Please note this event is being recorded. I would now like to turn the conference over to John McNamara with Three Part Advisors. Please go ahead.
Thank you. Good morning, everyone, and thank you again for joining the Crown Crafts fiscal year 2026 Q3 conference call. With us on the call this morning are Crown Crafts President and Chief Executive Officer Olivia Elliott and Vice President and Chief Financial Officer, Claire Spencer. During today's call, the company may make certain forward-looking statements, and actual results may differ materially from those expressed or implied. These statements are subject to risks and uncertainties that may be beyond Crown Crafts' control, and the company is under no obligation to update these statements. For more information about the company's risk factors and other uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and the Form 10-Q for the quarter ended December 28, 2025.
With that, I would now like to turn the call over to President and Chief Executive Officer, Olivia Elliott. Olivia?
Thank you, John, and good morning, everyone. As we noted in the press release issued earlier today, we believe our Q3 results demonstrate the resilience of our business model and the diligent efforts of our team as we work to overcome the challenging demand environment and the ongoing effects of higher tariffs. Net sales for Q3 were $20.7 million compared with $23.4 million in the prior year quarter, while net income increased to $1.5 million from $900,000 a year ago. We are committed to driving profitability as we continue to execute on pricing and cost actions to offset the sales environment. While we are encouraged by the positive performance in our bibs, toys, and disposable categories during the holiday season, the macro backdrop remains difficult for our category.
Elevated U.S. Tariff rates have raised product costs and contributed to uncertainty from certain China-based suppliers, while consumer spending remains uneven and price-sensitive. Q3 gross margin was 23.5% compared with 26.1% in the prior year quarter, despite our ongoing mitigation efforts. Also impacting gross margin were certain one-time costs that Claire will speak to in a moment. Within this environment, we are staying focused on what we can control. For starters, we are very excited about our product pipeline. Earlier this week, we announced Manhattan Toy's relaunch of Groovy Girls, an iconic line of soft fashion dolls that will be available starting in May of 2026. This relaunch reflects the strength of Manhattan Toy's portfolio and our commitment to internal product development. We believe Groovy Girls will create opportunities with specialty customers and direct- to- consumer as we broaden our reach in the juvenile space.
Operationally, our supply chain team continues to work closely with our sourcing partners in China and other regions to manage through tariffs, freight, and capacity constraints. The majority of our products are produced by foreign contract manufacturers with the largest concentration in China, and we remain focused on quality, compliance, and reliability while also continuing to evaluate alternative sources of supply where appropriate. Our inventory strategy has been deliberately conservative as we aim to minimize exposure to excess inventory in a volatile pricing and tariff environment. We also continue to execute on cost initiatives with further plans to consolidate certain internal operations, and during the quarter, we incurred $600,000 in severance expenses in connection with these consolidation efforts.
These actions are designed to eliminate redundant activities, reduce payroll and administrative expenses over time, and create a leaner operating structure that can better absorb external factors such as tariffs and raw material volatility. Shifting gears, we ended the Q3 with a solid balance sheet and liquidity position. We continue to view cash flow generation, debt reduction, and disciplined capital allocation, including our regular quarterly dividend, as key pillars of our shareholder value propositions, and we believe our brands, customer relationships, and category positions have us well prepared to enhance long-term shareholder value as conditions normalize. With that, I will now turn the call over to Claire, who will walk you through the financial details for the quarter. Claire?
Thank you, Olivia. For the Q3 of fiscal 2026, which ended December 28, 2025, net sales were $20.7 million compared with $23.4 million in the Q3 of the prior year. Gross profit was $4.9 million compared with $6.1 million, and gross margins were 23.5% versus 26.1%. The change in gross margin was driven primarily by higher tariffs on products imported from China and one-time licensing expenses in connection with the insurance claim I will speak further on in just a moment. Marketing and administrative expenses increased by $600,000 to $5 million in the current year quarter due to severance expenses incurred in connection with operational consolidation efforts. As a percentage of net sales, marketing and administrative expenses were 24% in the Q3 compared with 18.8% in the same period last year. Other income and expense was a positive contributor in the Q3.
