Crown Crafts Inc. (CRWS, Financial) designs, markets and distributes infant, toddler and juvenile consumer products, including crib and toddler bedding; blankets; nursery accessories; room decor; burp cloths; bathing accessories; reusable and disposable bibs; and disposable placemats, floor mats, toilet seat covers and changing mats. The company's operating subsidiaries include Crown Crafts Infant Products Inc. in California and Hamco Inc. in Louisiana. Crown Crafts is among America's largest producers of infant bedding, bibs and bath items. The company's products include licensed and branded collections as well as exclusive private label programs for certain of its customers.
Crown Crafts Infant Products, which contributes 74% of company sales, is a dominant manufacturer of infant and toddler bedding, blankets and accessories to mass and specialty markets. Hamco Inc., which contributes 26% of company sales, is a market leader of infant and toddler bibs and disposable feeding products. Neat Solutions, a leading designer, producer and marketer of infant and toddler products, with a focus on products that provide convenience and germ protection, was acquired by Hamco in 2009. Neat Solutions has more than 95% market share, with distribution in grocery and drug stores, restaurants, specialty stores and mass market retailers. Bibsters, with a dominant market share in the disposable bib category, with retail placement at mass, mid-tier, grocery & drug and top e-tailers, was acquired by Hamco in 2010.
Valuation
CRWS trades at 10.9x trailing twelve months P/E, valuations are close to its previous peaks at 11.5x P/E in 2011 and 12.6x P/E in 2007. CRWS also trades at 5.6x trailing 12 months EV/EBITDA and 0.56x PEG.
Financial and Business Risks
CRWS is debt free with cash and cash equivalents of $6.3 million representing 10.7% of its market capitalization of $58.8 million. Debt levels have been decreasing every year, from $47.7 million in July 2001 to $6.3 million in March 2011. Inventory days have spiked up to 92 days on a trailing 12 months basis, reflecting the weak retail environment.
Baseline demand for CRWS' products is derived from annual births in the U.S., which have decreased by approximately 7% from 2007 to 2010.
The company’s top three customers — Walmart, Toys R Us and Target — represented approximately 68% of gross sales in 2012.
Sales of licensed products represented 51% of CRWS' gross sales in 2012, which included 38% of sales associated with license agreements with Disney. The company could experience a material loss of revenues if it is unable to renew its major license agreements or obtain new licenses. Disney's license agreement for infant bedding and décor expires by the end of this year, while Disney's license agreements for toddler bedding and disposable products expire by the end of 2013.
CRWS uses significant quantities of cotton, either in the form of cotton fabric or cotton/polyester fabric. Cotton is subject to ongoing price fluctuations. CRWS claims to have improved gross profit margin from 22.3% in 2011 to 22.9% in 2012 due to the redesign of several product lines to reduce the dependency on cotton. It has also seen an increase in labor, transportation and currency costs associated with sourcing activities in China.
Business Quality and Capital Allocation
CRWS is the industry leader in a traditionally stable niche of the retail industry, and one of the largest U.S. providers of infant/toddler bedding, bibs, soft goods and accessories. It boosts an attractive line of leading name-brand and private-label merchandise, diverse distribution channels and strong licensing and retail relationships throughout the U.S.
In 2010, CRWS entered the $50 billion pet market through a newly launched pet bedding and accessories product line called Neat Solutions for Pets. According to the American Pet Products Manufacturers Association 2009 to 2010 National Pet Owners Survey, 39% of U.S. households own at least one dog and 33% of U.S. households own at least one cat. Neat Solutions for Pets is a good fit with CRWS because it leverages existing company competencies such as expertise in softline products and understanding of pet parents’ spending patterns.
CRWS has a 34% dividend payout ratio and a dividend yield of 5.3%. After a 10-year break, CRWS resumed the payment of quarterly dividends, dividends were initially paid at $0.02 per share, beginning in April 2010. Dividends were subsequently raised from $0.03 per share per share in April 2011 to $0.08 per share in July 2012. On Nov. 13, 2012, CRWS declared a special cash dividend of $0.50 per share, which is in addition to the declaration of the quarterly cash dividend of $0.08 per share.
Since December 2006, CRWS has also invested $5.1 million for share repurchases. Despite the share repurchases, shares outstanding have only decreased 0.5% compared with the share count five years ago, indicating limited value creation for shareholders.
