CROWN CRAFTS INC CRWS
June 08, 2010 - 7:48pm EST by
banjo1055
2010 2011
Price: 3.90 EPS $0.46 $0.46
Shares Out. (in M): 9 P/E 8.5x 8.5x
Market Cap (in $M): 36 P/FCF 6.1x 6.1x
Net Debt (in $M): 5 EBIT 8 8
TEV ($): 41 TEV/EBIT 5.3x 5.3x

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Description

 
CAVEAT: This is not a very liquid idea and is generally not intended for institutions/funds, although a very small fund might consider it.  Market cap is around $36m, and average volume is under $40k. 

Crown Crafts, Inc. (CRWS), a leading provider of infant and toddler bedding, bibs, soft goods and accessories, was written up on VIC in December 2006.  The stock has since been flat, significantly outperforming the S&P 500 (-24%).  What has changed is that an activist emerged in 2007, and may now be on the verge of controlling the board.  Given the nature of the activist's specific complaints in prior proxy contests and on public earnings calls, it seems that either costs will finally be cut back, resulting in increased earnings, or the company will be sold, potentially for a decent premium.  Meanwhile, CRWS trades for 6.1x LTM FCF and 5.3x LTM EBIT, so it does not seem as though we are paying up for either of these potential outcomes given that this is a reasonably decent business. 


Update on Fundamentals

The business has been very consistent recently in terms of EBITDA, EBIT and FCF.  Sales have moved around a bit more.  Most recently, while the June and September 2009 quarters saw sales decline, there was a rebound in the December 2009 quarter (Q3).  March 2010 (FYE) has yet to be reported, but should be out in late June.  The company has not provided guidance this year, and no analysts cover the stock. 

 

 

Fiscal Year Ending March 31,

LTM

 

 

 

2006

2007

2008

2009

12/31/09

Mulitple

Sales

 

$72.7

$69.3

$74.9

$87.4

$84.7

0.48x

  Growth

 

(13.3%)

(4.7%)

8.1%

16.7%

(2.5%)

 

 

 

 

 

 

 

 

 

Gross Profit

$17.1

$18.1

$18.6

$18.9

$19.1

 

  Gross Margin

23.5%

26.1%

24.8%

21.6%

22.6%

 

 

 

 

 

 

 

 

 

SG&A

 

$9.6

$9.2

$10.7

$11.0

$11.5

 

  % of Sales

13.2%

13.3%

14.3%

12.5%

13.6%

 

 

 

 

 

 

 

 

 

EBITDA

 

$7.5

$9.4

$9.0

$10.0

$9.6

4.2x

  Margin

 

10.3%

13.5%

12.1%

11.4%

11.4%

 

 

 

 

 

 

 

 

 

EBIT

 

$7.0

$8.9

$7.9

$8.0

$7.7

5.3x

  Margin

 

9.6%

12.8%

10.6%

9.1%

9.0%

 

 

 

 

 

 

 

 

 

FCF

 

 

$4.8

$5.4

$6.0

$5.9

6.1x

  Margin

 

 

6.9%

7.3%

6.8%

7.0%

 



Update on Activist Situation
 

After designating two directors in 2008 and agreeing to a 13-month standstill, Nelson Obus' Wynnefield Partners is again free to pursue additional influence/control.  The following summarizes recent developments on this front:


May 3, 2010

13D/A filing by Nelson Obus' Wynnefield Partners:

"On April 30, 2010, the Wynnefield Reporting Persons delivered to Mr. E. Randall Chestnut, the Issuer's Chairman of the Board, President and Chief Executive Officer, a letter dated April 30, 2010, notifying the Issuer that the Wynnefield Reporting Persons were exercising certain rights pursuant to a Governance and Standstill Agreement dated as of July 1, 2008 (the "Agreement"), between the Issuer and the Wynnefield Reporting Persons."

"In the letter delivered to Mr. Chestnut, the Wynnefield Reporting Persons requested pursuant to Section 2(d) of the Agreement, that the Issuer use its reasonable best efforts to obtain the resignation from the Board of Directors of one director (other than a Wynnefield Designee or a Class I Director), such resignation to be effective not later than thirty (30) days prior to the latest date that notice can be given to the company of a stockholder 's intention to nominate a person for election to the Board at the Issuer's 2010 Annual Meeting of Stockholders."

[The notice deadline is defined in last year's proxy as the latter of (A) 90 days prior to the annual meeting, or (B) one week following the announcement of the date of the Annual Meeting, which has yet to be announced but will likely be in the second week of August.] 

"The Wynnefield Reporting Persons are currently considering the nomination of one or more individuals for election to the Issuer's Board of Directors at the Issuer's 2010 Annual Meeting of Stockholders. In the event the Wynnefield Reporting Persons determine to pursue the election of any nominees to the Issuer's Board of Directors, the Wynnefield Reporting Persons will file a proxy statement with the Securities and Exchange Commission and intend to solicit proxies on behalf of any such nominees." 


June 3, 2010

CRWS announced that director Sidney Kirschner resigned from the Board in response to Wynnefield's request.  Kirschner was a Class II director. 

There are now six directors on the board: three Class I directors (one of which is a Wynnefield designee), one Class II director and two Class III directors (one of which is a Wynnefield designee).

So, two out of six current directors are Wynnefield designees.  The three Class I directors, including Randall Chestnut (the CEO), are up for election at this year's Annual Meeting.  Wynnefield has the option to go for the two Class I seats they don't already hold to get to four representatives out of six, and then, if successful, invite the CEO to be added back to the board as the seventh director, leaving Wynnefield still in control with four of seven seats. 


Wynnefield's Motive

For a fairly current view of what Obus might want to extract from this situation, the following summary of his questions/admonishments on a recent conference call gives some insight. 

November 11, 2009

Nelson Obus:

"Are you willing to look -- you seem to be pacing the future on some kind of up turn which may or may not occur, personally, I think it won't, the consumer is pretty taxed out and I think you'll see major changes in buying. Are you willing to address the entire overhead element of the board including salaries and board comp in the whole thing because certainly I can't present it when people ask me what I think about it." 

Randall Chestnut, Chairman President & CEO:

"Nelson, I think history has proven itself. And we'll do whatever we have to do to maintain profitability. And we did that in this quarter too."

Nelson Obus:

"Well, it's not just the question of maintaining profitability, Randall, you've got to create.  If you can't grow this company without making acquisitions, then essentially you owe it to the outside shareholders to take the company private at a fair price and take on that risk and take on the leverage.  That's how it works.  And I've note that you can keep this profitable and definitely, but it can't be a piggy bank for management." 


It seems clear that a sale would be pursued should Obus gain control of the board this summer, or perhaps even if he doesn't.  In fact, the official consideration of strategic alternatives was commenced in July 2008 as part of the standstill agreement, with the company promising an update within nine months.  Nothing ever came of it.  Management won't say why, but just points to the fact that no update was ever announced.  It seems clear that the unfortunate timing likely made a sale at a decent price impossible. 


Summary of Senior Management and Board-Level Compensation vs. Comps

It seems that $500k in annual compensation to CRWS board members is a bit much for a company with $85m in annual sales and just a $36m market cap.  Around $1 million in annual total compensation for a CEO who has not done anything heroic (he was already well compensated in free stock for the restructuring in 2006) is also a little rich for this small concern. 

The following table shows compensation as a % of total sales:

 

 

 

 

CRWS

SUMR

KID

Top 3 Employees' Total Comp

1.78%

0.74%

1.09%

Director Comp

 

0.57%

0.13%

0.27%

  Combined

 

 

2.35%

0.87%

1.35%

             


Summary of SG&A trends in 2009 vs. Comps

Wynnefield owns all three of CRWS, SUMR and KID, so Obus should know how they compare.  There is nothing overwhelming here, but the trend from 2008 to 2009 shows that while KID cut costs, and SUMR invested in new hires to drive growth, CRWS let costs creep higher by 6% as sales fell 2.5%.  This should give Wynnefield a current argument that CRWS has not made progress addressing its cost structure since the standstill agreement. 

