Crown Crafts, Inc. (CRWS) Earnings Call Transcript

Thanks, operator, and thanks to all of you for being on this afternoon's call. After the market closed today, Crown Crafts posted quite strong quarterly results considering that demand remains soft. We got there by concentrating on the things within our control, and our team did a fantastic job carrying out our strategy. Net sales rose 8% even with the uncertainty consumers keep experiencing regarding elevated interest rates, inflation, and geopolitical events around the world. Better inventory levels explain the bulk of that growth, since we could serve demand more effectively than we did amid last year's tariff volatility. Equally important, we managed to lift our gross margin, on a GAAP basis as well as after adjusting for tariff refunds, and Claire will take us through that shortly. On an adjusted basis, our gross margin for the quarter rose almost three full percentage points compared with a year ago, reaching 25.6%. Because of that, we delivered positive net income rather than the loss we posted in the same period last year, and we again produced positive operating cash flow of almost $5 million, comparable to the March quarter. Along with a substantial decrease in our debt balance over the quarter, our balance sheet is now considerably stronger. As we noted on our previous call, in the June quarter we brought back Manhattan Toy Brands' Groovy Girls. I'm happy to report that thus far, sales for this iconic fashion doll line have beaten our expectations, mostly because of the Canadian market. We think that points to ongoing success for this retro-inspired, much-loved brand. Now I'll give an update on our strategic efforts to grow both the top and bottom line. A leading priority is our continuing innovative internal product development aimed at broadening our product offerings. Another effort involves building on the margin expansion we've recently achieved to push profitability higher still. That comes from shifting toward a favorable mix of products with higher margins and, naturally, our unwavering discipline on spending. We're also working to consolidate selected internal operations to gain greater efficiency, bring down our debt levels, and across the next two years, we'll be pursuing warehouse consolidation to further improve our operating structure. These efforts to create long-term value frequently call for upfront investment. With that in mind, our board has chosen to rightsize our quarterly dividend, which gives us strategic access to a larger share of our cash flow and will also let us pay down debt and build the balance sheet strength needed to support Crown Crafts' growth far into the future; put simply, our new quarterly dividend supports a well-balanced capital allocation approach that includes investing in growth initiatives and keeping a solid balance sheet while still rewarding our valued shareholders with what is now roughly a 4% attractive dividend yield. To wrap up, we had a solid quarter as we keep executing on our business plan. As we draw on the strengths that are already ours—our brands, our licenses, and the retail and licensing partners we value—our strategy on several fronts, which includes developing new products in-house, refreshed marketing pushes, disciplined expense management, and putting capital to work in a strategic way, puts us in a strong position to build shareholder value over the long term. At this point I'll hand things to Claire, who will give more specifics about the quarter's results, and after that we'll open it up for your questions.

Thanks, Olivia, and hello again, everyone, for joining this call. We posted Q1 net sales of $16.8 million, which came in 8% higher than the previous quarter, since better inventory positions allowed us to take advantage of consumer spending that remains soft. As Olivia noted, our gross margin results were strong. Tariff refunds during the quarter lowered our cost of products sold by $3.7 million. Even if you strip out that benefit, our gross profit of $4.3 million exceeded last year's $3.5 million and works out to a gross profit margin of 25.6%, an increase of 290 basis points year-over-year. This growth in our adjusted gross margin shows the impact of both our strategic pricing efforts and a mix that increasingly favors higher margin products; we booked marketing and administrative expense of $5.2 million in Q1, versus $4.7 million during the same period a year ago. While this quarter's number contains just over $500,000 of accrued incentive and compensation tied to tariff refunds; on a normalized basis, we brought marketing and administrative expense as a percent of net sales down to 28% from 30.5% in Q1 of fiscal 2026, which demonstrates the intense focus on cost efficiencies that Olivia referenced. Further down the income statement, we also managed to bring net interest expense down to only $190,000, comfortably under the $283,000 from a year ago, thanks to our debt reduction work over the past year. On a GAAP basis, net income came to $2.1 million, or $0.19 per share, far better than the prior year's loss of $1.1 million, or $0.10 per share. While Q1 net income gained from the tariff-related adjustments I described, I'll repeat that on an adjusted basis, we still produced a Q1 profit compared with the net loss in the prior year quarter. Shifting to our balance sheet, as of June 28th, total liquidity stood at $12.1 million, comprising cash and equivalents plus availability on our revolving line of credit. In Q1, we cut our debt substantially, from more than $14 million when the fiscal year began to just $9.6 million when the quarter closed. Beyond lowering outstanding debt, net cash from operating activities of $5.5 million helped further reinforce our balance sheet strength, leaving us well positioned to pursue future growth opportunities in a disciplined manner. To sum up, this was yet another quarter of solid execution, one in which we concentrated on what's within our control while economic conditions stay soft. Even after adjusting for tariff refunds, we increased revenues, widened our gross margin, and delivered stronger earnings per share than in the year-ago quarter. We also continued to strengthen our balance sheet and are well positioned to advance our strategic initiatives as we progress through the new fiscal year. Now, operator, please open the lines, and Olivia and I will be glad to take questions.

Olivia and Claire, nice work. That was a great report. I've got a handful of questions, so if it seems like I'm piling on too many, I'm fine with rejoining the queue. Could you share a few thoughts on what you believe is going on with Groovy Girls?

Canada has been an incredible market for Groovy Girls. Looking back at how things unfolded, prior to our purchase of Manhattan Toy, when Groovy Girls first came out, it seems the brand gained traction in Canada initially too; at this moment we've moved such a large volume there that inventory destined for the U.S. is being rerouted up to Canada. The potential in that market has us genuinely thrilled. After that, come September we'll introduce Groovy Girls at K&J in Germany to serve the European market.

Is there a theory of why the Canadians like Groovy Girls so much?

That's not something we have an answer for. What I can say is that the distributor in that market teamed up with Indigo Books & Music, and they made a genuine marketing push, plus they held an event, so that likely gave it a boost — launching alongside such a big partner probably played a role.

All right. Earlier, you brought up that Groovy Girls would eventually be available on Amazon. Do you have a date in mind for when that could take place?

Our target remains an early fall launch. Because inventory has been moving more quickly than we anticipated, it might not be the complete line, but we are still aiming for some point in October with at least a portion of a line.

All right, that's great. Could you walk us through where things stand with the tariff funds? My recollection is that you mentioned a figure of roughly $5 million, perhaps $5.5 million. Do you anticipate additional funds coming in, or is your view that this is the final amount, or?

We're looking to bring in additional funds. We had put in for tariff reimbursements totaling between $5.6 million and $5.7 million, and up to now, roughly $4.7 million has come through. That's the piece we recorded. The bulk of it arrived in July. A tiny share had come in during the Q1. Around $900,000 remains outstanding, and we haven't recorded that.

All right. In what ways has the balance sheet shifted? Could you share anything regarding its current position compared with where it stood previously, perhaps taking into account the tariff funds?

You mean as of today versus the quarter end?

Yes.

In July, cash increased by more than $4 million, and that is honestly the extent of what we are able to share.

Ah, got it. I wasn't aware that the $4 million arrived during July. All right, that's excellent.

Right, so at the close of the quarter, that ended up being recorded under other current assets rather than as a trade receivable.

I see. So that's the other current asset that's on the balance sheet.