Conclusion
With valuations reaching historical highs, this is more of a growth story than a value play now. Quarterly dividends with no debt will make it an interesting stock, once valuations become more reasonable.
Disclosure
The author does not have a position in any of the stocks mentioned.
Crown Crafts Infant Products, which contributes 74% of company sales, is a dominant manufacturer of infant and toddler bedding, blankets and accessories to mass and specialty markets. Hamco Inc., which contributes 26% of company sales, is a market leader of infant and toddler bibs and disposable feeding products. Neat Solutions, a leading designer, producer and marketer of infant and toddler products, with a focus on products that provide convenience and germ protection, was acquired by Hamco in 2009. Neat Solutions has more than 95% market share, with distribution in grocery and drug stores, restaurants, specialty stores and mass market retailers. Bibsters, with a dominant market share in the disposable bib category, with retail placement at mass, mid-tier, grocery & drug and top e-tailers, was acquired by Hamco in 2010.
Valuation
CRWS trades at 10.9x trailing twelve months P/E, valuations are close to its previous peaks at 11.5x P/E in 2011 and 12.6x P/E in 2007. CRWS also trades at 5.6x trailing 12 months EV/EBITDA and 0.56x PEG.
Financial and Business Risks
CRWS is debt free with cash and cash equivalents of $6.3 million representing 10.7% of its market capitalization of $58.8 million. Debt levels have been decreasing every year, from $47.7 million in July 2001 to $6.3 million in March 2011. Inventory days have spiked up to 92 days on a trailing 12 months basis, reflecting the weak retail environment.
Baseline demand for CRWS' products is derived from annual births in the U.S., which have decreased by approximately 7% from 2007 to 2010.
The company’s top three customers — Walmart, Toys R Us and Target — represented approximately 68% of gross sales in 2012.
Sales of licensed products represented 51% of CRWS' gross sales in 2012, which included 38% of sales associated with license agreements with Disney. The company could experience a material loss of revenues if it is unable to renew its major license agreements or obtain new licenses. Disney's license agreement for infant bedding and décor expires by the end of this year, while Disney's license agreements for toddler bedding and disposable products expire by the end of 2013.
CRWS uses significant quantities of cotton, either in the form of cotton fabric or cotton/polyester fabric. Cotton is subject to ongoing price fluctuations. CRWS claims to have improved gross profit margin from 22.3% in 2011 to 22.9% in 2012 due to the redesign of several product lines to reduce the dependency on cotton. It has also seen an increase in labor, transportation and currency costs associated with sourcing activities in China.
Business Quality and Capital Allocation
CRWS is the industry leader in a traditionally stable niche of the retail industry, and one of the largest U.S. providers of infant/toddler bedding, bibs, soft goods and accessories. It boosts an attractive line of leading name-brand and private-label merchandise, diverse distribution channels and strong licensing and retail relationships throughout the U.S.
In 2010, CRWS entered the $50 billion pet market through a newly launched pet bedding and accessories product line called Neat Solutions for Pets. According to the American Pet Products Manufacturers Association 2009 to 2010 National Pet Owners Survey, 39% of U.S. households own at least one dog and 33% of U.S. households own at least one cat. Neat Solutions for Pets is a good fit with CRWS because it leverages existing company competencies such as expertise in softline products and understanding of pet parents’ spending patterns.
CRWS has a 34% dividend payout ratio and a dividend yield of 5.3%. After a 10-year break, CRWS resumed the payment of quarterly dividends, dividends were initially paid at $0.02 per share, beginning in April 2010. Dividends were subsequently raised from $0.03 per share per share in April 2011 to $0.08 per share in July 2012. On Nov. 13, 2012, CRWS declared a special cash dividend of $0.50 per share, which is in addition to the declaration of the quarterly cash dividend of $0.08 per share.
Since December 2006, CRWS has also invested $5.1 million for share repurchases. Despite the share repurchases, shares outstanding have only decreased 0.5% compared with the share count five years ago, indicating limited value creation for shareholders.
Conclusion
With valuations reaching historical highs, this is more of a growth story than a value play now. Quarterly dividends with no debt will make it an interesting stock, once valuations become more reasonable.
Disclosure
The author does not have a position in any of the stocks mentioned.
