Olivia W. Elliott - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary E. Randall Chestnut - Chairman, Chief Executive Officer, President and Member of Capital Committee.

David M. King - Roth Capital Partners, LLC, Research Division James Fronda - Sidoti & Company, LLC Igor Novgorodtsev Charles Levy.

Good afternoon, and welcome to the Crown Crafts, Incorporated First Quarter Investor Call. [Operator Instructions] Please also note that today's event is being recorded. I would now like to turn the conference call over to Ms. Olivia Elliott, the company's Vice President and Chief Financial Officer. Ms. Elliott, you may begin..

Thanks, Jamie. Good afternoon. Welcome to the Crown Crafts Earnings Conference Call for the First Quarter of Fiscal Year 2014. With me today is Randall Chestnut, the company's President and Chief Executive Officer..

Good afternoon..

A telephone replay of this call will be available from 1 hour after the end of the call through 8 a.m. Central Daylight Time on August 22, 2013. Also, a web replay of this call will be available for 90 days and can be accessed by visiting our website at crowncrafts.com.

Before we begin, I would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in today's conference call. I will now turn the call over to Randall..

Olivia, thank you, and good afternoon, again, and welcome to the Crown Crafts Incorporated investor conference call for the first quarter of FY 2014, for the quarter and month that ended June 30, 2013. I'll report on a few of the items, Olivia will come back and give you more detail and then we'll come back for anyone that has questions.

Net sales for the quarter were $16.6 million, as opposed to $17.5 million in the previous year, or a decrease of $800,000, or 4.8%. Net income for the quarter was $822,000, as opposed $897,000 in the previous year, or a decline of $75,000 or 8.4%. Diluted earnings per share were $0.08, as opposed to $0.09 in the previous year.

It should be noted that historically, the first quarter of our fiscal year is always our weakest quarter. Sales throughout the quarter continued to be depressed as retail experienced low point of sales. In addition, retailers continued to watch inventory and make adjustments as they went through the quarter.

Sales were also continued to be affected by the lower U.S. birth rate that we've been seeing for the past several years. As we enter into the second quarter, we are seeing some positive momentum, largely driven by 3 new programs that are set to roll out during the second quarter.

This reflects the success of our efforts to continually strengthen our product offering with innovative and popular new designs and lines. We're pretty excited about this. Gross profit for the quarter increased to 25 -- from 25.4% last year to 27.1% in the current year.

The improvement reflects lower deductions from gross to net sales based upon the customer mix for the quarter compared to the same quarter the previous year. We finished the quarter -- turning to the balance sheet, we finished the quarter with no debt and $2.9 million cash on hand.

We also announced this morning our 15th consecutive quarterly dividend. We announced that we would pay $0.08 per share to shareholders of record as of the close of business on September 13, and this will be paid on October 4. This represents a 4.7% annualized yield based on yesterday's stock close price.

I'll now turn it back over to Olivia for a few additional comments. Thank you..

I'm only going to give financial highlights. For a more detailed analysis, please refer to the company's Form 10-Q filed with the SEC this morning. Net sales for the current year first quarter were $16.6 million, which is $840,000 or 4.8% lower than the first quarter of fiscal 2013.

Sales were negatively impacted by a challenging retail environment and a lower birth rate.

Gross profit increased from 25.4% of net sales in the first quarter of fiscal 2013 to 27.1% in the first quarter of fiscal 2014, due primarily to lower reductions from gross sales to net sales based on the customer mix in the current year, as compared to the prior year.

The company also experienced a decline of $75,000 in costs associated with the rental of an auxillary warehouse and distribution center, which was vacated and sublet late in fiscal year 2013.

Marketing and administrative expenses for fiscal year 2014 increased in amount and as a percentage of net sales as compared with the same period of fiscal year 2013, primarily due to an increase of $237,000 in overall compensation costs, and an increase of $135,000 in legal fees, primarily due to $172,000 increase in legal fees in the current year associated with the company's defense of 2 lawsuits.

These increases were offset by a decrease of $88,000 in advertising costs, as compared with the prior year. The company's position for income taxes is based upon an estimated effective annual tax rate of 37.2% for both fiscal years 2014 and 2013.

Net income for the first quarter of fiscal 2014 was $822,000, or $0.08 per diluted share, compared to net income of $897,000, or $0.09 per diluted share, in the first quarter of fiscal 2013. I will now return the call to Randall..

Olivia, thank you very much. And Jamie, we'll get you to come back and give the instructions for anyone who might have any questions..

