Q1 2024 Educational Development Corp Earnings Call
Participants
Craig M. White; President, CEO & Director; Educational Development Corporation
Daniel E. O’Keefe; Corporate Secretary & CFO; Educational Development Corporation
Heather N. Cobb; Chief Sales & Marketing Officer; Educational Development Corporation
Unidentified Analyst
Edward Norcini
Jean Marie Young; MD; Three Part Advisors, LLC
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's First Quarter Fiscal Year 2024 Earnings Call. (Operator Instructions) This call is being recorded on Thursday, the 13th of July 2023.
Before beginning the call, we would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to the Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. I would now like to turn the conference over to Jean Marie Young from Three Part Advisors. Please go ahead.
Jean Marie Young
Thank you, JP, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's Fiscal First Quarter Earnings Call. On the call with us today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer.
After the market closed this afternoon, the company issued a press release announcing its results for the fiscal first quarter. The release is available on the company's website at www.edcpub.com. With that, I'd like to turn the call over to Craig White, the company's President and CEO. Craig?
Craig M. White
Thank you, Jean, and welcome, everyone, to the call. I will start today's call with some general comments in regards to the quarter, and I will pass the call off to Dan and Heather to run through the financials and provide an update on our sales and marketing. Finally, I will wrap up the call with some comments on strategy and fiscal 2024 outlook. During the first quarter, our sales continued to be impacted by high inflation, which we will likely face for the remainder of the year. As we have said on previous calls, our sales results are primarily driven by our active brand partners. This is our key indicator that reflects current sales levels and where we expect them to trend in the future. Our brand partner levels decreased again this quarter. We believe this was for a variety of reasons, like we mentioned, the economy, rebrand, et cetera.
As I mentioned on the fourth quarter earnings call, some of this was carryover from rebranding, which takes some time to work through our entire network of sales partners. We are still making additional changes to improve our sales to not only make our brand partners more successful but also entice new brand partners to join PaperPie. I'll let Heather talk further about that later in the call.
On a more positive note, our brand partners at leadership levels remain higher than pre-pandemic numbers, and they are primary drivers for new recruiting and overall sales growth. Brand partner success generates additional brand partners, and that continues to be our #1 focus.
We will be looking at numbers of our active brand partner count from this summer as an indicator for the future. This is due to the fact that by the end of the summer, based on our definition of active, which hasn't changed, that each of our brand partners will either have joined under the new PaperPie brand and/or made a sale under this new brand. As you will hear Heather discuss a bit more, our marketing promotions and programs are focused on building this number back at the higher levels.
Another positive in the first quarter was the continued results from our SmartLab Toys product line. We introduced 13 new SmartLab Toys to our Publishing and PaperPie customers, and our sales have exceeded expectations. Not only have we received great reception from our retail customers, but we have also picked up some nice international orders as well.
Our PaperPie division continues to drive the total sales for our company, and the sales of SmartLab Toys from this division are exceeding our original expectations. During the quarter, our gross sales of SmartLab Toy products exceeded $1.4 million. We introduced 10 new products in June and have another 15 or so over the next 12 months. Some of these are customers I've never seen before, so we've started new development since we've owned them. With that, I will now turn the call over to Dan to provide a brief overview of the financials. Dan?
Daniel E. O’Keefe
Thank you, Craig. To our fiscal first quarter results compared to the first quarter of last year, net revenues of $14.5 million, a decrease of $8.7 million or 37.5% compared to $23.2 million. Our average active PaperPie brand partners for the first quarter totaled 23,200 compared to 32,200 in the first quarter last year, a decrease of 9,000 or 28%. Loss before income taxes totaled $1.2 million, a decrease of $1.5 million, compared to an income of $0.3 million in the first quarter last year.
After-tax loss totaled $900,000 compared to $200,000, a decrease of $1.1 million. Loss per share for the quarter was $0.11 compared to income of $0.03 per share on a fully diluted basis. To update everyone on our inventory and working capital levels, inventories decreased $8.3 million from $70.6 million at May 31, 2022, compared to $62.3 million at May 31, 2023. Our working capital line of credit was $11 million at the end of May 2023. That concludes the financial update, and I'll turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?
