Crown Crafts slips in second qtr. earnings

By Staff -- Home Textiles Today, 11/17/2003 12:00:00 AM

GONZALES, LA —

With sales tumbling more than 20 percent, hurt by a sluggish economy and big shifts in customer buying patterns, second-quarter profits were slashed by more than half at Crown Crafts Inc., falling to $924,000 from $2.1 million last year.

Sales at the big producer of infant's and juvenile products fell 22.5 percent, to $22.0 million from $28.4 million last year.

Providing some relief to the bottom line, the company continued to hack away at operating costs and interest expense Expenses were pared by 18.2 percent, to $2.8 million from $3.5 million a year ago, generating a cash savings of $630,000. Interest expense was rolled back by 13.0 percent, to $1.0 million from $1.2 million, a further savings of $154,000. The lower interest costs resulted from a lower average debt balance and reduced interest rates.

But partially offsetting lower costs was a substantial margin erosion, the direct result, the company said, of the lower level of sales. Average gross margin narrowed by 170 basis points, or 1.7 percentage points, to 22.1 percent from 23.8 percent. Gross margin dollars fell by 28.0 percent, to $4.9 million from $6.8 million.

Sales, the company said, were hit by a losing trifecta of a sluggish economy; inventory reductions at retail; and a tough comparison with a year-ago quarter when the company rolled out substantial new product programs.

Putting the top line under even greater pressure, Crown's big Pillow Buddies program, strong a year ago, "has been comparatively weaker this year because seasonal retail dollars have not been allocated to the for shipment in the second quarter," the company said.

In a further complication, the company walked away from some character licenses and sales, rather than commit to higher royalty guarantees. "This business continues to be seasonal, and increased competition for character licenses has driven royalty commitments higher than management is comfortable guaranteeing. With the higher guarantees, the company has declined or chosen not to renew several licenses which could have subjected the company to royalty guarantee shortfalls in the future."

Adding one more layer of difficulty, the company said, was a marketing decision by Disney Consumer Products to take one of its brands direct to retail beginning in early 2004. "In anticipation of this decision, retailers currently offering this brand began to reduce their purchase volumes in the second quarter." On the upside, though, Crown said it has been selected as the future supplier of this direct-to-retail program. "In addition, we have secured our position with the retailers affected by this change in marketing direction."

Second quarter segment results

Crown Crafts Inc.