Educational Development Corporation (NASDAQ:EDUC) Q3 2024 Earnings Call Transcript

Educational Development Corporation (NASDAQ:EDUC) Q3 2024 Earnings Call Transcript January 11, 2024

Educational Development Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen and welcome to the Educational Development Corporation’s Third Quarter Fiscal Year 2024 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, January 11th of 2024. 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 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. I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.

Steven Hooser: Thank you, Alan, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation’s third quarter 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 fiscal third quarter. The release is available on the company’s website at www.edcpub.com. Additionally, as the operator noted, today’s conference call and prepared remarks are being recorded and there are forward-looking statements. With that, I would now like to turn the call over to Craig White, the company’s President and Chief Executive Officer. Craig?

Craig White: Thank you, Steven. Welcome, everyone, to the call. I will start today’s call with some general comments regarding the quarter, then I will pass the call over to Dan and Heather to run through the financials and provide an update on sales and marketing. Finally, I will wrap up the call with some comments on strategy and fiscal 2024 outlook. We are encouraged, as we have seen our active brand partner count, stabilize this summer and remain at consistent levels through our fiscal third quarter, which is traditionally our largest sales quarter of the year. During the third quarter, our sales within our PaperPie division decreased approximately 30% from third quarter last year, primarily due to the lower active brand partner levels.

The sales in our Publishing division were also lower this quarter due to the stoppage of selling Usborne products. As a reminder, this was in part due to our new distribution agreement with Usborne Publishing that we entered into May of last year. However, the decrease in Usborne sales were partially offset by strong orders for our new product line, SmartLab Toys, along with increased sales of Kane Miller books and Learning Wrap-Ups products. We continue to be excited about the demand for all of our products and especially when we look at the growth opportunities within SmartLab Toys, where we have only introduced 25 initial products through the third quarter. During the quarter, we offered sales promotions and strategically reduced freight charges to increase demand and make it easier for our brand partners to engage new customers.

These changes impacted our third quarter operating profits that were aligned with our goals to intentionally reduce our excess inventory levels and improve long-term brand partner success. Brand partner success generates future brand partners success and that continues to be our number one focus. With that, I will now turn the call over to Dan O’Keefe to provide a brief overview of our financials. Dan?

Dan O’Keefe: Thank you, Craig. To our fiscal third quarter results compared to the third quarter last year, net revenues for the third quarter totaled $16.9 million, a decrease of $13.4 million or 44% compared to $30.3 million in the third quarter last year. Average active PaperPie brand partners for the quarter totaled 16,400 compared to 27,100 in the third quarter last year, a decrease of 10,700 or 39%. Earnings before income taxes totaled $2.7 million compared to a breakeven level of earnings before taxes in the third quarter last year. After-tax income totaled $2 million compared to breakeven last year. Income per share for the quarter totaled $0.24. To update everyone on our inventory and working capital levels, net inventories decreased $6.3 million from $64.3 million at November 30th, 2022 compared to $57.9 million at November 30th, 2023.

Now for a working capital update. Our working capital line of credit borrowed was $5 million at the end of the quarter on November 30th 2023. During the quarter, the company met the line of credit step-down requirements from $13.5 million in August to $5 million in November, as outlined in the company’s credit agreement with our bank. Subsequent to the end of the quarter, the company executed the fourth amendment to its credit agreement with increased borrowing availability to $8 million and enables us to purchase new inventory of $2.1 million between December 1st 2023 and March 31st 2024. The line of credit maturity was also extended from January 31st to May 31st 2024, which is the expected sale period of our recently listed Hilti Complex, which Craig will touch on briefly.

The proceeds from the sale of the Hilti Complex will be used to pay down the line of credit and term loans with our bank. Also during the third quarter, the company switched our credit card processor from PayPal to Nexio, which released a majority of the increased reserves of cash held during the quarter. That concludes the financial update, and I’ll now 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 continue to make changes to bring new success to our brand partners. As an example, during the third quarter, we ran several promotions, including site-wide sales and sent marketing communications to previous customers, making them aware of the ability to purchase products from their brand partners at discounted pricing from 10% to 30% off retail prices. In addition, as Craig mentioned, in September, we began offering $5 flat rate shipping on our e-commerce orders with free shipping taking effect at $30. This change in shipping charges has been well received from our customers and brand partners alike. On January 3th of this year, we celebrated the first anniversary of the reveal of PaperPie, marking the rebrand of our direct sales division.