Heather N. Cobb
Thank you, Dan. As Craig mentioned earlier, we have made some recent changes to bring success to our brand partners this summer. We know that success begets success, and this is true with our brand partners as well. Success with our current brand partners leads to better recruiting, which leads to more sales. The most impactful change that we have made is to reduce the freight change on outbound shipping to our customers. That's reducing hurdles that prevent them from shopping with our brand partners.
Prior to this change, we saw a reduction in the number of smaller orders overall, and we believe that this is a direct reflection of the impact of inflation on the economy. By reducing our freight charge, through a simple flat rate structure, we expect to entice these customers to complete a purchase with a smaller order as opposed to abandoning their cart and not buying anything from their brand partner. We also expect for our number of higher-dollar orders to stay approximately the same.
An additional benefit from these smaller orders is that they introduce more new customers to our products. Having more customers introduced to these products gives our brand partners more opportunities to find their next party host and possibly even recruit their next brand partner.
We've heard stories from all levels of our brand partners that they join for the books. But then, they turn their discount into a successful business. Because we want our brand partners to be even more successful with their business this summer, we've offered them additional cash bonuses on their sales. This is due to the fact that we have seen a direct correlation between our brand partners who sell during the summer months and them continuing to sell and have success during the fall, which is always our busiest season of the year.
We have also added other promotions and specials this summer to give our brand partners reasons to contact their existing and potential new customers with these new and exciting offers. The summer is normally our slowest time of the year, so we are giving our brand partners lots of reasons to stay engaged and build their businesses. This concludes our sales and marketing update for today. I'm turning the call back over to Craig now for closing remarks. Craig?
Craig M. White
Thank you, Heather and Dan. As I have said before, EDUC has decades-long history of profitability. Naturally, it's easier to grow profitability when revenues are increasing and steadily outpacing expenses. However, we are in a period where we have seen our revenues decline and thus, we are having to manage our costs.
We are continuing to make operating adjustments each month to reduce our costs. The single most significant cost reduction this year will come from normalizing our inflated inventory levels. As we reduce inventory, it turns into free cash flow, which will be used to pay down debt, which will reduce the interest expense that hits our P&L. This will be one of the most significant improvements to profitability in fiscal 2024.
To normalize inventory levels, we are executing a two-pronged approach. First and foremost, as Heather mentioned earlier, we are taking significant steps to energize our sales force. We expect to introduce new incentives and promotions not only in December but throughout the rest of the year.
Additionally, we will maintain a strict discipline in our purchasing. Over the past 12 months, we have made significant efforts to reduce the quantities of titles we are printing and put increased focus on ordering more frequently. We expect this two-pronged approach will normalize our inventory faster. As an example, we have purchased roughly half of what we did last year and about 1/4 of what we did pre-pandemic levels. We have also reduced payroll and other operating costs and look for every opportunity to improve our bottom line performance. We will continue on this path until we reach profitability.
Once we return to profitability and pay down debt levels, we plan to reinstate our past practice of paying quarterly dividends to our shareholders. This has been and continues to be a top priority for myself and our shareholders. I'd like to take this opportunity also to mention we've just come off a couple of our largest opportunities to energize our sales force and make our PaperPie division as attractive as possible.
In June, we had our convention where we had a good average number of attendees. But what we kind of heard is that a lot of them are coming to just kind of see what the brand, the rebrand, was all about. And to a person, every single person left much more positive than they'd come into it. They were very impressed with what our sales and marketing teams have done with the brand, and we really, really focused on our mission, which is children's literacy and learning. So those things, the convention, was a very positive impact.
And right now, I happen to be -- Heather and I happen to be on our sales incentive trip. So we came from Rome last week where we had roughly -- that's the highest-level trip. It had roughly 40 people that -- with family members and such. We brought about 125 people. And now we're in Punta Cana, Dominican Republic, where we have roughly 400 people, and that's not all earners but that's including family members. So that's the biggest recruiting factor or one of the biggest recruiting factor for PaperPie is to see the amazing trips we take people that earn on. So anyway, the -- we're very, very encouraged coming out of convention and out of these trips, and we're looking forward to the fall.
Now that we have provided a summary of some recent activity, I will now turn the call back over to the operator for question and answer.
