Crown Crafts (CRWS) Q3 2026 Earnings Transcript

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DATE

Wednesday, Feb. 11, 2026 at 9 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Olivia Elliott
• Chief Financial Officer — Claire Spencer

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TAKEAWAYS

• Net Sales -- $20.7 million, a decrease from $23.4 million due to softness in the bedding category as consumers shifted from full bedding sets to individual blankets.
• Net Income -- $1.5 million, up from $900,000 driven by insurance proceeds and cost actions.
• Gross Margin -- 23.5%, down from 26.1% attributed to higher U.S. tariffs and one-time licensing costs associated with an insurance claim.
• Marketing and Administrative Expenses -- $5 million, up $600,000 due to severance from operational consolidation; 24% of net sales compared to 18.8%.
• Insurance Proceeds -- $2.5 million received as a one-time benefit from a representation and warranties insurance policy connected to a product line dropped post-acquisition.
• Pre-Tax Income -- $2.1 million, an increase from $1.3 million, reflecting nonrecurring insurance proceeds and mitigation efforts.
• EPS -- Basic and diluted earnings per share of $0.14, up from $0.09.
• Total Assets -- $76.1 million at quarter-end.
• Revolving Credit Facility Availability -- $10.6 million of undrawn capacity at quarter-end.
• Inventory -- $31.2 million at quarter-end, compared to $27.8 million at the prior fiscal year-end due to seasonal builds before Chinese New Year.
• Total Debt -- $16.4 million with full covenant compliance.
• Operating Cash Flow -- $7.1 million for the nine-month period, up from $7 million previously.
• Tariff and Sourcing Exposure -- Nearly all products (high 90% range) sourced from China; some categories (e.g, diaper bags) face tariff rates above 60% while toys face 20%.
• Price Increases -- Completed retail price increases at all major retailers as of October, with only half of Q3 reflecting new prices.
• Cost Actions -- $600,000 in severance for operational consolidation, with management indicating continued focus on further cost savings through contract consolidation, particularly in IT.
• New Product Launch -- Announced relaunch of Groovy Girls dolls by Manhattan Toy for May 2026, targeting specialty retail and direct-to-consumer channels with plans for international distribution.
• Disney License in Canada -- New licensing initiative started in January, with product transition under discussion with major retailers.
• Distribution Footprint -- Over 30 international distributors operating in more than 50 countries, with continued efforts to expand reach.
• Operational Consolidation -- Lease extensions in Minnesota and California to align end dates, with warehouse strategy discussions delayed until later in the year.
• Target Retailer Update -- Bib and diaper bag categories remain private label at Target, with no products returned to the company.

SUMMARY

The company’s results reflect trade-driven margin compression and ongoing consumer demand softness, counterbalanced by one-time insurance proceeds arising from a dropped post-acquisition product line. Significant tariff exposure persists given that sourcing from China remains in the high 90% range, with some product tariffs exceeding 60%, forcing the company to manage both supplier risk and margin pressure. Strategic launches such as Manhattan Toy’s Groovy Girls relaunch and a new Disney license in Canada signal efforts to broaden distribution and product reach despite macro volatility.

• Management specified price increases were fully implemented across major retailers by October, but further hikes are not planned unless market conditions change.
• Cost savings from operational consolidation and IT contract alignment are in progress but full benefits will not appear until the next fiscal year.
• The insurance proceeds received in the quarter are nonrecurring, and management does not anticipate similar claims in the foreseeable future.
• Limited improvement is expected in the tariff situation as product diversification outside China, though underway, will require time due to stringent quality and safety requirements, and tooling constraints for toys.

INDUSTRY GLOSSARY

• Representation and Warranties Insurance: Insurance policy covering specific contractual assurances made by a seller to a buyer in an acquisition, protecting the buyer from losses arising from breaches of representations.
• Groovy Girls: Proprietary line of soft fashion dolls under the Manhattan Toy subsidiary, relaunched for specialty and direct-to-consumer distribution.

Full Conference Call Transcript

Olivia Elliott: Thank you, John, and good morning, everyone. As we noted in the press release issued earlier today, we believe our third quarter results demonstrate the resilience of our business model and the diligent efforts of our team as we work to overcome the challenging demand environment and the ongoing effects of higher tariffs. Net sales for the third quarter were $20.7 million compared with $23.4 million in the prior year quarter, while net income increased to $1.5 million from $900,000 a year ago. We are committed to driving profitability as we continue to execute on pricing and cost actions to offset the sales environment.

