Educational Development Corporation (EDUC) Earnings Call Transcript

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for fiscal 2027 first quarter results. As a reminder, this conference is being recorded. On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2027 first quarter results. The release will be available later today on the company's website at www.edcpub.com. Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Thank you, Kelly, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials, after which Heather will provide an update on sales and marketing and IT projects and then I will provide an update on our plans for the rest of fiscal 2027. So during March, we ran a recruiting special surrounding our March 14 Pie Day which yielded better-than-expected results. We added over 1,300 new main partners, which brought our active brand partner numbers above 5,200, and we have maintained this level of brand proneness to this day. This was a 20% growth in Brand Partners' numbers since the end of last year, and continuing our Brand partner growth is a key focus. Also, at the beginning of the quarter, we made several expense reductions, which are expected to exceed $1.2 million in savings for the fiscal year. These savings, which include decreases in pay for our executive team, were made to improve our cash flow and give us the ability to continue to execute our conservative purchasing plan to replenish some of our best selling titles as well as bring in new titles. Bringing in new titles energizes our Brand partners and gives our retail reps some new products to present. I'm happy to say that many of these new titles came in throughout the last several months, and we have introduced them with much very early success. That is some confirmation that our strategy is on point. The results for the quarter were driven by our lower revenue levels, offset by lower expenses. The focus of our fiscal 2027 turnaround plan remains on growing our revenue and Brand partner levels back to pre-pandemic levels, and I'm happy with the initial progress our team has achieved. Heather will talk more about this progress in her marketing update. As I have said before, our turnaround plan is not an overnight change, but a carefully developed plan for growth over the next few quarters and years. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of financials.

Thank you, Craig. Our 2027 fiscal first quarter results compared to the first quarter last year included net revenues were $4.8 million compared to $7.1 million. Our average Active Brand Partners for the quarter totaled 5,300 compared to 7,700 last year. Loss before income taxes were $1.4 million in both quarters. Net loss totaled $1.4 million for the quarter compared to a net loss last year of $1.1 million in the first quarter. Loss per share totaled $0.16 compared to a loss per share of $0.13 on a fully diluted basis. Now for an update on our working capital. Inventory levels decreased from $37.7 million at the beginning of fiscal year 2027 to $36.2 million at the end of May, generating $1.5 million of cash flow from inventory reductions. Our cash balance increased from $1.3 million at the end of February to $1.8 million at the end of the first quarter. I would also like to mention an unusual accounting adjustment we continue to make. Due to our historical losses and operating expectations during the turnaround period, we evaluated the need for a valuation allowance for our deferred tax assets. Based on this evaluation, we continue to recognize a valuation adjustment offsetting the deferred tax asset, eliminating the tax benefit on our income statement. This adjustment has no cash flow impact but had a direct impact to our tax expense, net earnings and earnings per share. When the company returns to profitability, this evaluation adjustment will be reversed. The reversal will have no cash flow impact will have a direct impact to tax expense, net earnings and earnings per share. This concludes the financial update. I will now turn the call back to Heather Cobb for our sales and marketing updater?

Thanks, Dan. As Craig mentioned, our paper Pie Day celebration in March delivered positive results across the business. The promotion generated strong recruiting activity drove sales through our sitewide offer, increased engagement with our newly created account credits program and helped introduce several new titles to customers. It was a great example of how coordinated initiatives can create engagement across multiple areas of the company at the same time. In April, members of our team attended the Bellona Children's Book Fair, the premier event in children's publishing. The fair provides an important opportunity to discover new content, strengthen relationships with our publishing partners and evaluate future additions to our catalog. We also had the privilege of then traveling and celebrating many of our top performers during our incentive trip to Bermuda, recognizing those who continue to share our products and build driving businesses, helping to expand our reach and impact. May brought the announcement of our next story scape incentive trip, which will take earners to Zion National Park in 2027. These experiences continue to be a powerful way to recognize achievement while inspiring future growth across the field. While brand partners were focused on serving customers and building their businesses throughout the spring, our home office team was busy preparing for unfold our annual convention. The event generated tremendous energy and optimism as attendees explored new product releases, participated in recruiting focus initiatives and received an early look at several technology enhancements currently in development. These include our new AI-assisted Book study named Reed, which launched this week as well as our upcoming projects like our Wish List and registry options and the ability to identify and market to specific audiences with targeted offers. The response to all of this reinforce what we're seeing throughout the organization, a strong belief in where we're headed and excitement about what lies ahead. Throughout this time period, our retail team was attending trade shows and showrooms, highlighting the new titles that we have available as well as our vast backlist offerings. As we move forward through the summer months, our attention is centered on our well read summer campaign. We're leaning into the growing consumer interest in analog experiences, reading and intentional time together by focusing on book levers and families seeking alternatives to screen-based entertainment. With additional promotions planned throughout the season, we believe that there are tailwinds to build on the engagement that we've seen so far this year. I will now turn the call back over to Craig White.

Thank you, Heather, and Dan. As I mentioned before, we are happy with the initial results of our turnaround plan. Specifically, we are continuing our effort to build our brand partner levels, and they are excited about our new titles and our IT improvements. You heard from Heather about some of our recent IT initiatives are focused on making it easier to do business with us and adapting to the new way that different generations prefer to transact with us. This new generation presents challenges, not just for our company, but many companies in the direct selling industry to revise their engagement methods. I can tell you that our sales and marketing as well as IT departments are working actively to ensure our strategies take into account this important group. Lastly, I want to thank all shareholders for their patients, our employees for their commitment to our mission and our customers and very partners for their loyalty. I am confident that the steps we have taken and will continue to take will result in sales growth and our return to profitability. Now that we have provided a summary of some recent activity. I'll now turn the call back over to the operator for question and answer.

[Operator Instructions] We have a question from Paul Carter from Capstone Asset Management.

So first question is more of a housekeeping question. Most shareholders probably know Randall White swung history [indiscernible] I was just curious about the beneficial owners disclosure in your porting circular. He's no longer listed as a 5% beneficial owner. Was there an ownership transition? Or was that a [indiscernible].

Well, it's a good question, Paul. The challenge is we don't know -- he's not a novo owner, and we have no visibility to these ownership levels. So we could not include it in the proxy because we could not confirm its shareowners.

Okay. so that -- and then just to clarify 1 thing on the brand partner numbers the press release referenced average Active Brand Partners of 300 for the quarter, but then your comment that started at 4,300 and in the quarter that can -- what happened there is just like is that a reflection of the increase in red after the March promotion and the end of the quarter or...

Well, Yes. So it increased in March and then kind of remained pretty consistent through the end of the quarter.

Yes. Based on our -- the way we count active -- at the end of every month, there's some people that fall off that we had such a great addition that, that's why we increased as a net.

Okay. Okay. Great. And then just related to that, maybe this is a question for Heather I know in in your fiscal fourth quarter around, I think, was 4,500 in Q1 as a of margin -- so by the end of May, average number was up I'm just trying to understand the 3 -- like do you feel -- you have a pipeline of new recruiting initiatives a you can continue use to expand to the brand partner of the base from here? Or was kind of the margin recruiting promotion will come a big one that caught sort of going forward, like that.

That's a great question, Paul. I would say it's -- we consistently offer a variety of different kind of recruiting initiatives and promotions, not only just because we know that different audiences may be paying attention at different times of the year, but also different things attract different audiences as well. And so when we offer any sort of recruiting special or promotion, it will vary in some way, shape or form, whether it's cost or what is available as part of the kit different things like that. So we did a promotion immediately out of convention. We have other promotions planned coming later in the year as well. I don't think that we're are now or have ever been in the business that we can lean solely on a single promotion in a year and think that, that is a place that we're in good standing. -- direct selling as a whole is a business of people coming in and people staying and people going at some sort of some sort of level. And so I think that we're definitely looking ahead and planning ahead, both in the current day and in the coming 6 months to a year. So does that answer your question?

Let me add just a little bit, Paul. While I'm certainly not forecasting what's going to be happening the rest of this year, I think this is evidence that our strategy is somewhat working. I mean they were waiting for new titles -- and now that we've released some new titles, everyone's excited. There's a buzz in the field. Vito was incredible. That's how it works. It's word of mouth and while our Brand Partners are energized and excited and enthusiastic, it's just easier for them to recruit. So I think that's basically what's happening.

Actually, that's a really good point. I'm curious, do you measure that? I'm sure you measure a lot of the partners. But since you are now able to buy new titles. Are you noticing in data that Brand Partners are sticking around and be active for longer than maybe they were a year ago? Or is it just just too early to.

That's a great question. I will say we do look at all sorts of data like that. I think considering our new titles dropped, we released a few in March and April. But when I say a few, I mean that pretty literally -- and so considering we're not even a full month into our full release of new title. It's really too early to look at any concrete data that would show that.

Okay. Great. And then just switching gears, and I apologize, I just have a quick questions here. So last quarter, you talked about moving away from diesel promotion just retaining more to more like historical gross margin. You had product promotions during Q1 gross margins kind of move closer to historical levels -- are you still seeing some impact from some of the accent.

I would say that we're still seeing impact related to that. The promotions that we ran and the site like that we ran the surrounding our paper Pie Day kind of was consistent with the promotions that we ran in the first quarter last year. So we don't see a lot of margin improvement yet.

Okay. Just One observation about that? So I know like as of now, I think your book value per share is around $4. You said that post quite a bit about your stock price but 90% of that give or take is represented by inventory. I recognize that we could generate cash and improve inventory turn -- given the amount of shareholder value that's tied up in inventory, how are you balancing the desire to like reduce inventory level with ensuring that you're not or pricing in terms of gross margin through promotions?

Well again, good question. It's kind of a balancing act, right? I mean we need to bring in cash, but we don't want to reduce the value of our product. So it is -- I mean, we look at it every single month, okay, do we need to do something in the next quarter or things like that. So it's not -- well, I'd like to say it's an overall strategy where we're not going to discount as much and that is the case. But there's just times where it's necessary.

Is it -- is that balance sort of shifting or not sacrificing gross margin? Because you said as top obviously, when you have the bank facility and ongoing need and pressure from your bank.Now you don't have that, and I think you said your to during the order. It doesn't sound like you kind of actively need cash or at least your cash balance grow as much as we did in the past and just sort of wondering if that is like directly playing into your decision on...?

Well, it's a great question. I'd like to say we're back, but we just so recently come out of difficult periods. I'm somewhat conservative, but I think you're right. We need to focus on new title acquisition and really make sure we're not missing the window of opportunity here. So it's a point well taken, and I agree with you, we need to try to reduce the times that we're discounting to it. So you're right.

I think I'll add too, Paul, that when we do look at times that we're discounting, we're looking at it through a different loan. When we were doing deep discounting across the board as a site-wide sales that looks very different than some of the things that we've done recently, where we've done more of a category sale approach. And so we've discounted a handful of titles as opposed to just an across the board things like that, that while from an outside view, it might look like, oh, they're still offering site-wide sales. If you dig a little deeper, you will see that move that will get us back to those normal gross margins without just stopping that activity altogether in anticipation that the consumers are ready for that.

Our next question is from Igor Novgorodtsev.

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