Question and Answer Session
Operator
Your first question comes from the line of Ed Norcini, private investor.
Edward Norcini
Craig, I haven't talked to you in a while. I'm on the call and I was looking at the 10-K that was published in February of this year, February 28. Your inventory at that level was $59 million. Today, it's $62 million, so it went up $3 million from the last quarter. It seems to me that inventory has gone in the wrong direction. Do you have anything to say?
Daniel E. O’Keefe
This is Dan O'Keefe. Just to clarify, because I think you've got some numbers that are different. If you look at our press release, our inventory at the end of February of this year was -- if you add both the current and the long-term inventory together, was $63,800,000. And at the end of May, it's $62,300,000, so we dropped about $1.5 million this quarter. And just -- I just wanted to clarify that before, the drop in inventory, the $1.5 million.
Edward Norcini
Well, Dan, my point is, and Craig also, also in that 10-K that you released, you're having problems with the bank. They need their money. Is there any plans? Do you have any plans to sell any of your assets in bulk, like, for example, sell on the Hilti complex or sell Kane Miller or maybe sell $30 million worth of this inventory back to Usborne or another distributor? Do you have any plans to get some massive amount of cash in to pay off these debts? I'm worried about it.
Craig M. White
Yes. Well, you kind of had a bunch of points there. I was trying to keep track so I could respond. But first of all, yes, inventory levels, we -- I've said all along that we will continue to order new titles. We have to do that. But what we said in earlier in the call was that we were reducing the quantities and potentially the number of new titles that we're ordering. So we're being very aggressive on reducing our purchases, very aggressive. Historically, aggressively low. So as we sell inventory, it will turn into cash, and we'll pay the bank back.
Another point you made is that we owe the bank a lot of money. Yes, we do. We have renewal coming up next month, and there's no indication whatsoever that we will not be able to renew successfully with them. And that's for our working capital line. And another point you made is, do we have any plans to sell our assets? I -- we have engaged with a firm to look into the market for a building of our size and the market is very good. We could turn the building around and sell it within 60 to 90 days, so we know that's available to us. I want to keep that in my back pocket as a last resort. We have plans for this property once we get sales back up, so I don't want to get rid of that property just yet. Now if we need to, we can. So again, I just want to reiterate that we have a good relationship with the bank, and there's -- I've had no indication that we're not going to be able to renew the line of credit.
As far as the building debt, Hilti pays their part. We pay a smaller portion of it, and we've never defaulted on any payment. So again, they're not concerned about the building debt. They just want us to work down the working capital line, which we're doing by selling inventory.
Edward Norcini
Okay. That's helpful, Craig. And my other main concern, for right now, in my mind, you have no concrete plans to sell $30 million, $40 million worth of that inventory back to Usborne or another distributor. Because I'm looking, Craig, at your 2017 fiscal ending, we had approximately 25,000 consultants, which are probably what you have today. You had 34,000 -- excuse me, $34 million in inventory. So it seems like to me, you're like close to $30 million over what you need based on 2017, okay?
Craig M. White
That's correct.
Edward Norcini
So wouldn't it be helpful if we just had a mass sale just because it seems like the consultants aren't producing enough sales to reduce this inventory to normal levels?
Craig M. White
Yes, that's a good point. We are looking at options to do some mass inventory reductions. But whatever we do, we don't want to damage our brand partners' ability to continue to sell inventory. As far as selling it back to Usborne or other distributors, that's not an option. They have no incentive to buy back inventory from us. So again, we're looking at some major foundations. We're looking at some other inventory reduction in sales and things like that. So...
Heather N. Cobb
I'll also just add, Ed, that one of the things that we know that you look to us to do for the company is to manage not only the short-term challenges as well as successes but with long-term things in mind. And so I'll just kind of reiterate what Craig said. We're looking at what all of our options are now, but one of the last things that we want to do is some sort of short-term strategy that will end up in some sort of damaging long-term effect that none of us want to see. So while, yes, we are looking at various different creative and alternative ways to reduce this inventory, we definitely want to do it in a way that will allow us to continue the business as we've done with PaperPie as well as with our retail division for the long term.
