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Edited Transcript of CRWS earnings conference call or presentation 7-Feb-19 7:00pm GMT

Q3 2019 Crown Crafts Inc Earnings Call

Gonzales Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Crown Crafts Inc earnings conference call or presentation Thursday, February 7, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* E. Randall Chestnut

Crown Crafts, Inc. - Chairman, CEO & President

* Olivia W. Elliott

Crown Crafts, Inc. - VP, CFO & Secretary

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Conference Call Participants

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* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Charles Levy

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc. Investors Conference Call. Your host for today's call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer. (Operator Instructions) Any reproduction of this call, in whole or in part, is not permitted without the prior written authorization from Crown Crafts, Inc.

And as a reminder, this conference is being recorded today, February 7, 2019.

At this time, I would like to turn the call over to Ms. Olivia Elliott, Vice President and CFO, who will begin the call. Please go ahead, ma'am.

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [2]

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Thank you. Welcome to the Crown Crafts Investor Conference Call for the third quarter of fiscal 2019.

With me today is Randall Chestnut, the company's President and Chief Executive Officer.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [3]

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Good afternoon, everyone.

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [4]

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A telephone replay of this call will be available 1 hour after the end of the call through 4:00 p.m. Central Time on February 14, 2019.

Also, a web replay of the call will be available for 90 days, and can be accessed by visiting our website at www.crowncrafts.com.

Before we begin, I would like to remind listeners 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.

Also, in regard to comments made in today's conference call that are related to the company's recently announced dividend, its history of paying dividends and the annualized yield on the company's common stock, we remind listeners that the declaration of each dividend is at the discretion of the company's Board of Directors, and the company expressly disclaims any assurances as to the frequency and amount of any future dividend.

I will now turn the call over to Randall.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [5]

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Olivia, thank you very much, and good afternoon again to everyone, and welcome to the Crown Crafts, Inc. Investors Conference Call.

Before the market opened this morning, we released our earnings for our third quarter, which ended December 30, 2018, and represented the third quarter of our FY '19, the year we're in now.

I'm going to touch on the highlights of the numbers for the quarter. Olivia will come back a little bit later, and she'll touch on the quarter and year-to-date and expand more.

Net sales for the quarter this year were $18.7 million, as opposed to $17.5 million in the same quarter last year, or an increase of $1.2 million or 6.8%.

Net income increased from $531,000 in the third quarter of last year to $1,554,000 in the third quarter of this year, are up to $1,023,000 or 193%.

Diluted earnings per share were $0.05 last year and $0.15 in the third quarter this year. We're very proud of our third quarter performance, which included a sales increase of 6.8%.

Through the year, we've navigated a rapidly changing retail landscape, which included customer bankruptcies, store closings and liquidation. And we present -- which have presented unusual challenges, but our team has adjusted and performed well during this period.

As we have stated in earlier calls, we feel that the programs and products that we have in place point to a bright future for the company.

Gross profit for the current year quarter was 30.0% of net sales, basically flat with the 30.1% for the prior year same quarter. For the 9-month period, gross profit increased from 29.2% last year to 29.4% this year.

On the balance sheet side of the business, we remained strong. We ended the quarter with less than $2 million in long-term debt and a revolver availability of $20.9 million as of December 30, 2018.

Today, with the earnings release, we also announced that the company's Board of Directors declared a quarterly cash dividend of the company's Series A common stock of $0.08 per share. Based on yesterday's closing price of the company stock, this represents an annualized yield of 5.5%.

This dividend will be paid April 5, 2019, to shareholders of record as of the close of business on March 15, 2019. Once again, we're pleased to offer a dividend payment that reflects the board's confidence in the business and the ongoing commitment to provide value to our shareholders.

Recently, we announced the planned retirement of Nanci Freeman, the longtime President and CEO of NoJo Baby & Kids, effective August 2019. At the same time, we announced Nanci's replacement. Effective January 18, 2019, Donna Sheridan joined the company as President and CEO of NoJo Baby & Kids. Donna's resume and background fits perfectly with our company, and we're excited to have Donna join our team.

