Crown Crafts, Inc. (CRWS) Earnings Call Transcript

Thanks, Michael. Morning, everybody, and I appreciate you all being here once more for Crown Crafts' Fiscal Year 2026 Second Quarter Conference Call. Joining us this morning are Crown Crafts President and Chief Executive Officer Olivia Elliott, along with Vice President and Chief Financial Officer Claire Spencer. On today's call, the company might issue certain forward-looking statements, and actual results could differ materially from those expressed or implied. Such statements carry risks and uncertainties that may lie beyond Crown Crafts' control, and the company has no obligation to update these statements; to learn more regarding the company's risk factors and other uncertainties, please see the company's filings with the Securities and Exchange Commission. Having said that, I'd now like to hand the call over to President and Chief Executive Officer Olivia Elliott. Go ahead, Olivia.

Thanks, John, and good morning to all of you. As we mentioned in the press release that went out this morning, we delivered higher net income for the second quarter, and we think that speaks well to how we're managing through the current conditions. The tariff situation that's still unfolding, especially for goods coming from China, keeps pushing costs up and squeezing margins. Tariff policies like these touch a lot of products across our industry, and numerous brands have no choice but to raise prices. On top of that, there's volatility in global supply chains and in what we pay for raw materials. We're encouraged by the recent trade discussions between the U.S; and China, and we'll keep steering through the persistent uncertainty of a difficult macro backdrop. When growth potential shows up, we'll pursue it, and we'll manage costs carefully, including taking advantage of synergies from last year's acquisition. Along those lines, as we've said before, after the quarter ended, we started combining certain internal operations, which will lower payroll expenses and also remove some redundant costs. Our ties with suppliers, customers, and licensors are still strong, and we anticipate continuing to renew our licensing agreements, while our product development team works hard on exciting launches ahead. Our balance sheet and cash flow stay solid as we run the business, and we're positioning the company to react quickly to any shift in the broader environment; with that, I'll hand the call over to our Chief Financial Officer, Claire Spencer, who will take us through the financial details.

Thanks, Olivia. I'll start by walking through the quarter's results and adding some further detail on how our finances performed. Net sales for the second quarter came in at $23.7 million, versus $24.5 million during the second quarter of fiscal year 2025. The change stemmed from a $1.6 million drop in bedding and diaper bag sales, partly offset by an $800,000 gain in sales of bibs, toys, and disposable products. The falloff in bedding and diaper bags largely reflected fewer items carried in the program at a major retailer. That was partly offset by stronger sales in bibs, toys, and disposable products across various distribution channels. Gross profit reached $6.6 million, a 27.7% margin for the second quarter, against 28.4% in the same period a year earlier, mainly because tariff costs rose on goods imported from China. We cut marketing and administrative expenses by $740,000, bringing them to 19.9% of net sales for the quarter, versus 22.3% in the prior year period. That decrease came from acquisition-related costs booked in the earlier period, partly offset by higher advertising costs. GAAP net income for the second quarter was $1.2 million, or $0.11 per diluted share, compared with $0.08 in the year-ago quarter, driven mainly by the reduction in marketing and administrative expenses from the prior year period, as I mentioned earlier. Now to our balance sheet. At the close of the second quarter, cash and cash equivalents came to $810,000, up from $521,000 at the close of fiscal 2025. Our inventory balance of $32.6 million is consistent with both the prior quarter and the prior year quarter. That balance sits above the level at the close of fiscal 2025, since fiscal year end is typically when inventory is at its lowest, after which it builds through the year ahead of new program sets and Chinese New Year. As of September 29th, 2025, the company carried $16.3 million in indebtedness, and $13.7 million remains available under our revolving line of credit. Lastly, we declared a $0.08 per share cash quarterly dividend to shareholders, continuing our long history of returning value to our shareholders. Now I'll hand the call back to Olivia for additional commentary.

Thanks, Claire. As we headed into Q2, we were completely mindful of the macroeconomic hurdles, in particular the heightened tariff landscape and how it bears on profitability. Even so, we pulled off a modest uptick in net income, which speaks to our durability and careful stewardship. Tariffs keep pressing down on our gross margins and profitability overall, but we'll adapt and tweak our approaches as necessary to help counter that drag, making sure we stay well-positioned to seize opportunities and generate stronger growth and profitability as market conditions shift. To wrap up, I want to express gratitude to our shareholders for your backing, and we're eager to update you on our progress over the next several quarters; so with that, let's open up the line for questions. Michael.