While we are encouraged by the positive performance in our bibs, toys, and disposable categories during the holiday season, the macro backdrop remains difficult for our category. Elevated U.S. tariff rates have raised product costs and contributed to uncertainty from certain China-based suppliers, while consumer spending remains uneven and price-sensitive. Third quarter gross margin was 23.5% compared with 26.1% in the prior year quarter, despite our ongoing mitigation efforts. Also impacting gross margin were certain one-time costs that Claire will speak to in a moment. Within this environment, we are staying focused on what we can control. For starters, we are very excited about our product pipeline.

Earlier this week, we announced Manhattan Toys' relaunch of Groovy Girls, an iconic line of soft fashion dolls that will be available starting in May 2026. This relaunch reflects the strength of Manhattan Toy's portfolio and our commitment to internal product development. We believe Groovy Girls will create opportunities with specialty customers and in direct-to-consumer as we broaden our reach in the juvenile space. Operationally, our supply chain team continues to work closely with our sourcing partners in China and other regions to manage through tariffs, freight, and capacity constraints.

The majority of our products are produced by foreign contract manufacturers with the largest concentration in China, and we remain focused on quality, compliance, and reliability while also continuing to evaluate alternative sources of supply where appropriate. Our inventory strategy has been deliberately conservative as we aim to minimize exposure to excess inventory in a volatile pricing and tariff environment. We also continue to execute on cost initiatives, with further plans to consolidate certain internal operations. During the quarter, we incurred $600,000 in severance expenses in connection with these consolidation efforts.

These actions are designed to eliminate redundant activities, reduce payroll and administrative expenses over time, and create a leaner operating structure that can better absorb external factors such as tariffs and raw material volatility. Shifting gears, we ended the third quarter with a solid balance sheet and liquidity position. We continue to view cash flow generation, debt reduction, and disciplined capital allocation, including our regular quarterly dividend, as key pillars of our shareholder value proposition, and we believe our brands, customer relationships, and category positions have us well-prepared to enhance long-term shareholder value as conditions normalize. With that, I will now turn the call over to Claire, who will walk you through the financial details for the quarter. Claire?

Claire Spencer: Thank you, Olivia. For the 2026, which ended December 28, 2025, net sales were $20.7 million compared with $23.4 million in the third quarter of the prior year. Gross profit was $4.9 million compared with $6.1 million, and gross margins were 23.5% versus 26.1%. The change in gross margin was driven primarily by higher tariffs on products imported from China and one-time licensing expenses in connection with the insurance claim I will speak further on in just a moment. Marketing and administrative expenses increased by $600,000 to $5 million in the current year quarter due to severance expenses incurred in connection with operational consolidation efforts.

As a percentage of net sales, marketing and administrative expenses were 24% in the third quarter compared with 18.8% in the same period last year. Other income and expense was a positive contributor in the third quarter. Other income benefited by $2.5 million in insurance proceeds received during the quarter related to certain claims made by the company under a representation and warranties insurance policy purchased in connection with the recent acquisition. The net impact of these insurance proceeds to income before tax expense, excluding certain legal and licensing-related expenses, was $2.1 million in the current year quarter. Income before tax expense for the quarter was $2.1 million, up from $1.3 million in the prior year quarter.

Income tax expense was $600,000, up from $400,000 a year ago, and net income for the quarter was $1.5 million, an increase from $900,000. Basic and diluted earnings per share were $0.14 in 2026, which was up from $0.09 in 2025. Turning to the balance sheet, we ended the quarter with total assets of $76.1 million. We had $10.6 million of additional availability under our revolving credit facility. Inventories were $31.2 million at quarter-end, compared with $27.8 million at fiscal 2025 year-end, reflecting our seasonal builds ahead of Chinese New Year. Total debt at quarter-end was $16.4 million, and we were in compliance with all financial covenants.

