Educational Development Corporation (NASDAQ: EDUC) Q2 2023 earnings call dated Oct. 06, 2022
Corporate Participants:
Steven Hooser — Investor Relations
Craig White — President and Chief Executive Officer
Dan O’Keefe — Chief Financial Officer
Heather Cobb — Chief Sales and Marketing Officer
Analysts:
Edward Norcia — Private Investor — Analyst
Nick De Postella — NR Management — Analyst
Presentation:
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 Second Quarter and Fiscal 2023 Year-to-date Results. As a reminder, this call is being recorded.
I would now like to turn the conference over to your host, Steven Hooser, Investor Relations. Please go ahead.
Steven Hooser — Investor Relations
Thank you, Michelle, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation’s second quarter 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. We will also be joined by Randall White, Executive Chairman of the Board during the question-and-answer session.
After the market closed this afternoon, the Company issued a press release announcing its results for the second quarter and fiscal 2023 year-to-date. The release is available on the Company’s website at www edcpub.com.
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 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 conditions.
With that, I would now like to turn the call over to Craig White, the Company’s President and Chief Executive Officer. Craig?
Craig White — President and Chief Executive Officer
Thank you, Steven, and welcome, everyone to the call. We have quite a few people here today. Looks good. I will start today’s call with some general comments in regard to the quarter. I’ll then pass the call off to Dan and Heather to run through the financials and provide an update on our sales and marketing. I’ll then wrap up the call with some comments on product strategy and outlook.
During the second quarter, we continued to feel the negative impacts of high inflation in the U.S. market. Soaring costs have reduced disposable income of families with young children, which is our target customer base. While we hope to see these pressures subside, we are making strategic adjustments to address our own increased costs, including an increase to the amount we charge for freight on outbound shipments. We are usually [Phonetic] extreme caution with these price increases, working to balance our increased costs, while being sensitive to the increased dollars to our customers.
Additionally, during the first quarter earnings call, I discussed that we had entered a new distribution agreement with Usborne Publishing Limited, our U.K.-based supplier of Usborne products. The new agreement continues to allow uninterrupted sales through the UBAM division, however, there was some initial uncertainty from our consultant salesforce about the ongoing relationship and how it might impact them. This resulted in a reduction in new recruits by 38% from the second quarter of last year.
While we continue to manage through the impacts and changes created not just from the pandemic, but also all of the additional global related headwinds and other items within our business, I am proud to see the resiliency of our team.
Profitability is the cornerstone of our business, and although we have had some recent shortcomings, while managing through the rapidly changing environment, we are working hard and remain laser-focused on returning the Company to its long-standing profitable state. Once we return to profitability, we will look to reinstate our historical practice of paying quarterly dividends.
With that, I will now turn the call over to Dan O’Keefe to provide a brief overview of the financials for our second quarter of fiscal 2023 highlights.
Dan O’Keefe — Chief Financial Officer
Thank you, Craig.
Turning to the second quarter. Net revenues were $19.4 million, a decrease of $13.6 million or 41.2% as compared to $33 million in the second quarter of fiscal 2022, or a decrease of 16.4%, as compared to $23.2 million during the first quarter. The decline in revenue was primarily due to the lower active consultant count of our UBAM division, coupled with rising inflation, which caused a reduction in disposable income for families within our target market.
The average active UBAM sales consultants totaled 26,800 compared to 46,100 in the same period a year ago and 32,200 in the first quarter of this year. Although, consultant counts continue to trend down, we expect this to stabilize throughout the remainder of the year.
Our loss before income taxes was $1.1 million, a decrease of $3.8 million or 140.7% compared to $2.7 million in the second quarter last year. Net loss totaled $0.8 million compared to $1.9 million, a decrease of $2.7 million or 142.1%.
Losses per share totaled $0.10 compared to $0.23 of earnings down 143.5% on a fully diluted basis.
Now turning to our year-to-date highlights. We recorded net revenues of $42.6 million, a decrease of $31.2 million or 42.3% compared to $73.8 million during the same period last year. Again, the decline was primarily due to the lower active consultant count coupled with rising inflation. Average active UBAM sales consultants totaled 29,500 compared to 50,200 for the first half of fiscal 2022.
