Crown Crafts (CRWS) Q2 2027 Earnings Call Transcript

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DATE

Thursday, Nov. 12, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Olivia Elliott

TAKEAWAYS

• Net Sales -- $19.0 million, compared to $23.7 million in the prior-year quarter, reflecting a decline attributed to a high comparison base and softer consumer demand.
• Gross Margin -- 32.0%, up from 27.7% in the prior-year quarter, driven by a shift toward higher-margin products and strategic pricing initiatives.
• Adjusted Gross Margin -- 30.9%, excluding $449,000 in tariff refunds and $236,000 in severance expenses.
• Net Income -- $1.3 million, an increase from $1.2 million in the prior-year period.
• GAAP EPS -- $0.12, compared to $0.11 in the same period last year.
• Operating Cash Flow -- $11 million for the first six months of the fiscal year, partially driven by the receipt of tariff refunds.
• Total Debt -- $5.3 million, reduced from $14.1 million since the start of the fiscal year in March.
• Total Liquidity -- $18.8 million, consisting of cash, equivalents, and available credit on the revolving line.
• Pending Tariff Refunds -- less than $900,000, representing claims applied for but not yet received or recognized on the balance sheet.
• Marketing and Administrative Expenses -- $4.5 million, a decrease from $4.7 million in the prior-year quarter due to efficiency initiatives.
• Net Interest Income -- $72,000, swinging from a net interest expense of $287,000 a year earlier due to lower debt and interest on tariff refunds.
• Quarterly Dividend -- $0.03 per share, representing a stock yield of approximately 5%.
• Severance Expense -- $236,000, related to a reorganization effort and the consolidation of duplicate positions.
• Current Tariff Rate -- 12.5% across all categories, with management noting a potential reduction to 0% for the toy category.
• Advertising Expenses -- $140,000, down from $400,000 in the prior-year quarter due to the timing of customer-related programs.

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RISKS

• Elliott stated, "there's no doubt consumers are feeling a bit hesitant given the uncertainty around high interest rates, gas prices, overall affordability and geopolitical events," identifying macroeconomic factors as headwinds to current demand.

SUMMARY

Crown Crafts, Inc. (NASDAQ:CRWS) reported a decrease in quarterly revenue while highlighting expanded profit margins and significant debt reduction. Management stated that the sales decline was partially due to a difficult comparison with the prior year, when revenue was inflated by a recovery from tariff-related inventory issues. The company indicated it is utilizing a period of softer consumer spending to focus on internal efficiency initiatives, product development, and the consolidation of warehouses and operations.

• Elliott stated, "While demand conditions remain soft, we're executing on our own improvement initiatives to prepare for what's next and to capitalize on stronger sales ahead when conditions normalize."
• Management reported that the Groovy Girls brand relaunch gained traction in Canada and recently launched on Amazon's platform.
• The company is evaluating new sourcing locations in Vietnam, Thailand, Cambodia, and Egypt to diversify manufacturing outside of China.
• Elliott indicated that the company plans to exit its current Manhattan Toy office location by the end of March 2027 in favor of a smaller, less expensive space.
• Management expects to complete a warehouse consolidation process by approximately April 2028 to May 2028.
• The company identified potential new sourcing options for its diaper bag product line following a month-long trip to Asia.

INDUSTRY GLOSSARY

• Groovy Girls: A retro-inspired brand of fashion dolls and accessories owned by the company.
• Kind + Jugend (K&J) Show: An international trade fair for premium baby and toddler products.
• Manhattan Toy: A brand subsidiary of Crown Crafts that focuses on developmental toys.
• Sourcing: The business process of identifying and selecting suppliers to manufacture goods.
• Tariff Refund: A reimbursement of duties previously paid on imported goods, often following a change in trade policy or a legal ruling.

Full Conference Call Transcript

Operator: Good afternoon, everyone, and welcome to the Crown Crafts Fiscal Year 2027 Second 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. In addition, during today's conference call, management will refer to certain non-GAAP or adjusted financial measures.

Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are available in the company's earnings release, which has been posted on the Investor Relations section of the company's website and are also available on Form 8-K filed today with the SEC. With that, I would now like to turn the call over to President and Chief Executive Officer, Olivia Elliott.

Olivia Elliott: Thank you for the introduction, operator, and thanks, everyone, for joining us today. Normally, I'd be joined by our CFO, Claire Spencer, but she's just welcomed a baby into her family, so I'll be speaking on her behalf today. During the second quarter of our fiscal year, Crown Crafts continued to make progress on our internal initiatives aimed at improving profitability both today and in the years to come. This is evidenced by our gross profit margin that expanded more than 300 basis points over the prior year quarter, even on an adjusted basis as well as our stronger bottom line performance.

Our earnings per share were up slightly over the past year and our operating cash flow through the first 6 months of our fiscal year has remained strong. In other words, while demand conditions remain soft, we're executing on our own improvement initiatives to prepare for what's next and to capitalize on stronger sales ahead when conditions normalize. While sales were off relative to the year ago quarter, this is largely due to the year earlier September quarter benefiting from the bounce back from the initial tariff reaction and related inventory issues in the June quarter of fiscal 2026.

In terms of the current demand environment, there's no doubt consumers are feeling a bit hesitant given the uncertainty around high interest rates, gas prices, overall affordability and geopolitical events. But our own sales benefited from the recent relaunch of Manhattan Toy brand's iconic line of fashion dolls. Groovy Girls continues to see strong growth in Canada, and we look forward to keeping you posted as this retro-inspired line gains additional traction. I also today want to dig deeper on our margins, cash flow and balance sheet strength that are a direct reflection of our focus on profitability. As I mentioned, our gross margin expanded considerably over the past year.

And I'll note that we were able to trim marketing and administrative expenses as well due to our continued sharp focus on driving efficiencies and cost control. As a result, not only were we able to report stronger net income this quarter, but our operating cash flow year-to-date has climbed to $11 million, partially driven by tariff refunds. We've utilized this solid cash flow to further strengthen our balance sheet with our long-term debt now substantially reduced. We're paying far less interest expense as a result and are also able to continue paying the dividend to our highly valued shareholders with the stock currently yielding approximately 5%.

With that, I'll now transition to the traditional CFO portion of our prepared remarks, taking us through our financial results in more detail before opening it up for questions. As I mentioned, we had stronger profitability and solid operating cash flow during the second quarter despite the year-over-year decline in revenues, which itself was partially due to strength a year earlier in the second quarter of 2026 as sales came back after the initial round of tariffs and related inventory moves that impacted the prior year's first quarter. Our second quarter net sales were $19 million compared with $23.7 million in the second fiscal quarter of 2026.

We grew our gross margin for the quarter to 32% or 30.9% adjusted for tariff refunds and severance expense, well above the 27.7% level in the year ago quarter, reflecting our shift towards a higher-margin product mix and our strategic pricing initiatives. Our ongoing focus on efficiency helped us also successfully reduce marketing and administrative expenses, which came in at $4.5 million. This was an improvement relative to $4.7 million in the prior year quarter. As I mentioned, our strong cash flow, partially related to tariff refunds has allowed us to sharply reduce debt over the past year, as I'll discuss in a moment.

The lower debt, stronger cash balances and interest associated with tariff refunds have helped us swing to positive net interest income for the most recent quarter of $72,000 as compared to net interest expense of nearly $300,000 a year earlier. In terms of bottom line performance, our GAAP net income of $1.3 million for the quarter was up slightly over the past year, and GAAP earnings per share of $0.12 was up from $0.11. Moving on to the balance sheet. We ended September with total liquidity of $18.8 million, including cash and equivalents and availability on our revolving line of credit.