Net cash provided by operating activities for the nine-month period was $7.1 million, up slightly from $7 million in the prior year period. In summary, third-quarter results reflect ongoing tariff-driven margin pressure and a continued soft demand environment, offset by cost actions and non-recurring items such as severance expense and insurance proceeds. We believe our balance sheet, liquidity, and disciplined approach to expenses provide us a solid foundation as we navigate the current environment and position the company for improvement as conditions normalize. With that, I will turn the call back to Olivia for some closing remarks before we open the line for questions. Olivia?

Olivia Elliott: Thank you, Claire. We entered this fiscal year fully aware that we would be operating against a difficult backdrop, including elevated tariffs, shifting retailer behavior, and a cautious, value-focused, and uneven consumer environment. The third quarter did not change that reality, but it did reinforce our conviction that our strategy, anchored in strong brands and licenses, disciplined cost management, conservative inventory management and sourcing decisions, and a focus on cash generation, is the right one for Crown Crafts. At the same time, our capital allocation strategies focus on growth-oriented investments in our business and the return of capital to our valued shareholders.

We remain confident in the long-term fundamentals of the infant, toddler, and juvenile category, in Crown Crafts' ability to be a trusted partner to our customers, licensors, and consumers. I want to thank our employees for their hard work and dedication, our customers and licensors for their continued partnership, and our shareholders for their ongoing support. With that, we'd now be happy to take your questions. Operator?

Operator: We will now begin the question and answer session. Our first question comes from John Deysher with Pinnacle. Please go ahead.

John Deysher: Good morning, everyone. Thanks for taking my question. Hey, John. Hello, Olivia. Just curious, the sales decline you had all your acquisitions for both quarters, I think. Where was the softness on the revenue line?

Olivia Elliott: The softness is really in the bedding category. So from the toddler bedding perspective, it's a category of business that just isn't required. I mean, you need sheets for a crib, that type of thing, but you can skip the toddler bedding set altogether. And so in this environment, we're seeing where the consumer is maybe trading down and not buying the bedding set, but buying just a blanket instead. And so a bedding set can be maybe a $50 item, whereas a blanket is more like a $12 item. So we're still seeing the category be popular; it's just what the consumer is buying right now.

John Deysher: Okay. So it was just about all bedding?

Olivia Elliott: It was all bedding.

John Deysher: Okay. Okay. And you mentioned China was a major source. What percentage of the product comes out of China roughly right now?

Olivia Elliott: Almost all of it. I mean, it's in the high 90%.

John Deysher: Okay. Alright. Gotcha. And then in terms of the reimbursement, not reimbursement, the benefit of $2.5 million from insurance claims. Could you provide some color there? That's a big number. Fortunately, it went your way, but I'm just curious what the backstory is there.

Claire Spencer: It relates to a product category that was dropped at retail not long after we did the acquisition. And so we made a claim under the reps and warranties insurance, and it went our way, as you said. That also included a couple of one-time costs associated with that same category of business, which was a licensing shortfall and then some inventory that we closed out at a pretty deep discount.

John Deysher: Okay. So let me just make sure I understand that. So you made the acquisition and then a product was dropped, and you submitted a claim because you thought you were going to have that product going forward? Is that right?

Claire Spencer: That's correct.

John Deysher: Okay. That's interesting. Okay. Alright. Well, I'm glad your agreement specified that. Okay. And do you expect any more like that going forward?

Claire Spencer: Not that I'm aware of right now.

John Deysher: Okay. Good.

John Deysher: Okay, great. I appreciate the color. Thank you.

Operator: Our next question comes from Anthony Lebensky with Sidoti and Company. Please go ahead.

Anthony Lebensky: Good morning, everyone, and thanks. I just have a couple of things here. Can you just comment on the pricing? How much did that contribute to the quarterly revenue? Just wondering if you could comment on that.

Olivia Elliott: You just mean on retail price increases?

Anthony Lebensky: That's correct.

Olivia Elliott: So as of October, we have pretty much gotten all of the price increases through all of our retailers. And I think we mentioned in the last quarter, the first quarter that the tariffs went through was in our June quarter, we had tariff increases but not a lot of retail price increases. And so it takes a period of time to get all of those prices through. So as of October, the last of the major retailers took the price increases. And so the third quarter was kind of a mix. We had half of the quarter where we didn't have them, and then half of the quarter where we did.

