Educational Development Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 10, 2024

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's 2nd Quarter Fiscal Year 2025 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, October 10, 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.

Operator

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 Stephen Houser. Please go ahead.

Speaker 1

Thank you, operator, and thank you, everyone, for joining today for Educational Development Corporation's 1st, 2nd quarter 2025 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, the company issued a press release announcing its results for the fiscal Q2 year to date results. The release will be available on the company's website at www.edcpub.com. As the operator mentioned, we will make forward looking statements, and I suggest that you take a look at our forward looking documents.

Speaker 1

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. We appreciate your continued interest. 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 our sales and marketing. Finally, I will wrap up the call with an update on our progress of the sale leaseback of our headquarters, the Hilti complex, and provide some comments on strategy and the remaining fiscal 2025 outlook.

Speaker 2

During the Q2, we ran recruiting promotions to increase our brand partner levels and offer discounts to customers, both in an effort to increase sales and generate cash flow. These strategic decisions are necessary to address the covenants of our bank agreement related to our current inventory levels coupled with the challenging macroeconomic environment as higher inflation is reducing the discretionary spending levels of our customers. Although these higher than historical discounts increase our sales in the short term, it also negatively impacts our gross margin percentage and our pre tax profits for the quarter.

Operator

While we

Speaker 2

have been making these strategic decisions to focus on sales stability, our priority is focused on improving our overall operational efficiency and reducing costs. I will talk about some of these changes at the end of the call. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan?

Speaker 3

Thank you, Craig. Our Q2 summary compared to the prior year Q2, net revenues were $6,500,000 compared to $10,600,000 Our active active brand partners totaled 13,900 compared to 18,100. Loss before income taxes were 2,500,000 compared to income before taxes of 1,500,000. Net loss totaled 1,800,000 compared to income of 1,100,000. Loss per share totaled $0.22 compared to income per share of $0.13 on a fully diluted basis.

Speaker 3

Next

Speaker 4

to

Speaker 3

our year to date summary compared to the prior year, net revenues of $16,500,000 compared to $25,100,000 Our active active brand partners from our active average brand partners totaled 13,700 compared to 20,600. Loss before income taxes totaled 4.2 compared to income before income taxes of 300,000. Loss totaled 3,100,000 compared to income of 200,000 and loss per share totaled 0 $0.37 compared to income per share of $0.02 on a fully diluted basis. Now for an update on our working capital positions. Net inventories decreased 5,300,000 from 55,600,000 at February 28, 2024 to 50,300,000 as of August 31, 2024.

Speaker 3

Borrowings on our working capital line of credit totaled $6,100,000 at the end of August, with $9,000,000 of availability at the end of the second quarter. That concludes the financial update. I'll now turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?

Speaker 5

Thank you, Dan. As Craig mentioned earlier, we continue to make strategic changes to bring new initiatives for success to our brand partners on the paper pie side. This included our June national convention, which happened shortly after we launched our new StoryScapes travel incentive contest. After convention, we held July sales promos, including a very successful Dollar Days incentive, where we offered several books for $1 to our customers and sold through full inventory on many of those. In addition, we offered a summer recruiting promotion, where we provided training, support and incentives for promoting to leadership.

Speaker 5

Our overall focus on the paper pie side continues to be on brand partner growth and retention, as well as sales strategies to move inventory. Our retail division continues to see success working with current customers, as well as with new independent bookstores and specialty gift shops, especially in relation to our Smart Lab Toys line of offerings. This concludes our sales and marketing update. I will turn the call back over to Craig for closing remarks. Craig?

Speaker 2

Thank you, both Heather and Dan. One of the biggest events in fiscal 2025 is the anticipated sale and leaseback of our headquarters building, the Hilti complex. The proceeds from this sale will not only bring savings from reduced interest expense, but will allow us to build a positive cash position as we continue to work down our excess inventory levels, which is approximately $30,000,000 at the end of August. That's $25,000,000 to $30,000,000 in excess. Selling a complex of this size is not an easy transaction as we have learned over the past 10 months.