 

 

SG&A as % of Sales

 

CRWS

SUMR

KID

2008

12.5%

28.3%

22.2%

2009

13.6%

29.8%

19.9%

Change

1.1%

1.4%

(2.2%)



Valuation

This investment probably isn't a potential home run, but there does seem to be ample upside with limited downside.  If a buyer were to pay 10x LTM FCF (6.6x EBITDA and 0.75x Sales), this would imply a $6.35 stock, for over 60% upside from today's price.  This seems like a reasonable possibility.  If a buyer were to pay 1x Sales (where SUMR and KID trade), this would imply over a double from here.  This is probably a stretch, in my view.  If the company is not sold, any cost cutting should drive increased profitability, higher returns and hopefully a better valuation.  However, the company really is too small to make any waves as a standalone public entity, so a successful sale process would seem to be the best outcome for shareholders. 


Chances of Success?

It should not be too difficult for Wynnefield again to convince other shareholders that the company is being run primarily for the benefit of the board and senior management.  They secured a board seat in a 2007 proxy contest, and was able to secure a second seat through the standstill agreement reached "amicably" in 2008.  Wynnefield now holds a 17% stake in the company, vs. incumbents' 11%, so Wynnefield needs about 33% out of the remaining 72% (in other words, 46% of the up-for-grabs votes) for a majority. 

While success seems probable, I am content holding the stock at this price in either case. 


Capital Allocation

With a FCF yield over 16%, there is clearly opportunity to move the dial through capital allocation. 

Ask management their opinion of buybacks, and see if you get anything more colorful than: "We tried that.  Felt like pissing off your rowboat into the ocean, trying to raise the tide.  We like the dividend because it introduces a whole new set of owners who have to buy the stock." 

So, a buyback under the current board seems unlikely.  They do pay a dividend, which currently yields just north of 2%. 

Finally, and not surprisingly, they seem very interested in acquiring other businesses, which they think they do well.  They have said that they would buy businesses at 4-7x EBITDA.  Given they currently trade at the very low end of this range, there is little reason to believe they will create more value through acquisitions than they would going private.  So far, they don't seem to have done anything too stupid, but they are making small buys which over time will add up.  Neat Solutions was purchased in 2009 for $4.4m (plus potential earnout) for a business doing $4.6m in sales.  Bibsters ($3m in annual sales) was bought less than two weeks ago from P&G for $1.8m, plus an undisclosed sum for inventory. 


Risks

Their Disney license comprised about one third of total sales last year.  It comes up for renewal every two years (next renewal date is 12/31/10), and they have had the business since the 80's.  They say switching would be problematic for Disney, since WMT has already committed to orders beyond the term of the license.  So this seems safe (more due to the history than management's assessment), but still worth noting. 

If Wynnefield for some reason decides not to pursue control of the board, or for some reason is not successful this time in efforts to gain further representation, there is certainly some risk to holding a fairly illiquid stock in a decent company with mediocre management for a long period of time, even at an attractive valuation.  The stock did drop below $2 last spring - worth noting. 


Catalysts

Activist gains control in 2010

Cost cuts are announced

Business is sold / taken private

 

Catalyst

Activist gains control in 2010

Cost cuts are announced

Business is sold / taken private
    sort by    

    Description

     
    CAVEAT: This is not a very liquid idea and is generally not intended for institutions/funds, although a very small fund might consider it.  Market cap is around $36m, and average volume is under $40k. 

    Crown Crafts, Inc. (CRWS), a leading provider of infant and toddler bedding, bibs, soft goods and accessories, was written up on VIC in December 2006.  The stock has since been flat, significantly outperforming the S&P 500 (-24%).  What has changed is that an activist emerged in 2007, and may now be on the verge of controlling the board.  Given the nature of the activist's specific complaints in prior proxy contests and on public earnings calls, it seems that either costs will finally be cut back, resulting in increased earnings, or the company will be sold, potentially for a decent premium.  Meanwhile, CRWS trades for 6.1x LTM FCF and 5.3x LTM EBIT, so it does not seem as though we are paying up for either of these potential outcomes given that this is a reasonably decent business. 