Anthony Lebensky: Got you. Okay. Alright. And then in terms of the cost actions that you have taken, can you comment, can you give any specifics as to what the annualized cost savings might be as we think about the business going forward?

Olivia Elliott: We're still working on that number. We're going through our budgeting process now for our next fiscal year, and we'll know a little bit more where we can make some of those cuts now. It will take a little bit of time. I think a lot of it's going to be in some of our IT contracts and other contracts where currently each of our subsidiaries has to have a separate agreement. But we can only do that when the current contracts roll out. So it's going to be something that you might see part of in this fiscal year, and then we won't really fully realize the full amount until the next fiscal year.

So hopefully by June, when we have our next call, we'll be able to give more color.

Anthony Lebensky: Alright. Well, thank you very much.

Olivia Elliott: Thank you.

Operator: The next question comes from Igor Navigordativ with Lares Capital. Please go ahead.

Igor Navigordativ: Good morning and thank you for taking my question. I am a bit surprised that you still get 90% of all your products from China given the difficult trade relations between the United States and China. So what is your contingency plan if the tariffs will go up again to 100%? What would you do?

Olivia Elliott: We are actively looking at sources in other countries. We've been doing that for some period of time, and we have other contacts, etcetera. But right now, we stuck with China for several reasons. One, being the biggest is quality and safety. As you know, we deal with infant products, and so we have to take time to make any changes because we need to make sure that the product is very safe and that the proper quality control standards are in place. So while we're exploring those and we have been for the last year or so, we're taking it slowly. But we do have those contacts.

We've been to Cambodia, Pakistan, India, any number of other countries that we're making those contacts. Toys would be the hardest, particularly the plastic toys, because those are molded, and you can't just pick up your mold out of the current factory and move it to some other factory. So we would have to rebuild those molds. So that would be the toughest category for us.

Igor Navigordativ: To follow-up on this, I know there's a lot of moving parts, and tariffs have been moved back and forth several times. What is your effective tariff rate right now on average versus pre-April? How much would it be today?

Claire Spencer: I do not have kind of an effective tariff rate. I mean, obviously, the current 20% rate is on all categories of business. But it varies widely. So for example, toys, the only duty and tariff on it is the 20%. Whereas on diaper bags, the total of all of that is above 60%. So it just varies very widely. Everything else kind of falls out in the middle.

Igor Navigordativ: Do you have I see that you mentioned the price increases in October, the last price increases. Do you think you'll be able to raise prices further? Or do you think unless something changes, you're done for now? Other than normal pricing?

Olivia Elliott: Unless something changes, we're done for now. I just don't think that the consumer can absorb any price increases right now, and the price increases that have already gone into effect are impacting sales.

Igor Navigordativ: Understood. Okay. Thank you very much.

Operator: Thank you. The next question comes from Doug Ruth with Lennox Financial Services. Please go ahead.

Douglas Scott Ruth: Olivia, under difficult circumstances, I feel that you and the company have done a wonderful job. And I'm grateful for what you've done for the shareholders. I have some questions now. Where will the Groovy Girls be sold?

Olivia Elliott: So initially, in specialty stores and on our own website, manhattantoy.com is the initial goal. I mean, the hope is eventually that we'll roll it out to some larger retailers, but we would need to change the product a little bit so that you don't take the same product to both channels or then you ruin one channel.

Douglas Scott Ruth: Yes. I understand. How would you be selling them overseas as well?

Olivia Elliott: Yes. So it will be sold internationally through our distributors.

Douglas Scott Ruth: And then I noted that year over year, the inventory was down about 4%. Are you is the company happy with the present inventory level?

Olivia Elliott: I mean, I'll use the word happy, yes. I mean, I always think that we could have less inventory, but some of our planners disagree with me. So yes, I think overall, the inventory levels are good.

Douglas Scott Ruth: Okay. And then, you had previously talked some about the international sales. Could you tell us some about what's going on with the Disney license? Like I know you got the Disney license in Canada, and how has that been going?

Olivia Elliott: So the Disney license in Canada, our license for that started this calendar year, so just in January. And so we've already talked to some of the larger retailers, the product from the old licensor is kind of selling out, and we're in the process of putting the product in for our product.