Other income benefited by $2.5 million insurance proceeds received during the quarter related to certain claims made by the company under a representations and warranties insurance policy purchased in connection with a recent acquisition. The net impact of these insurance proceeds to income before tax expense, excluding certain legal and licensing-related expenses, was $2.1 million in the current year quarter. Income before tax expense for the quarter was $2.1 million, up from $1.3 million in the prior year quarter. Income tax expense was $600,000, up from $400,000 a year ago. Net income for the quarter was $1.5 million, an increase from $900,000. Basic and diluted earnings per share were $0.14 in Q3 of fiscal 2026, which was up from $0.09 in Q3 of fiscal 2025.
Turning to the balance sheet, we ended the quarter with total assets of $76.1 million, and we had $10.6 million of additional availability under our revolving credit facility. Inventories were $31.2 million at quarter end compared with $27.8 million at fiscal 2025 year end, reflecting our seasonal build ahead of Chinese New Year. Total debt at quarter end was $16.4 million, and we were in compliance with all financial covenants. Net cash provided by operating activities for the nine-month period was $7.1 million, up slightly from $7 million the prior year period. In summary, Q3 results reflect ongoing tariff-driven margin pressure and a continued soft demand environment, offset by cost actions and non-recurring items such as severance expense and insurance proceeds.
We believe our balance sheet, liquidity, and disciplined approach to expenses provide a solid foundation as we navigate the current environment and position the company for improvement as conditions normalize. With that, I will turn the call back to Olivia for some closing remarks before we open the line for questions. Olivia?
Thank you, Claire. We entered this fiscal year fully aware that we would be operating against a difficult backdrop, including elevated tariffs, shifting retailer behavior, and a cautious, value-focused, and uneven consumer environment. The Q3 did not change that reality, but it did reinforce our conviction that our strategy, anchored in strong brands and licenses, disciplined cost management, conservative inventory management and sourcing decisions, and a focus on cash generation is the right one for Crown Crafts. At the same time, our capital allocation strategies focus on growth-oriented investments in our business and the return of capital to our valued shareholders. We remain confident in the long-term fundamentals of the infant, toddler, and juvenile category and in Crown Crafts' ability to be a trusted partner to our customers, licensors, and consumers.
I want to thank our employees for their hard work and dedication, our customers and licensors for their continued partnership, and our shareholders for their ongoing support. With that, we'd now be happy to take your questions. Operator?
We will now begin the question- and- answer session. To ask a question, you may press star, then one, on your telephone keypad. If you were using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Deysher with Pinnacle. Please go ahead.
Good morning, everyone. Thanks for taking my question.
Hey John.
Hello, Olivia. Just curious, the sales decline, you had all your acquisitions for both quarters, I think. Where was the softness on the revenue line?
The softness is really in the bedding category. So from the toddler bedding perspective, it's a category of business that just isn't. It's not required. I mean, you need sheets for a crib, that type of thing, but you can skip the toddler bedding set altogether. S o in this environment, we're seeing where the consumer is maybe trading down and not buying the bedding set but buying just a blanket instead. S o a bedding set can be maybe a $50 item where a blanket is more like a $12 item. So we're still seeing the category be popular. It's just what the consumer is buying right now.
Okay. So it was just about all bedding?
It was all bedding.
Okay. Okay. And you mentioned China was a major source. What percentage of the product comes out of China, roughly, right now?
Almost all of it. I mean, it's in the high 90%.
Okay. All right. Gotcha. And then the reimbursement, not reimbursement, the benefit of $2.5 million from insurance claims, could you provide some color there? That's a big number. Unfortunately, it went your way, but I'm just curious what the backstory is there.
It relates to a product category that was dropped at retail not long after we did the acquisition. S o we made a claim under the reps and warranties insurance, and it went our way, as you said. That also included a couple of one-time costs associated with that same category of business, which was a licensing shortfall and then some inventory that we closed out at a pretty deep discount.
Okay. So let me just make sure I understand it. So you made the acquisition, and then a product was dropped, and you submitted a claim because you thought you were going to have that product going forward? Is that right?
That's correct.
Okay. That's interesting. Okay. All right. Well, I'm glad your agreement specified that. Okay. And do you expect anything more like that going forward?
