Educational Development Corporation (NASDAQ:EDUC) Q4 2023 Earnings Call Transcript May 11, 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 Fourth 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, Mr. Steven Hooser, Investor Relations. Please go ahead sir.

Steven Hooser: Thank you, Jenny, and good afternoon everyone. Thank you for joining us today for Educational Development Corporation’s fourth 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 filed an 8-K and scheduled a press release announcing its results for the fourth quarter and fiscal 2023 year-to-date. The release will also be available on the company’s website at www.evcpub.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 further detailed discussion of the company’s financial condition. With that, I’d now like to turn the call over to Craig White, the company’s President and Chief Executive Officer. Craig?

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 financials and provide an update on our sales and marketing. Finally, I will wrap up the call with some comments on strategy and 2023 outlook. During the fourth quarter we had several onetime events that impacted our results. First and foremost was the rebranding of our direct sales division to PaperPie. This planned rebrand was part of our updated Usborne distribution agreement that we executed last June. Aimed with great efforts from our marketing and sales team Heather and I were able to formally announce the new direct sales division in PaperPie at the NASDAQ closing bell on December 28th.

This rebrand was a significant achievement but also created some disruption to our fourth quarter sales. Also during the fourth quarter, we introduced our first 10 products of our recent edition SmartLab Toys. I am pleased to report that since January we have sold over 90,000 units of these products, generating over $2 million in gross sales. We introduced three additional products in March and have plans to introduce many more over the next two years. These theme-based toys are great addition to our product suite and we are encouraged to see additional progress each quarter and the full impact of SmartLab Toys once the full line of toys have been released. There were also several one-time cost expense incurred during the quarter that contributed to our quarterly and total loss for the year.

Many of these costs will be beneficial to teachers as we return the company to profitability. I will cover those more in detail later in the call. With that, I’d like to 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 fourth quarter. Net revenues were $15 million, a decrease of $8.3 million or 36% compared to $23.3 million in the fourth quarter last year. Average active PaperPie brand partners totaled 26,100 compared to 37,500 in the same period a year ago. Earnings before income taxes for the fourth quarter — the net loss for the quarter totaled $1.9 million, compared to income of $0.3 million or $300,000, a decrease of $2.2 million. Loss per share totaled $0.24 compared to $0.04 on a fully diluted basis. Now, turning to our fiscal year 2023 full year highlights. We recorded net revenues of $87.8 million a decrease of $54.4 million or 38% compared to $142.2 million during the same period of 2022.

The decline was primarily due to the lower active brand partners coupled with rising inflation and to a lesser extent the rebranding distraction. Our average active brand partners totaled 28,000 compared to 44,900 for fiscal 2022. Last year, we saw inflated numbers continuing for pandemic when school closures continue to many members work from home. This year, as schools remained open and families return to work and we have seen our brand partner levels returned to pre-pandemic levels. Year-to-date loss before income taxes for fiscal 2023 was $3.4 million, a decrease of $14.6 million compared to $11.2 million during fiscal 2022. Net loss to date totaled $2.5 million compared to $8.3 million for last year a decrease of $10.8 million. Year-to-date loss per share totaled $0.31 compared to earnings per share last year of $0.98.

To update everyone on our working capital levels, Inventory levels decreased from $64.3 million at the end of the third quarter to $63.8 million as of February 28, 2023. During the fourth quarter, borrowings on our working capital line increased from $9 million to $10.6 million. We continue to expect further inventory reductions in fiscal 2024. Cash generated from these reductions will be used primarily on working capital line paydowns. Turning to our banking relationship. We have some recent developments with our bank that have impacted our presentation of long-term debt in our financial statements. Our fourth quarter loss resulted in a default of the fixed charge covenant in our loan agreement with our bank. This covenant calculation includes financial information from the previous 12 months.

As such, this quarter’s loss will negatively impact the calculation during fiscal 2024. We do not forecast to be in compliance with the fixed charge ratio requirement during the next four quarters. We recently executed an amendment with our bank to waive the covenant violation for the fourth quarter and for the first quarter of fiscal 2024. However, because this waiver did not encompass the entire fiscal 2024 period and we do not expect to be in compliance accounting guidance requires we classify our long-term debts as current liabilities. We are working diligently with our bank and have made plans to execute new agreements this summer that will allow us to be in compliance and reclassify the debt back to long term. That concludes the financial update, and I’ll now turn the call over to Heather Cobb to talk about sales and marketing opportunities into the detail.