Congrats to both of you, Olivia and Claire. That report was truly outstanding. It went well beyond what I had anticipated.

Thank you, Doug.

Can you walk us through the source of the gain you saw in bibs, toys, and disposable products?

Honestly, this is happening fairly broadly. Every product line is affected, and multiple retailers are involved too. So basically, what we observed was growth just about anywhere you look.

Great. So what's your take on the inventory position right now? I saw that it's somewhat below where it stood during the second quarter of fiscal 2025.

The inventory position feels fine to me. Across this year, the timing of when certain retailers will reset new programs has moved around somewhat. By and large, I'd say we're sitting in a solid spot.

I went and checked out the Manhattan Toy site, and honestly it comes across as quite appealing and very polished. I was wondering whether you've been hearing anything back regarding how it's been performing.

Yeah, on the whole, I'd say the appearance appeals to a lot of folks, though what matters more is that they can find their way around and buy things on the site. We've heard quite a bit of positive feedback, I'd say.

Alright, so I'm aware a big Legoland launched over in China, and I was just wondering, at this stage, how are Manhattan Toy sales performing at Legoland?

From my perspective, Legoland's sales are performing well. The park's opening happened somewhat behind schedule, and that, I suppose, had an effect relative to our budgeted expectations. On the whole, things appear to be progressing nicely.

All right, earlier on you mentioned there was a phase of testing things out with the Manhattan Toy ad spend, and I saw that during Q2, it went up quite a bit. I wanted to ask how you're feeling about it, how things are going with that budget, and what sort of results you believe came out of that higher spending.

I mean, the sales are arriving at a slower pace than what we'd hoped for, but when all is said and done, investing in advertising and marketing matters to us so we can start pushing those sales forward.

All right. I remember you'd mentioned the Stella Doll redesign earlier, and then I came across a piece in The New York Times saying Meghan Markle picked up a Stella Doll for herself. I was wondering whether all that buzz and attention is translating into sales for the Stella Dolls, and whether there's anything you could tell us on that front.

Well, I'd say the response to Stella Dolls has been positive. For the most part, this is something you'd find in a specialty store. You won't see it on shelves at any of the big brick-and-mortar chains. And of course, whatever exposure we can gain from it — particularly from someone like Meghan Markle — that can only be a benefit.

All right. There are a couple of additional things I'd like to ask, though maybe I should give someone else a chance to pose some questions, and then possibly I could rejoin the queue later.

Okay. Thanks.

Hello there. Good morning. I wanted to ask whether you might share more detail about merging the internal operations — what exactly that entails, what kind of cost reductions you expect, and when that would happen.

I can say a bit more about how the process works, though at this point we aren't providing much detail regarding possible savings, since we're still pulling that information together. Our plan is to combine the two subsidiaries into a single entity, which ought to let us remove certain overlapping roles and, in particular, a significant amount of IT expenses. Basically almost everything — a website, your EDI contracts, really any IT contract — requires a separate one for each subsidiary. So we think there are plenty of chances to cut some of those unnecessary expenses by needing just a single contract for all of it. We're still working through everything that can be removed, but we do expect that as the year progresses, it will grow a bit more with every quarter. Some contracts can't be terminated early; we'll certainly attempt it, yet mostly we won't be able to exit very many of them ahead of schedule. As the year moves along and those contracts run out, we'll then be in a position to combine them.

Alright. So when you mention those two subsidiaries, are you referring to Sassy and NoJo?

Yes.

All right. But those brand names are staying in place, right?

They are not going anywhere. That is certain.

So essentially, you're combining the back-office functions of those two, right?

That's right. As you know, up until now our sales and design teams have operated quite separately, and we're going to bring those groups together too. It's possible that some individuals who previously didn't handle Sassy will begin doing so, and the opposite could happen as well.

All right. I understand those agreements don't all expire at once — they roll off across several months — but at what point will you be able to estimate, even roughly, what the consolidation will save?

Once we're back from the Christmas break, we'll kick off the budgeting work for fiscal 2027. My sense is that by the end of February or in March, we'll have a clearer picture of what the effect looks like, although I'm not certain — as you know, we don't provide earnings guidance, so I can't say how much of that we'd share publicly, but on an internal basis, we'll have a clearer picture.

By the end of February or so.

Yeah.

Alright, sounds good. Many thanks.

Thanks.