We're also striving to consolidate certain internal operations for greater efficiency, reduce our debt levels. And over the next 2 years, we'll be working on warehouse consolidation to further enhance our operating structure. These initiatives to create long-term value can often require upfront investment. And to that end, our Board has elected to rightsize our quarterly dividend, which will provide us strategic access to a greater portion of our cash flow that will also allow us to pay down debt and build the balance sheet strength that will support Crown Crafts growth well into the future.

In essence, our new quarterly dividend allows for a well-balanced capital allocation approach that includes investing in growth initiatives and maintaining a solid balance sheet while still rewarding our valued shareholders with what is now approximately a 4% attractive dividend yield. In closing, we had a solid quarter as we continue to execute on our business plan. While leveraging our inherent strengths, including our brands, our licenses and our valued retail and licensing partners, our multipronged strategy that covers internal development of new products, reinvigorated marketing efforts, tight cost controls and the strategic allocation of capital positions us well for the creation of long-term shareholder value.

And now I'll turn it over to Claire to provide additional details around our quarterly results before we take your questions.

Claire Spencer:Thank you, Olivia, and welcome, everyone, once again to the call. Our first quarter net sales of $16.8 million were up 8% over the prior year quarter as improved inventory levels helped us capitalize on still soft consumer spending. As Olivia mentioned, we had strong gross margin performance. During the quarter, tariff refunds reduced our cost of products sold by $3.7 million. Even adjusting for this benefit, our gross profit of $4.3 million was above the prior year's $3.5 million and equates to a gross profit margin of 25.6%, which was up 290 basis points year-over-year. This expansion of our adjusted gross margin reflects both our strategic pricing initiatives and an increasingly favorable mix of higher-margin products.

We recorded marketing and administrative expense of $5.2 million for the first quarter as compared to $4.7 million a year earlier, although this quarter's figure includes just over $0.5 million of accrued incentive compensation associated with tariff refunds. On a normalized basis, we reduced marketing and administrative expense as a percent of net sales to 28% versus 30.5% in the first quarter of fiscal 2026, which speaks to our sharp focus on cost efficiencies, as Olivia mentioned. Moving down the income statement. We also successfully reduced net interest expense to only $190,000, well below the year-ago $283,000 as a result of our efforts to reduce debt over the past year.

From a GAAP perspective, we reported net income of $2.1 million or $0.19 per share, well above the prior year loss of $1.1 million or $0.10 per share. While first quarter net income benefited from the tariff-related adjustments described, I'll again note that on an adjusted basis, we still generated the first quarter profit versus the prior year quarter's net loss. Turning to our balance sheet. As of June 28, we had total liquidity of $12.1 million, including cash and equivalents and availability on our revolving line of credit. During the first quarter, we significantly reduced our debt from more than $14 million at the start of the fiscal year to just $9.6 million at the end of the quarter.

Not only did we reduce outstanding debt, but our net cash from operating activities of $5.5 million served to further support our balance sheet strength, putting us in a strong position to capitalize on future growth opportunities in a disciplined manner. In summary, this was another quarter of strong execution in which we focused on what we can control while economic conditions remain soft. Even adjusted for tariff refunds, we grew revenues, expanded our gross margin and generated stronger earnings per share than in the year ago quarter. We also further strengthened our balance sheet and are well positioned to make progress against our strategic initiatives as we move through the new fiscal year.

And now operator, if you could please open the line, Olivia and I will be happy to take questions.

Operator: [Operator Instructions] And our first question will come from Doug Ruth with Lenox Financial Services.

Douglas Ruth:Olivia and Claire, congratulations, fabulous report. I have several questions. So if you feel like I'm asking too many I mind getting back in the queue. Could you give us -- offer some commentary of what you think is happening with Groovy Girls?

Olivia Elliott:So Groovy Girls has done phenomenally well in Canada. And as we look back on history, even when -- before we acquired Manhattan Toy, the first time they launched Groovy Girls, it appears that it took off in Canada first then as well. So we have actually sold so much in Canada at this point in time that we're having to divert inventory that should be coming to the U.S. to go to Canada. So we're really excited about the opportunity there. And then we'll be launching Groovy Girls at K&J in Germany for the European market in September.

Douglas Ruth:Okay. Is there a theory of why the Canadians like Groovy Girls so much?

Olivia Elliott:We don't know. I can tell you that -- so our distributor, they are partnered with Indigo bookstores, who really put some marketing efforts behind it, and they hosted an event. So that probably helps with it to have such a large partner to launch with.

Douglas Ruth:Okay. What about -- you had previously mentioned that ultimately, the Groovy Girls will be on Amazon. Is there like a date that, that might happen?

Olivia Elliott:We are still hoping to launch early fall. The inventory having it take off faster than we expected that it may not be the full line, but we're still targeting October sometime with at least part of the line.

