Educational Development Corporation (EDUC) Earnings Call Transcript & Summary

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 2027 second quarter and year-to-date results. As a reminder, this conference is being recorded. On the call 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 this afternoon, the company issued a press release announcing its results for the fiscal 2027 second quarter and year-to-date results. The release will be available later today 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 condition. With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Thank you, Alan, 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 to run through the financials after which Heather will provide an update on sales and marketing and IT projects, and I will provide an update on our plans for the rest of fiscal 2027. First, I would like to remind everyone that our second quarter is typically our softest quarter of the year, and our quarters cannot be analyzed sequentially. During the quarter, we saw progress in the execution of our turnaround strategy. This is most evident by a reduction in our sales decline. Over the past quarters, we have reported sales declines of 30% or more, and our forecasts have been for 35% down. During the second quarter, our sales declined decreased to 11%. This shows that our strategies and turnaround plan is working. During the quarter, we were able to replenish some existing best-selling titles that were out of stock as well as introduce several new titles, both energizing our sales force. The overall results for the quarter were driven by our lower revenue levels, offset by lower expenses. The focus of our fiscal 2027 turnaround plan remains on growing our revenue and brain partner levels back to pre-pandemic levels, and I'm happy with the progress we've made in the second quarter, which, as I said, is our softest period of the year. Heather will talk more about this progress in her marketing update. As I've said before, our turnaround plan is not an overnight change, but a carefully developed plan for growth over the next few quarters and years. With that, I will now turn the call over to Dan O'Keefe to provide a brief overview of the financials.

Thank you, Craig. Our fiscal 2027 second quarter results compared to the second quarter last year included net revenues were $4.1 million compared to $4.6 million, a decrease of approximately 11%. Average active brand partners totaled 5,100 compared to 5,800 at the end of August 2025. Our average -- active brand partners increased from 4,300 at the end of February 2026 to 5,100 at the end of August 2026, an increase of approximately 19%. Our loss before income taxes were $1.6 million compared to a loss in the second quarter last year of $1.8 million. Net loss totaled $1.6 million in the second quarter compared to $1.3 million in the second quarter last year. Loss per share totaled $0.19 compared to a loss of $0.15 on a fully diluted basis. Now for an update on our working capital. Inventory levels have decreased from $37.7 million at the beginning of the fiscal year to $34.9 million at the end of August, generating $2.8 million of cash flow from inventory reductions. Our cash balance decreased slightly from $1.3 million at the end of February 2026 to $1.1 million at the end of August. We had no borrowings under our $2 million line of credit during the quarter. I would also like to mention an unusual accounting adjustment that continues through the second quarter. Due to historical losses and operational expectations during our turnaround period, we evaluated the need for a valuation allowance for our net deferred tax assets. Based on this evaluation, we continue to recognize the valuation adjustment offsetting the deferred tax asset and eliminating the tax benefit on our income statement. This adjustment has no cash flow impact but had a direct impact on our tax expense, net earnings and earnings per share. When the company shows sign of returning to profitability, this valuation adjustment will be reversed. The reversal will have no cash flow impact, but it will have a direct impact to our tax expense in earnings and earnings per share. That concludes the financial update. I'll now turn the call back over to Heather Cobb for a sales and marketing update. Heather?