Keep in mind that the first half of last year was the strongest period in the Company’s history due to the major short-term benefits we experienced in relation to the pandemic.
Our losses before income taxes for the six months was $0.8 million, a decrease of $8.1 million or 111% compared to earnings of $7.3 million during the same time in fiscal 2022.
Net loss totaled $0.5 [Phonetic] million compared to $5.3 million for the first half last year, a decrease of $5.8 million or 109.4%. Losses per share totaled $0.07 compared to earnings of $0.63 from the first half of fiscal 2022, down 111.1% on a fully diluted basis.
To update everyone on our inventory, we finished fiscal 2022 with approximately $74 [Phonetic] million in inventory, as of the end of February of this year. At the end of our second quarter of fiscal 2023, we’ve reduced our inventory to approximately $68 [Phonetic] million. We expect to continue driving this inventory back down to historical levels throughout the remainder of the year and into calendar 2023. The major impacts of reducing our inventory will bring to — be to bring down our working capital borrowings.
Lastly, as Craig mentioned in his previous comments, the strategic decision we have made to temporarily postpone our quarterly dividend currently improves our quarterly cash flows by approximately $1 million per quarter.
That now concludes the financial update. And I will turn the call over to Heather Cobb, our Chief Sales and Marketing Officer, to further talk about sales opportunities and the UBAM division in further detail.
Heather Cobb — Chief Sales and Marketing Officer
Thank you, Dan. As Craig mentioned previously, our business is continually facing headwind or tailwind depending on both the change in discretionary cash flow of our customers and the change in unemployment or inflation impacting our consultant network. Fortunately, we can capitalize on these tailwinds and adjust our promotions during these challenging periods like we are now, when consumer discretionary spending has declined.
We are not sitting idly by watching the impact of the market. We are constantly changing our marketing and sales strategy and maximize our opportunities, while not straying from our overall long-term strategy. We have run recent sales and marketing specials, and we’ll continue to do so. I’d like to highlight just a few of those.
In May of this year, we started our trip earning period during May, which is a new time frame for us we traditionally start in June. And when we did that, that resulted in an uptick in May sales.
In May and June, we provided various discount promotional opportunities on our products. Our consultants were able to then offer those to their customers, which resulted in increased sales for them.
July promotions included free shipping opportunities, as well as the ever popular release of new titles, and we do have more promotions coming that will be announced later.
A convention [Phonetic] update, I would like to give you because in June, we host our annual UBAM National Convention. And for the first time ever this year, it was a hybrid, in-person and virtual event. Though our in-person convention attendance members were promising, net profits were down from the prior two years at the same event.
While our convention costs during those two years were minimal given that we were 100% virtual, having an in-person convention though is still the most desirable event that we can possibly do, as it is the lifeblood for retention and recruiting. We will adjust our strategy with budgeting and offerings in the future to ensure a more positive net impact for not only next year, but beyond.
We have run several recruiting specials throughout the summer. During the second quarter, we added almost 6,000 new consultants, and many of those can be attributed to the specials that we were offering. New consultant additions as high as — are similar to the height of last year, but we are continuing some recruiting specials and additional options and offerings in the third quarter.
We continue to have strong leader levels within our UBAM division. Our leader levels remain above 10% of our total active consultants, which is the highest level in UBAM’s history. The leaders tend to be our top recruiters and sales generators and receive bonus payments monthly based on the sales of not only their personal selling, but also their [Indecipherable]. As these leader levels continue to remain strong, we continue to expect positive recruiting result.
And then I would just like to remind that UBAM has been in the industry for over 30 years, and high inflationary periods usually proceed a growth in active consultant, as more families are looking for supplemental income to offset the increased living costs. We are currently working to create and support opportunities that will enable that to happen again.
This concludes the sales and marketing update. I’m going to turn the call back over to Craig White for closing remarks.