Speaker 2

However, we remain confident in the sale based on strong recent interest levels. One recent improvement that is driving demand in the complex's marketability is the work we did to add a new tenant, Crusoe Energy Systems, which began occupying just under 30% of the complex on July 1, 2024. This new tenant not only strengthens the income of the complex, but they have committed to several capital improvements in their leased space. As we previously announced on September 19, we executed a letter of intent to sell leaseback of the Hilti complex. The agreement excludes the 17 acres of excess land which will remain under EDC's ownership.

Speaker 2

The proceeds from the sale, which is expected to be completed around the end of this calendar year, is expected to fully pay back the bank, leaving us with no debt, and we expect to have limited borrowing needs moving forward. We made other recent improvements to help reduce our costs, including changing our outbound freight carrier, which has reduced outbound parcel costs by approximately 20%. Making this change was not easy, but a strategic move to reduce freight costs that have increased significantly over the past several years. Another cost reduction we executed after the end of the second quarter was the consolidation of our Learning Wrap Ups warehouse in Salt Lake City, Utah into our Tulsa facility here in Oklahoma. Savings from both these changes will improve our operational performance on a go forward basis.

Speaker 2

Lastly, I want to thank all of our shareholders for their patience, our employees for their commitment to our mission and our customers and brand partners for their loyalty during this difficult period. I'm confident in our collective ability to emerge stronger and more resilient than ever before. Now that we have provided a summary of some recent activity, I'd like to turn the call back over to the operator

Operator

Thank you, ladies and gentlemen. We will now begin the question and answer Your first question comes from Paul Carter from KapStone Asset Management. Your line is now open. Please go ahead.

Speaker 4

Thank you. Good afternoon, everyone. So just talking about the building, first of all, so this is the 3rd investor group that you've announced buying the Hilti complex. I know the first two investor groups fell through, but now you've got the Crusoe Energy lease there. Can you just talk through a little bit more like how confident are you that this 3rd investor group will close on the transaction?

Speaker 4

Yes,

Speaker 2

the first two groups were actually somewhat related at arm's length. So I'm kind of considering them 1 group. But towards the end of that negotiation period, it got to where they were using deadlines to renegotiate the sale price and we had full support of our bank to terminate that LOI and move on. Okay, so

Speaker 4

the structure or the details of this transaction with this investor group you feel is a little bit more solid?

Speaker 2

Yes, yes, I do. So they've been on the sidelines for the last 8 months to 10 months. They've put in a couple offers, which each time was not our best offer, but they've increased their offer and we're moving forward with them.

Speaker 3

Yes. The only thing I would add to that Paul is that this new group that we've disclosed as partner holdings, if you look at their holdings on the Internet, they have similar campuses to this. So, the Hilti complex is a campus. And some of the real estate that's underneath the management of partner holdings is similar kind of to this kind of a structure where you've got an entire complex, not just a small real estate holding.

Speaker 4

Okay. That's great. And then, so the sales price in the letter of intent is 30 just over $38,000,000 What's the net amount that you figure you'll be receiving?

Speaker 3

Paul, we haven't executed the agreements to identify what the net price is going to be. We've kind of got the letter of intent executed, but we're not at a point where we can disclose the net number at this time.

Speaker 4

Okay. Okay. And then assuming that goes through, you're going to pay off your bank. Will you be entering into another credit agreement with a different institution just to facilitate new inventory purchases? And if so, have you thought through parameters of what that agreement might look like?

Speaker 3

We have a couple of different interested parties to give us some small working capital needs. You're right that we will need to buy some inventory. But we're talking about a very small borrowing that will be paid back in under 12 months. So it's just you're absolutely right that we do need to do some inventory replenishment and some purchases of some new titles that we've kind of been delaying. And we expect to do that.

Speaker 3

And as soon as we close on this agreement move forward.