Thanks, Dan. As Craig mentioned earlier, our second quarter is traditionally our slowest selling period. As we entered June, our internal sales projections anticipate a decline of approximately 35% compared to the prior year, reflecting the trends we've seen in recent quarters. Instead, we finished the quarter with an overall revenue decline of approximately 11%, significantly outperforming those internal expectations. While we recognize there's still work ahead, we're encouraged by this progress, especially as several important initiatives began coming together during the quarter. One of the most significant developments was the return of new product intros. In mid- to late June, we released our first full group of new titles. And over the past several months, we've also replenished inventory for several of our best-selling titles and series. We've shared previously that new titles are an important sales driver for our business, and we believe the sales results we are seeing continue to reinforce that. Even more importantly, we're moving back toward a consistent release schedule with 2 main season and 2 mid-season product intros planned each year. This is an integral step forward because it creates a more predictable flow of new products and gives our brand partners and retail sales reps more opportunities to reconnect with customers, generate excitement and drive repeat purchases throughout the year. We're seeing encouraging activity within our EDC Pub Retail division, where our retail partners continue to respond positively to our offerings across Kane Miller Books, Learning Wrap-Ups and SmartLab Toys. We're receiving strong interest in sizable orders across these brands, reinforcing the demand we're seeing for our educational products. Response to our recently introduced new titles has been enthusiastic, and we're already seeing excitement surrounding additional releases planned for January from both Kane Miller and SmartLab Toys. As we return to a more consistent product intro schedule, we believe these offerings will create additional sales opportunities across both our sales channels. Alongside product availability, another key priority remains rebuilding and strengthening our PaperPie Brand Partners community. During the quarter, we offered a special activation opportunity in June, along with the targeted summer sales event designed to encourage engagement, generate customer activity and support our brand partners during a traditionally slower season. And while our brand partner population remains below where it was a year ago, we're encouraged that we've grown from approximately 4,300 active brand partners at the beginning of the fiscal year to approximately 5,100 at the end of August. As Dan mentioned, that represents an increase of nearly 19% over the first 6 months of our fiscal year. We recognize that growing our brand partner community is only one part of the equation. Equally important is helping those brand partners become active, productive and successful in building their businesses. We continue to focus on both growth and new customer acquisition because those 2 priorities are closely connected. We're also taking a renewed strategic approach to social media and communications, focusing on strengthening our PaperPie Brand presence, creating more consistent and engaging content and expanding our reach to new audiences. We've added team members to support these efforts with an emphasis on connecting with today's consumers and the next generation of brand partners. And looking beyond the quarter, we've been additional outreach directly to former brand partners, highlighting the many improvements we've made to our products, programs and technology and inviting them to take another look at the opportunities available with PaperPie today. That brings me to our IT and enterprise initiatives where we've continued to make significant progress. Over the past several months, our team has successfully completed and launched numerous enhancements to our e-commerce platform and supporting systems. These improvements are an important part of our overall strategy because we're not simply focused on bringing more people to PaperPie. We're also focused on making it easier for them to shop, share and build their businesses. We continue to enhance our mobile shopping experience, knowing it's where most shopping trips happen today. We've also introduced [ Reed ], our new AI-assisted book discovery and search tool on the e-commerce site. Reed helps customers navigate our product selection and discover books based on their interest, needs and preferences, creating a much more personalized and intuitive shopping experience. Additionally, we've launched new wish lists and registry features, making it easier for customers to save and share their favorite products with family and friends. While these may all sound like individual website enhancements, collectively, they represent something much more important. We are building a much more modern, accessible and efficient shopping platform that supports both the customers and the productivity of our brand partners. As we move into the second half of our fiscal year, our priorities remain clear. We're focused on growing and engaging our brand partner community, reaching new customers, maintaining a consistent flow of new products and continuing to improve the tools and technology that support our business. We're especially encouraged to enter our stronger selling season period with improved product availability, new titles in the market and these additional new releases on the horizon. We understand that sustainable growth won't happen overnight, and we recognize that we still have work to do. But we're encouraged by the progress we've made this quarter, not only in our sales performance relative to our expectations, but also in restoring important elements of our business and strengthening the foundation that we have for future growth. We believe our products, people and increasingly modernized tools and systems position us to keep making meaningful progress in the quarters ahead. As we continue to develop these things, we're placing an increased emphasis on improving internal efficiencies, simplifying processes and creating technology solutions that can support this growth without requiring proportional increases in operating costs, which Craig will share a bit more about. With that, I'll turn the call back over to Craig.

Thank you, Dan and Heather. As I mentioned before, we are happy with the initial results of our turnaround plan. Specifically, we are building our brand partner levels, and they are excited about our new titles and our IT improvements. You heard from Heather about some of our recent IT initiatives that are focused on making it easier to do business with us and improving the shopping experience. I believe you've also heard me say that I'm a big proponent of AI, not as a solution to all our problems, but as a tool to assist in achieving our strategic goals. It is also not part of the plan to further reduce head count as part of our AI strategy. I wanted to be used to make our current employees more efficient so that we can -- so that we do not need to hire as many new employees as we get back to growth. Part of my overall strategy is to help us more effectively build community. AI can assist with this by recognizing patterns good or bad very quickly. I began using AI to help me create more touch points with our brand partners by recognizing certain achievements much closer to real time. I assume weekly e-mails for large orders, recognizing effort and impact and e-mails when new brand partners make their first sale. It has been very well received. Another key initiative is to be recognized by customers and the greater community as experts in providing educational resources, our books and toys for their children. This, in part, can be achieved by establishing blogs or social media post to build trust in our brands. This will, in turn, strengthen our positioning in AI, LLMs recommendations of our products, which is becoming the new search engines. This is a major undertaking that we had many, many assets available for use and a clear path to get there aided by our 2 new hires. And then in general, I support any employee or department in their AI exploration process to transform EDC. I believe that AI can help automate processes to free up employees to do more critical thinking work. We have also engaged a company who has created their own front end sitting on our data, which will allow us to ask natural language questions without IT involvement to make more informed, timely decisions. For example, I can use the software to provide me daily morning briefs of milestones that were achieved overnight as a result of posted sales. It just provides readily useful data more quickly. Many companies in the direct selling industry are evaluating the recruiting and engagement methods to attract and retain brand partners and customers. I can tell you that our brand -- our PaperPie sales and marketing teams and the IT department are working actively to analyze our strategies to engage this target group as well. I really feel like we're rebuilding from a position of strength. What our small, scrappy staff throughout the building to accomplish is really amazing, and we have solid short-term strategies that everyone can get behind. We are truly all pulling in the same direction. Lastly, I want to thank our shareholders for the patients, our employees for their commitment to our mission and our customers and brand partners for their loyalty. I'm confident that the steps we have taken and will continue to take will result in sales growth and our return to profitability. Now that we have provided a summary of some recent activity, I will now turn the call back over to the operator for question-and-answer. Alan?