Not that I'm aware of right now.
Okay. Good. Okay. Great. I appreciate the color. Thank you.
Our next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.
Good morning, everyone, and thanks for taking the questions. I just have a couple of things here. Can you just comment on the pricing? How much did that contribute to the quarterly revenue? Just wondering if you could comment on that.
You just mean on retail price increases?
That's correct.
So as of October, we have pretty much gotten all of the price increases through all of our retailers. I think we mentioned in the last quarter, the Q1 that the tariffs went through, which was in our June quarter, we had tariff increases but not a lot of retail price increases. I t takes a period of time to get all of those prices through. So as of October, the last of the major retailers took the price increases. Q3 was kind of a mix. We had half of the quarter where we didn't have them and then half of the quarter where we did.
Gotcha. Okay. All right. T hen in terms of the cost actions that you have taken, can you comment? Can you give any specifics as to what the annualized cost savings might be as we think about the business going forward?
We're still working on that number. We're going through our budgeting process now for our next fiscal year, and we'll know a little bit more where we can make some of those cuts now. It will take a little bit of time. I think a lot of it's going to be in some of our IT contracts and other contracts where currently each of our subsidiaries has to have a separate agreement. But we can only do that when the current contracts roll out. So it's going to be something that you might see part of in this fiscal year, and then we won't really realize the full amount until the next fiscal year. So hopefully, by June, when we have our next call, we'll be able to give more color.
All right. Well, thank you very much.
Thank you.
The next question comes from Igor Novgorodtsev with Lares Capital. Please go ahead.
Good morning, and thank you for taking my question. I'm a bit surprised that you still get 90% of all your products from China, given the difficult trade relations between the United States and China. So what is your contingency plan if the tariffs will go up again to 100%? What would you do?
We are actively looking at sources in other countries. We've been doing that for some period of time, and we have other contacts, etc. But right now, we've stuck with China for several reasons. One being the biggest is quality and safety. As you know, we deal in infant products, and so we have to take time to make any changes because we need to make sure that the product is very safe and that the proper quality control standards are in place. So while we are exploring those, and we have been for the last year or so, we're taking it slowly. But we do have those contacts. We've been to Cambodia, Pakistan, India, any number of other countries that we're making those contacts.
Toys would be the hardest, particularly the plastic toys, because those are molded, and you can't just pick up your mold out of the current factory and move it to some other factory. So we would have to rebuild those molds. So that would be the toughest category for us.
To follow up on this, I know there's a lot of moving parts, and tariffs have been moved back and forth several times. What is your effective tariff rate right now, on average, versus pre-April last year? What would it be today?
I do not have kind of an effective tariff rate. I mean, obviously, the current 20% rate is on all categories of business, but it varies widely. So for example, toys, the only duty and tariff on it is the 20%, whereas on diaper bags, the total of all of that is above 60%. So it just varies very widely. Everything else kind of falls out in the middle.
I see that you mentioned the price increases in October, the last price increases. Do you think you'll be able to raise prices further, or do you think, unless something changes, you're done for now other than normal prices?
Unless something changes, we're done for now. I just don't think that the consumer can absorb any price increases right now, and the price increases that have already gone into effect are impacting sales.
Understood. Okay. Thank you very much.
Thank you.
The next question comes from Doug Ruth with Lenox Financial Services. Please go ahead.
Olivia, under difficult circumstances, I feel that you and the company have done a wonderful job, and I'm grateful for what you've done for the shareholders. I have some questions now.
Thank you, Doug.
Where will the Groovy Girls be sold?
So initially, in specialty stores and on our own website, manhattantoy.com, is the initial goal. I mean, the hope is eventually that we'll roll it out to some larger retailers, but we would need to change the product a little bit so that we don't, you can't take the same product to both channels, or then you ruin one channel.
Yes, I understand. Would you be selling them overseas as well?
Yes. It will be sold internationally through our distributors.
Then I noted that year-over-year, the inventory was down about 4%. Is the company happy with the present inventory level?
I mean, I'll use the word happy, yes. I mean, I always think that we could have less inventory, but some of our planners disagree with me. So yes, I mean, I think overall, the inventory levels are good.