Our total debt of $5.3 million as of September was much improved from $14.1 million just since the start of our fiscal year this past March. This solid financial position serves as a source of strength as we continue to execute on our business plan, prudently invest in future growth opportunities and pay a quarterly dividend to our valued shareholders. Looking ahead, our entire team remains focused on driving profitable growth for Crown Crafts. While our internal product development team works on exciting ways to expand our product offering, we also continue to seek efficiencies and closely track expenses to continue driving margin expansion as you saw this quarter.

Specifically, we aim for an increased mix of higher-margin products and over time, plan to consolidate certain internal operations and consolidate warehouses as you've heard me reference on prior calls. All of these initiatives are progressing as planned, and we look forward to providing further updates over time. In summary, to enhance long-term shareholder value at Crown Crafts, we're using this period of softer consumer spending to expand our own profitability while also preparing to capitalize on stronger demand trends in the future. This starts with internal development and includes expanding our marketing programs, all while leveraging our brands as well as our retail and licensing agreements with our valued partners.

With that, operator, I'd be happy to take questions, if you could please open the lines.

Operator: [Operator Instructions] Our first question is from Igor Novgorodtsev from Lares Capital.

Igor Novgorodtsev: So could you maybe break down a little bit? I understand that your sales are down, as you already explained, because you had an unusual quarter a year ago. But how much of the reduction, not counting that came from your deliberate decision to improve the margin? And how much of it came from the weakness? And maybe you can also mention how should we look forward to the Q4 giving? Is it also going to be down year-over-year? Or do you have any visibility into that?

Olivia Elliott: So I can answer the first couple of questions. But as far as looking forward to the next few quarters, we really don't do any forward-looking information. As far as the second quarter goes, I'm going to -- without having exact numbers, it's about half of it, maybe a little bit more was from the second quarter of last year being inflated due to the first quarter of last year being under the prior year. The rest of it is going to come from some programs that we've already talked about over the last few quarters like a blanket program that we no longer have and some other things.

And then there were some programs, maybe not programs per se, but some products that we chose to take off of sale because they were just not profitable for us.

Igor Novgorodtsev: Okay. That's very helpful. Regarding your profit margin, obviously, it's nice to see that it's been increased to 30.9% if you normalize it, as mentioned in your press release. Is that sort of a new normal or it's not yet clear what it's going to look like? Again, I'm not looking for guidance. I just want to how you think about this. Is it restoration was due to certain things that you've done, certain measures and is it going to improve going further? How do you think about this?

Olivia Elliott: I mean I'm not going to look forward again, but I mean, I think it's a good number. It's a number that we strive for. It's where we used to be maybe a couple of years ago before we had all of the impact of the economy and the tariffs, et cetera. Other than what's already accounted for, the tariffs and the severance, there were no other items in there that were unusual.

Igor Novgorodtsev: Okay. And my last question, I had just a brief chance to look at the 10-Q. It looks like your advertising expenses have come down substantially in this quarter. Is that correct? Am I right about this, something like from $400,000 to $140,000? And is it going to have impact on going forward? Was it a deliberate thing that you decided to reduce advertising expenses?

Olivia Elliott: It's probably more timing than anything else, just the timing of when we advertise, say, going into the holiday season or timing of certain, I'm going to say, customer-related programs. So it may be that we supported a program at a customer at a different time last year than we did this year.

Operator: Our next question is from Doug Ruth with Lenox Financial Services.

Douglas Ruth: Olivia, congratulations on the good quarter here. I had some questions related to Groovy Girls. I think you had noted that you were possibly going to -- you were working to get the Groovy Girls on the Amazon website. I was just wondering if there was anything happening with that initiative?

Olivia Elliott: Thankfully, they are up and running as of the beginning of this week.

Douglas Ruth: Oh, wonderful. Congratulations.

Olivia Elliott: Thank you.

Douglas Ruth: And then I know that you had gone to the European toy show, and I was wondering if there's anything happening with the Europe sales of the Groovy Girls so far? Or is that maybe a process or...

Olivia Elliott: So those sales probably won't start until our next quarter, but we did show them at the K&J show, and they were received very well. So we're looking forward to seeing the results of that.