    Update on Fundamentals

    The business has been very consistent recently in terms of EBITDA, EBIT and FCF.  Sales have moved around a bit more.  Most recently, while the June and September 2009 quarters saw sales decline, there was a rebound in the December 2009 quarter (Q3).  March 2010 (FYE) has yet to be reported, but should be out in late June.  The company has not provided guidance this year, and no analysts cover the stock. 

     

     

    Fiscal Year Ending March 31,

    LTM

     

     

     

    2006

    2007

    2008

    2009

    12/31/09

    Mulitple

    Sales

     

    $72.7

    $69.3

    $74.9

    $87.4

    $84.7

    0.48x

      Growth

     

    (13.3%)

    (4.7%)

    8.1%

    16.7%

    (2.5%)

     

     

     

     

     

     

     

     

     

    Gross Profit

    $17.1

    $18.1

    $18.6

    $18.9

    $19.1

     

      Gross Margin

    23.5%

    26.1%

    24.8%

    21.6%

    22.6%

     

     

     

     

     

     

     

     

     

    SG&A

     

    $9.6

    $9.2

    $10.7

    $11.0

    $11.5

     

      % of Sales

    13.2%

    13.3%

    14.3%

    12.5%

    13.6%

     

     

     

     

     

     

     

     

     

    EBITDA

     

    $7.5

    $9.4

    $9.0

    $10.0

    $9.6

    4.2x

      Margin

     

    10.3%

    13.5%

    12.1%

    11.4%

    11.4%

     

     

     

     

     

     

     

     

     

    EBIT

     

    $7.0

    $8.9

    $7.9

    $8.0

    $7.7

    5.3x

      Margin

     

    9.6%

    12.8%

    10.6%

    9.1%

    9.0%

     

     

     

     

     

     

     

     

     

    FCF

     

     

    $4.8

    $5.4

    $6.0

    $5.9

    6.1x

      Margin

     

     

    6.9%

    7.3%

    6.8%

    7.0%

     



    Update on Activist Situation
     

    After designating two directors in 2008 and agreeing to a 13-month standstill, Nelson Obus' Wynnefield Partners is again free to pursue additional influence/control.  The following summarizes recent developments on this front:


    May 3, 2010

    13D/A filing by Nelson Obus' Wynnefield Partners:

    "On April 30, 2010, the Wynnefield Reporting Persons delivered to Mr. E. Randall Chestnut, the Issuer's Chairman of the Board, President and Chief Executive Officer, a letter dated April 30, 2010, notifying the Issuer that the Wynnefield Reporting Persons were exercising certain rights pursuant to a Governance and Standstill Agreement dated as of July 1, 2008 (the "Agreement"), between the Issuer and the Wynnefield Reporting Persons."

    "In the letter delivered to Mr. Chestnut, the Wynnefield Reporting Persons requested pursuant to Section 2(d) of the Agreement, that the Issuer use its reasonable best efforts to obtain the resignation from the Board of Directors of one director (other than a Wynnefield Designee or a Class I Director), such resignation to be effective not later than thirty (30) days prior to the latest date that notice can be given to the company of a stockholder 's intention to nominate a person for election to the Board at the Issuer's 2010 Annual Meeting of Stockholders."

    [The notice deadline is defined in last year's proxy as the latter of (A) 90 days prior to the annual meeting, or (B) one week following the announcement of the date of the Annual Meeting, which has yet to be announced but will likely be in the second week of August.] 

    "The Wynnefield Reporting Persons are currently considering the nomination of one or more individuals for election to the Issuer's Board of Directors at the Issuer's 2010 Annual Meeting of Stockholders. In the event the Wynnefield Reporting Persons determine to pursue the election of any nominees to the Issuer's Board of Directors, the Wynnefield Reporting Persons will file a proxy statement with the Securities and Exchange Commission and intend to solicit proxies on behalf of any such nominees." 


    June 3, 2010

    CRWS announced that director Sidney Kirschner resigned from the Board in response to Wynnefield's request.  Kirschner was a Class II director. 

    There are now six directors on the board: three Class I directors (one of which is a Wynnefield designee), one Class II director and two Class III directors (one of which is a Wynnefield designee).