Daniel E. O’Keefe
And Ed, this is Dan. I'll kind of add another thought as well. You mentioned the 2017 period. If you recall during that time, we were also over inventory. And the over inventory issue is we have excess quantities of our best-selling items. Those were the titles that we ordered the most quantity of, the titles that are our best sellers. And so in 2017, what we did is just we worked through it. And through 2017 to 2018, we reduced our inventory from the high 40s down to about $30 million, reaching about $18 million. And so that's kind of the approach we're taking right now, too. We're a little bit more aggressive on the purchasing than we were back in 2017, as Craig has explained earlier. But the excess inventory is working down and it's in our best-selling items.
Edward Norcini
Okay. That's understood. My other question, if you don't mind, is about your relationship with Usborne. I read in the 10-K that you are in violation of the new distribution requirement. Is that correct? You're not buying enough minimum amounts from Usborne, so you're in violation. And they -- according to the 10-K, they can cut you off at any minute because you're violating the contract. What do you say to that? What kind of assurances can you say because you've been dealing with these people for decades? And also, they said that they're not -- they owe you $1 million from last year, and they're not paying. To me, it's like, well, you've been dealing with these people for decades. And they -- they're fighting you about a $1 million discount rebate. To me, it's like, well, this is not right. So what do you say to that?
Craig M. White
Yes. We have been dealing with Usborne for decades. I've just taken over and been dealing with them myself for the last 2 years. And recently, Nicola -- his father, Peter Usborne, the founder of the company, passed away, so I'm dealing exclusively with Nicola at this point. There is no incentive for them to cancel the distribution agreement. That's not to say they won't, but they know that we just got to get this inventory situation back to a normal level, and then we will get back to purchasing inventory at historic levels.
So they have no options to replace us on the PaperPie side. They're replacing us as a distributor for our retail division, but that's going to be -- take years and years for them to ramp up the inventory that's necessary to service the retail division. So I really don't feel like it's in their best interest. Again, we're preparing ourselves. We are trying to protect ourselves. Whatever kind of cancellation of the distribution agreement gives us a sell-off period. So we're just trying to get stronger financially by selling down inventory, and that gives us a little bit more leverage with Usborne. So that's the approach we're taking.
Edward Norcini
Well, my other question. Dan, what's the status of the employee retention credit?
Daniel E. O’Keefe
Well, we filed for it. So we're waiting on the IRS to take action.
Edward Norcini
So nothing concrete there.
Daniel E. O’Keefe
No, it's working towards -- go ahead.
Edward Norcini
Okay. So I was just wondering if there's nothing -- there's no definitive answer from the IRS on that.
Daniel E. O’Keefe
Not yet.
Craig M. White
We meet the requirements, so I would expect that we would get it at some level, which, man, if we can get some cash from that would be outstanding. It's not necessary or required for us to continue on, but it sure would be great.
Edward Norcini
Okay. Well -- and Craig, I've been wanting to ask you this question. We're going to have to go back some time with you. So Christmas of 2016, you remember when you guys just moved into the Hilti complex and you bought a software package from a company in Florida and it broke down? Actually, it was a classic nightmare, okay? Your father and you had grandkids up there trying to get all the packages out, and customer service was going crazy. Anyway, you paid about $1 million for the software package, as I recall. Did you ever get your money back for that software package? Do you remember that?
Craig M. White
Well, of course, I've been with the company for 30 years. I remember that. Of course, I do. Both sides were working in good faith, and we had just determined that it was not in our best interest to continue with them, so we severed the tie and we moved on. We developed all the software programs we needed in-house. And so that's a distant memory.
Edward Norcini
Yes. Well, it almost bankrupt your company at the time, if I recall, because you were also in violation with the covenants with the bank. I'm thinking it was Midwest Bank at the time. So anyway, I kind of -- right now, I think you guys are in a pickle, and we have to get this inventory or have some cash up to get to the bank because you're working on a waiver right now it seems like from the 10-K. And how generous are they going to be with the waiver? I mean they could shut you off August 9, I think. And you might be out of business is a going concern.
Craig M. White
No. That is highly unlikely.
Operator
Your next question comes from the line of [Frank Goodell] from [Jean Goodell Associates].
Unidentified Analyst
Am I on?
Craig M. White
Yes, we can hear you.
