Educational Development Corporation (NASDAQ:EDUC) Q1 2024 Earnings Call Transcript

Educational Development Corporation (NASDAQ:EDUC) Q1 2024 Earnings Call Transcript July 13, 2023

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?

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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.

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Q&A 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…