This milestone is important as it provides an opportunity for reflection, assessment and celebration and marks the completion of the introduction of this new brand. Not just the outward marks like our name, colors and logo, but also more intrinsically, our mission of gathering for good around literacy and learning are more recognizable in communities around the country. This anniversary also provides a foundation for us to build momentum and sustain the positive changes initiated by this rebrand. Another significant upcoming improvement will be the launch of our new e-commerce platform later this month for PaperPie. We are thrilled with the opportunity to share with our brand partners and our customers a more intuitive, efficient and visually stunning platform, allowing for a mobile-friendly experience.

Our retail sales team continues to focus on opening new accounts and selling to our established customers. As Craig stated earlier, the addition of the SmartLab Toys line has provided some sales momentum for us alongside our Kane Miller and Learning Wrap-Ups line of products. We are continuing to introduce new SmartLab Toys in fiscal 2025, which we expect will continue to have a positive impact on the sales within this division. This concludes our sales and marketing update. I will turn the call back over to Craig for closing remarks. Craig?

Craig White: Thank you, both Heather and Dan. Now I’d like to talk about some recent changes before opening the call up for questions. During the second quarter, we received $3.8 million in funds from the employee retention credit. These funds were part of the government-sponsored CARES Act offered to employers who maintain employees during COVID. During the third quarter, we listed and sold our old headquarters building, which is primarily used for warehousing for $5.1 million. The funds received from the sale were used to pay down our term loans with our bank. Paying down our existing debts has been the primary focus for excess cash flow as this will reduce our interest expense and improve our overall financial performance.

To continue this focus of improving our financial profile, we have recently listed our current headquarters consisting of approximately 402,000 square feet of office and warehouse space for $40 million. The proceeds from this sale are expected to pay all of our line of credit and term loans with our bank. As part of the listing, we have agreed to lease back the property to continue our normal business operations. The terminal leaseback will be contingent on the offers received and are proposing a leaseback period of approximately seven years. We believe selling this building and executing a leaseback is in the best interest of our long-term shareholders and strategic direction. Repaying our bank debts and removing future interest expense is the fastest path to restoring our long history of profitability.

We also expect to generate a significant amount of cash from reducing our excess inventory levels. As of November 30th 2023, we have approximately $30 million of excess inventory. Selling this inventory through our existing sales channels will have a significant impact on our overall liquidity and profitability. During the quarter, we also continued our focus on reducing costs. While there is no magic wand to cut our way to profitability, we look for every opportunity and are laser-focused on improving our bottom line results. Once we return to profitability, 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. Now that we have provided a summary of some recent activity, I’ll turn the call back over to the operator for question-and-answers.

Operator?

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Q&A Session

Operator: Thank you, ladies and gentlemen. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Paul Carter of Capstone Asset Management. Your line is already open.

Paul Carter: Thank you. Thanks for taking my questions. So it looks like your inventory just for the quarter was down about $4 million. So what was your cash flow from operations for the quarter, if you have that?

Dan O’Keefe: Well, the cash flow from operations, I don’t have that in front of me. It will be published — we’re publishing the queue later today at 4 O’clock. So the overall profitability for the quarter was driven from the sale of our old headquarters building, which generated a gain of approximately $4 million. So from an operational viewpoint, we were not profitable for the quarter, but at a profitability before tax line, we were profitable.

Paul Carter: Right, but I’m thinking if your inventory came down $4 million, that would have, there might have been some positive cash flow from operations to offset the operating loss?

