Crown Crafts FY2027 Q1 Earnings Call - Margin Expansion and Debt Reduction Offset Soft Demand

Operator: Good afternoon, everyone, and welcome to the Crown Crafts Fiscal Year 2027 first quarter conference call. During today’s call, the company may 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 beyond 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, including its annual report on Form 10-K. With that, I would now like to turn the call over to President and Chief Executive Officer, Olivia Elliott. Please go ahead.

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Thank you, operator, and thank you everyone for joining this afternoon’s call. Today after the close, Crown Crafts reported very solid quarterly results given the still soft demand environment. We accomplished this by focusing on what we can control, and our team did a terrific job executing on our strategy. We were able to grow our net sales 8%, despite the uncertainty that consumers continue to feel around high interest rates, inflation, and global geopolitical events. Improved inventory levels account for most of the growth, as we were able to better meet demand than during last year’s tariff instability. Just as important, we were able to drive a higher gross margin, both on a GAAP basis and also when adjusting for tariff refunds, as Claire will walk us through in a moment.

On an adjusted basis, our gross margin for the quarter climbed nearly three full percentage points year over year to 25.6%. As a result, we were able to produce positive net income versus the loss reported in the prior year period, and we once again generated positive operating cash flow of nearly $5 million, similar to the March quarter. Combined with a significant reduction in our debt balance during the quarter, our balance sheet is significantly strengthened. As we mentioned on our last call, during the June quarter, we relaunched Manhattan Toy Brands’ Groovy Girls. I’m pleased to say that so far, sales of this iconic line of fashion dolls has exceeded our expectations, largely driven by the Canadian market. We believe this bodes well for continued success of this retro-inspired beloved brand. Next, I’ll provide an update on our strategic initiatives to grow both our top and bottom line.

A top priority is our ongoing innovative internal product development to expand our product offerings. Another initiative is to build on our recent margin expansion to further drive profitability. From moving towards a favorable mix of higher margin products and of course, our relentless spending discipline. We’re also striving to consolidate certain internal operations for greater efficiency, reduce our debt levels, and over the next two years, we’ll be working on warehouse consolidation to further enhance our operating structure. These initiatives to create long-term value can often require upfront investment. To that end, our board has elected to rightsize our quarterly dividend, which will provide us strategic access to a greater portion of our cash flow that will also allow us to pay down debt and build the balance sheet strength that will support Crown Crafts’ growth well into the future.

In essence, our new quarterly dividend allows for a well-balanced capital allocation approach that includes investing in growth initiatives and maintaining a solid balance sheet while still rewarding our valued shareholders with what is now approximately a 4% attractive dividend yield. In closing, we had a solid quarter as we continue to execute on our business plan. While leveraging our inherent strengths, including our brands, our licenses, and our valued retail and licensing partners, our multi-pronged strategy that covers internal development of new products, reinvigorated marketing efforts, tight cost controls, and the strategic allocation of capital positions us well for the creation of long-term shareholder value. Now I’ll turn it over to Claire to provide additional details around our quarterly results before we take your questions.

Claire, Chief Financial Officer, Crown Crafts: Thank you, Olivia, and welcome everyone once again to the call. Our first quarter net sales of $16.8 million were up 8% over the prior quarter as improved inventory levels helped us capitalize on still soft consumer spending. As Olivia mentioned, we had strong gross margin performance. During the quarter, tariff refunds reduced our cost of products sold by $3.7 million. Even adjusting for this benefit, our gross profit of $4.3 million was above the prior year’s $3.5 million and equates to a gross profit margin of 25.6%, which was up 290 basis points year-over-year. This expansion of our adjusted gross margin reflects both our strategic pricing initiatives and an increasingly favorable mix of higher margin products. We recorded marketing and administrative expense of $5.2 million for the first quarter as compared to $4.7 million a year earlier.