Craig White — President and Chief Executive Officer
Thank you both, Heather and Dan. I would like to make a couple of additional comments to expand upon my earlier comments regarding our recent Usborne agreement. First and foremost, our new agreement does not change the 40-plus year relationship with Usborne Publishing. Secondly, since executing the new agreement, we have made concerted efforts to address the concerns from our consultants and new recruits, regarding the ongoing relationship and the potential impacts to our consultant salesforce.
We have since made live stream presentations, recorded question-and-answer sessions and involved our consultants and the changes outlined in the new distribution agreement. As such, we are confident in the changes we have made, and we expect our UBAM recruiting efforts and results will be more productive, and we should see stability in this division in the coming months.
As a reminder, during inflationary times, we have historically grown our consultant count, as more families look for non-traditional income to offset rising living costs. However, this is an extremely unique employment environment that we are all faced with.
As Heather mentioned, our sales and marketing team is making exciting changes. We are creating new ideas to promote our products and excite our salesforce and to grow our active consultant count. We also expect to see continued strength from sales channels that are coming back online, such as school book fairs and booth events.
Regarding the rising costs and actions we are taking, we believe the increased charges on outbound freight, along with other changes we have made to our cost structure will offset the ongoing negative cost impact from our outbound sales orders. These strategic changes along with our overall reduced labor costs are expected to restore profitability even at lower sales volumes.
As Dan mentioned, we have a strong balance sheet, inventory that will turn to cash and we have made changes to our cost structure to drive profitability. Our priority remains unchanged, as we work to sustain profitability, pay down our working capital line, restore our dividend; and lastly, look for additional products or content to offer that we can acquire or create.
Now that we have provided a summary of some of our recent activity, I will turn the call back over to the operator for question-and-answers.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Edward Norcia [Phonetic], Private Investor. Please go ahead.
Edward Norcia — Private Investor — Analyst
Can you hear me?
Craig White — President and Chief Executive Officer
We hear.
Edward Norcia — Private Investor — Analyst
Okay. Craig, I’m a little confused about this Usborne contract with your publishing division. Can you tell me what affects the new contract has with your publishing division and its effects…
Craig White — President and Chief Executive Officer
Yeah.
Edward Norcia — Private Investor — Analyst
Go ahead.
Craig White — President and Chief Executive Officer
Yeah. We didn’t address the impact on our publishing division so far in this earnings call. We are just addressing our multi-level marketing division. But as of November, they are taking over traditional publishing sales in the U.S. It’s about a $7.5 million impact to our sales.
Edward Norcia — Private Investor — Analyst
Okay. And my follow-up question is what level of inventory do you feel is appropriate for the Company with this reduced consultant level.
Craig White — President and Chief Executive Officer
Well, yeah, sales are driven by consultants. So we don’t necessarily think of inventory level by consultant. But yeah, we are over-inventoried. We’re at about $67 [Phonetic] million. The appropriate level for a company our size right now would probably be closer to $40 [Phonetic] million to $45 [Phonetic] million. So we’re not making any more purchases of our books right now, and we should just be turning that inventory into cash, nothing spoils or expires or goes obsolete. So we just got to work through the inventory and turn it into cash.
Dan O’Keefe — Chief Financial Officer
I’ll add to that, Ed, we’re entering into — typically and August is our highest — in a normal cycle, August is the highest inventory we have during the normal year because that’s when we’re going into our busiest selling season, which is our third quarter. So we expect to have strong impact this quarter in our inventory turnover.
Edward Norcia — Private Investor — Analyst
Okay. Follow-up question. Do you have a certain amount of books or dollar amount you need to buy from Usborne to keep the agreement in force per year?
Craig White — President and Chief Executive Officer
Yeah. There were some minimum amounts that we kind of negotiated in the contract, and we were close to that. We are just short of it. But I’m not going to buy inventory just to put our Company in jeopardy. I’m going to keep it strong.
Dan O’Keefe — Chief Financial Officer
The contract has a kind of an ongoing inventory volumes on a normal year, Ed. And so we’ve historically done well over that purchasing volume. It’s a little bit unique right now. As Craig said, we’re working on — working down excess — little bit of excess inventory. But under normal circumstances, we won’t — shouldn’t have a problem hitting that minimum inventory require — minimum purchase requirements outlined in our contract.
