Value Find: Crown Crafts Inc.
With a push from its largest shareholder, little-followed microcap play Crown Crafts Inc. (Nasdaq:CRWS) could be poised to finally unlock shareholder value in the coming quarters.
On July 3, Gonzalez, La.-based Crown Crafts announced a settlement agreement with Wynnefield Capital, its largest shareholder. The agreement averts a proxy contest showdown between the long-time shareholder and the designer of infant and toddler bedding, blankets and accessories. As part of the settlement, Crown agreed to add a Wynnefield nominee to the company’s board of directors. Crown also agreed to form a strategic review committee to explore strategic alternatives. Wynnefield is permitted under the agreement to increase its ownership stake in Crown up to 20%. The investment firm currently holds around a 15% stake.
Following a successful restructuring in 2001, Crown has maintained profitability since 2002 through a combination of organic and acquisition-driven revenue growth and sensible moves to clean up its capital structure. The $32 million market capitalization company is the largest producer of infant bedding, bibs and bath items in the United States. Crown’s products are marketed under a variety of company-owned trademarks, such as NoJo and Hamco, as well as licensed trademarks. The sale of products under licenses from Walt Disney Co. (NYSE:DIS) accounted for 30% of total revenue in fiscal 2008. Crown’s top customer is Wal-Mart Stores Inc. (NYSE:WMT), followed by privately held Toys “R” Us, Inc., and Target Corp. (NYSE:TGT).
For fiscal 2008 ended March 30, Crown reported revenue of $74.9 million and net income of $4.4 million, or $0.43 a diluted share, compared with year-ago revenue of $69.2 million and net income of $3.9 million, or $0.39 a diluted share. This reported net income total for fiscal 2007 excluded a gain on refinancing, net of taxes, of $3.7 million. Much of Crown’s year-over-year growth was attributable to its $11 million acquisition of Springs Global’s infant and toddler product line in November 2007. Fiscal 2008 EBITDA inched up 3% to nearly $9 million from $8.7 million a year ago. Turning to Crown’s balance sheet, it ended the year with $7.9 million in cash and $24.8 million in debt.
Looking ahead, Crown is projecting fiscal 2009 revenue in a range of $90 to $93 million, EBITDA in a range of $10.2 to $10.8 million and diluted earnings a share in a range of $0.41 to $0.46. Not even taking into account this guidance, at a recent price of $3.40 a share and an enterprise value of $51 million, Crown is trading for just nine times last year’s earnings and less than 6 times last year’s cash flow. Even for a lower-margin, microcap retail play with no Wall Street analyst coverage like Crown, this is a cheap valuation. Given this meager valuation, Wynnefield Capital’s recent pressure on the company to maximize shareholder value is understandable.
In recognition of its low equity value, Crown has been buying back its stock recently. During its fiscal fourth quarter, Crown bought back $1.2 million worth of stock at an average price of $3.59 a share. While Crown’s recently formed strategic review committee will likely look into selling all or part of the company, an enhanced stock buyback program will also likely be on the agenda. Interestingly, ahead of the settlement announcement with Wynnefield, the company announced in June that its lead director, Zenon Nie, had adopted a prearranged stock trading plan to purchase Crown shares. Under this plan, Nie purchased nearly 8,000 shares at the $4 level on June 13. On a related note, Crown CEO E. Randall Chestnut, the company’s second-largest shareholder, agreed back in February to refrain from selling stock for at least 18 months.
While a continued stock buyback and a review of strategic alternatives should help put a floor under this thinly traded stock, investing in Crown also has its risks. For starters, Crown’s profit margins are under pressure, due to cost inflation from its Chinese manufacturers. Crown is attempting to pass on some of this increase to its retail partners, but this is a price sensitive business. Without additional acquisitions, it remains unclear if Crown can sustain or boost its level of profitability. In addition, with average daily trading volume of only 5,000 shares, trading in Crown is limited, making the stock more prone to volatility on the downside. Finally, while Crown is the market leader, it remains susceptible to a further slowdown in retail spending.
Given its inexpensive valuation and the active presence of an experienced value investor in Wynnefield Capital, Crown shares look like a worthy “value find” around the $3.25 level. Use limit orders and keep in mind this is a “buy and tuck” away stock — not a quick trading play.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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