With that, I'll turn it over to Olivia for additional comments. Thank you.

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [6]

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I'm only going to give financial highlights. For more details, please refer to the company's Form 10-Q filed with the Securities and Exchange Commission this morning.

Net sales were $18.7 million for the third quarter of fiscal 2019, up $1.2 million or 6.8% from prior year sales of $17.5 million. Year-to-date, net sales were $54.7 million, up $7.1 million or 14.9% from $47.6 million in the prior year. The increase for the third quarter is primarily due to sales that resulted from the acquisitions of Sassy, which had $3.6 million of sales in the quarter, and Carousel, which had $1.4 million of sales in the quarter compared with $1.8 million of net sales in the prior year.

Year-to-date, Sassy sales were $8.6 million and Carousel sales were $5 million compared with $3 million of Carousel sales in the prior year period. These increased sales were partially offset by the elimination of Toys "R" -- of sales to Toys "R" Us, Babies"R"Us, which amounted to $2.4 million during the prior year quarter and $7.5 million during the prior year-to-date period.

During the first quarter of the current year, most of the sales that ordinarily would have been made to Toys "R" Us, Babies"R"Us had not yet shifted to other customers of the company, as Toys "R" Us, Babies"R"Us actually became a major competitor of the company as they conducted liquidation sales during the entire first quarter, which included deep discount on in-line merchandise.

Gross profit increased by $328,000 and was 30% of net sales for the current year quarter compared with the prior year quarter gross profit of 30.1% of net sales.

Gross profit increased by $2.2 million, an increase from 29.2% of net sales for the year-to-date period of the prior year to 29.4% of net sales for the current year. The increase is primarily due to the net higher sales levels in the current year.

Marketing and administrative expenses decreased by $210,000 for the quarter and increased $594,000 year-to-date compared with the same periods in the prior year.

Contributing to the increase are costs associated with Carousel of $756,000 during the current year quarter and $2.4 million year-to-date. Carousel costs, which included acquisition costs, were $900,000 during the quarter and $1.7 million during the year-to-date periods of the prior year.

The current year-to-date period also included $210,000 in charges, associated with transferring the remaining inventory acquired in the Sassy acquisition from Grand Rapids, Michigan, the company's distribution facility in Compton, California, while the prior year-to-date period included $572,000 in credit coverage fees associated with Toys "R" Us, Babies"R"Us.

The current year provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 24.2% compared to the prior year estimated rate of 33%.

Tax legislation enacted in December 2017 included a provision to lower the federal corporate income tax rate from 34% to 21%, effective as of January 1, 2018.

As the company's fiscal year 2018 ended on April 1, 2018, the lower corporate income tax rate was phased in, resulting in a blended federal statutory rate of 30.75% for fiscal year 2018. The company provides for deferred income taxes based upon the difference between the financial statement and tax basis of the company's assets and liabilities.

The company's net deferred income tax asset had previously been recorded based upon the enacted composite, federal state and foreign income tax rate of approximately 37.5%, that would have been applied as the financial statement tax differences began to reverse. Because these differences are now expected to reverse at a composite rate of approximately 23.5%, the company was required to revalue its net deferred income tax assets. This revaluation resulted in a discrete charge to income tax expense of $409,000 during the quarter and year-to-date periods of the prior year.

Additionally, because the company's measurement regarding the tax impact of certain state apportionment percentages are measured net of federal income taxes, the company also revalued its reserve for unrecognized tax benefits, which resulted in a net discrete charge to income tax expense of $132,000 during the quarter and year-to-date periods of the prior year.

During the third quarter and year-to-date periods of both fiscal 2019 and 2018, the company recorded discrete entries associated with excess tax benefits or charges arising from the vesting of nonvested stock during the period and also recorded reserves for unrecognized tax benefit.

The effective tax rate from continuing operations, combined with these discrete income tax charges and benefits, resulted in an overall provision for income taxes of 25.8% for the current year-to-date period and 49.7% for the same period in the prior year.