Edward Norcia — Private Investor — Analyst
Okay. Thank you.
Operator
Thank you. [Operator Instructions] The next question comes from Nick De Postella [Phonetic] of NR Management [Phonetic]. Please go ahead.
Nick De Postella — NR Management — Analyst
Hi. Can you just give us some balance sheet figures, cash, inventory, debt, etc., I don’t know. I didn’t see them with the press release. Thank you.
Craig White — President and Chief Executive Officer
Yeah. Good Nick. Just to clarify, we’ll be filing our 10-Q later today, and that will have all those figures. Our cash position is less than $1 million because we sweep all of our cash to our working capital line. Our line of credit was around $13 million at the end of the quarter. And then inventory was right around $67 million at the end of the quarter. And again, we look to be turning inventory into cash now during our busiest quarter of our fiscal year, which is between September and November. So we look for inventory to continue to decline, as well as working capital availability to increase this quarter.
Nick De Postella — NR Management — Analyst
Okay. So at the end of next quarter, what kind of forecast do you have for where inventory would be at and cash?
Dan O’Keefe — Chief Financial Officer
[Speech Overlap] if you’ve got that crystal ball, can I — can you send it to us, so. [Speech Overlap].
Nick De Postella — NR Management — Analyst
[Indecipherable] hard at you [Phonetic].
Dan O’Keefe — Chief Financial Officer
Well, here’s the key things for us, and this is really what Craig mentioned earlier, and I’m just going to kind of repeat what he was saying. We’ve made changes recently to our outbound freight and reduced our operating cost to make sure we can be profitable even on reduced revenues. And so if we’re profitable and whatever sales we have this quarter are going to be turning inventory into cash, which will be used to free up availability on our working capital line.
I don’t have the crystal ball to tell you how much or it’s going to drop our inventory from $67 million by the end of the quarter or by the end of the fiscal year, but it will be dropping. We’re in a position, where — and I’ll also say that where we have a lot of inventory is on our best selling products. So when we were going through rapid growth during 2020 and 2021 with the pandemic, we were running out of about 25% of the titles that we offer.
And so 25% — we had over 25% of our products that were out of stock for significant periods of times, and those are typically our top-selling items. And so when we were looking at reordering at those revenue levels, that’s where we put in large orders for inventory replenishment. And so what we have a lot of is not our — it’s our fastest-moving titles.
Nick De Postella — NR Management — Analyst
I understand. Okay. And just is there — do you have any issues with your lenders? Or is there any apprehension or concern at this point?
Dan O’Keefe — Chief Financial Officer
Well, the — we have a new relationship with our lender, we closed in August, and it’s a very positive relationship. They understand our high inventory position. And because they understood it — because they understood it, they came to us and said, look, we’re not going to put some unreasonable debt covenants on you this first year because we know you’re working down inventory. And so with our new agreement, we don’t have a lot of traditional, which you would normally have as debt covenant requirements.
We have basically one covenant that’s really tied to the real estate. And the — it’s called a fixed charge ratio. It’s more of a real estate debt covenant than a working capital covenant. But they understood our inventory was high. They know we’re going to be turning it into cash. You can go backwards. We were in this position back in 2017 when we had excess inventory and we worked through it. It will take us a few quarters to do this, but we’ll be back in a normal working capital position next year.
Nick De Postella — NR Management — Analyst
Okay. Thank you so much and best of luck.
Dan O’Keefe — Chief Financial Officer
Thank you.
Craig White — President and Chief Executive Officer
Thank you.
Operator
Thank you. There are no further questions at this time. I would like to turn the call back over to Craig White for closing remarks.
Craig White — President and Chief Executive Officer
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 three in January. Additionally, we will be presenting at the Southwest IDEAS Investor Conference in Dallas on November 16th and 17th. For more information on this event, please contact Three Part Advisors. With that, thank you, everyone, and we’ll talk to you next time.
Dan O’Keefe — Chief Financial Officer
Thank you, everyone.
Operator
[Operator Closing Remarks]