Crown Crafts, Inc. (CRWS) Earnings Call Transcript

Good morning, everyone, and thank you for once again joining Crown Crafts' conference call on the third quarter of fiscal year 2026. With us this morning are Olivia Elliott, Crown Crafts' President and Chief Executive Officer, and Claire Spencer, our Vice President and Chief Financial Officer. During today's call, the company may make forward-looking statements, and actual results might differ materially from those expressed or implied. These statements can be affected by risks and uncertainties outside Crown Crafts' control, and the company has no obligation to update them. For more detail regarding the company's risk factors and other uncertainties, please refer to its filings with the Securities and Exchange Commission, including the annual report on Form 10-Ks and the Form 10-Q for the quarter ended December 28, 2025. With total assets of $76.1 million, that said, I'd now like to turn the call over to Olivia Elliott, President and Chief Executive Officer. Olivia?

Thanks, John, and good morning to all of you. As we mentioned in the press release that went out earlier today, we feel our third quarter results show how resilient our business model is and reflect the hard work of our team as we strive to get past the difficult demand environment and the continuing impact of higher tariffs. Net sales during the third quarter came in at $20,700,000 versus $23,400,000 in the same quarter last year, while net income rose to $1,500,000 from $900,000 a year earlier; we remain dedicated to improving profitability as we keep carrying out pricing and cost measures to counter the sales environment. Although we take encouragement from the positive performance in our bibs, toys, and disposable categories over the holiday season, the macro backdrop is still tough for our category. Higher U.S. tariff rates have pushed up product costs and added to uncertainty from certain China-based suppliers, while consumer spending is still uneven and sensitive to price. Gross margin in the third quarter was 23.5%, down from 26.1% in the prior year quarter, even with the mitigation efforts we continue to make. Gross margin was also affected by certain one-time costs that Claire will discuss shortly. Amid this environment, we are keeping our focus on what we can control. To begin with, we are very enthusiastic about our product pipeline. Earlier this week, we announced Manhattan Toys' relaunch of Groovy Girls, a beloved line of soft fashion dolls that will become available beginning in May 2026. This relaunch speaks to the strength of Manhattan Toy's portfolio and our dedication to internal product development. We believe Groovy Girls will open up opportunities with specialty customers and in direct-to-consumer as we expand our reach in the juvenile space. On the operational side, our supply chain team keeps collaborating closely with our sourcing partners in China and other regions to navigate tariffs, freight, and capacity constraints. Most of our products come from foreign contract manufacturers, with the biggest concentration in China, and we stay focused on quality, compliance, and reliability while also continuing to assess alternative sources of supply where appropriate. Our inventory strategy has been intentionally conservative as we seek to limit exposure to excess inventory in a volatile pricing and tariff environment; we also keep executing on cost initiatives, with additional plans to consolidate certain internal operations. During the quarter, we incurred $600,000 in severance expenses related to these consolidation efforts. These actions are meant to remove redundant activities, lower payroll and administrative expenses over time, and build a leaner operating structure that can better absorb external factors such as tariffs and raw material volatility. Turning to another topic, we finished the third quarter with a solid balance sheet and liquidity position. We still see producing cash flow, paying down debt, and allocating capital with discipline—our standard quarterly dividend included—as central supports of what we offer shareholders. And we think our brands, the relationships we have with customers, and where we sit in our categories leave us ready to build more long-term shareholder value once conditions return to normal. With that said, I'll hand things over now to Claire, and she'll take you through the quarter's financial specifics. Claire?