Dan O’Keefe: With inventory dropping $4 million in operational losses of $1 million in cash flow from the inventory reduction, we would have generated $3 million, $4 million of cash flow. That was all used to pay down the line of credit. And that, as I mentioned in the call, Paul, we reduced our line of credit with our bank from $13.5 million down to $5 million at the end of November.

Paul Carter: Okay. Great. And then you’ve — you’re launching your new e-commerce platform later this month. And I imagine there’s other sort of CapEx items. What’s kind of the CapEx that you’re running at right now? I know it’s been pretty low recently, but just thinking about sort of cash flow, what is your kind of ongoing CapEx looking like?

Dan O’Keefe: Our ongoing CapEx is primarily tied to our IT development of our internal systems. Our non-IT CapEx is less than a couple of hundred thousand dollars a year. But our IT CapEx, we spent a significant amount in the last year, but that’s been reduced significantly as we’re now getting ready to launch our new e-commerce platform. So we, right now, our CapEx — we don’t have a budget for next year, but it will be greatly reduced from or we’re expecting it to be greatly reduced from what our CapEx was this year.

Paul Carter: Okay. Great. And just sort of bigger picture. So your third quarter net revenue was like $17 million. I know third quarter is a good quarter for you typically. So seasonally adjusted, it means that right now, you’re running at an annual kind of run rate of somewhere in the neighbourhood of like $40 million of net revenue, give or take. So if you stabilize that net revenue at the $40 million level, you’ll be doing something like, I don’t know, $27 million, $28 million in gross profits depending on a lot of different factors, of course. But are you confident that you can get to consistent sort of operating profitability at that level? If you like, I guess, just assume no growth, even with the increase in the rent expense that you’re going to have to take on going forward once you sell your building?

Craig White: Yes. We do feel confident that we can — we’ve reduced expenses a great deal just in the last eight months. We anticipate that selling the building, the net from our lease payments and our interest expense will still be a positive. So that’s the biggest expense. But I will also say in the last six months, we’ve had to do things kind of in a short-term strategy to generate cash to pay back the bank. Some of those things were not as profitable as our historical levels. So we’ll have to evaluate that going forward, whether that will still remain to be necessary or we can kind of get back to normal operations. Now addressing the normalized $40 million. We’re not happy with that level of sales, and we’re doing everything we can to increase sales. There’s only so much we can do to cut costs. Personnel is a big expense, but we’re kind of about as low as we’re going to be. So there’s not much more cutting that we can do. We need to increase sales at this point.

Paul Carter: Yeah, I guess, that was sort of the gist of my question is, I mean, I know you want to increase sales, but the question is, do you need to? Like if you don’t, just because of macro issues or whatever kids are on their computers rather than looking at books or what have you. If that just sort of stabilizes at $40 million, I mean, is EDC able to get to operating profitability?

Craig White: Yes, we can.

Paul Carter: Okay. Great. And then I know you mentioned and you’ve mentioned in the past, reinstating your quarterly dividend is a pretty big priority for you and the Board. So I know even if you get to kind of — you don’t even have to get to like operating profitability or net GAAP profitability. If you’re working down your inventory, you’re going to be free cash flow positive, would you consider starting up the dividend before you get to operating profitability if you can see sort of profitability on the horizon?

Craig White: That’s a good question. There is some — there’s some hurdles in the way right now. I would say anything is possible, but we would definitely want to be confident that profitability is on the horizon before we reinstate it. So I don’t anticipate it this quarter or maybe even next quarter, but it’s something we’re always looking at.

Paul Carter: Okay. All right. That’s helpful. And then just shifting gears a little bit. So I know a couple of months ago, John Clerico resigned from the Board. It looks like it was kind of abruptly after, I think you’ve been on the board for almost 20 years. Since he was your lead Independent Director and Chairman of all your committees, that’s obviously a pretty big deal. Can you — it’s been a couple of months now. Can you discuss the circumstances around that at all?

Craig White: Yes, sure. He is kind of somewhat personal. He had some health issues back in the summer, and he’s 82 years old. He was just looking to spend his time in other ways. There was no disagreement. There was no — there was no fight in it in the circumstances around why he left. So it was just time for him.