.
- Management said disclosure controls were effective at quarter-end and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the consignment arrangement produces the expected sales, inventory turnover and working-capital benefits, and how much additional borrowing it requires.
- How quickly the company sells through higher-cost inventory and whether gross-margin improvement continues as freight costs and replacement-goods costs change.
- Customer and supplier concentration, including the effect of any changes in major-customer orders and the timing of seed inventory sales.
- Remaining availability and cost of the credit line, covenant compliance, and sensitivity to further increases in SOFR.
- Progress toward the SECOS agreement’s $2.8 million minimum sales target and the result of the distributor arbitration.