[Operator Instructions] Your first question comes from Igor Novgorodtsev of Lares Capital.

Nice to see that deterioration is declining. So I understand it will take some time to come. I have quite a few questions, and I'll probably ask a few and if nobody else behind me -- so let me get started by asking about the new versus titles already in your inventory. So you started selling new cycles in June. How much like what percent of the titles that were sold in new titles? And what percentage is that if on your inventory? And what is your inventory level looks like after this quarter?

I'll take the first part as far as the percentages. The percentage of new titles that go into actual sales of overall sales is actually relatively small. What it does is it provides that excitement and bump of enthusiasm to get out and share with customers. And what we consistently see over time is that when those new titles are placed on an order, they are almost always accompanied by what we call backlist titles which are the additional titles that have always been there and available for purchase, but that people are going ahead and taking advantage of buying while they're on the site and doing so.

Okay. We do not have the inventory levels yet. I assume I have to wait for the 10-Q, right?

No, I think -- Igor, you joined just a little bit late. We said that earlier on. Our inventory levels decreased from $37.7 million at the beginning of fiscal year 2027 to $34.9 million. So some...

Okay. Yes. So my next question is about the current quarter and active members. Now this is obviously right now is the most important quarter of the year. How is it looking? What are the active members? Are they increasing? What does the sales look like as much as you guys can tell us at this point now that we're halfway through.

Sure. I referenced that a little bit in my conversation and Dan mentioned it as well. While the active brand partner count year-over-year is lower than it was at the same time last year, we've seen an almost 20% increase since the beginning of fiscal year '27, which is promising and something that we got as extremely positive.

So maybe we can just dig in a little bit more? I believe you ran a promotion in the last quarter. And at 1 point of time, you have 5,300 members now. I understand there is something that's churning off and now 5,100 members. Should we expect that the numbers will start increasing or stabilize? Or how should we look at that?

Igor, I will tell you that historically, in the fall, we have an increase in brand partners because it's the strongest selling season of the year. So we have some brand partners that go inactive during the year, but come back to us in the fall. So typically, our fall is our time frame where our brand partner numbers increased. The summer is typically a time when they actually decreased because a lot of the fall people that join in the fall, fall off in the summer because they don't make a sale during the first 6 months of the year. But then they come back in the fall each year. So fall is typically our highest brand partner levels.

Okay. Fair enough. Maybe you can talk a little bit about operating expenses? I know that you've been doing a good job reducing your operating expenses. I'm just curious, is the job less done at this point? Or are you still working on significantly reducing operating expenses going forward? I mean, I assume everything stays more or less equal.

Yes. The -- I'll take this one, too. We kind of mentioned it -- at our fiscal year-end, our 10-K call -- in our Q1 call that we reduced our operating expenses during -- for the budget for the fiscal 2027 year by $1.2 million. That includes some expense reductions immediately. Our executive team took compensation reductions. We were able to -- we actually did a staff reduction immediately in the beginning of the fiscal year. But we also have expenses that are dropping off during the year. For example, we have an outside warehouse facility that we're vacating in October, and it will save us $15,000 a month in rent expense by not using that outside warehouse, and that will start in November. So throughout the year, we're doing expense cutting. But cumulatively, we expect our operating expenses to be about $1 million below where they were last year.

Okay. My next question is -- on getting queue and see if anybody else wants to ask questions. I'm a bit confused about the cash flow. Your press release specifically said that you had a positive cash flow yet the cash has been reduced, I believe, by $100,000 from the beginning, $1.3 billion to $1.2 billion and you had $1.8 million in May, if I'm not mistaken. Could you just kind of walk me through this? I understand that I would need to see your cash flow statement to fully understand this. But what did you alluded to in the press release when you said that the cash flow in the first half was positive?

Well, the cash flow in the first half of the year is positive because we're reducing our inventory levels. So from a simple standpoint, we reduced our inventory levels $2.8 million and reducing -- and all that inventory is fully paid for, Igor. So that just generates positive cash for us. Now over the first 6 months, we've lost our earnings before taxes were negative $2.9 million. So from a simple math perspective, $2.8 million of positive cash flow offset by $2.9 million of operating losses is negative $100,000, and that's what our cash decreased over the first 6 months. But I will also tell you that the fall selling season is our busiest selling season of the year, and we expect cash to be higher at the end of this quarter than it is right now.

No, I understand. So I would need to see this. But do you expect you're confident that on the trailing 12 months, your operating cash flow will be positive this year? It seems, right? I mean, it's fair to say that given that there is 1 quarter left in as your strongest quarter. So your basically cash at the end of the year should be higher than it was in the beginning of the year. Is that -- are they on target on that?

I don't want to give forward-looking statements to Q4 since it kind of is. But I can tell you that typically, at the end of Q3, we -- is our biggest cash position of the year.

Oh, sorry -- Q3, right? Correct. Sorry. Okay. I'll try to get back in queue and if nobody else is on, then I'll ask more questions. And if not, then I'll ask at the end.