    So, two out of six current directors are Wynnefield designees.  The three Class I directors, including Randall Chestnut (the CEO), are up for election at this year's Annual Meeting.  Wynnefield has the option to go for the two Class I seats they don't already hold to get to four representatives out of six, and then, if successful, invite the CEO to be added back to the board as the seventh director, leaving Wynnefield still in control with four of seven seats. 


    Wynnefield's Motive

    For a fairly current view of what Obus might want to extract from this situation, the following summary of his questions/admonishments on a recent conference call gives some insight. 

    November 11, 2009

    Nelson Obus:

    "Are you willing to look -- you seem to be pacing the future on some kind of up turn which may or may not occur, personally, I think it won't, the consumer is pretty taxed out and I think you'll see major changes in buying. Are you willing to address the entire overhead element of the board including salaries and board comp in the whole thing because certainly I can't present it when people ask me what I think about it." 

    Randall Chestnut, Chairman President & CEO:

    "Nelson, I think history has proven itself. And we'll do whatever we have to do to maintain profitability. And we did that in this quarter too."

    Nelson Obus:

    "Well, it's not just the question of maintaining profitability, Randall, you've got to create.  If you can't grow this company without making acquisitions, then essentially you owe it to the outside shareholders to take the company private at a fair price and take on that risk and take on the leverage.  That's how it works.  And I've note that you can keep this profitable and definitely, but it can't be a piggy bank for management." 


    It seems clear that a sale would be pursued should Obus gain control of the board this summer, or perhaps even if he doesn't.  In fact, the official consideration of strategic alternatives was commenced in July 2008 as part of the standstill agreement, with the company promising an update within nine months.  Nothing ever came of it.  Management won't say why, but just points to the fact that no update was ever announced.  It seems clear that the unfortunate timing likely made a sale at a decent price impossible. 


    Summary of Senior Management and Board-Level Compensation vs. Comps

    It seems that $500k in annual compensation to CRWS board members is a bit much for a company with $85m in annual sales and just a $36m market cap.  Around $1 million in annual total compensation for a CEO who has not done anything heroic (he was already well compensated in free stock for the restructuring in 2006) is also a little rich for this small concern. 

    The following table shows compensation as a % of total sales:

     

     

     

     

    CRWS

    SUMR

    KID

    Top 3 Employees' Total Comp

    1.78%

    0.74%

    1.09%

    Director Comp

     

    0.57%

    0.13%

    0.27%

      Combined

     

     

    2.35%

    0.87%

    1.35%

                 


    Summary of SG&A trends in 2009 vs. Comps

    Wynnefield owns all three of CRWS, SUMR and KID, so Obus should know how they compare.  There is nothing overwhelming here, but the trend from 2008 to 2009 shows that while KID cut costs, and SUMR invested in new hires to drive growth, CRWS let costs creep higher by 6% as sales fell 2.5%.  This should give Wynnefield a current argument that CRWS has not made progress addressing its cost structure since the standstill agreement. 

     

     

    SG&A as % of Sales

     

    CRWS

    SUMR

    KID

    2008

    12.5%

    28.3%

    22.2%

    2009

    13.6%

    29.8%

    19.9%

    Change

    1.1%

    1.4%

    (2.2%)



    Valuation

    This investment probably isn't a potential home run, but there does seem to be ample upside with limited downside.  If a buyer were to pay 10x LTM FCF (6.6x EBITDA and 0.75x Sales), this would imply a $6.35 stock, for over 60% upside from today's price.  This seems like a reasonable possibility.  If a buyer were to pay 1x Sales (where SUMR and KID trade), this would imply over a double from here.  This is probably a stretch, in my view.  If the company is not sold, any cost cutting should drive increased profitability, higher returns and hopefully a better valuation.  However, the company really is too small to make any waves as a standalone public entity, so a successful sale process would seem to be the best outcome for shareholders. 


    Chances of Success?

