Educational Development Corporation (NASDAQ:EDUC) Q3 2023 Earnings Call Transcript

Educational Development Corporation (NASDAQ:EDUC) Q3 2023 Earnings Call Transcript January 5, 2023

Operator: Good afternoon, everyone. And thank you for participating in today’s conference call to discuss Educational Development Corporation’s Financial and Operating Results for its Fiscal Third Quarter and Fiscal 2023 Year-to-date Results. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steven Hooser, Investor Relations.

Steven Hooser: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation’s third quarter and fiscal 2023 year-to-date earnings call. On the call with me 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 third quarter and fiscal 2023 year-to-date. The release is available on the company’s website at www.edcpub.com. Before turning to the prepared remarks, I 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 Educational Development Corporation’s recent filings with the SEC for a more detailed discussion of the company’s financial condition. With that, I would now like to turn the call over to Craig White, the company’s President and Chief Executive Officer. Craig?

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Craig White: Thank you, Steven, and welcome everyone to the call. I will start today’s call with some general comments in regard to the 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 and strategy and 2023 outlook. We are pleased with our sales for the third quarter, especially when compared to the previous quarter. We continue to face macroeconomic pressures from record inflation resulting in high food and fuel costs that have hit the pockets of our target customers, which are families with young children. To combat these continued pressures like many retailers, we offer additional discounts to support our customers and additional incentives to energize our sales force.

These market decisions allowed us to generate over $30 million in net sales but did impact our ability to drive the bottom-line. Having said that, I am pleased by our ability to remain profitable for the quarter. With that, I will turn the call over to Dan O’Keefe to provide a brief overview of the financials. Dan?

Dan O’Keefe: Thank you, Craig. Turning to the third quarter, net revenues were 30.3 million, a decrease of 14.8 million or 32.8% compared to 45.1 million in the third quarter last year, or an increase of 56.2% as compared to 19.4 million during the previous quarter. The annual decrease is due to the positive benefit we saw a year ago driven by the pandemic. The quarter-over-quarter increases primarily due to the seasonality and also included some promotions and incentives. Average active UBAM sales consultants totaled 27,100 compared to 41,500 in the same period a year ago, and 26,800 in the previous quarter of this year. During the third quarter, we saw stabilization in the average active number of consultants. We’ve seen our active consultant levels begin to rebound while our leader level consultants remain at historically high numbers.

Earnings before income taxes for the third quarter was 0.0 million a decrease of 3.6 million compared to 3.6 million recorded in the third quarter of last year. Net earnings for the quarter also totaled zero compared to 2.6 million a decrease of 2.6 million. Earnings per share totaled zero compared to $0.31 on a fully diluted basis. Now turning to our year-to-date highlights. We recorded net revenues of 72.8 million a decrease of 46.1 million or 38.8% compared to 118.9 million during the same period of 2022. The decline was primarily due to lower active consultant count coupled with rising inflation, especially during the first and second quarters this year. Average active UBAM sales consultants totaled 28,700 compared to 47,300 for the first three quarters of 2022.

Last year, we saw inflated numbers continuing from the pandemic when school closures continued, and many family members worked from home. This year as schools remained open and families returned to work, we’ve seen our sales consultant levels start to normalize. Year-to-date loss for income taxes was $800,000, a decrease of 11.7 million compared to 10.9 million during the same time last year. Net year-to-date loss totaled 600,000, compared to 8.6 million for the first half of last year — for the first three quarters of last year, a decrease of 8.6 million. Year-to-date loss totaled $0.07 compared to earnings per share of $0.94 from the first three quarters of fiscal 2022 down 107.4% on a fully diluted basis. To update everyone on our working capital levels, inventory levels decreased from 67.6 million at the end of the second quarter to 64.3 million as of November 30, 2022.

Cash generated from our reduced inventory was primarily used to pay down our working capital line, which ended the quarter at $9 million. We continue to expect further inventory reductions and working capital line pay downs during our fiscal fourth quarter and throughout fiscal 2024 as we normalize our inventory levels. Lastly, our longstanding dividend program remains paused as part of the strategic decision to preserve cash, which improves cash flows by approximately 1 million per quarter. This concludes the financial update. I will now 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 continue to evaluate market conditions and make changes we feel are needed to motivate our sales force and engage our customers. We ran several customer discount promotions and sales incentives during the quarter to ensure strong results during our peak seasonal selling period. These market decisions not only helped us normalize our working capital, but also keep our commission-based sales force engaged. During the second and third quarters, our sales and marketing teams internally spent significant efforts executing a rebranding directive for our direct sales division. We announced the rebranding efforts in June engaged a Tier-1 rebranding firm to assist us and completed and announced the new name of our direct sales division PaperPie in December.