Heather?

Heather Cobb: Thank you, Dan. As Craig mentioned earlier, we continue to evaluate market conditions and make adjustments we feel are needed to motivate our sales force and engage customers. During the fourth quarter, we rebranded our direct sales division to paper pie. Once we announced this new brand along, with a resource library containing marketing materials to back that up, our brand partners made great efforts to update their own personal business materials training videos and social media platforms, with the new name logo tagline and other branded information. We appreciate all the efforts our brand partners made and are very proud of their accomplishments. These PaperPie rebranding efforts were a distraction to our sales during the quarter and we are still seeing some withering effects continue into fiscal 2024.

We see this summer as a pivotal time for our active brand partner count. And by then, every brand partner will have either made a sale as a PaperPie brand partner or they will have initially signed up as a PaperPie brand partner. Along with the rebrand starting in January, we rolled out our new SmartLab Toys product line as Craig mentioned these award-winning steam-based educational products include Squishy human body laboratory toys science lab toys electronic toys and our best-selling tiny series offering children ages eight and up hands-on learning opportunities. We launched 10 products in January and followed up with three more in March. We plan to launch an additional 10 products this summer to be followed by another three products in the fall for the holiday season.

By the end of the year, we will have almost 30 SmartLab Toys products and even more remaining to introduce in fiscal 2025 and beyond. This also includes several new items that are in development and have never been produced. Needless to say both our brand partners and our retail customers are extremely excited about this new product line. This concludes my sales and marketing update. I will turn the call back over to Craig for more remarks.

Q&A Session

Craig White : Thank you both Heather and Dan. I’d like to talk about some recent changes. EDC is decades-long history of profitability. This last year we saw a record inflation in food and fuel prices. These price increases hit young families, which are our target customer, the hardest in our sales similar to other retailers were negatively impacted. We see inflation continue to be a headwind for us in fiscal 2024. Reduced sales and onetime issues drove our fiscal 2023 performance. Rebranding was not only distracting, but it was expensive. There were lots of time and money spent on rebranding including writing off old division items. This was only one element. We also saw reduced revenues from time spent on Salesforce updating the business items.

I am proud of our accomplishment but glad it was a onetime event. We also had to reverse $1 million volume rebate with one of our largest vendors. As we saw our sales impacted last year, we made several adjustments to reduce operating costs and increased margins. One example was the freight change we made in the fall to increase shipping charges on smaller orders from $6.95 to $9.95 with lower shipping rates offered on higher dollar orders. We’ve seen our average order size increase with this change as customers look for every savings opportunity. We have reduced payroll and other operating costs and continue to focus on every opportunity to improve bottom line performance in order for us to return to profitability. One challenge we faced last year and continue to face is rising interest rates on borrowings.

We have too much inventory and too much borrowers associated with our excess inventory. We need to sell our excess inventory turn it into cash and pay down our debt levels. Lower debt will result in lower interest and increased performance. We are committed to making this happen as quickly as possible. I want to expand on our plan to reduce inventory. Purchases of new titles drive our sales. We introduced new titles four times a year, generating with major releases in March and October with smaller releases. Our infra purchases this year were half what they were last year and a quarter of what they were pre-pandemic. So we are aggressively not purchasing inventory. And in fact, even on new titles, we’re reducing our purchases to minimum amounts.

Returning to profitability, paying down debt and reinstating our past practice of paying quarterly dividends to our shareholders, continues to be a top priority for myself and our shareholders. 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. This initial start makes us very excited about our long-term opportunities with these additional offerings. Now, that we have provided a summary of some recent activity. I will now turn the call back — over to the operator for Q&A.

Operator:

Craig White: All right. Thank you. I expected a few calls, a few questions. But thanks everyone for joining us on our call today. We appreciate your continued support and look forward to providing you additional update when we report quarter one in July. Additionally, I will be at the three-part advisor conference virtually in June, where we will have another presentation then. So thank you everyone. And have a great day.

Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.