Douglas Scott Ruth: Okay. And then also I think you were talking about having a different distributor in Canada for the Sassy Toys and the Manhattan Toys. Is there any update on that?

Olivia Elliott: Yes. So we think that's going well. That transition just also started happening, kind of in December, January. But I think that's going to be a very good partnership for us.

Douglas Scott Ruth: And then, I also heard you mention that you had 33 international distributors for like the Fancy Toy and the Manhattan Toy. Can you give us some ideas of what's happening there?

Olivia Elliott: I don't know if that's the exact number. We have more than 30 distributors in probably more than 50 international countries. And so, you know, that's going well. We're continuing to try to sign up more distributors and expand the countries. But that's certainly been a focus for us, and I think it's going very well.

Douglas Scott Ruth: And then how about the Q3 sales? Were the international sales higher in there any way you could maybe give us a percentage of how much they might be increased?

Olivia Elliott: We don't have that number sitting here with us. And I don't think we've disclosed that specifically. So I think I'll have to pass on answering that question.

Douglas Scott Ruth: Okay. I noticed that you had increased the advertising budget, and then I had heard you talk previously that you were doing some things, like, with Facebook and Instagram. Could you maybe tell us a little bit more about what's going on with that?

Olivia Elliott: So we're continuously trying to increase our presence both in the marketing and the advertising side. I mean, it's just a part of doing business now. It's the way you get your consumer. And so we've increased it a little bit this year, and I think that you'll see us budget more and spend more in the next fiscal year. Otherwise, it's very hard to get the consumer now.

Douglas Scott Ruth: Is the company thinking anything more about the warehouse? I believe that possibly one of the leases is coming up. Is there any talk about that at all?

Olivia Elliott: We still put that on hold right now. We are extending the lease in Minnesota to coincide with the termination of the lease in California. And we'll pick back up on that conversation probably toward the end of this calendar year. You kind of need about an eighteen-month lead time to choose a location, do a lease, and then do whatever kind of build-out needs to go to the new location. So probably I'm going to say maybe November, we'll start that conversation again.

Douglas Scott Ruth: Okay. With this insurance policy, the representation and warranty insurance policy, how who figured out to buy that? How did that come about?

Olivia Elliott: You mean getting the policy itself?

Douglas Scott Ruth: Is that a normal, is that something that the company maybe does when you make an acquisition? Or is this something that was unique?

Olivia Elliott: It was something specific to this acquisition. It was just part of the agreement.

Douglas Scott Ruth: Well, whoever came up with that, I would like to give I would like the company to consider giving that person a bonus. If it was you, I think you should get the bonus. That was an outstanding idea to come up with that. I've never heard of that before, and it really worked out for the company and the investors' favor. So that's really a it was really a great idea.

Olivia Elliott: I don't think I can take credit for that one. It was kind of a mutual agreement. So, I appreciate the comments.

Douglas Scott Ruth: Oh, okay. I want to thank everybody who is involved in it and, of course, the people that who did it know who they are. But thank you for doing that. And thank you, and thank you, Claire, for your contribution, and you really did a great job. Thank you for that.

Claire Spencer: Thank you, Doug.

Operator: We have a follow-up question from John Deysher with Pinnacle. Please go ahead.

John Deysher: My follow-ups have been answered. So thank you and good luck going forward.

Olivia Elliott: Alright. Thanks, John. Thank you.

Operator: Our next question comes from Greg Bennett with Retail. Please go ahead.

Greg Bennett: Hey, good morning. I think in a previous conference call, there was some discussion about Target was going to get out of some of their, I guess, store categories and that they may be the impression I got is that they may be looking towards you or somebody else. Can you comment on that?

Olivia Elliott: I think what you're talking about is just that Target's been taking a lot of their programs to private label and direct sourcing them. And so we've had a couple of categories in the past, one of them being our bib category and then one of them being the diaper bags, that have been taken away from us and given, they've gone private label and gone direct source.

Greg Bennett: So they're not bringing yours back? Because they were gonna get to somewhere like

Olivia Elliott: Right now, we have not been able to get those back. We certainly are trying, and we hope to. But at this point in time, we've not gotten them back.

Greg Bennett: Okay. Thank you. 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: Thank you all for your support and interest in Crown Crafts. We look forward to updating you on our next call in mid-June. Thank you.

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

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