Thanks, Olivia. For the 2026 period that closed on December 28, 2025, net sales came in at $20,700,000, versus $23,400,000 during the third quarter of the previous year. Gross profit reached $4,900,000, down from $6,100,000, while gross margins stood at 23.5% against 26.1%. What drove the shift in gross margin was mainly heavier tariffs applied to goods brought in from China, plus one-time licensing costs tied to the insurance claim I'll go into more detail on shortly. Marketing and administrative expenses rose by $600,000, landing at $5,000,000 this quarter, because of severance costs tied to efforts to consolidate operations. Measured against net sales, marketing and administrative expenses came to 24% in Q3, compared with 18.8% during the same stretch a year earlier. Other income and expense made a positive contribution in the third quarter. Other income got a boost from $2,500,000 in insurance proceeds collected during the quarter, related to certain claims the company filed under a representations and warranties insurance policy taken out alongside the recent acquisition. Excluding certain legal and licensing-related costs, the net effect of those insurance proceeds on income before tax expense was $2,100,000 this quarter. Income before tax expense for the quarter totaled $2,100,000, an increase from $1,300,000 in the prior year quarter. Income tax expense came to $600,000, higher than $400,000 a year ago. Net income for the quarter was $1,500,000, rising from $900,000. Basic and diluted earnings per share came in at $0.14 in the 2026 period, an improvement over $0.09 in the 2025 period. Shifting to the balance sheet, we closed the quarter with total assets of $76,100,000. We had $10,600,000 in extra availability under our revolving credit facility. Inventories totaled $31,200,000 at quarter end, versus $27,800,000 at the close of fiscal 2025, which mirrors our seasonal builds ahead of Chinese New Year. Total debt at quarter end was $16,400,000, and we remained in compliance with every financial covenant. Net cash provided by operating activities across the nine-month period was $7,100,000, a slight increase over $7,000,000 in the same period last year. To sum up, third quarter results show continuing margin pressure from tariffs along with a still-soft demand backdrop, partly offset by cost actions and non-recurring items like severance expense and insurance proceeds; we feel our balance sheet, liquidity, and disciplined approach to expenses give us a solid foundation as we navigate the current environment and position the company for improvement as conditions normalize; with that, I'll hand the call back to Olivia for some closing remarks before we open the line for questions. Olivia?

Thank you, Claire. As we began this fiscal year, we were completely aware that conditions would be tough, with higher tariffs, changes in how retailers behave, and a consumer who is careful, focused on value, and inconsistent. Nothing about the third quarter altered that fact, though it did strengthen our belief that the approach we follow—built on powerful brands and licenses, tight control of costs, prudent choices about inventory and sourcing, and an emphasis on producing cash—is the correct path for Crown Crafts. In addition, our plans for allocating capital center on investments aimed at growth within our business and on giving capital back to our appreciated shareholders. Our confidence stays strong regarding the long-term basics of the infant, toddler, and juvenile segment, and in Crown Crafts' capacity to serve as a dependable partner for our customers, licensors, and consumers. I wish to express gratitude to our employees for their effort and commitment, to our customers and licensors for their ongoing partnership, and to our shareholders for their continued support. Having said that, we are now glad to answer your questions. Operator?

Morning, everybody. I appreciate you taking my question. Hey there, John. Hi, Olivia. I'm just wondering — with the sales drop across all of your acquisitions, I believe in both quarters — where exactly did things get soft on the revenue line?

The weak spot is honestly the bedding category. Looking at it from the toddler bedding side, that's a business segment that simply isn't a necessity. I mean, crib sheets are something you have to have, that sort of thing, but a toddler bedding set can be skipped entirely. So in the current climate, what we're observing is the consumer perhaps trading down, choosing not to purchase the bedding set and instead picking up just a blanket; a bedding set might run about $50, while a blanket comes in closer to $12. So the category is still proving popular with shoppers — it's just a matter of what they're choosing to buy at this moment.

All right, so bedding accounted for essentially the whole thing?

Bedding accounted for the whole thing.

Alright, alright. And you said China was a big supplier. Roughly what share of the product is coming from China at this point?

Pretty much everything. I'd say it's up in the 90s.

Okay. Alright. Understood. Then regarding the reimbursement—not reimbursement, rather the $2,500,000 benefit from insurance claims—could you give us some detail? That's a sizable figure. Luckily, it turned out in your favor, but I'm just wondering what the story behind it is.

It has to do with a product category that was discontinued at retail shortly after we completed the acquisition. So we filed a claim under the reps and warranties insurance, and it turned out in our favor, as you mentioned. That also covered a couple of one-time costs tied to that same business category, which were a licensing shortfall and then some inventory that we liquidated at a pretty steep discount.