Net income for the third quarter of fiscal 2019 was $1.6 million or $0.15 per diluted share compared with net income of $531,000 or $0.05 per diluted share in the third quarter of fiscal 2018.

Net income for the first 9 months of fiscal 2019 was $3.6 million or $0.36 per diluted share compared with net income of $1.8 million or $0.18 per diluted share for the same period in fiscal 2018.

I will now return the call to Randall.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [7]

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Olivia, thank you very much. And Denise, I'll ask you to come back on and open it up for any questions that anyone on the line may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Linda Bolton-Weiser of D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [2]

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So I just wanted to start by asking just on the margin side. I guess that was the area of the earnings report that was better than we expected. In particular, the gross margin was a little better than we expected. So that 30 percentage gross margin, is there anything unusually positive in it? If not, then can we expect that type of level to continue into the fourth quarter? Since we have quite a bit lower in the fourth quarter, I'm wondering if we should raise our expectations a little bit, just given the good performance in this quarter.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [3]

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Well, I mean, Linda, the short answer is we -- well, it's not a short answer. The answer is, we work on a burden system, which defers burden based on certain times of the year, so there's probably a little bit of burden hung up in the third quarter that could roll out and hurt us a little bit in the fourth quarter. So I would say that the margin, percentagewise, may not be quite as good in the fourth quarter as it is in the third. That's the best answer I can give you, without making a forward-looking projection.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [4]

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Yes, that's helpful. And then just on -- your sales performance, maybe a little lighter than what we would have expected. Maybe, could you comment on what's going on at retail? I mean, Target and Walmart are sort of reporting pretty strong same-store sales, so are you finding anything going on with those particular retails? And are there any strange things going on with the retail inventory? Are they reducing inventory in your areas? Or maybe you could just talk a bit about the retail environment? How it's affecting you or not affecting you?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [5]

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Well, in those 2 accounts, Linda, business was actually up, all across -- in all sectors of our business with 1 of the 2 accounts you mentioned, Walmart and Target. We were still in the third quarter trying to overcome the huge deficit that we had to overcome from the loss of Babies"R"Us, and so that was a drag. And the other thing that made it very tough is there were still -- even through the third quarter, there were some residual hangover because of all the excess inventory that was liquidated from the liquidation of Toys "R" Us. Some of the closeout customers were still not buying and at the rates that they should have been buying because they had bought a lot of that inventory. So that also had depressed -- pushed the sales down for the third quarter.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [6]

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Okay. And then, you had commented -- and I still think your tone sounds like you're having some success though in having replaced some of those lost sales with other retailers. Can you comment on those other retailers and how the consumers are reacting to maybe thinking of them as different destination? Maybe some retailers that hadn't carried a lot of baby products before now are carrying? Is -- are there examples of that? And are consumers sort of catching on that they can go to other places to buy infant and baby type products that you are marketing?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [7]

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The biggest swing, Linda, that I can point to would be that the Amazon online business that we do was up appreciably in the quarter. And so yes, consumers are looking at that and saying, "Oh, there's an option, I can go and buy that." And consequently, Amazon's carrying more now than they used to carry of our type products. So that is definitely a plus. I mean, we've got other customers that we're up too, but that was -- that's the biggest one.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [8]

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Okay. That's helpful. And can you -- is there any update on -- you had alluded before previously to some work or progress in expanding your distribution more internationally, do you have any update on that front? And if you expect that to contribute to a little bit better sales growth going forward?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [9]

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Linda, we're still -- yes, we're still pushing hard on the international side of the business. As I think you know, we showed for the first time ever at the Cologne show in September, we've signed on a couple of more distributors since then. So we're feeling pretty good about the international side of the business. It is showing some increases, and we think that will continue to show increases as we go forward. So yes, we feel good about that.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [10]

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Okay. And just to kind of review -- I mean, I guess, Sassy will have fully anniversary-ed as an acquisition in the fourth fiscal quarter, so therefore, there won't be any incremental contribution from that incremental acquisition revenue. So therefore, I mean -- I guess, the revenue, the reported revenue should be expected to be down somewhat in the fourth fiscal quarter, am I thinking of that in the right way?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [11]

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Well, again, I mean, that's forecasting, Linda, and we stopped short of doing that. But your assumption is correct that, yes, in the third quarter, Sassy last year only participated in a very short period of time for that quarter, a couple of weeks before the end of the quarter. The fourth quarter, the quarter we're in now, Sassy was fully on board, and we're shipping. So yes, we don't get an extra kick from any recent acquisitions in the fourth quarter.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [12]

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Okay. And then, again, I don't want to get it going too far off into the future, but it seems to me that the Toys "R" Us comparison issue, the Babies"R"Us and Toys "R" Us, it's fully anniversary-ed. Isn't that beginning in your first fiscal quarter of 2020? That -- as the year-over-year comparison, that should stop being such a big drag, is that correct?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [13]

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That's correct. It goes through the fourth quarter. We -- they didn't go into liquidation until the fourth quarter, March, okay, is when they finally shut it down. And so we had shut most January, February and over half of March last year. But you're right, going into the first quarter, beginning in April -- April, May, June, we will not be circling around with any comparisons of Babies"R"Us.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [14]

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Great. And then, I guess, just finally, on the tax rate. It was a little bit lower in the quarter than we had expected. For now, I guess, it was a little bit higher, actually.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [15]

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That's higher.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [16]

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Yes, it was higher. So should we continue that higher rate in the fourth quarter? Or it's more like -- I guess, we had 24% in for the fourth quarter?

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [17]

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The effective tax rate for the year should continue to hold. So we said the effective tax rate for the year is 20 -- hold on, I'm just checking to make sure I have it right in my head -- 24.2% is what we're saying is the effective tax rate for the year. Now there could be some discrete entries that would change that for the quarter. But that's what we're using for the annual tax rate.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [18]

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Okay. And just -- can I finally just ask about -- you had commented previously on the tariff impacts, which are really quite immaterial for your business. Is there any updates there? Is pretty much in previous comments still holding in terms of the tariff impact?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [19]

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Yes, Linda, so far, it's still very minimal. We were affected by a couple of areas that were not major to us. And one of them was a little larger than the other. But we did pass those prices on to the retailer, and we're successful in getting that done. If they -- if they're coming with another round of tariffs, which includes footwear and apparel, I'm certain it will catch more of our products. But to date, we have not seen any indication that, that's on the horizon. I mean, it could happen, but we don't know. But today, it's been minimal. You're right, very minimal.

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Operator [20]

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(Operator Instructions) We do have a question from Charles Levy, a private investor.

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Charles Levy, [21]

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The decline in Carousel from $1.8 million to $1.4 million in the comparable quarter, is that seasonality? Or is the -- is that something we should have expected? Could you expand on that?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [22]

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Well, I mean, Charles, it's -- no, it's not seasonality. It's softness in that business affected by the phenomena that we've talked about many times before called the naked crib, which affected them in a negative manner and had a depressing effect on the sales for the quarter as well as it has with our other infant businesses. So that's the main driver behind the decline in Carousel.

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Charles Levy, [23]

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Okay. And is there any offsetting product that you've been able to come up which might make up for that softness?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [24]

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Well, obviously, we didn't have it in the third quarter, but I could say tell you that it's in works and we're working on alternative products and alternative things to do to sell directly to the consumer, which we hope will be positive going forward.

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Operator [25]

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And ladies and gentlemen, we will conclude the question-and-answer session at this time. I would like to hand the conference back over to Mr. Randall Chestnut for his closing comments.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [26]

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Denise, thank you very much. Olivia, thank you. And to wrap it up, the quarter year-to-date results were very strong performances, and we're very pleased with it. We weathered the bankruptcy and liquidation of our second largest customer, and came through it on the strong side.

We'd like to thank all of our employees, suppliers, customers and shareholders for their continued support, and we look forward to speaking with you at the close of the year.

And just a reminder that this -- we're in a -- we are in our fourth quarter now, so our next conference call will be in June of 2019, which will be for the fourth quarter and the full year.

Again, thank you very much.

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Operator [27]

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Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your line.