Educational Development Q4 2023 Earnings Call Transcript

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May 11, 2023

There are 5 speakers on the call.

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 4th 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 Huser, Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Jenny, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's Q4 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, company filed an 8 ks and scheduled a press release announcing its results for the Q4 fiscal 2023 year to date. Release will also be available on the company's website at www.edcpub.com.

Speaker 1

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 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?

Speaker 2

Thank you, Stephen, 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 During the Q4, we had several one time events that impacted our results. 1st and foremost was the rebranding of our direct sales division to Paper Pie.

Speaker 2

This planned rebrand was part of our updated Usborne distribution agreement that we executed last June. And with great efforts from our marketing and sales team, Heather and I were able to formally announce the new direct sales division named Taper Pie at the NASDAQ closing bell on December 28. This rebrand was a significant achievement that also created some disruption to our 4th quarter sales. Also during the Q4, we introduced our first ten products of our recent addition Smart Lab Toys. I am pleased to report that Since January, we have sold over 90,000 units of these products generating over $2,000,000 in gross sales.

Speaker 2

We introduced 3 additional products in March and have plans to introduce many more over the next 2 years. These team based toys are great addition to our product suite and we are encouraged to see additional progress each quarter and the full impact of Smart Lab 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 in the future as we return the company to profitability. I will cover those more in later detail later in the call.

Speaker 2

With that, I'd like to turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan?

Speaker 3

Thank you, Craig. Turning to the 4th quarter, net revenues were $15,000,000 a decrease of $8,300,000 or 36 percent compared to $23,300,000 in the Q4 last year. Average active Paper Pie Brand Partners totaled 26 $1100 compared to $37,500 in the same period a year ago. Earnings before income taxes for the 4th quarter Net loss for the quarter totaled $1,900,000 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.

Speaker 3

We recorded net revenues of $87,800,000 a decrease of 50 $4,400,000 or 38 percent compared to $142,200,000 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 fiscal 2022. Last year, we saw inflated numbers continuing from the pandemic when school closures continued and many families' members worked from home. This year as schools remained open and families returned to work and we have seen our brand partner levels return to pre pandemic levels.

Speaker 3

Year to date loss before income taxes for fiscal 2023 was 3,400,000 decrease of $14,600,000 compared to $11,200,000 during fiscal 2022. Net loss to date totaled $2,500,000 compared to $8,300,000 for last year, a decrease of $10,800,000 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 $64,300,000 at the end of the 3rd quarter to $63,800,000 as of February 28, 2023. During the Q4, borrowings on our working capital line increased from $9,000,000 to 10,600,000 We continue to expect further inventory reductions in fiscal 2024. Cash generated from these reductions will views primarily on working capital line pay downs. Turning to our banking relationship.

Speaker 3

We had some recent developments with our bank that have impacted our presentation of long term debt in our financial statements. Our 4th quarter loss resulted in a default of the fixed charge covenant and 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.

Speaker 3

We recently executed an amendment with our bank to waive the covenant violation for the Q4 and for the Q1 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're working diligently with our bank and have made plans to execute new agreements this summer that would 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 Cai to talk about sales and marketing opportunities in further detail. Heather?

Speaker 3

Heather?

Speaker 4

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 Q4, we rebranded our direct sales division to Paper Pie. Once we announced this new brand, training videos and social media platforms with the new name, logo, tagline and other branded information. Sales during the quarter and we are still seeing some rippling effects continue into fiscal 2024.

Speaker 4

We see this summer as a pivotal time for our active brand partner count as by then every brand partner will have either made a sale as a Paper Pie Brand Partner or they will have initially signed up as a Paper Pie 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 8 and up hands on learning opportunities. We launched 10 products in January and followed up with 3 more in March. We plan to launch an additional 10 products this summer to be followed by another 3 products in the fall for the holiday season.

Speaker 4

By the end of the year, we will have almost 30 SmartLab Toy 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.

Speaker 2

EDC has decades long history of profitability. This last year, we saw 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 continuing to be a headwind for us in fiscal 2024. Reduced sales and one time issues drove our fiscal 2023 performance.

Speaker 2

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 their business items. I am proud of our accomplishment, but glad it was a one time event.

Speaker 2

We also had to reverse $1,000,000 volume rebate with 1 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 to increase with this change as customers looked 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.

Speaker 2

One challenge we faced last year continue to face is rising interest rates on borrowings. We have too much inventory and too much borrow 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.

Speaker 2

I want to expand on our plan to reduce inventory. Purchases of new titles drive our sales. We introduced new titles 4 times a year, January, June with major releases and March October with smaller releases. Our inventory 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.

Speaker 2

And in fact, even on new titles, we're reducing our purchases to minimum amounts. Returning to profitability, paying down debts 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 Smart Lab Toys. 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 and A.

Operator

Yes. Thank you. Ladies and gentlemen, we will now begin the question and answer questions will be taken in the order received. There are no questions. I will now hand the call over back to Craig.

Speaker 2

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 1 July. Additionally, I will be at the 3 part advisor conference virtually in June, where we will Have another presentation then.

Speaker 2

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.

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Earnings Conference Call
Educational Development Q4 2023
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