All right, I just want to confirm I've got this straight. You completed the acquisition, and then a product got discontinued, and you filed a claim since you believed that product would continue to be available to you going forward? Is that accurate?

That's right.

All right, that's intriguing. Fine. Well, it's good that your contract spelled that out. Okay. And should we anticipate additional situations of that kind down the road?

There aren't any I know of at this moment.

Alright. Fine. Okay, that's good. I'm grateful for the detail. Thanks.

Hello, everybody, and thank you. I've got just two items to raise. Could you talk a bit about pricing? What portion of the quarter's revenue came from that? I'd simply like to hear your thoughts on it.

Are you referring only to the increases in retail prices?

That's right.

By October, essentially every one of our retail partners had accepted the full set of price hikes. As I believe we noted during the prior quarter, tariffs first hit us in the June quarter, and back then we were absorbing tariff costs while retail prices had barely moved. Getting those prices fully in place is a process that takes time, so by October, the final large retailers had implemented the increases, which made the third quarter something of a blend — during one half of it, the increases weren't in effect, and during the other half, they were.

Understood. All right, then. When it comes to the cost measures you've implemented, could you share anything specific about what the yearly savings could amount to as we consider the future of the business?

That figure is still being finalized. Right now we're in the middle of our budgeting work for the upcoming fiscal year, so we'll have a clearer picture of where those reductions can be made soon. Some time will be needed for this. Much of it, I believe, will involve certain IT contracts as well as other agreements that at present require every subsidiary to hold its own separate deal. However, we can only act once the existing contracts expire; therefore, you may see a portion of it during this fiscal year, and the complete amount won't truly be achieved until the following fiscal year. So with any luck, by June, at the time of our next call, we'll be in a position to provide further detail.

Alright. Well, thank you very much.

Thank you.

Hello, and thanks for letting me ask something. Given how strained the trade relationship is between the US and China, it's a little unexpected to me that 90% of everything you sell still comes out of China. So if tariffs were to climb back up to 100%, what's your backup strategy? What steps would you take?

We're actively exploring suppliers in other nations. That's something we've been working on for a while, and we've got additional connections and so on. Even so, at this point we remain with China for a few reasons. The largest one is quality and safety. As you're aware, our business involves infant products, which means any shift requires time, since we must confirm the product is extremely safe and that appropriate quality control standards are in place. So although we're investigating those options — and have been for roughly the past year — we're proceeding carefully. Still, those connections exist; we've traveled to Cambodia, Pakistan, India, and any number of other nations where we're establishing them. Toys would pose the greatest difficulty, especially plastic ones, since they're molded, and you can't simply lift your mold out of the existing factory and relocate it to a different one. That means we'd need to recreate those molds, making that the hardest category for us.

Just to build on that, I realize there are many shifting pieces here, and tariffs have been adjusted in both directions multiple times. At this moment, what's your average effective tariff rate compared with before April? And what would that figure be as of today?

Honestly, I don't really have an effective tariff rate to give you. Clearly, that 20% rate currently applies across every category of business. However, it swings quite a bit. Take toys, for instance — the sole duty and tariff applied there is that 20%. On diaper bags, though, when you add everything up, it comes to more than 60%. So it really does vary a great deal. All the rest lands somewhere in between.

So, about those price hikes you brought up from October — the most recent ones. Do you figure there's room to push prices up even more? Or is it your sense that, barring some shift, that's it for the time being? Outside of the usual pricing adjustments?

Barring some shift, that's it for the time being. My honest view is that right now the consumer simply isn't in a position to take on additional price increases, and the ones that are already in place are weighing on sales.

Got it. All right. Thanks a lot.

Olivia, given how tough things have been, I think you and the business have performed admirably. And for everything you've delivered for the shareholders, I'm thankful. Now I have a few questions. What locations will carry Groovy Girls?

At the outset, specialty retailers and our own site, manhattantoy.com, that's where we're aiming first. What I mean is, the eventual aspiration is to expand into certain bigger retailers, though we'd have to modify the item somewhat, since if the identical item goes into both channels, you end up destroying one of them.