Okay. And then you had previously talked some about the international sales. Could you tell us some about what's going on with the Disney license? I know you got the Disney license in Canada. How has that been going?
So the Disney license in Canada, our license to that started this calendar year, so just in January. W e've already talked to some of the larger retailers. The product from the old licensor is kind of selling out, and we're in the process of putting the product in for our product.
Okay. And then also, I think you were talking about having a different distributor in Canada for the Sassy Toy and the Manhattan Toys. Is there any update on that?
Yes. So we think that's going well. That transition just also started happening kind of in December, January. But I think that's going to be a very good partnership for us.
I also heard you mention that you had 33 international distributors for the Sassy Toy and the Manhattan Toy. Can you give us some ideas of what's happening there?
I don't know if that's the exact number. We have more than 30 distributors in probably more than 50 international countries. S o that's going well. We're continuing to try to sign up more distributors and expand the countries. But that's certainly been a focus for us, and I think it's going very well.
Then how about the Q3 sales? Were the international sales higher? And is there any way you could maybe give us a percentage of how much they might be increased?
We don't have that number sitting here with us, and I don't think we've disclosed that specifically. So I think I'll have to pass on answering that question.
Okay. I noticed that you had increased the advertising budget, and then I had heard you talk previously that you were doing some things with Facebook and Instagram. Could you maybe tell us a little bit more about what's going on with that?
So we're continuously trying to increase our presence both in the marketing and the advertising side. I mean, it's just a part of doing business now. It's the way you get your consumer. S o we've increased it a little bit this year, and I think that you'll see us budget more and spend more in the next fiscal year. Otherwise, it's very hard to get the consumer now.
Is the company thinking anything more about the warehouse? I believe that possibly one of the leases is coming up. Is there any talk about that at all?
We still put that on hold right now. We are extending the lease in Minnesota to coincide with the termination of the lease in California, and we'll pick back up on that conversation probably toward the end of this calendar year. You kind of need about an 18-month lead time to choose a location, do a lease, and then do whatever kind of build-out needs to go into the new location. So probably, I'm going to say maybe November of this year, we'll start that conversation again.
Okay. With this insurance policy, the Representations and Warranties Insurance policy, who figured out to buy that? How did that come about?
You mean getting the policy itself?
Is that normal? Is that something that the company maybe does when you make an acquisition? Or is this something that is unique?
It was something specific to this acquisition. It was just part of the agreement.
Well, whoever came up with that, I would like the company to consider giving that person a bonus. I f it was you, I think you should get the bonus. That was an outstanding idea to come up with that. I've never heard of that before, and it really worked out for everybody, for the company and the investor's favor. So it was really a great idea.
I don't think I can take credit for that one. It was kind of a mutual agreement. So I appreciate the comments.
Okay. Well, I want to thank everybody who was involved in it. Of course, the people who did it know who they are. But thank you for doing that. Thank you. Thank you, Claire, for your contribution. You really did a great job. Thank you for that.
Thank you, Doug.
Again, if you have a question, please press star then one. We have a follow-up question from John Deysher with Pinnacle. Please go ahead.
Hi. My follow-ups have been answered, so thank you, and good luck going forward.
All right. Thanks, John.
Thank you.
Our next question comes from Greg Zenit with Retail. Please go ahead.
Hey, good morning. I think in a previous conference call, there was some discussion about Target was going to get out of some of their, I guess, store categories and that they may be the impression I got is that they may be looking towards you or somebody else. Could you comment on that?
I think what you're talking about is just that Target's been taking a lot of their programs to private label and direct sourcing them. S o we've had a couple of categories in the past, one of them being our bib category and then one of them being the diaper bags that have been taken away from us and given that they've gone private label and gone direct source.
They're not bringing yours back? They were going to get them back to whomever that's buying from?
Right now, we have not been able to get those back. We certainly are trying, and we hope to. But at this point in time, we've not gotten them back.
Okay. Thank you.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Olivia Elliott for any closing remarks.
Thank you all for your support and interest in Crown Crafts. We look forward to updating you on our next call in mid-June. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.