Q4 2024 Crown Crafts Inc Earnings Call

Participants

John Beisler; IR; Crown Crafts Inc

Olivia Elliott; President, Chief Executive Officer, Director; Crown Crafts Inc

Craig Demarest; Chief Financial Officer, Vice President; Crown Crafts Inc

Doug Ruth; Analyst; Lenox Financial Services Inc

John Deysher; Analyst; Pinnacle

Dennis Scannell; Analyst; Rutabaga Capital Management LLC

Presentation

Operator

Good day and welcome to the Crown Crafts Inc fourth quarter fiscal year 2024 conference call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to John Beisler, Investor Relations. Please go ahead.

John Beisler

Thank you, Betsy, and good morning, everyone. We appreciate you joining us for the Crown Crafts fourth quarter and fiscal 2024 conference call. Joining me on the call today are Crown Crafts, President and CEO, Olivia Elliott; and the company's CFO, Craig Demarest.
Earlier this morning, Crown Crafts filed its 10-K and issued a press release regarding the fourth quarter and fiscal 2024 financial results. A copy of this release is available on the company's website, crowncrafts.com. During today's call the company will make certain forward-looking statements and actual results may differ materially from those expressed or implied.
These statements are subject to risks and uncertainties that may be on Crown Crafts control and the company is under no obligation to update these statements. For more information about the company's risk factors and other uncertainties, please refer to the company's filings with the Securities and Exchange Commission.
Finally, I would like to remind you, today's call is being recorded and a replay will be available through the company's Investor Relations page.
Now I'd like to turn the call over to the President and CEO, Olivia Elliott.

Olivia Elliott

Thank you, John, and good morning, everyone. Fiscal 2024 was a transitional year for the company. We started the year on the heels of acquiring and integrating Manhattan toys as well as exploring the cross selling opportunities made possible by the acquisition. We remain enthusiastic about the addition of Manhattan toys as our offerings across the toy category continue to grow.
Additionally, we plan to leverage our long-standing relationships with major retailers and specialty stores to gain shelf space and position our brands for future growth. We also continue to proactively manage the impact of the economic headwinds facing our operations and our customers. Inflationary pressures continue to linger, raising costs for materials and labor and reducing the discretionary income of consumers, which has a more meaningful impact of lower income households.
We will continue to strategically manage our cost structure and sales process, but remain well positioned with our balance sheet and expect to see some of the macro pressure lessens throughout the remainder of the year. Despite these current challenges, we are -- we were able to minimize the impact on gross margin by proactively managing costs across the business. As a result, we've reported another year of profitability and we reduced our debt by $4.6 million from the end of fiscal 2023.
With that, I would like to turn it over to Craig to cover the financials in more details.

Craig Demarest

Thank you, Olivia, and good morning, everyone. Net sales for the fourth quarter of 2024 were $22.6 million compared to $21.6 million in the prior year quarter. The increase reflects a full quarter's contribution from Manhattan toy this year compared to two weeks in the fourth quarter of fiscal '23. This more than offset reduced orders from our customers, including a prior year feature from a major customer that was not repeated in the current year, and the impact of consumers' response to the current macroeconomic conditions and adjusted inventory levels.
Gross profit for the quarter was 23.2% compared to 21.9% in the fourth quarter of fiscal '23. The margin increase is primarily related to the effect of reserves recorded in the prior year associated with the customer who declared bankruptcy.
Marketing and administrative expenses were $3.9 million in the fourth quarter of fiscal '24, relatively unchanged to the prior year quarter despite the addition of Manhattan toys, marketing and administrative costs for a full quarter. We worked throughout fiscal '24 to reduce the historical costs of both Manhattan toys and our legacy businesses.
Net income for the quarter was $1 million or $0.1 per diluted share compared to net income of $828,000 or $0.08 per diluted share in the prior year.
Turning now to our results for the full year, net sales for fiscal '24 or $87.6 million compared to $75.1 million in the prior year. Increase was primarily driven by the addition of Manhattan toys, which generated $18.5 million of net sales during fiscal '24, partially offset by a decline in our bedding, blankets and accessories business.
Gross profit for the year was 26.2% compared to 26.4% in fiscal '23, reflecting the rent increase at our California warehouse last February, partially offset by the impact of product mix. Marketing and administrative expenses were $16.1 million versus $12.7 million in the prior year. The increase primarily reflects the addition of Manhattan toy at the end of fiscal '23. Net income for the year was $4.9 million, or $0.48 per diluted share, compared to net income of $5.7 million or $0.56 per diluted share in fiscal '23.
Turning now to our balance sheet. Cash and cash equivalents as of the end of fiscal '24 totaled $830,000 compared to $1.7 million at the end of the prior year. Inventories at the end of fiscal '24 were $29.7 million compared to $34.2 million at the end of fiscal '23. Our long-term debt at the end of fiscal '24 was $8.1 million compared to $12.7 million at the end of 2023.
And finally, we paid $0.32 per share in cash dividends to shareholders in fiscal 2024. With a yield of 6.4% based on yesterday's close, we continue to believe our dividend is a key component towards offering long-term returns to our shareholders.
Now I'll turn the call back over to Olivia for additional comments.

Olivia Elliott

Thank you, Craig. We recently passed the one-year mark since our acquisition of Manhattan toys. In that time, we have successfully completed the brand's integration into Sassy and the IT conversion is nearly center. On the operations side, we adjusted the brand's advertising spending and worked through the excess inventory to substantially improve the profitability of the brand compared to pre-acquisition periods.
We are very encouraged by the strats Manhattan toy has made on the product development front. Customers have given positive feedback on the items viewed at recent events, and they look forward to having these products on their shelf. As stated earlier, these new designs expand our offerings across the toy category, which now represents the largest portion of sales across our portfolio.
Looking ahead to fiscal 2025, we will continue to manage the macroeconomic -- economic challenges facing our business and consumers and expand the product offering across our brands. We believe we are well-positioned for when the economy improves, and our strong balance sheet will allow us to consider favorable acquisition opportunities that can strengthen our existing categories.
We would like to thank our team for their efforts over the past year and our customers and licensors for their continuing support. We look forward to updating you on our progress throughout the year. And thank you our shareholders for your continued support.
With that, I'd like to open up the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Doug Ruth, Lenox Financial Services.

Doug Ruth

Olivia and Craig, congratulations. It was a very solid report. It checks all the boxes, revenue growth, margin expansion, strong cash flow, debt reduction and of course, the dividend. So thank you for what you did for the shareholders?

Olivia Elliott

Thank you, we appreciate your support.

Doug Ruth

Okay. Could you tell us a little bit more about us. So we know you had sales of $18.5 million of Manhattan toys. Would there be an -- are you able to make a projection what the goal might be for Manhattan toy for fiscal 2025?

Olivia Elliott

Yeah. We really don't give projections we kind of stay away from forecasting. And I think the best thing to do is probably go back to what we said when we acquired Manhattan toys, and that's the goal in the long term. It won't happen in fiscal '25, I think we said it was going to be $24 million. It's going to take three or four years to get there. But the projections are that we will grow steadily over those few years.

Doug Ruth

Okay. Is it possible to get maybe get some placement from Manhattan toy like in Walmart maybe in fiscal 2025? Or would it take be a longer time period than that.

Olivia Elliott

No, we have some placement in Walmart already, and that will be shipping sometime between the first and second quarter fiscal '25 or just a handful of items, and it's in a limited number of stores, but it's a start.

Doug Ruth

Very good. Congratulations. And all you also had talked about possibly combining the two warehouses, the Compton warehouse and then Manhattan toy our warehouse or is there any progress on that?

Olivia Elliott

We're still exploring that opportunity. We have engaged a third-party to help us kind of figure out where the best place to place those warehouses are that minimize the impact to our customers as well as to anybody that's working in those warehouses.

Doug Ruth

Or do you expect maybe something that can happen in fiscal 2025 or we'd be looking beyond that?

Olivia Elliott

You'll be looking beyond that. I think we by the end of fiscal 2025. I think we will have a plan, but I think any changes will happen in fiscal '26.

Doug Ruth

Okay. And what about the of that sales and product development office and Minneapolis. You had previously stated that possibly we're hoping to do something with the leases or is there any progress on that?

Olivia Elliott

That's one going to be more long term process. I think that lease ends in the beginning of 2027. And unfortunately, downtown Minneapolis has way too much open office space to be able to sublease it. So that's going to be a longer-term issue.

Doug Ruth

Okay. And what about the direct to consumer? How do you feel like you're making any progress with that?

Olivia Elliott

We have not gotten anybody except for Manhattan toys up and running on the direct to consumer for our own website. But we have no Joe's website is now complete and able to sell direct to consumer. And we are working through right now getting Sassy website up and running. And so I do believe by the end of fiscal 2025, we will have all of these on subsidiary selling direct to consumers.

Doug Ruth

Okay. And what about a -- how are things going for the company with buybuy Baby? You had previously told us at buybuy Baby, he'd had opened up to reopen some stores. Is there any progress with that initiative at all?

Olivia Elliott

They did reopen, I believe 11 stores and we are shipping to all 11 of those stores. But I believe any expansion by them is slower, I think, than we had hoped it would be and they haven't opened up any new stores since the initial grand openings.

Doug Ruth

Okay. And then a couple more how there was recently an article about expansion of Legoland. And I know that was one of the things that came with Manhattan Toy acquisition, how is that business going for the company?

Olivia Elliott

That business is actually going very well. And we are -- we believe there will be three new parks, two of which will be in China. And those will be opened in, I believe, the summer of 2025. And so we're continuing to grow that business and we look forward to them opening the new parts, the one of the ones in China will be the largest one in the world.