Unidentified Analyst
Yes. I had a couple of comments off of what Ed has said. I noticed the sales volumes are down quite a bit. Everything gets healed, of course. I've been in business myself many years, everything gets healed if you can increase sales. What's the outlook for the next year or so realistically?
Daniel E. O’Keefe
Well, we don't -- and this is Dan. Frankly, we don't give guidance as far as revenue, just to put that out there, before turning the call back over to Craig. As a small reporting company, we just -- it's been our past practice to just be conservative and not put out guidance. Craig, I'll let you take over from there.
Craig M. White
Yes. That's good. Thank you. Well, things are looking up. We're doing all kinds of things to help increase sales, retain brand partners. And it takes a little time for those things to come to fruition. The sentiment right now is more positive than it has been. We're going to be releasing some of our software projects in the next couple of months, which will be a positive impact. Our products get better and better. When we keep our brand partners and salespeople and customers focused on our mission of children's literacy and learning, things always go better. So we're doing all the right things. It's just taking a little longer than we hoped. But we will survive this tough period and increase sales.
Unidentified Analyst
Second question I had. What are the insiders within EDUC doing as far as stock retention?
Craig M. White
All 3 of us are buying.
Heather N. Cobb
[Yes, same here].
Daniel E. O’Keefe
I was going to say, so the insiders being the -- obviously, the White family, the Board, and nobody has really been selling any shares. And then, of course, as Craig mentioned, Heather, Craig and I continue to buy shares every quarter. And we've recently filed some Form 4s that reflect our activity for the first quarter.
Unidentified Analyst
Okay. To that point, one way you obviously improved cash flow is to pay in shares rather than salaries. Obviously, people have to make a certain amount of money to maintain a standard of living. Companies I worked for in the past often did that. Call them golden handcuffs, whatever, but they paid with shares when times are hard to reduce losses, I guess, you could say, by having high salaries.
Daniel E. O’Keefe
And I don't know how long ago you're mentioning. But [Frank], the key thing that -- I mean it's a great idea. It's something that Craig has -- and I have talked about in the past. But I just want to -- before Craig -- before I turn the call over to Craig, I just want to make sure you're aware that it's not legal underneath the SEC rules for us to issue shares to management, unless we've got shareholder approval to do so. So we will -- to do that, we will have to file -- we would have to file a registration statement registering the shares and have a shareholder vote. So just on -- just giving you current SEC guidance. Craig, I'll let you discuss your thoughts on that.
Craig M. White
Yes. The only thing also I was going to add is that we do have short-term and long-term incentives. The long-term incentives are shares. Now those were earned, and the first tranche was awarded this past March after a 5-year vesting period. But we have other chunks of stock that our top 15 to 20 management have earned over the past several years. They're still being vested and things like that, so we do have long-term incentive plans in place. We have small cash bonuses with short term. They've been bigger in the past. We're doing very nominal short-term cash incentives. But yes, I like the thinking that -- we're doing some of that.
Unidentified Analyst
Part of where I'm going is you're highly incentivized to turn this company around rather than bailing when it gets tough, and you are in a tough situation right now. So as a stockholder, I have a lot of patience if I have hope. But if you lose hope, then your patience goes away. So it's just a -- it's been a tough time for EDUC in my own stock account that I have with it. Luckily, I have a lot of other assets, but it's just a very worrisome thing when you see a company stock go down as heavily as EDUC has done in the last 3 years. I'm sure I'm not telling you to...
Craig M. White
I hear you. Right. I'm probably in the top 10 largest shareholders, including institutional. So I get what you're saying. I've been through a lot of the good times, some of the bad times. And yes, ever since I took over, it's been a little bit of a tough stretch with the pandemic and the economy and things like that, but I'm here for the long haul. I've got to look at this as a long-term turnaround, and we're here for it.
Operator
There are no further questions at this time. I will now hand over to Craig. Please continue.
Craig M. White
Thanks, everyone, for joining us on the call today. We appreciate your continued support and look forward to providing you an additional update when we report quarter 2 in October. We know it's been a tough time. We're doing everything we can to get this turned around. We're seeing positive indicators, so hang in there. Have a great day. Thank you.
Daniel E. O’Keefe
Thank you, everyone.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