Douglas Ruth: Wonderful. Very, very good. And then I was wondering, is there any update as far as what kind of progress you're making with the warehouse? Has that process started? Or...

Olivia Elliott: It is starting as we speak. And so when I was in Asia for the last month on a sourcing trip, the team that's working on that had their first call. And so it's very initial, and there's really nothing to report yet.

Douglas Ruth: Okay. And then are you -- is the company thinking could there still be some more tariff money coming back? Or do you think that's the end or...

Olivia Elliott: We still have a little less than $900,000 that we have not received yet that we applied for. I mean we're still hopeful and we're hearing that it's going to be paid back, but we have not received it yet. And we have not reported it either.

Douglas Ruth: Okay. And then is the current financial statement, is there any cash that's not on the balance sheet that's still owed to the company from the tariffs?

Olivia Elliott: Yes, that's a little less than $900,000, but we haven't reported.

Douglas Ruth: No, I meant that the money that was to be paid is on the balance sheet now, is that correct?

Olivia Elliott: That we've received is on the balance sheet and maybe there's about $20,000 in the receivable. That's it. Then there's $900,000 we haven't put into the receivable yet.

Douglas Ruth: And then I was wondering if you could give a little commentary on the severance. Maybe you could tell us like how many jobs were cut? Or was there a specific job cut or...

Olivia Elliott: It was a small number of jobs. It was the continuing efforts put around the reorganization we started last year about this time. Some of those will be -- some of that money will be redirected towards positions in other departments. So it's kind of our ongoing merger where we realized that we had duplicate positions in some areas and then we had holes in other areas that we needed to fill.

Douglas Ruth: And then is the company having any additional thoughts or thinking about doing anything with the diaper bags at this point?

Olivia Elliott: We're still looking at diaper bags. As I just mentioned earlier, we -- several of us have been in Asia for the last month looking at alternative sources, and we found a few good potential options that we can -- that we're looking at.

Douglas Ruth: Do you think something could happen still in fiscal '27? Or would that be like a fiscal 2028 event?

Olivia Elliott: It would certainly be after fiscal 2027.

Douglas Ruth: Okay. And then how do you feel about the inventory at this point?

Olivia Elliott: I think it's an appropriate level of inventory. As you know, we usually build up our inventory going into the holiday season and then also we start building up for Chinese New Year. And so this is a pretty normal level for us, and I feel good about it.

Douglas Ruth: And I want to congratulate you and the team. You really did a good job getting that debt down. Is there a certain target level? Or do you think that you're at about the level that you might be? Or is there anything you could share there?

Olivia Elliott: I don't know that we have a target level per se. I mean we would like to have a lower debt level. I mean even if it swings to a cash position, that's fine because we know that there's going to be a decent amount of expenses that we need to spend to do a warehouse consolidation and potential move.

Douglas Ruth: And then my last question was, has there been any additional progress on like -- I know the Manhattan Toy -- that office facility is a fairly large expense for the company and I think that lease expires at the end of March. Has there been any progress on thinking about where you might -- what you might do with that facility or what you might do with office space for the Manhattan Toy people?

Olivia Elliott: So we're definitely exiting the current location. And anything that we move into will be much smaller and much less expensive. We haven't really made any final decisions. But it would be a very small, maybe even more storage and photography studio than anything else.

Douglas Ruth: Congratulations on a good quarter. And I also want to congratulate Claire and her family. It's wonderful to hear that she has a baby, and I'm hoping that she's doing okay.

Operator: Our next question is from John Deysher with Pinnacle Capital.

John Deysher: Most of my questions have been answered. But regarding the sourcing trip, one of the things that you really need to do is get away from China. So I was just curious, based on your month abroad, whether you found any potentially realistic sources outside of China?

Olivia Elliott: So we visited Vietnam, Thailand and Cambodia, saw factories in each of those locations. The Thailand factory, we already are doing business in. Vietnam and Cambodia, we saw several good options. I think Vietnam is probably more of an option for us than Cambodia. But yes, there's some good opportunities. And we also heard about a lot of emerging opportunities maybe in Egypt. So that could be a potential future sourcing trip.