Although this quarter’s figure includes just over $500,000 of accrued incentive and compensation associated with tariff refunds. On a normalized basis, we reduced marketing and administrative expense as a percent of net sales to 28% versus 30.5% in the first quarter of fiscal 2026, which speaks to our sharp focus on cost efficiencies as Olivia mentioned. Moving down the income statement, we also successfully reduced net interest expense to only $190,000, well below the year ago $283,000 as a result of our efforts to reduce debt over the past year. From a GAAP perspective, we reported net income of $2.1 million, or $0.19 per share, well above the prior year loss of $1.1 million, or $0.10 per share.

While first quarter net income benefited from the tariff-related adjustments described, I’ll again note that on an adjusted basis, we still generated a first quarter profit versus the prior year quarter’s net loss.

Turning to our balance sheet, as of June 28th, we had total liquidity of $12.1 million, including cash and equivalents and availability on our revolving line of credit. During the first quarter, we significantly reduced our debt from more than $14 million at the start of the fiscal year to just $9.6 million at the end of the quarter. Not only did we reduce outstanding debt, but our net cash from operating activities of $5.5 million served to further support our balance sheet strength, putting us in a strong position to capitalize on future growth opportunities in a disciplined manner. In summary, this was another quarter of strong execution in which we focused on what we can control while economic conditions remain soft. Even adjusted for tariff refunds, we grew revenues, expanded our gross margin, and generated stronger earnings per share than in the year-ago quarter.

We also further strengthened our balance sheet and are well positioned to make progress against our strategic initiatives as we move through the new fiscal year. Now, operator, if you could please open the lines, Olivia and I would be happy to take questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 if you would like to ask a question. Our first question will come from Doug Ruth with Lenox Financial Services.

Doug Ruth, Analyst, Lenox Financial Services: Olivia and Claire, congratulations. Fabulous report. I have several questions, so if you feel like I am asking too many, I do not mind getting back in the queue. Could you offer some commentary of what you think is happening with Groovy Girls?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Groovy Girls has done phenomenally well in Canada. As we look back on history, even before we acquired Manhattan Toy, the first time they launched Groovy Girls, it appears that it took off in Canada first then as well. We have actually sold so much in Canada at this point in time that we’re having to divert inventory that should be coming to the U.S. to go to Canada. We’re really excited about the opportunity there. Then we’ll be launching Groovy Girls at K&J in Germany for the European market in September.

Doug Ruth, Analyst, Lenox Financial Services: Is there a theory of why the Canadians like Groovy Girls so much?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: We don’t know. I can tell you that our distributor there partnered with Indigo Books & Music Inc., who really put some marketing efforts behind it, and they hosted an event, so that probably helped with it, to have such a large partner to launch with.

Doug Ruth, Analyst, Lenox Financial Services: Okay. You had previously mentioned that ultimately the Groovy Girls will be on Amazon. Is there a date that that might happen?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: We are still hoping to launch early fall. The inventory, having it take off faster than we expected, it may not be the full line, but we’re still targeting October sometime with at least part of a line.

Doug Ruth, Analyst, Lenox Financial Services: Okay. Very good. Could you explain to us what the status is of the tariff money? I think you had told us there was maybe around $5 million, maybe $5.5 million. Are you expecting more money, or do you think that’s it, or?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: We’re hoping to get more money. We had requested reimbursement for $5.6 million to $5.7 million in tariffs, and so far, we’ve received about $4.7 million. That is the portion that we booked. Most of that was received in July. A very small portion had been received in the first quarter. There’s about $900,000 that we still haven’t received, and we have not booked.

Doug Ruth, Analyst, Lenox Financial Services: Okay. How has the balance sheet changed? Are you able to tell us anything about where the balance sheet is now versus where it was based on maybe tariff money?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: You mean as of today versus the quarter end?

Doug Ruth, Analyst, Lenox Financial Services: Yes.

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: It certainly improved by getting $4-plus million in cash in in the month of July, but that’s about all we can really tell you.

