Crown Crafts, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 26, 2021; comparatives are the periods ended December 27, 2020. Unaudited. Amounts below are in millions except per-share data.
Business context
Crown Crafts sells infant, toddler and juvenile products, including bedding, blankets, bibs, bath products, toys and accessories, through owned and licensed brands and private-label goods. It operates primarily in one segment. Most products are made by contract manufacturers, with the largest sourcing concentration in China. Carousel Designs, its direct-to-consumer bedding subsidiary, ceased operations on May 21, 2021.
Financial performance
| Metric | Three months ended Dec. 26, 2021 | Three months ended Dec. 27, 2020 | Nine months ended Dec. 26, 2021 | Nine months ended Dec. 27, 2020 |
|---|---|---|---|---|
| Net sales | $22.742 | $19.476 | $61.674 | $57.340 |
| Gross profit | $6.170 | $6.153 | $16.894 | $18.270 |
| Gross margin | 27.1% | 31.6% | 27.4% | 31.9% |
| Operating income | $3.076 | $2.733 | $7.270 | $7.668 |
| Net income | $2.432 | $2.141 | $7.483 | $5.843 |
| Diluted EPS | $0.24 | $0.21 | $0.74 | $0.57 |
| Operating cash flow | Not separately presented for the quarter | $4.266 | $8.079 |
- Quarterly sales rose 16.8%; nine-month sales rose 7.6%. Nine-month sales in bibs, bath, developmental toys, feeding, baby care and disposable products increased 26.2% to $28.836 million, while bedding, blankets and accessories declined 4.8% to $32.838 million.
- Quarterly gross profit was nearly flat despite higher sales; gross margin fell 4.5 percentage points. For the nine-month period, gross profit decreased 7.5%. Management cited higher costs across the supply chain and Carousel closure-related costs, including inventory sold below cost, a $0.334 million supplier settlement and $0.265 million in inventory liquidation charges.
- Nine-month net income includes a one-time $1.985 million gain from forgiveness of the Paycheck Protection Program loan. The loan’s $1.964 million principal and accrued interest were forgiven in full in May 2021.
Financial position, debt and liquidity
- At December 26, 2021, cash was $2.052 million, total assets $63.479 million, current assets $48.915 million and current liabilities $17.569 million. Shareholders’ equity was $43.902 million.
- Inventory increased to $24.467 million from $20.335 million at March 28, 2021. Trade receivables, net of allowances, were approximately $21.0 million; substantially all trade receivables are factored with CIT.
- No revolving-credit balance or letters of credit were outstanding. The company reported $26.0 million available under its asset-based facility, which matures July 11, 2025. The company said it was in compliance with facility covenants.
- Nine-month operating cash flow was $4.266 million, down from $8.079 million. Investing activities used $0.355 million, primarily for capital expenditures; financing activities used $2.472 million. Cash increased by $1.439 million to $2.052 million.
- The company declared dividends of $0.59 per share for the first nine months, versus $0.41 in the prior-year period; $4.338 million of dividends declared remained payable at period-end.
Outlook, risks and other notable items
- No specific revenue, earnings or margin guidance was provided. Management said operating cash flow and available credit were expected to cover working capital and capital expenditures for at least the next 12 months.
- Management cited a strong new modular set and higher replenishment orders at a major retailer as contributors to sales growth, partly offset by online-retailer declines as consumers returned to stores.
- Risks include COVID-19-related uncertainty, supply-chain and shipping disruptions, inflation in cotton, oil, labor and freight, foreign sourcing and currency exposure, competition, customer order variability, and reliance on third-party licenses and suppliers. The top two customers represented approximately 68% of fiscal 2021 gross sales; licensed products were 41%, including 34% associated with Walt Disney Company affiliates.
- California state tax and federal tax examinations are ongoing; management stated their outcomes could result in tax adjustments. The filing reported no material subsequent events, no material changes to previously disclosed risk factors, and no legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales momentum and replenishment orders continue, especially given customer concentration and the shift in consumer shopping channels.
- Whether supply-chain, freight and input-cost pressures continue to depress gross margins, and the extent to which pricing or sourcing can offset them.
- Underlying earnings excluding the $1.985 million PPP forgiveness gain, as well as the continuing cash-flow and working-capital effects of inventory and receivables.
- Availability and terms of the CIT facility, the company’s factoring exposure to CIT, and the status and potential impact of the tax examinations.
- How the Carousel closure affects comparable sales, profitability and remaining costs in subsequent periods.