John Deysher: Okay. What's the lead time in terms of changing sourcing? Is it 6 months or if you found the right opportunity in Vietnam, Cambodia or Egypt, when would we start to see that in terms of goods flowing in?

Olivia Elliott: It depends on the product category. So a cut-and-sew like a blanket or a bib or something like that, that could be immediate if the pricing is right and it works out. For toys, well, the Thailand manufacturers wooden toys. So we could do that fairly quickly. But from the perspective of a plastic toy, that's a lot harder because those -- you need molds, which are quite expensive, and we already have molds built in China. So it would have to be one of those kind of things that it would be something in the future, and it takes some bit of time to design those, have the molds built, test everything, have the safety done.

So plastic toys would be the absolute longest lead time.

John Deysher: Good. That's encouraging. And then just on the warehouse consolidation, is it -- would it be your goal to have that in place by the end of the year, March? Or is it okay if that goes over into the New Year?

Olivia Elliott: The end goal is sometime around April to May of 2028, which is ahead of when both of the warehouse leases expire. And so backing up from that, we really need to start 18 months ahead of time doing the legwork as to where we might move and starting to do a build-out.

John Deysher: Okay. So no -- when would you guess we'll have a public announcement about that, not necessarily the combination, but the planned combination?

Olivia Elliott: Maybe when we release our year-end numbers in June, it's a possibility we'll make an announcement then.

Operator: [Operator Instructions] Our next question is from Igor Novgorodtsev at Lares Capital.

Igor Novgorodtsev: I have a couple of follow-up questions. So one of them, again, not necessarily looking for precise numbers, but maybe you can at least describe it qualitatively, the tariff situation today for each product category versus before what it was before the Liberation Day and basically what it was like a year ago before the Supreme Court vacated some of the tariffs. So if you can just give us a much better idea kind of where it stands now that after the election, the situation may change again. So we kind of want to see the potential effects.

Olivia Elliott: So where it was exactly a year ago from today, I'm not positive if it was at around the 30% or the 20% number. It was 20% across all categories when the Supreme Court said no, they're not legal. Now it's 12.5% across all categories. We are hopeful there was -- in the announcement about the possibility of going to 0 on certain categories. Toys were included in that, but we haven't gotten an effective date yet. So we think we could see some relief on the toys where toys go back to 0. They had 0 duty before. They were carved out of the 25% tariff from President Trump's first term.

And if we get the relief on those, that would go back to 0, and that would be very helpful for us. But right now, everything has 12.5% on it on top of the tariff from the previous term and their regular duties.

Igor Novgorodtsev: Okay. That's very helpful. My other question, you mentioned that now your balance sheet is in much better shape, actually in a very good shape, and you may want to consider returning cash to shareholders. Again, how do you think about this? What is more likely higher dividends, stock buybacks, or you want to acquire somebody? Again, I'm not looking for guidance. I'm just looking how you think about this.

Olivia Elliott: So that is at the discretion of the Board every single quarter. But I will tell you from a historical conversation perspective, we haven't done any stock buybacks in a long time, and they really did not do anything to improve the liquidity of the stock for sure. So right now, I would tell you that dividends are the way we would return.

Igor Novgorodtsev: If I may make a humble suggestion, given your almost historically low stock price, stock buybacks would not be such a bad idea to just sort of kind of putting it on record, but it's just obviously my humble opinion. But thank you. I don't have anything else.

Olivia Elliott: Thank you very much.

Operator: We've reached the end of the question-and-answer session. I would like to turn the floor back over to Olivia Elliott for closing comments.

Olivia Elliott: Thank you, operator. We very much appreciate everyone joining us for today's call, and I want to thank you for your ongoing interest in Crown Crafts. We're working hard to drive sales growth, including during the upcoming holiday season, and I look forward to providing additional updates as we move through our fiscal year. Please don't hesitate to reach out with any further questions, and have a wonderful evening. Thanks again.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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