Douglas Ruth:Okay. Very good. And then could you explain to us what the status is of the tariff money? I think you had told us there was maybe around $5 million, maybe $5.5 million. Are you expecting more money? Or do you think that's it or...

Olivia Elliott:We're hoping to get more money. So we had requested reimbursement for $5.6 million to $5.7 million in tariffs. And so far, we've received about $4.7 million, and that is the portion that we booked. Most of that was received in July. A very, very small portion had been received in the first quarter. There's about $900,000 that we still haven't received and we have not booked.

Douglas Ruth:Okay. And then how has the balance sheet changed -- or are you able to tell us anything about where the balance sheet is now versus where it was based on maybe tariff money?

Olivia Elliott:You mean as of today versus the quarter end?

Douglas Ruth:Yes.

Olivia Elliott:It certainly improved by getting $4-plus million in cash in, in the month of July, but that's about all we can really tell you.

Douglas Ruth:Okay. I didn't realize the $4 million came in, in July. Okay. Very good.

Olivia Elliott:So it was booked as other current assets as opposed to a trade receivable at quarter end.

Douglas Ruth:I see. So that's the other current asset that's on the balance sheet.

Olivia Elliott:Yes. And I think there's more information Claire just pointed out in footnote 4.

Douglas Ruth:Footnote 4. Okay. Good. Okay. And then what can you tell us about the warehouse?

Olivia Elliott:We'll be starting that project sometime in late fall, early winter. It's about an 18-month process, and the plan is to get -- consolidate sometime in May of 2028. So that process is not quite started yet.

Douglas Ruth:And can you provide any additional details about capital expenditures and what you're thinking and how much you might be spending?

Olivia Elliott:As of right now, our capital expenditure should just be the normal capital expenditures, which is mainly IT. So it would be any ERP upgrades that we're going through right now, molds for plastic toys. Anything for the warehouse is unlikely to be spent in this fiscal year. It will probably start sometime in the next fiscal year.

Douglas Ruth:Okay. All right. And then how about -- the international sales are doing so well. Can you share anything that's happening and why they're doing so well or what you're doing and the kind of stuff?

Olivia Elliott:Well, a lot of that's Groovy Girls in Canada, but it's more than that in Canada as well. We had 2 different distributors in Canada previously and starting in this calendar year, maybe a little bit in December of '25, we got a new distributor that is handling both the Manhattan Toy and Sassy product lines and taking that to all channels. So we've seen a pretty good improvement there across the board. Groovy Girls certainly added to it. And then we did starting -- when we went to K&J last fall, we did pick up some new distributors that started buying product maybe later in the fall, early winter.

So a little bit in Europe, a little improvement as well.

Douglas Ruth:Okay. And then what can you tell us about LEGOLAND? And we know we got that big new facility or I guess it's a year old now in Shanghai. What's happening with LEGOLAND?

Olivia Elliott:I don't think there's been any changes with LEGOLAND. That was the last new park of any size. And a lot of the parks for LEGOLAND actually start winding down and closing for the winter. So there are some that are open. I know like Florida and California stay open year-round, but a lot of them closed maybe sometime in October. So those are more seasonal sales than year-round.

Douglas Ruth:Okay. And then how about the Manhattan Toy office in Minnesota? Is there any thoughts or update on that at all?

Olivia Elliott:That lease expires at the end of March next year. So we will obviously not renew that lease. We're still kind of thinking about what we need, if anything at all, in Minneapolis. If we do get a lease, I mean, there's 2 trains of thought there. We can either let -- it's a very small staff so they can either work from home full time or we may need some small lease that can just hold a few people and some like a photography studio, but we will not be renewing the very expensive lease that we're in right now.

Douglas Ruth:Okay. And my last question, is there any new thoughts or ideas on diaper bags and how the company might proceed with that business?

Olivia Elliott:We're still working on that product line. I mean we did just start selling the new Motherhood Diaper Bags, very slow start at this point in time, it's only on Amazon, but we're working on that. And then we have a couple of NoJo bags, NoJo branded, one of which is in Walmart, but that's really it right now. But we haven't given up on diaper bags. We're just still working on it.

Douglas Ruth:Okay. You just did a fabulous job, and thank you for what you did on behalf of the shareholders.

Operator:And this now concludes our question-and-answer session. I would like to turn the floor back over to Olivia Elliott for closing comments.

Olivia Elliott:Thank you, operator. And again, we appreciate everyone being on the call. We look forward to building on the early success of Groovy Girls and our other innovative products on the way. We appreciate your continued interest in Crown Crafts, and we'll keep you posted on our progress as we move through the new fiscal year. Please feel free to reach out with any additional questions, and thanks again for being with us.

Operator:Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

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Crown Crafts (CRWS) Q1 2027 Earnings Call Transcript was originally published by The Motley Fool