Speaker 4

Okay, great. And speaking of that, so I understand that your recent sort of inability to purchase new inventory has related to an inflated level of out of stocks, which and I don't know how significant is that, but can you quantify like how much has that impacted sales the last couple of quarters? Has that been sort of a meaningful drag on Paper Pie's net revenues?

Speaker 5

Hi, Paul. I'll jump in and give my color on that question. I think that, yes, absolutely, it's a factor. I don't know that we are in a place that we can truly say that it is representative of a specific percentage, because I think it has to do a little bit with, out of stock, waiting to be replenished, as well as the lesser number of titles. Are you there?

Operator

Hello? And

Speaker 5

so I think there's a number. Paul, can you hear me?

Speaker 4

Oh, sorry. Yes, you cut out there for a moment. I can hear you now.

Speaker 5

No worries. No worries. No worries. No, I do think that there's a number of factors that we always say it's hard to identify any one specific factor. The economy right now is an added insult to injury as we're dealing with the various things that we are.

Speaker 5

And so we're actually taking this time to just make some strategic decisions on what our catalog of offerings looks like and building that out in a way that is going to be successful and sustainable for both the Paper Pie and the Retail divisions as we move forward.

Speaker 4

Okay. Thanks for that. And thinking of strategies, so I know Tupperware recently filed for bankruptcy, which introduces probably quite a bit of uncertainty for their independent sales reps. What strategies are you guys sort of using to specifically attract those Tupperware sales reps that are probably looking to do something else with their time right now?

Speaker 5

Yes, that's an interesting question, Paul. We're not specifically doing any targeted outreach to those brand ambassadors or consultants that Tupperware has. It's not necessarily a one to one where just because they're selling Tupperware, it means they're going to want to fill their time selling children's books. They may want another opportunity for an arm of income that they can bring in. And obviously, we are ready and willing and available and are making ourselves as prominent as we can with anyone who would be looking not just Tupperware.

Speaker 5

We are working on the strategies, like I said, with our products, but also with our programs and our offerings so that we can adapt to, the various different things that we're seeing, in society right now and what the different generations are expecting and really wanting to see out of the direct selling industry.

Speaker 4

Okay. Curious, do many of your brand ambassador or brand partners also sell for Tupperware?

Speaker 5

That's a great question. We don't track, specifically who else they sell for. But off the top of my head, I can't think of very many that are doing that side by side.

Speaker 4

Okay. All right, great. Well, that's it for me. Thanks very much, everybody.

Speaker 5

Thanks, Paul. Thanks, Paul.

Operator

There are no further questions at this time. I will now give back the call to Mr. Craig White. Please go ahead.

Speaker 2

All right. Thank you. Yes, it's been a challenging year, but we get through this sale leaseback transaction and kind of get back to somewhat business as usual. And I think we're poised and ready to go. I mean, we've gotten more efficient.

Speaker 2

We've changed. We've adapted some of our paper pie division offerings. And we're really excited about the future. So thanks everyone for joining us on our call today. We appreciate your continued support and look forward to providing an additional update in January 2025.

Speaker 2

Thank you and have a great day.

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Key Takeaways

  • In Q2 fiscal 2025, net revenues fell to $6.5 million from $10.6 million year-ago and the company reported a $1.8 million net loss versus a $1.1 million net income in the prior year, with active brand partners declining to 13,900.
  • Management ran sales and recruiting promotions like Dollar Days and recruiting discounts to boost cash flow and partner growth, but these actions pressured gross margins amid high inflation and weaker discretionary spending.
  • The company executed a letter of intent for a $38 million sale-leaseback of its Hilti headquarters, excluding 17 acres of land, expected to close by year-end and eliminate debt while bolstering cash reserves.
  • Operational initiatives include switching outbound freight carriers to achieve a 20% reduction in parcel costs and consolidating two warehouses to streamline distribution and cut expenses.
  • Inventories decreased by $5.3 million to $50.3 million as of August 31, and management plans a small short-term borrowing to replenish titles and address out-of-stock issues affecting sales.
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Earnings Conference Call
Educational Development Q2 2025
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