Crown Crafts (NASDAQ:CRWS) is the perfect example of how to turn around a company reporting losses every year into a company that not only survived the financial crisis but grew over 1300% in 10 years. The orange and red lines are the S&P small cap index and the Russell microcap index, respectively.
Before we get into the factors that drove the Company to succeed, a little overview of what the Company does.
Crown Crafts designs, licenses, manufactures and markets infant and toddler products – mostly in bedding, blankets and bibs and a smaller percentage of sales in plastic-related products.
Crown Crafts has an impressive distribution network of retailers:
Baby care market has increased overall since 2011.
However, it is a very competitive market. Crown Crafts has had to be strategic and disciplined. And that’s exactly what they’ve done.
How Did They Grow 1300%? Key Success Factors:
Upon a detailed analysis of Crown Crafts’ path reveals key success factors that contributed to the Company’s 1300% growth in 10 years. A more detailed analysis is below – with notes that point out significant events that caused the stock to reflect the value of the Company.
A lot happened in 2001. The Company IPO’ed, a new CEO was in charge, and they refinanced the debt from $106 million to $47 million. Management team vowed to turn the Company around. They started by selling off their unprofitable business in adult bedding products. This hurt their top line sales, but their focus was to cut costs and protect their profitability.
The next 5 years proved to be a difficult time, but throughout it all, the Management team continued to pay down debt every year and put in place a continuous feedback loop to determine which product divisions were working and which product divisions were not, i.e. they were ready to take appropriate risk measures in order to keep reinventing the Company.
2006 was a pivotal year. Crown Crafts refinanced their debt again, reducing the debt outstanding by more than 70% and just as importantly, extinguishing exercisable warrants that were attached to the debt, reducing the fully diluted shares by more than 70%. Overnight, the Company’s shareholders rewarded the Crown Crafts by more than 200% and the Company started gaining momentum. Crown Crafts’ CEO, Chestnut, also had a strategy to grow the company – to make meaningful acquisitions.
Since 2006, the Company continued to be profitable and it is evident that the Management team stayed disciplined. (Read through the detailed analysis of success key success factors below.)
To sum up the analysis, the key success factors that contributed to the Company’s success in the last 10 years (and continue to do so) are:
- Reducing debt first and foremost
- Share repurchase program
- Meaningful acquisitions
- Actively enter licensing agreements and partnerships to market other brands that are successful or distribute their brands to others, i.e. active business development
- Disposing of divisions/assets that are not profitable
- i.e. paying special attention to what works and what doesn’t and not being afraid to cut off cancerous products
- Protecting profitability and controlling costs – saying no to retailers who are going to suck their margin
- Cash dividends but only after the company has paid down debt and can
Detailed Company Analysis of Success Factors (and Failures)
Letter on the stock chart indicates key events discussed below in detail.
- Refinanced debt from $106 million which was refinanced in July 2001 to $47 million. Debt to equity was reduced from 1.9x to a negative debt to equity of -2.9x due to huge losses, deeming shareholders’ equity to be worthless. No wonder the stock had been crawling before major changes to turn around the company.
- Along with E. Randall Chestnut named new CEO; had been VP Corporate for the Company since 1995.
- Also sold off the adult bedding division to the former CEO. Key efforts to turn around the company: New CEO, new debt structure, and new product segment mix.
A. July 2006
- Underwent a MAJOR refinancing reducing debt by more than 70% AND extinguishing with it fully diluted shares by more than 70% (i.e. exercisable warrants that came with the debt).
- Since the CEO change in 2001 along with adult bedding division being sold off and refinancing of the debt, the Company’s financials started seeing improvements, including:
- Debt being paid off every year. In 2002, debt to equity was 2.9x and by 2006, debt to equity was reduced to 0.8x (less than 1.0x for the first time!)
- While debt is being paid off, holding off on cash dividends (As much as shareholders want to get a cash dividend Christmas bonus, the Company was stretching its dollars to the detriment of the Company’s profitability in the past)
- Positive net income (after having sold off the adult bedding division in 2001 which was contributing to its losses)
- Also in 2003, Company announced a shift in product sales mix. Their Pillow Buddies business was decreasing due to increased competition pushing royalty licenses of character licenses up higher. Decided also to take their Disney Consumer Products direct to retail starting early 2004. Considering Toddler Bedding (bedding with Disney characters) is in now (2016 FY) the second highest grossing segment of product sales, this was a good decision (i.e. toddlers + Disney characters).
