EDUC - Educational Development Corporation (EDUC) Q1 2024 Earnings Call Transcript
2023-07-13 19:03:06 ET
Educational Development Corporation (EDUC)
Q1 2024 Earnings Conference Call
July 13, 2023, 04:30 PM ET
Company Participants
Jean Marie Young - IR, Three Part Advisors
Craig White - President and Chief Executive Officer
Dan O'Keefe - Chief Financial Officer
Heather Cobb - Chief Sales and Marketing Officer
Conference Call Participants
Frank Goodell - Gene Goodell Associates
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's First Quarter Fiscal Year 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [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 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 White
Thank you, Jean, and welcome everyone to the call. I will start today's call with some general comments in regards to quarter, then 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 is for a variety of reasons like we mentioned, 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 will 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 partners success generates additional branding partners and that continues to be our number one 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 up to higher levels.
Another positive from 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 Toys 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, our customers have 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?
Dan O'Keefe
Thank you, Craig. To our fiscal first quarter results compared to the first quarter 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 05/31/2022 compared to $62.3 million at 05/31/2023. 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 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, thus 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 to 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 then 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 reason 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 White
Thank you, both, Heather and Dan. As I have said before, EDC 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're 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 this summer, 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 a quarter of what we did pre-pandemic levels.
We have also reduced payroll and other operating costs and looked 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 were 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 at 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 was -- that's the highest level trip, 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 for -- one of the biggest recruiting factors for PaperPie is to see the amazing trips we take people to earn on.
So anyway, we're 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
Thank you. [Operator Instructions] Your first question comes from the line of [Ed Norsini] (ph), Private Investor. Your line is now open.
Unidentified Analyst
Craig, I haven't talked to you in a while. I'm on the call and I was looking at the 10-K. And that was published in February of this year, February 28. Your inventory at net 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 is going in the wrong direction. Do you have any plans?
Dan O’Keefe
This is Dan. 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] (ph). So we dropped about $1.5 million this quarter. And just -- I just want to clarify that before the -- we actually have dropped inventory $1.5 million.
Unidentified Analyst
Okay. 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 White
Yeah. Well, you kind of hit a bunch of points there. I was trying to keep track, so I could respond. But first of all, yeah, 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 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’ll 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. We've never defaulted on any payments. 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.
Unidentified Analyst
Okay. That's helpful, Craig. 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've been look -- I'm looking, Craig, at your 2017 fiscal ending where you had approximately 25,000 consultants, which is probably what you have today, but 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…
Dan O’Keefe
That's correct.
Unidentified Analyst
…2017. Okay? So…
Dan O’Keefe
That's correct.
Unidentified Analyst
…wouldn't it be -- wouldn't it be helpful if 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 White
Yeah, 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 sales and things like that. So…
Heather 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.
Dan O’Keefe
And, Ed, you've -- 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-inventoried. And the over inventory issue is we have excess quantities of our best-selling items. Those are the titles that we ordered the most quantity of, the titles that are our best sellers. And so in 2017, we did, it’s just we worked through it. And through 2017 to 2018, we reduced our inventory from the high 40s down to about $30 million, [reducing by about $18 million] (ph). 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.
Unidentified Analyst
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 they're -- 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, whoa, you've been dealing with these people for decades, and they -- they're fighting you about $1 million discount rebate. To me, it's like, woah, this is not right. So what do you say to that?
Craig White
Yeah, we have been dealing with Usborne for decades. I've just taken over and been dealing with them myself for the last two years. And recently, Nicola's father, Peter Usborne, the founder of the company passed away. So I'm dealing exclusively with Nicola at this point. There's 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. They're on the PaperPie side. They're replacing us as a distributor for our retail division, but that's going to be taking 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.
Unidentified Analyst
All right. Well my other question. Dan, what's the status of the employer retention credit?
Dan O’Keefe
Well, we filed for it.
Unidentified Analyst
I know.
Dan O’Keefe
So we're waiting on the IRS to take action.
Unidentified Analyst
Okay. So nothing concrete there.
Dan O’Keefe
No. It's -- go ahead.
Unidentified Analyst
Okay. I just -- just wondering -- there's nothing -- there's no definitive answer from the IRS on that.
Craig White
Not yet.
Dan O’Keefe
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 will be great.
Unidentified Analyst
Okay. Well -- and Craig, I've been wanting to ask you this question. We're going to have to go back through the time machine. Christmas of 2016. Do you remember when you guys just moved into the Hilti Complex and you bought a software package.
Craig White
I do.
Unidentified Analyst
You bought a software package from a company in Florida and broke down. Actually, it was a classic nightmare. Okay? Your father and you had the grandkids up there trying to get all the packages out, 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?
Craig White
No.
Unidentified Analyst
You remember that?
Craig White
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.
Unidentified Analyst
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 think 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 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 all this life, I think. And you might be out of business as a going concern. So, good luck.
Craig White
No. That's highly unlikely. All right. Thank you, Ed. Appreciate it.
Unidentified Analyst
All right. Thank you.
Dan O’Keefe
Thanks, Ed.
Operator
Your next question comes from the line of Frank Goodell from Gene Goodell Associates. Your line is now open.
Frank Goodell
Yes. Am I on?
Craig White
Yes, we can hear you.
Frank Goodell
Yes, I had a couple of comments off of what Ed had said. I noticed the sales volumes are down quite a bit. Everything has 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?
Dan O’Keefe
Well, we don't -- and this is Dan. Frank, we don't give guidance as far as revenue. Just to put that out there before I turn the call back over to Craig. As a small reporting company, we just -- it's -- as it's been our past practice to just be conservative and not put our guidance. Craig, I'll let you take over from there.
Craig 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'd hoped, but we will survive this tough period and increase sales.
Frank Goodell
Second question I had, what are the insiders within EDUC doing as far as stock retention?
Dan O’Keefe
You -- Craig, you want me to take this?
Craig White
All three of us were buying.
Heather Cobb
Yes. Go ahead, Dan.
Dan 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.
Frank Goodell
Okay. To that point. One way you obviously improve 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, called them golden handcuffs, whatever, but they paid with shares when times were hard to reduce losses, I guess, you could say by having high salaries.
Dan O’Keefe
Well, 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 and I've talked about in the past. But I just want to -- before Craig -- 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 gotten shareholder approvals 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 the thoughts on that.
Craig White
Yeah, the only thing I also 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 five-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 in 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 yeah, I like the thinking, but we're doing some of that.
Frank Goodell
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…
Craig White
Sure.
Frank Goodell
…it's just a -- it's been tough time for EDUC and my own stock account that I have with it. Luckily, I have a lot of other assets that, it’s just a very worrisome thing when you see a company stock go down as heavily as EDUC has done in the last three years. I'm sure I'm not telling you that to giggle.
Craig White
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 yeah, ever since I took over, it's been a little bit of a tough stretch with the pandemic and then 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.
Frank Goodell
All right. That's all the comments I have. Thank you.
Craig White
Thank you, Frank.
Dan O’Keefe
Thanks, Frank.
Operator
There are no further questions at this time. I will now hand over to Craig. Please continue.
Craig White
Thanks everyone for joining us on the call today. We appreciate your continued support and look forward to providing an additional update when we report quarter two in October. We know it's been a tough time. We're doing everything we can to get this turned around. Things -- we're seeing positive indicators. So hang in there. Have a great day. Thank you.
Dan O'Keefe
Thank you everyone.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
For further details see:
Educational Development Corporation (EDUC) Q1 2024 Earnings Call Transcript