[Operator Instructions] And our first question comes from Dave King from Roth Capital..

So I guess, first off, just looking to get a little bit more color on the SG&A increase year-over-year. Even with the litigation and the legal fees, it looks like it was still kind of up.

I was wondering if you could just provide some more color on what might be driving that? It looks like it's compensation, but just any more color around that, and then, how we should think about that going forward..

Compensation was the other big piece of it and it's primarily related to stock-based compensation, and a lot of that is related to the increase in the stock price..

Okay. So -- okay, so we can make assumptions around that. And then in terms of gross margin, Randall, it sounds like from your comments that that's driven -- was driven -- the improvement was driven by changes in the channel mix or sales by channel, if I heard that correctly..

Well, yes, Dave, by channel and our customer mostly, okay? I mean, with certain customers, there are more deductions and allowances, et cetera, that are given to other customers.

So we had a shift in the quarter, and then this quarter happened to be a shift that was favorable and we -- it had less to some customers that have the larger discounts, allowances, et cetera, to customers that have lesser, and that did have an impact on it..

Okay. So then if I think about that going forward in that it sounds like that could then bounce around a little bit....

It could bounce around, Dave. A portion of it, a smaller portion of it, was definitely a change and an improvement in product mix, but that's the smaller of the 2 percentage points. That's the smaller part of it. The larger part is the change in the customer mix. So that can bounce around, yes..

Okay. Perfect. And then just lastly, it sounds like you have some new programs that are -- you're seeing good momentum with the second quarter.

Can you just elaborate on those a little bit, Randall?.

Yes, just a little bit, Dave. We'll elaborate a little bit. There's 3 new programs, 2 with 1 retailer and 1 with a third retailer -- excuse me, with a second retailer. And one of them is a new concept. It's a little bit of a mix-and-match type program, and it's -- so we're pretty excited about it.

It's a new concept that we developed internal, with some new internal branding that we're using, and it will start rolling out here in the next few weeks..

Our next question comes from James Fronda from Sidoti..

Most of my questions were answered, but I guess, do you have any insight, I guess, into -- can you give us some color on acquisitions? Are you thinking about those going forward?.

Yes, James, we're looking at acquisitions all the time. As you see, we've got a balance sheet with no debt on it, and we're building some cash. So we look at acquisitions constantly. And that's not new, we do that a lot. And we walk a lot more than we act on because we're -- look for a good buy and something that fits and something that makes sense.

But yes, we always look and we're always interested..

Are there any, I guess, specific avenues that you might be looking at right now?.

Yes, I mean, we've talked about this before on calls, and we look for something that complements what we do.

We're not looking to expand, in particular, in any one category that we're already in, but we're looking at something that we could bring into the portfolio that would be to the same channels of distribution and ultimately the same end-user, but complement the categories that we currently have..

[Operator Instructions] Our next question comes from Igor Novgorodtsev from Lares Capital..

I just want to follow up quickly on an SG&A question. So SG&A, as a percentage of sales, seems to be a little bit up and that has to do pretty much when the stock went up and basically flow [ph] through the compensation went up because of this.

So would it be fair to say, let's say, if the price -- the stocks stay stagnant through the rest of the year, the price doesn't come up [indiscernible] should we expect the SG&A is going to be less percentage of sales? Or you have some other expense that you ramped up, such as marketing or some administrative expenses?.

Well, part of it is when we -- the timing of when we make stock option grants or stock grants. And so those are valued for accounting purposes using the current stock price at the time. So the expense we're doing for that will stay pretty steady. Of course, if sales go up, and then, as a percentage of net sales, it's going to look better..

Yes, Igor, in this quarter, it's sort of exaggerated because it is a lower sales quarter. And as I said earlier, it, historically, has always been our weakest quarter. So we would take that cost and divide it, it is a higher percentage and that will decline..

Okay. My other question, obviously you have to -- it looks like you lost about $0.01 a share in net income because of the legal spending and lawsuit, et cetera.

Should we expect the further drag or everything has been finished on the legal side? Or we should model some things towards the next quarter, that there's going to be additional legal expenses?.

The legal -- I can't really elaborate a whole lot on legal, on litigation. But suffice it to say, that the litigation is not settled, okay? And it's not resolved as of this time..

Okay. All right. And you don't have -- okay.

So you don't really have any timeline where you think you might settle it, or could you not really comment on that?.

No, we really don't. And we disclosed in the Q that in one of the particular cases, the discovery was just recently -- a judge, a magistrate judge, ordered a stay on discovery, which is going to slow down some of the expense. So that was a favorable ruling on our behalf. But we really don't have a timeline on it. Those things are very unpredictable..