Doug Ruth

Well. So that would potentially really expand the international sales?

Olivia Elliott

Correct.

Doug Ruth

And then the last question is I have been you did just did a tremendous job reducing the inventory. Are you happy with the inventory level at where it's at, or is there an objective for that?

Olivia Elliott

I always think we have too much inventory. I do think we made great strides. We still have a little bit more and there's a close-out inventory to work through. But I don't think it's not a huge number, but we always have had something that we need to get rid of.

Doug Ruth

Okay. Thank you for answering my questions. Congratulations to the team there. You've just done a really good job integrating the Manhattan toy business into the core operation.

Olivia Elliott

Thank you.

Operator

(Operator Instructions)
John Deysher, Pinnacle.

John Deysher

Good morning. Thanks for taking my question. You said I think was at $18.5 million in this fiscal year. I think you indicated last fiscal year was about $25.8 million on a pro forma basis, if that's the case that seems like a pretty significant drop. And I know you're going to let some accounts go, but how should we think about that decline in Manhattan toys year over year?

Olivia Elliott

Some of the decline was planned. There was -- there were some sales in the legacy business to the original, but about 80, that's bankrupt. So that was a little bit of the decline. We had some customers that we stopped shipping to because they didn't have a good credit. So that was planned as well. But once we got into it a little bit.
It was a bigger drop, I guess, than we had planned initially because we realized that, for example, the direct to consumer business, they were spending as much on advertising as the top line sales. So obviously, when you're looking at it, something like that, the sales were at a 30% loss. So we will sacrifice some top line sales to improve the bottom line.
But we've been working throughout the year to get better costings on to move our products to new factories where we can get better prices out of China. And I think that as time goes by, you'll see those sales pick back up.

John Deysher

Okay. So do you think the $18.5 million this fiscal year was the trough?

Olivia Elliott

I do think that.

John Deysher

Okay, let's figure it will go up. And on the flip side, if we back out Manhattan toys from the legacy business, it looks like the legacy your sales were about $69 million versus $49 million. Obviously, a big jump. What do you attribute that?

Olivia Elliott

That was last year versus this year. Are you looking for your back?

John Deysher

I'm just going to hear from you subtract the $18.5 million from the $87.6 million, that's about $69 million and if we subtract the $25.8 million, I'm sorry, the apples of eyes, I'd say you're right, you're right. As I delete that last question, that was may be a slight decline? Yeah, slight decline in legacy.
Okay. Okay. That's it for me. Thank you.

Olivia Elliott

Thank you.

Operator

Dennis Scannell, Rutabaga Capital.

Dennis Scannell

Yeah, good morning, Olivia and Craig. I just a couple of quick things for me. I had a quick question on gross margins in the fourth quarter. So gross margins were down -- I'm sorry, gross margins were up year over year nicely, but down sequentially, kind of what we were doing in the first three quarters. It looks like we're kind of around 27%. Is that just a seasonal issue or mix or is it just any commentary on the decline relative to the previous three quarters?

Olivia Elliott

And that's more of a timing issue on you see a little bit of a pull back when I hate to talk about, garden variances, et cetera. But I mean, you see a little bit of a negative burden variance when you get into Q4 because of Chinese New Year. So we're bringing less inventory. And during that time, a year. So it's more of a seasonal or a timing thing.

Dennis Scannell

Okay, great. Thank you. So and then looking at the full year around 26% you know in past years, certainly before inflation really took off and we saw the softness on the consumer side, we had seen kind of gross margins 29%, maybe even 30% and looks like fiscal '21 is some recognizing that the mix of business has changed somewhat, particularly with the acquisition of Manhattan toys is 29%, 30% gross margins our potential for the business going forward? Or is that not realistic?

Olivia Elliott

I mean, I think at the potential in the longer term future. The biggest thing that's impacting us right now is the increase in rent at the warehouse in California. So that had a big impact on us. And until we get that long term solution, there's it's not going to be at 30%, I don't think.

Dennis Scannell

Okay. Okay. And then just out of curiosity on the insulin for the rents in California, it sounds like you're looking to exit that. Are you looking for another maybe at a lower cost facility, is there a solution to that rent? I guess is my question.

Olivia Elliott

We are working on that solution. And so we've engaged a third party to help us with that move because if you're going to move a warehouse that you've been in for 25, 30 years. We need to have the plan to be there for 10 to 20 years, at least on the forward-looking side. So we want to make sure that we do it right. So it is something that's going to take us 18 months to two years to get the long-term solutions.

Dennis Scannell

Got it. Interesting. Okay. And so an opportunity there. Great. Thank you very much.

Olivia Elliott

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Olivia Elliott for any closing remarks.

Olivia Elliott

We just like to thank you for your support over the years, and we look forward to updating you on our Q1 earnings, which will be in mid-August. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.