- CEO announced that Company was going to grow via meaningful acquisitions going forward
B. November 2006
- Reaching into Latin American market – entered licensing agreement to develop, produce, market and sell infant home furnishings and accessories under the Baby Mink brand, which has 80% of market share in Mexico.
C. December 2006
- Acquired all of the assets of Kimberly Grant, Inc., a designer of various infant and toddler products. Under the agreement, the founding designer will continue to develop designs.
D. February 2007
- Announced closure of their subsidiary Churchill Weavers (which sold beddings), which has been unprofitable. The Company tried to sell Churchill Weavers but could not reach an agreement, so they decided to liquidate.
- On Feb 14, 2007, announced Q3 results, which reported lower sales by $1.1 million YoY. The sales shortfall came from pricing pressures by two retailers. Company decided not to participate in those sales because they wanted to protect profitability and control costs.
E. July 2008 – November 2008
- Stock repurchase program
F. June 2009
- Reported earnings that doubled YoY
- From 2007-2009 through the global financial crisis, the Company made key meaningful acquisitions (Spring Global – infant and toddler line in Nov 2007) and entered into licensing agreements to introduce new popular branded infant/toddler products (licensed from Crayola – toddler beddings in Mar 2008, licensed Kimberly Grant toR. Gibson to use the brand to produce complementary toddler products like books and photo albums )
- increased sales while keeping costs low. The Company was profitable except for non-cash impairment charges due to lower value of carrying book value like goodwill
- Net cash on the books increased; lowered A/R and inventory
G. July 2009 – December 2009
- Stock repurchase program
H. February 2010
- Announces cash dividends to start being paid in May 2010
I. May 2010 – December 2010
- Began distributing cash dividends again
- Debt is almost extinguished
- Second letter to shareholders in the last year to dissuade shareholders to listen to Wynnefield Partners Small Cap Fund, an activist fund, that had on several occasions induced proxy battle
- Also in the same month introduce bedding for pets – a new product category
July 2010 – December 2010
- Focuses on expanding international sales – adds an Executive to lead the international sales efforts
- Partners with ProjectNursery.com, a popular mommy blog run by moms, to increase social marketing by marketing directly with and to moms
- Presents at multiple investor conferences
J. July/August 2011
- Reached an agreement with the activist fund, Wynnefield, to replace one of their directors with one they nominated with
- Reported lower profitability despite increased sales for the quarter YoY. Also revealed lack of cash on their balance sheet compared YoY.
- Debt free
Company’s value took a hit in 2011 as their gross profit remained in question due to rising costs for raw materials, labor, transportation, and currency translation. Along with decreased profitability and a losing “proxy”, throughout the year, there weren’t positive impacts that fueled the momentum they experience in 2010:
- Company continued to pay quarterly cash dividends and continued to marketing efforts through presentations at multiple investor conferences throughout the year.
- Introduced a bedding liner product for infants
- However, no new meaningful acquisitions or licensing agreements made
K. February 2012
- Reported growth in sales and profitability finally
L. March 2012
- Announced 100% increase in the quarterly cash dividends to start in July 2012, representing an annualized yield of 7.4%
2012 – 2013
- Entered into licensing agreements and distribution agreements
M. June 2013
- Reported fiscal year end – although sales dropped slightly, income is higher – proving that their cost cutting and profitability protection strategy is working and that Management is disciplined.
- Announced reduction of board members from 7 to 5 directors to reduce board-related expenses
N. June/July 2014
- Yet again another increase in their gross profit and income. This time they also increased sales as well in their fiscal year end report.
- In July, made another acquisition for $1.35m– Kidsline and CoCaLo brand names – only the rights to use the brand as Kidsline undergoes chapter 11 bankruptcy proceedings
O. June 2015
- Reported another increase in income and sales. Profitability margin decreased 300bps
P. February 2016
- Reported another increase in income in absolute value and profitability margin despite decrease in sales. First time reporting over 30% in gross profit.
Q. November 2016
- Reported a decline in sales and profitability.