Educational Development - Q2 2025

Transcript

Speaker 6

Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's second quarter fiscal year 2025 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, October 10th, 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. 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 Steven Hooser. Please go ahead.

Steven Hooser (Head of Investor Relations)

Thank you, operator, and thank you everyone for joining today for Educational Development Corporation's fiscal second 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 second quarter and 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. 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 (President and CEO)

Thank you, Steven, 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 sell-leaseback of our headquarters, the Hilti Complex, and provide some comments on strategy and the remaining fiscal 2025 outlook. During the second quarter, we ran recruiting promotions to increase our brand partner levels and offered 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. While we 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?

Dan O'Keefe (CFO)

Thank you, Craig. Our second quarter summary compared to the prior year second quarter, net revenues were $6.5 million, compared to $10.6 million. Our active brand partners totaled 13,900, compared to 18,100. Loss before income taxes were $2.5 million, compared to income before taxes of $1.5 million. Net loss totaled $1.8 million, compared to income of $1.1 million. Loss per share totaled $0.22, compared to income per share of $0.13 on a fully diluted basis. Next to our year-to-date summary compared to the prior year, net revenues of $16.5 million, compared to $25.1 million. Our active brand partners, pardon me, 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 $0.3 million. Loss totaled $3.1 million, compared to income of $0.2 million. Loss per share totaled $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 $5.3 million from $55.6 million at February 28, 2024, to $50.3 million as of August 31, 2024. Borrowings on a working capital line of credit totaled $6.1 million at the end of August, with $9 million 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?

Heather Cobb (Chief Sales and Marketing Officer)

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 PaperPie side. This included our June national convention, which happened shortly after we launched our new Storyscape 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.

Our overall focus on the PaperPie 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 SmartLab Toys line of offerings. This concludes our sales and marketing update. I will turn the call back over to Craig for closing remarks. Craig?

Craig White (President and CEO)

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 million at the end of August. That's $25 million-$30 million in excess. Selling a complex of this size is not an easy transaction, as we have learned over the past 10 months. 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 1st, 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 19th, 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. 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 and necessary 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. 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 for question and answer.

Operator (participant)

Thank you, ladies. Yes, I'm here. I'm sorry. Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star button, followed by the number one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Paul Carter from Capstone Asset Management. Your line is now open. Please go ahead.

Paul Carter (Chief Investment Officer)

Thank you. Good afternoon, everyone, so just talking about the building, first of all, so this is the third 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 third investor group, you know, will close on the transaction?

Craig White (President and CEO)

Yeah, the first two groups were actually somewhat related at arm's length, so I'm kind of considering them one 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. The group we have now.

Paul Carter (Chief Investment Officer)

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

Craig White (President and CEO)

Yes. Yes, I do. So they've been on the sidelines for the last eight 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.

Dan O'Keefe (CFO)

Yeah, the only thing I would add to that, Paul, is that this new group that we've disclosed, it's 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, you know, not just a small real estate holding.

Paul Carter (Chief Investment Officer)

Okay, that's great. And then, so the sales price in the Letter of Intent is just over $38 million. What's the net amount that you figure you'll be receiving?

Dan O'Keefe (CFO)

We haven't executed the agreements to identify what the net price is gonna 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.

Paul Carter (Chief Investment Officer)

Okay. Okay, and then assuming that goes through, you're gonna 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?

Dan O'Keefe (CFO)

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-

Paul Carter (Chief Investment Officer)

Okay, great.

Dan O'Keefe (CFO)

It's just we need. You're absolutely right, though. 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 as soon as we close on this agreement and move forward.

Paul Carter (Chief Investment Officer)

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, 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 PaperPie's net revenues?

Heather Cobb (Chief Sales and Marketing Officer)

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.

Paul Carter (Chief Investment Officer)

Oh, hello?

Heather Cobb (Chief Sales and Marketing Officer)

The lesser number of titles. Are you there?

Paul Carter (Chief Investment Officer)

Hello?

Heather Cobb (Chief Sales and Marketing Officer)

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

Paul Carter (Chief Investment Officer)

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

Heather Cobb (Chief Sales and Marketing Officer)

No worries. No worries. No, I do think that there's a number of factors that, you know, 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. 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 PaperPie and the retail divisions as we move forward.

Paul Carter (Chief Investment Officer)

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?

Heather Cobb (Chief Sales and Marketing Officer)

Yeah, 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.

We're 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.

Paul Carter (Chief Investment Officer)

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

Heather Cobb (Chief Sales and Marketing Officer)

Oh, 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.

Paul Carter (Chief Investment Officer)

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

Heather Cobb (Chief Sales and Marketing Officer)

Thanks, Paul.

Dan O'Keefe (CFO)

Thanks, Paul.

Operator (participant)

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

Craig White (President and CEO)

All right. Thank you. Yeah, it's been a challenging, 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, we've changed, we've adapted some of our PaperPie 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. Thank you and have a great day.