This new name allows us to better showcase our full product offering. Kane Miller Books, Usborne Books, SmartLab Toys and Learning Wrap-Ups. PaperPie also allows us to build a recognizable name unique to our company. Our rebranding process was completed earlier this week, when we transitioned our customer facing ecommerce, and brand partner facing back office to the new paperpie.com. We are extremely excited about our new name PaperPie, as it does allow us to build a recognizable brand and encompassing all of our wonderful products and people. There’s a lot of meaning behind the name. But overall, we wanted our brand to represent our mission of gathering for good around literacy and learning. This is a newly formed compound word which we will be defining ourselves.

At PaperPie, paper is our medium of communication. Whether it’s a board book, game pieces, a series of chapter books or creative activity. As the world continues to fight for our children’s attention through screens and devices, it has never felt more important for tangible literacy and learning tools that will feed the imagination, grow the emotions and nourish the mind of our children. And when you think of pie, you think of something to be gathered around something to be shared an experience worth savoring. That’s exactly what we believe our products are made for, literacy and learning as a lifestyle. PaperPie is for memory making, creative learning and unlimited possibilities, all within the context of togetherness. Along with this strategic rebranding, starting this week, we rolled out our SmartLab Toys product line.

These award-winning theme-based products, including squishy human body, laboratory toys, science lab toys, and our tiny series offer children ages eight and up hands-on learning opportunities. We expect our initial launch of 10 products to have an immediate sales impact and we plan to follow that up with additional product releases mid-season this spring and another significant release this summer. This concludes our sales and marketing update. I’ll turn the call back over to Craig for closing remarks. Craig?

Q&A Session

Craig White: Thank you both Heather and Dan. EDC have decades long history of profitability. We have been profitable during recessions and other challenging times. During this past year, our product costs and sales commissions have remained unchanged, but other costs have increased, especially in the areas of inbound and outbound freight. As our earnings have been impacted, we have made recent changes to improve profitability, including increasing the freight we charge our customers. This was done late in the quarter so had a small impact so far. We have also made changes to reduce our operating expenses, and we are seeing inbound freight rates come down and are taking advantage of better spot rates. We expect these changes will yield profitable results even on reduced sales volumes.

As we return to higher profitability, we plan to reinstate our longstanding practice of paying quarterly dividends to our shareholders. This has been and continues to be a top priority for myself and our shareholders. Turning to future expectations, I want to highlight some exciting changes happening at EDC. First, I want to thank Heather and our sales and marketing team for the successful rebranding. Launching PaperPie was a great accomplishment. I expect not only short-term benefits from the excitement surrounding our new name, but a positive momentum building trend in our PaperPie brand partner count as we rally around our new names or improving and diversified line of products in our improved IT systems. We recently hired a new Chief Information Officer John Leach that brings 30 years of IT experience and 20 years IT experience in the direct sales industry.

His guidance and leadership supporting our PaperPie launch was a key to its success and the additional resource library that was added to our brand partner success platform. He has taken the lead on several IT projects, and we have new products and system enhancements that will not only make our existing PaperPie sales brand partners more successful but offered new brand partners or shorter path to financial success selling our products. We will be rolling out several system improvements over the next few months. Lastly, I’d like to talk about our new product line SmartLab Toys. This product line has a long history of sales success but has never had a marketing and sales engine like PaperPie, where we have a much broader reach. Also, our trade retail division has outside sales groups who have represented the product line in the past and are ecstatic to get the line back.

SmartLab Toys most recent year sales was 7.5 million and we feel very good about being able to exceed that. We do not need to acquire companies to continue to diversify the product lines. We have been working with existing vendors to provide more educational games and toys. And we begin selling some of those this week. We will continue to look for opportunities with our existing vendors as well as outside opportunities. Now that we have provided a summary of some of our recent activity, I’ll now turn the call back over to the operator for question-and-answer.

Operator: Thank you. .

Craig White: Hello, Alan.

Unidentified Analyst: Hello.

Craig White: Is it Alan?

Unidentified Analyst: Yes, it is.

Craig White: Shoot.

Unidentified Analyst: Sorry.

Craig White: Ask a question. Do you have a question for us Alan? Sorry.

Unidentified Analyst: Yes, I do. Yes, I do. Sorry, I wasn’t sure if I was on or if I was holding there.

Craig White: We weren’t sure either.