Right. I mean, it just looks like -- I mean, I haven't gone through your 10-Q yet, but it looks like it's a pretty large expense, considering that this is not huge lawsuits.

So it's -- I'm just wondering if this particular quarter, if that's just happened to be due to timing, because that's affected this quarter more than any other quarters? That's due to the timing..

There was a lot going on in this quarter. There was a lot of discovery, okay, which caused it to run it up a little bit. But again, I can't really elaborate except to say what we reported in the Q, and that is, for the time being, the judge, the magistrate judge, issued a stay on discovery, which helps on that one case.

So -- and it's still ongoing, it's not resolved..

Okay. Fair enough. And on the loss on -- just to pick up on your comments, you've said that you liked your momentum going into the second quarter.

Could you just elaborate a little bit more on any specifics, more particularly like of the second quarter versus the first quarter?.

No, as I've said -- and we don't forecast, but we are saying that we've got some new programs going in that we're pretty darned excited about. And as I said to Dave on the previous question, it's 3 new groups, or 3 new assortments in groups, to 2 retailers. And those are new and they're going in and they're just shipping in the second quarter.

And one of them is a new concept, and one of them is to -- a retailer that historically has not been in our portfolio in a big way. So we're pretty excited about it..

Okay.

But this is not just based on that your expectations, but you already have something intangible where you see the actual interest from your channels?.

We do. We do..

[Operator Instructions] And we have an additional question, this comes from Charles Levy from Morgan Stanley..

Could you detail a little bit, over the last year or 2 you've made or announced some intriguing joint ventures or acquisitions or product development with some name brand people? But I have no idea how any of them have been going, whether they're successful, whether they're continuing.

Could you go into some detail on all of those, please?.

Yes. And, Charles, let me clarify that. There really hasn't been any acquisition. There's been some announcements of new licenses and partnerships, et cetera and I will touch on some of those, okay? We announced a new partnership with a distributor in Canada, and that's going pretty well. I mean, it's got -- it got off to a slow start.

We now have inventory in Canada, and we are shipping a number of retailers from the inventory that we've positioned in Canada. And that one's going pretty well. We also made an announcement about 1 year ago on a brand and a new channel, or a new product or designs, called Wendy Bellissimo. And that one, we're really excited about.

That is 1 of the 3 programs that I referred to that is going in, it's branded Wendy Bellissimo. So with that, we feel really, really good about. And we've announced some other ones, and I don't recall right offhand which ones they were, but those are 2 that come to top of mind right at the moment, and those 2 have been successful..

Okay.

Could you give us an idea what kind of products are involved in these new programs?.

For Wendy Bellissimo, it's bedding, blankets, we also have bib and bath items and we have plush in it. So it's categories that we've been in. Plush is a little bit new to us. We had some plush in a small way, but this is pretty good. So -- but it's the product that we've been having and just new designs. And so -- and really exciting looking product..

I think there was an announcement a while back about entering the pet market with some items for dogs, et cetera.

Could you let us know if that's working?.

That one, Charles, we've been at it now for a few years, and we've had a little bit of success, but not much. And not enough that it's noteworthy at this point.

And candidly, it's something that we have under the microscope to examine on whether we're going to try to expand it, go further into it and do acquisitions or fold the tent and go home, and get out of it and do something else. You try a lot of different things and some work and some don't work so well.

That one, it's been okay, but for the amount of effort we're putting into it, it's just not giving us the traction we'd like to see on the return..

And I think there was an acquisition or a venture where you were getting into some of the fast food chains?.

Yes. Okay, Neat Solutions. That one, Charles, we did that. And I didn't go back that far. That one, we did the acquisition in 2010 and it has a component to it. It's a place meant for kids, place meant for children. It has a component to it, where we sell to the casual dining restaurants. And that one is very successful.

That one is growing, and the casual dining part of that business is the largest percentage of the business of that particular brand and category. And it's a good percentage of the overall business. I mean, we sell to traditional retailers too, but the casual dining is the largest percentage. So that one we feel really good about..

And sir, at this time, I'm showing no additional questions. I'd like to turn the conference back over for any closing remarks..

Jamie, thank you very much. And we'd like to say to everyone on the line, thank you for your time and attention and your interest in the company today. And as always, if you have questions, please don't hesitate to give us a call and we'll be back and talk with you again whenever we report our second quarter in approximately 3 months. Thank you.

Have a good day. Goodbye..

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines..