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Edited Transcript of CRWS earnings conference call or presentation 13-Jun-19 6:00pm GMT

Q4 2019 Crown Crafts Inc Earnings Call

Gonzales Jun 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Crown Crafts Inc earnings conference call or presentation Thursday, June 13, 2019 at 6:00:00pm 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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* Justyn R. Putnam

Talanta Investment Group, LLC - Managing Member and MD

* Ralph P. Marash

First Manhattan Co. - MD & Portfolio Manager

* Runxin Ding

D.A. Davidson & Co., Research Division - Research Associate

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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 prior written authorization from Crown Crafts, Inc.

As a reminder, this conference is being recorded today, June 13, 2019.

And at this time, I would now like to turn the call over to Ms. Olivia Elliott, Vice President and CFO, who will begin the call. Please proceed.

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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 Call for the Fourth Quarter and Full Fiscal Year 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.

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

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A telephone replay of the call will be available 1 hour after the end of the call through 4:00 p.m. Central Time on June 20, 2019. 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 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, and good afternoon, again, to everyone. Before the market opened this morning, we released our press release for the fourth quarter and full year of FY '19, ending March 31 of this year, 2019. I will touch on the numbers for the quarter and the year, a few comments and then Olivia will come back with more detail.

Net sales for the quarter and the current year were $21.717 million as opposed to $22.686 million in the same quarter last year or down $969,000 or 4.3%.

Net income for FY '19 was $1.392 million as opposed to $1.247 million in the same quarter last year or up $145,000 or 11.6%. Diluted earnings per share in the current year were $0.14 as opposed to $0.12 last year same quarter.

Turning to the full year. Net sales for the full year were $76.381 million as opposed to last year FY '18 of $70.270 million or up $6.111 million or 8.7%.

Net income for FY '19 was $5.019 million as opposed to FY '18 of $3.021 million or up $1.998 million or 66.1%. Diluted earnings per share for the current year were $0.50, and in the previous year, FY '18, were $0.30.

As we began FY '19, we were dealing with some very difficult market conditions. Late in fiscal 2018, our second largest customer went into liquidation. Not only did we lose a large customer, we also had to deal with the tremendous amount of merchandise that flooded the market, as in essence, they become one of our competitors.

We began the year looking for new customers to replace this huge hole. Over the course of the year, FY '19, we recovered nicely. We finished the year with an 8.7% increase in net sales. We also finished the year with a 66.1% increase in net income. Of course, this was helped by not having numerous nonrecurring charges to repeat in the current year, most of which were related to the bankruptcy and subsequent liquidation of our second largest customer.

Gross profit as a percent of net sales for the quarter increased from 25.9% in the prior year to 28.6% in the current year. Gross profit as a percent of net sales for the year increased from 28.1% in the prior year to 29.2% in the current year. We finished strong, and we're proud of the efforts of all of our staff. Fiscal '19 was a good year.

Turning to the dividends. On May 13 of this year, we announced a quarterly dividend of $0.08 per share. This represents a 6.67% annualized yield based on yesterday's closing price per share of the company's common stock. This quarterly dividend will be paid July 5, 2019, to shareholders of record on June 14, 2019.

It was a very -- in this very challenging year, we actually returned $3.2 million in cash to the shareholders, which was a tremendous feat. We're proud of the track record we continue to operate the business in a manner that generates very strong cash flow and deliver substantial value to our shareholders.

Olivia, I'll turn it back to you for comments.

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

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

Net sales were $21.7 million for the fourth quarter of fiscal 2019, down $969,000 or 4.3% from prior year sales of $22.7 million. For the year, net sales were $76.4 million for fiscal 2019, up $6.1 million or 8.7% from $70.3 million in the prior year. The increase in sales for the year is primarily due to sales that resulted from the acquisitions of Sassy and Carousel during fiscal 2018.

Sassy sales were $11.8 million in fiscal 2019 compared to $2.1 million in fiscal 2018. Carousel sales were $6.5 million in fiscal 2019 compared to $5.4 million in the prior year.

These increased sales were partially offset by the elimination of sales to Toys "R" Us, Babies"R"Us, which amounted to $9.7 million during the prior year.

Gross profit increased by $326,000 and was 28.6% of net sales for the current year quarter compared with the prior year quarter gross profit of 25.9% of net sales. Gross profit increased by $2.5 million, an increase to 28 -- from 28.1% of net sales for fiscal 2018 to 29.2% of net sales for the current year. The increase is primarily due to the net higher sales levels in the current year.

In addition, sales in the current year remained at overall higher gross profit percentages and sales to Toys "R" Us, Babies"R"Us, during the prior year leading up to and continuing further bankruptcy and liquidation resulted in a shift for less profitable product mix and shortfalls of minimum guaranteed royalties in the prior year.

Marketing and administrative expenses increased by $922,000 for fiscal 2019 compared with fiscal 2018. Contributing to this increase is $3.1 million in costs incurred during the current year that were associated with Carousel compared with $2.6 million in such costs during the prior year, which included $347,000 in acquisition costs.

Costs in the current year also included $210,000 in charges associated with transferring most of the Sassy inventory from Grand Rapids, Michigan to the company's distribution facility in Compton, California. Offsetting the increase in the current year is the elimination of credit coverage fees of $653,000 and a bad debt charge of $218,000 that occurred in the prior year that were associated with the bankruptcy and liquidation of Toys "R" Us.

The current year provision for income tax is based upon an annual effective tax rate from continuing operations of 24.4% compared to the prior year rate of 32.7%. Tax legislation enacted in 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 on the tax -- based on 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 rates 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 24.5%, the company was required to revalue its net deferred income tax asset. This revaluation resulted in a discrete charge to income tax expense of $377,000 during fiscal 2018.

Additionally, the company's measurement regarding the tax impact of certain state apportionment percentages are measured net of federal income tax. The company also revalued its reserve for unrecognized tax liabilities, which resulted in a net discrete charge to income tax expense of $120,000 during fiscal 2018.

During 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 liability.

The effective tax rate from continuing operations, combined with these 3 income tax charges and benefits, resulted in an overall provision for income taxes of 26.1% for the current year and 44.3% for the prior year.

Net income for the fourth quarter of fiscal 2019 was $1.4 million or $0.14 per diluted share compared with net income of $1.2 million or $0.12 per diluted share in the fourth quarter of fiscal 2018. Net income for fiscal 2019 was $5 million or $0.50 per diluted share compared with net income of $3 million or $0.30 per diluted share for 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 that concludes our remarks. And now Ian, if you'll come back, we can open it up to 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) Our first question comes from Linda Bolton-Weiser from D.A. Davidson.

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [2]

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This is Cindy Ding on from Linda. So our first question is, can we expect modest sales growth in fiscal '20? And what do you see as the key drivers of growth?

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

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Okay. I'm sorry, I didn't quite get the question. It was a little blurred.

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [4]

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I'm sorry, let me repeat the question. So can we expect modest sales growth in fiscal '20? And what do you see as the key drivers of growth?

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

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Okay. And I know you're not Linda, so your name is? What's your name?

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [6]

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This is Cindy on for Linda.

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

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Cindy. Okay. Hi, Cindy. We spoke with Linda earlier, and she told me you were going to be on. The drivers for the growth is -- and we were working diligently to do this -- is developing new products. And it's not just new products within the categories that we currently participate in, it would be product -- developing product in adjacent categories to the infant and toddler businesses that we're in, okay? And we're doing that as rapidly as we possibly can. We have nothing today to announce, but we accept that we are working towards that end.

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [8]

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Great. And our second question is, your cash flow was really strong in fiscal '19, and do you expect a similar level in fiscal '20?

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

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Well, I mean, the best way I can answer the cash flow is yes, it was very strong. And you've got to look back for the last 15 to 17 years, and our cash flow has been strong over the last 15 to 17 years. As the market adjusts, as situations occur, i.e., bankruptcy, liquidation of major customers, we adjust our business to compensate for that and to protect the cash flow. So our cash flow, if you look back over almost 20 years, has been very, very, very strong. So we see no reason to believe that we cannot continue that. We have very low debt. We have considerable amount of borrowing availability. And so therefore, we think from the balance sheet side, we're healthy.

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [10]

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And then are you actually looking for potential acquisitions? And has the Babies"R"Us liquidation created any opportunities?

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

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The answer to that is -- to both of those is yes. We think that the Babies"R"Us situation has created some opportunities. And yes, we're always looking for additional acquisitions that would complement the product categories and the subsidiaries that we're in. So that's an ongoing active conversation.

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [12]

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Okay. And how will you manage through the impacts of the 25% tariff as we go through?

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

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That's a good question. And we'll address it in the following manner. And we believe that most of our competitors are going to take the same approach, is we -- our margins are not strong enough to support us absorbing a 25% tariff increase. We've had very minimal impact through rounds 1, 2 and 3. And we passed those on to our customers. And without exception -- but they've been minor, don't get me wrong, they haven't been large numbers, but in every case, the customer accepted it, sometime not quite as quick as we -- as others did, but they did accept the price increase, with one small exception where a customer discontinued the product, but as we learned, they had intended to discontinue it anyway for performance reasons. So our philosophy is we're going to pass it on. And we're going to pass it on to the consumer -- excuse me, to our customers, and we think the retailers are going to pass it on to the ultimate consumer. And I've called a couple of -- one in particular, a large retailer, who is going public and says, we will pass it on. And it's going to be passed on ultimately to the consumer. So we can't absorb it, we're going to pass it on. The timing, we don't know for sure when that will be, but it is anticipated that it will be sometime in July, if it occurs.

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Runxin Ding, D.A. Davidson & Co., Research Division - Research Associate [14]

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Okay. Great. And we have a follow-up to the previous question. Do you think demand for your product will be impacted by the tariff-related price increases?

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

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That's hard to say, okay? We don't know the answer to that question. It could have an effect. But we've learned over the many, many years that if there's discretionary spending in the family, that the baby, the infant, who is our market, infant and toddler, are not going to be affected as the family has to cut the budget as maybe some of the older kids or the parents, i.e. the father may wear shoes with holes on the bottom around still, but they're going to try to provide for the newborn baby. So we're hoping that, that effect still takes place. Will there be some downshifting to less-expensive product? Could be. We don't know, okay? We've never been through rough seas like this where there's a 25% increase and one fails through. And so we're just have to see how it happens.

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Operator [16]

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Our next question comes from Justyn Putnam of Talanta.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [17]

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I just had one quick follow-up on the impact on the tariff. And you're pretty clear that you're going to pass price increases along. But I was curious to know if there are any opportunities for you to improve the pricing for your suppliers -- in your negotiations for your suppliers?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [18]

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I mean just -- there maybe a little, but there's not enough to offset a 25% price increase, I can assure you. As you may have noticed, the exchange rate between the RMB versus the dollar has gotten -- the RMB has gotten less, the exchange rates going up. So there may be a point in the future if it keeps going up, it's in the low 6.90s or something as of today. If it keeps going up and gets above 7, there's an opportunity to go back to the vendors and shave a little off. But it's nowhere near what the cost of the tariffs are going to be.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [19]

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Okay. Great. Next question is on a year-over-year basis for the fiscal fourth quarter, it looked like your Carousel and Sassy numbers for the quarter went to kind of different directions, with Carousel being down maybe 40% year-over-year and Sassy being up somewhere around 50% for the quarter. I was just curious what impact may have been in the quarter, but more importantly, what kind of your outlook is for those businesses going forward?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [20]

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Well, the Hamco, Sassy business, this -- we purchased Sassy in December of '17, so we didn't get the full benefit that first year. We only got 4 months or 3.5 months of effective Sassy. But this past year, we had the full 12 months effect. So that did help, no question about that.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [21]

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Well, I was talking about quarter-over-quarter, sorry.

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [22]

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Just with the quarter.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [23]

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Okay. As a quarter-to-quarter, it's -- I mean, it's hard to say quarter-to-quarter. It could be one order that got moved up or one order that got delayed, okay? And that could happen the last day of the month, where a truck doesn't pick up. And it shifts it from 1 quarter to the next. So it's sort of hard to analyze a business based on 1 quarter to 1 quarter.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [24]

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Okay. Then -- so for fiscal 2019, Sassy was $11.8 million, I think. Is that a good annual run rate for that business? Or has there been a change in expectations for that one?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [25]

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We don't make forward-looking predictions, but I mean it's a solid business, and we think that it's going to continue to be solid for the future. We're very pleased with that acquisition.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [26]

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And same question for Carousel. Is that a -- is there anything unusual in the business this year? Let me put it that way.

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [27]

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Anything unusual on the Carousel business coming up for 2020?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [28]

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No. We're changing a few things that we're just not at liberty to say as we speak. But we're changing a few things at Carousel to expand their sales opportunity. And we think that's going to pay off in 2020. Some new channel of distribution, et cetera.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [29]

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Okay. Last question here, and this is for Olivia. So I need your view on CapEx for 2020. It's up a little bit in 2019. I was just curious to know if you're going to be changing it for 2020 in CapEx?

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [30]

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The reason that is up is the Sassy acquisition for the toys. Toys include molds, et cetera for the manufacturing process, so we put those on books of fixed assets. So that's the reason for the increase. And with that business being a good business, I would expect that to continue to be the best -- pretty close to that rate.

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Justyn R. Putnam, Talanta Investment Group, LLC - Managing Member and MD [31]

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Okay. So maybe it's got back, going forward more in the $700,000 range?

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Olivia W. Elliott, Crown Crafts, Inc. - VP, CFO & Secretary [32]

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I would think it's going to be closer to what it ran in 2019 than the previous numbers from prior fiscal year.

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Operator [33]

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At this time, our next question comes from [Josh Peters] of [Zenith Sterling Advisers].

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Unidentified Analyst, [34]

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Congratulations on quite a year here, quite a good job coming back from -- actually I wanted to drill in just a little bit more on that, thinking about the disruptions that you faced, especially in the first couple of quarters of fiscal '19, where as you say not only that you lost Toys "R" Us as a customer, but that inventory had become a competitor to your own shipment. Does that create an opportunity to have something if you have found new outlets for your products here going into fiscal 2020?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [35]

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Well, I mean, [Josh], thank you for the kind remarks. But no, it really doesn't -- Toys "R" Us has reemerged as a new company, but it's really -- they don't have any storefronts or any sales in the U.S., it's really a licensing business. So the business that Toys "R" Us, Babies"R"Us add has been spread out to a number of retailers that we had before, including Walmart, Amazon, Target, Buy Buy Baby and the list goes on.

So there's not like a big huge opportunity to sell into that -- it's the same customers that just -- they're picking up the bits and pieces, and there's no one retailer that stepped up and took it off. So it's sort of spread out. And it was -- it was a tough, tough thing to overcome, the loss of our second largest customer.

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Unidentified Analyst, [36]

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Okay. So at this point, you feel like things have kind of sorted themselves out in terms of market share between the different retail partners that you have?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [37]

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We sure hope so. We think they have, yes, but we sure hope so.

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Unidentified Analyst, [38]

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Well, I know in the absence of a firm guidance for this year, I think it would be kind of helpful to get a sense if you're even just lapping some easy comparisons on the year-ago period because that's kind of what it would look like to me, but I don't have a feel for how much that business really shifted.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [39]

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Well, and again, we don't give guidance and we stand pretty firm on that. But what we can tell you is we're out every day beating the bushes for every possible order that exist.

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Unidentified Analyst, [40]

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Okay. And the other question I wanted to touch on, I think, it's interesting that you consider looking at other acquisitions. What would be your position in terms of your willingness to borrow in order to finance that? Is there a feeling on how much leverage you'd be willing to put on the balance sheet in order to finance the transaction?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [41]

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Yes, there is. I mean, [Josh], we're not going to go crazy. I mean, we've had huge debt before, and we don't want to have huge debt again. So any acquisitions we do -- yes, we would borrow and we proved it. We did. We borrowed to do the Sassy acquisition 1.5 years ago. So yes, we don't -- we're not fearful to borrow money and our bank is supportive of us doing that to borrow money to do acquisitions. But we're not going to go out and run up a huge, huge debt beyond what we're capable of service.

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Unidentified Analyst, [42]

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Okay. And within that framework, I'm assuming that the dividend remains the priority for shareholder return?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [43]

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Well, again, let me say that dividends are approved quarterly by the Board. There's no guarantee that they will be done. But again, you got to look in the rearview mirror, and we've been doing it now since 2010. So that's the best answer I can give you on the future of dividends.

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Operator [44]

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(Operator Instructions) At this time, our next question will be coming from Ralph Marash of First Manhattan Company.

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Ralph P. Marash, First Manhattan Co. - MD & Portfolio Manager [45]

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I had a follow-up on tariffs. Are you exploring any alternative -- sourcing manufacturing sites away from China?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [46]

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Ralph, we have. And we've looked in a number of countries. And we've done sample costings out of, at least, a half-dozen different countries. And it's very difficult to find a country that can do it competitive with China. And like in some countries, they don't have the fabric available, the woven fabric, there's knits available in a lot of different countries, but we don't do a lot of knits. So in the woven category, there's not a whole lot and they have to go back and rely on China to get the fabric. So you have to bring the fabric from China into whatever country. And by the time you do that, the cost is, in all cases that we run into so far, is an excess of the 25%. For instance, there's one basic fabric that we use for a lot of our product, and it's not produced outside of China. And it's got to come from China. So -- and when you move that fabric from one country to the other, you're adding cost to it and freight, et cetera, so the savings you get doesn't really help you, and in most cases, it's equal to or more than the tariffs that are imposed. So we think that we're going to have to bite the bullet and pass it on. Yes, we have looked. We have looked, I promised.

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Ralph P. Marash, First Manhattan Co. - MD & Portfolio Manager [47]

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For Carousel, is all of their product U.S. made?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [48]

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At this point, Ralph, it's all U.S. made. We do some product of imported -- fabric that's imported but then it's imported fabric and then printed at Carousel and then all made in the U.S., yes. At this point, it's all U.S. made.

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Ralph P. Marash, First Manhattan Co. - MD & Portfolio Manager [49]

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And I'm assuming given Carousel's go-to-market and their -- the niche in the market they have, they can absorb that cost structure, but the rest of the company's products couldn't absorb domestic manufacturing?

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [50]

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The rest of the company's products going...

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Ralph P. Marash, First Manhattan Co. - MD & Portfolio Manager [51]

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The rest of Crown Crafts products, sorry.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [52]

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No. No. But the rest of our business going to customers like Walmart, Target and Amazon, quite candidly, no. They cannot absorb the cost it would be to make that product in the U.S.

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Operator [53]

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This concludes our question-and-answer session. I'd like to turn the conference over back to Randall Chestnut for any closing remarks.

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E. Randall Chestnut, Crown Crafts, Inc. - Chairman, CEO & President [54]

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Ian, thank you very much, and thanks to everyone who participated on the call today. And just a couple of closing remarks. Management remains very optimistic about the future of our business. We're pleased with our position in the market. Our staff has done a remarkable job of rebuilding after the demise of Babies"R"Us and the ultimate liquidation of Babies"R"Us.

We'd like to thank all of our customers, employees, suppliers and shareholders for their continued interest and support of our company. Fiscal 2019 was a recovery year. The company remains very solid and has a bright future. We thank you very much and we'll speak to you again next quarter. Have a good day.

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Operator [55]

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This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.