Doug Ruth, Analyst, Lenox Financial Services: Oh, okay. I didn’t realize the $4 million came in in July. Okay, very good.

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Yeah. So it was booked as other current assets as opposed to a trade receivable at quarter end.

Doug Ruth, Analyst, Lenox Financial Services: I see. So that’s the other current asset that’s on the balance sheet.

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Yeah, and I think there’s more information Claire just pointed out in footnote 4.

Doug Ruth, Analyst, Lenox Financial Services: Footnote 4. Okay, good. What can you tell us about the warehouse?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: We’ll be starting that project sometime in late fall or early winter. It’s about an 18-month process, and the plan is to consolidate sometime in May of 2028. So that process is not quite started yet.

Doug Ruth, Analyst, Lenox Financial Services: Okay. Can you provide any additional details about capital expenditures and what you’re thinking and how much you might be spending?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: As of right now, our capital expenditures should just be the normal capital expenditures, which is mainly IT. So it would be any ERP upgrades that we’re going through right now, molds for plastic toys. Anything for the warehouse is unlikely to be spent in this fiscal year. It will probably start sometime in the next fiscal year.

Doug Ruth, Analyst, Lenox Financial Services: Okay. All right. How about the international sales are doing so well, can you share anything that’s happening and why they’re doing so well or what you’re doing and that kind of stuff?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Well, a lot of that’s Groovy Girls in Canada, but it’s more than that in Canada as well. We had two different distributors in Canada previously, and starting in this calendar year, maybe a little bit in December of 2025, we got a new distributor that is handling both the Manhattan Toy and Sassy product lines and taking that to all channels. So we’ve seen a pretty good improvement there across the board. Groovy Girls certainly added to it. When we went to K&J last fall, we did pick up some new distributors that started buying product maybe later in the fall, early winter. So a little bit in Europe, a little improvement as well.

Doug Ruth, Analyst, Lenox Financial Services: Okay. What can you tell us about LEGOLAND? We know we got that big, new facility, or I guess it’s a year old now, in Shanghai. What’s happening with LEGOLAND?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: I don’t think there’s been any changes with LEGOLAND. That was the last new park of any size. A lot of the parks for LEGOLAND actually start winding down and closing for the winter. There are some that are open. I know like Florida and California stay open year-round, but a lot of them close maybe sometime in October. Those are more seasonal sales than year-round.

Doug Ruth, Analyst, Lenox Financial Services: Okay. How about the Manhattan Toy office in Minnesota, is there any thoughts or updates on that at all?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: That lease expires at the end of March next year. We’ll obviously not renew that lease. We’re still kind of thinking about what we need, if anything at all, in Minneapolis, if we do get a lease. There’s two trains of thought there. It’s a very small staff, so they can either work from home full time or we may need some small lease that can just hold a few people and like a photography studio. But we will not be renewing the very expensive lease that we’re in right now.

Doug Ruth, Analyst, Lenox Financial Services: Okay. My last question, is there any new thoughts or ideas on diaper bags and how the company might proceed with that business?

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: We’re still working on that product line. We did just start selling the new Motherhood diaper bags. Very slow start at this point in time. It’s only on Amazon. We’re working on that. Then we have a couple of NoJo bags, NoJo branded, one of which is in Walmart, but that’s really it right now. We haven’t given up on diaper bags. We’re just still working on it.

Doug Ruth, Analyst, Lenox Financial Services: Okay. You just did a fabulous job, and thank you for what you did on behalf of the shareholders.

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Thank you.

Operator: This now concludes our question and answer session. I would like to turn the floor back over to Olivia Elliott for closing comments.

Olivia Elliott, President and Chief Executive Officer, Crown Crafts: Thank you, operator. Again, we appreciate everyone being on the call. We look forward to building on the early success of Groovy Girls and our other innovative products on the way. We appreciate your continued interest in Crown Crafts, and we will keep you posted on our progress as we move through the new fiscal year. Please feel free to reach out with any additional questions, and thanks again for being with us.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.