CROWN CRAFTS INC Q3 FY2026 earnings call

• Product pipeline: Manhattan Toys relaunched Groovy Girls, an iconic line of soft fashion dolls, available starting May 2026, aiming to create opportunities with specialty customers and direct-to-consumer. - Supply chain: Working with sourcing partners in China and other regions to manage tariffs, freight, and capacity constraints; focusing on quality, compliance, and evaluating alternative suppliers. - Inventory strategy: Conservative to minimize excess inventory in volatile pricing and tariff environment. - Cost initiatives: Incurred $600,000 in severance expenses for consolidation efforts to eliminate redundant activities and reduce expenses; plans to further consolidate internal operations. - Insurance proceeds: Received $2,500,000 from a representation and warranties insurance policy related to a dropped product category post-acquisition.

For the third quarter, net sales were $20,700,000 compared to $23,400,000 in the prior year quarter. Net income increased to $1,500,000 from $900,000 a year ago. Gross margin was 23.5% vs. 26.1% in the prior year quarter. The bedding category was soft, with consumers trading down from bedding sets to cheaper items like blankets. Bibs, toys, and disposable categories showed positive performance during the holiday season, but the macro backdrop remained challenging.

• Focus on cash flow generation, debt reduction, and disciplined capital allocation, including regular quarterly dividend. - Confident in long-term fundamentals of infant, toddler, and juvenile category, and preparedness to enhance long-term shareholder value as conditions normalize. No specific forward-looking guidance beyond current strategies outlined.

• Elevated U.S. tariff rates increasing product costs and causing supplier uncertainty. - Uneven and price-sensitive consumer spending. - Dependence on China for manufacturing (high 90% of products from China), potential issues if tariffs increase further. - One-time costs impacting gross margin.

Q: 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?

A: 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.

Q: Okay. So it was just about all bedding?

A: It was all bedding.

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

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

Q: Okay. Alright. Gotcha. And then in terms of the reimbursement, not reimbursement, the benefit of $2,500,000 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?

A: 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.

Q: 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?

A: 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 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: Yes. I understand. How would you be selling them overseas as well?

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

Q: 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?

A: 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.

Q: 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?

A: 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.

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

A: 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.