    It should not be too difficult for Wynnefield again to convince other shareholders that the company is being run primarily for the benefit of the board and senior management.  They secured a board seat in a 2007 proxy contest, and was able to secure a second seat through the standstill agreement reached "amicably" in 2008.  Wynnefield now holds a 17% stake in the company, vs. incumbents' 11%, so Wynnefield needs about 33% out of the remaining 72% (in other words, 46% of the up-for-grabs votes) for a majority. 

    While success seems probable, I am content holding the stock at this price in either case. 


    Capital Allocation

    With a FCF yield over 16%, there is clearly opportunity to move the dial through capital allocation. 

    Ask management their opinion of buybacks, and see if you get anything more colorful than: "We tried that.  Felt like pissing off your rowboat into the ocean, trying to raise the tide.  We like the dividend because it introduces a whole new set of owners who have to buy the stock." 

    So, a buyback under the current board seems unlikely.  They do pay a dividend, which currently yields just north of 2%. 

    Finally, and not surprisingly, they seem very interested in acquiring other businesses, which they think they do well.  They have said that they would buy businesses at 4-7x EBITDA.  Given they currently trade at the very low end of this range, there is little reason to believe they will create more value through acquisitions than they would going private.  So far, they don't seem to have done anything too stupid, but they are making small buys which over time will add up.  Neat Solutions was purchased in 2009 for $4.4m (plus potential earnout) for a business doing $4.6m in sales.  Bibsters ($3m in annual sales) was bought less than two weeks ago from P&G for $1.8m, plus an undisclosed sum for inventory. 


    Risks

    Their Disney license comprised about one third of total sales last year.  It comes up for renewal every two years (next renewal date is 12/31/10), and they have had the business since the 80's.  They say switching would be problematic for Disney, since WMT has already committed to orders beyond the term of the license.  So this seems safe (more due to the history than management's assessment), but still worth noting. 

    If Wynnefield for some reason decides not to pursue control of the board, or for some reason is not successful this time in efforts to gain further representation, there is certainly some risk to holding a fairly illiquid stock in a decent company with mediocre management for a long period of time, even at an attractive valuation.  The stock did drop below $2 last spring - worth noting. 


    Catalysts

    Activist gains control in 2010

    Cost cuts are announced

    Business is sold / taken private

     

    Catalyst

    Activist gains control in 2010

    Cost cuts are announced

    Business is sold / taken private

    Messages


    SubjectWynnefield moves to take control of board
    Entry06/28/2010 09:31 AM
    Memberbanjo1055
    The company anounced last week that their annual meeting will be held on Tuesday, August 10 at the company's offices in Gonzales, Louisiana. 
    From Wynnefield's Form 13D/A filed today...
    Item 4. Purpose of Transaction.  
    Item 4 of the Schedule 13D is hereby amended by the addition of the following:   On June 25, 2010, the Wynnefield Reporting Persons delivered a letter to the Issuer (the "Nomination Letter"), notifying the Issuer that the Wynnefield Reporting Persons intend to appear at the Issuer's 2010 Annual Meeting of Stockholders and any adjournments or postponements thereof (the "Annual Meeting"), in person or by proxy, to nominate and seek to elect two individuals as members of the board of directors of the Issuer. The two individuals named as nominees in the Nomination Letter are Melvin L. Keating and Jon C. Biro (each a "Nominee" and collectively, the "Nominees"). The Wynnefield Reporting Persons intend to solicit proxies on behalf of the Nominees and file a proxy statement with the Securities and Exchange Commission.  

    SubjectDividend doubled (again) to 32c a year
    Entry03/27/2012 09:46 AM
    Memberbanjo1055
     
    CRWS paid out 8c a year when I wrote this up in June 2010.  The dividend was subsequently increased to 12c, then 16c, and now they will now pay out 32c a year.  This reduces the risk of Randall making too many meaningful acquisitions, which was already low due to an activist-heavy baord, and further highlights the business' free cash flow generation.  They will cover this dividend very easily - FCF per share should be around 60c this year. 
     
    We still think the company will ultimately be sold, but for now we will collect the dividend.  7.4% yield on yesterday's close ($4.35); 6.4% yield at $5.00; 5.3% yield at $6.00... 
     
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