Summer Infant, Inc.
Q2 2021 Earnings Call Transcript

Published: 17 Aug 2021

[Operator:]

Good day and welcome to the Summer Brands fiscal year 2021 second quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations advisor. Please go ahead.

[Chris Witty:]

Hello and welcome to the Summer Brands 2021 second quarter conference call. With me on the call today is the company’s CEO, Stuart Noyes, and interim CFO, Bruce Meier. I would now like to provide a brief Safe Harbor statement. This call may include forward-looking statements that relate to Summer Brands’ outlook for 2021 and beyond. These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company’s annual report on Form 10-K, its quarterly reports on Form 10-Q, and in our other filings with the Securities and Exchange Commission. During the call, management may make references to adjusted EBITDA, adjusted net income, and adjusted earnings per share. These metrics are non-GAAP financial measures which the company believe help investors gain a meaningful understanding of changes in Summer Brands’ operations. For more information on non-GAAP financial measures, please see the table for a reconciliation of GAAP results to non-GAAP measures included in the company’s financial release issued yesterday evening. With that, I’d like to turn the call over to Mr. Stuart Noyes. Stuart?

[Stuart Noyes:]

Thanks Chris, and good morning everyone. We appreciate you joining our second quarter conference call today. I’ll start by providing an overview of the recent developments, after which Bruce will go through our financial results in detail. To anyone watching current events and supply chain disruptions facing companies worldwide, this quarter was not surprising but, again, both challenging and certainly well below our potential. The company’s performance reflected the ongoing tug of war between strong demand and limited supply, which is the primary reason we did not post year-over-year growth this quarter. Net sales of $30.6 million reflected the realities of container bottlenecks and related issues negatively impact trade across the Pacific Rim. If normal or even near normal levels of containerships had been available and operating, I’m certain we would have seen many of our core product categories post strong revenue gains year over year. As it was, we were able to show nice growth in certain areas even in the face of such challenges. We saw double digit expansion in soothers, strollers, bath and boosters, but even some of our hotter categories’ more in-demand items, like potties and gates, were hampered by supply chain disruptions. That said, we are cautiously optimistic about the third quarter’s top line growth given the current level of product being built now in transit and in our warehouse. We have aggressively tried to increase the level of available inventory, placing more orders to meet demand going forward. However, logistical uncertainties remain as shipping factors seem to change week by week, if not day by day. In addition, container pricing is still much higher than normal, which we expect to continue negatively impacting gross margins for the foreseeable future. Let me assure our listeners that we’re doing everything possible to mitigate these circumstances, accelerate product throughput, and get our goods in the hands of consumers. For example, we are when possible using alternative ports in China and the U.S. and are actively managing our suppliers here and abroad, and researching additional manufacturing options that are less constrained. We will continue to adjust prices when feasible to help mitigate pressure on margins. We used operating cash flow this quarter to pay down an additional $2 million of debt, and while the company’s bottom line performance was an improvement from quarter one, it largely reflected the forgiveness of a $2 million PPP loan from the federal government, as Bruce will discuss more in a moment. That said, we continue to control SG&A costs even while investing for the future On that note, I’m pleased to say that we recently hired Michael Silverman and Kim Ashley as Vice Presidents of Product. Together, they bring years of experience from such well known names as Central Garden & Pet, Baby Togs, and Dorel. Michael will focus on executing the company’s new pet brand strategy in managing product development, while Kim will be responsible for driving growth across our core categories and managing the company’s fashion team. These steps align our internal talent with Summer’s goal of strengthening its product portfolio and accelerating top line growth. Let me add that our pet expansion in areas where we already dominate the market, such as gates and play yards, is well underway and we’ll have more to say about that in the next quarter. While already selling some of these items online through channels such as Chewie.com, the company is positioned for a broader launch in the pet arena early next year, and we’re currently investing in IP and branding for this important complement to our product portfolio. Before turning the call over to Bruce, let me remind our investors of the underlying improvement in our operating structure even in the face of the current challenging supply chain environment. We now have a solid array of products, many with enviable brand loyalty which are in high demand. We have paid down debt, stabilized the business, are managing working capital, and doing everything possible to get product to market while handling freight cost challenges. This is a balancing act of immense proportions. While many things could still change in the weeks and months to come, I believe we are well positioned for sequential top line growth in the third quarter and, as of now, are hopeful that container expenses will start to normalize. In any event, we do not take these issues lightly and are clearly focused on managing the day-to-day challenges that this operating environment has handed us. I don’t think Summer could be any better prepared for such unusual and ever-changing conditions than it currently is, and we will continue to take advantage of the economic recovery and increasing consumer demand as best we can this fall. With that, I’ll turn it over to Bruce to review our financial results in detail. Bruce?

[Bruce Meier:]

Thanks Stuart, and good morning everyone. As a reminder, our 10-Q and related press release were issued yesterday. In addition to listening to this conference call, I encourage you to review our filings. Now to the results. Second quarter net sales were $30.6 million compared with $38.2 million in the second quarter of fiscal 2020. Revenue was down year-over-year due to the reasons Stuart discussed, mainly ongoing supply chain constraints and shipping bottlenecks. As was the case in the first quarter, these issues more than offset robust product demand with an improving economic landscape. While revenue did rise double digits across several categories such as soothers, strollers, baths and boosters, this was more than offset by the company’s inability to secure sufficient containers, thus preventing shipments to customers. We have, however, experienced some near term success with obtaining inventory, which suggests the potential for top line growth in the third quarter. The problem is not demand but supply, and we are doing everything in our power to get product to market while managing the associated higher freight costs and other extraordinary logistical expenses. Gross profit was $9.7 million for the second quarter of fiscal 2021 versus $14 million in 2020, and our gross margin as a percentage of sales was 31.6% versus 36.7% last year. The year-over-year margin decline primarily reflects an increase in transportation and raw materials costs and the fact that certain items are no longer receiving tariff exclusions that were granted in 2020. Selling expense was $2.5 million in the second quarter versus $3.7 million in the prior year period, and as a percentage of net sales was 8% this year versus 9.8% in 2020. The decrease year-over-year and as a percentage of revenue was due to the revenue decline and lower cooperative advertising costs resulting from a shift to more direct import sales. General and administrative expenses were $6.8 million in the second quarter versus $6.7 million in the prior year period, and G&A as a percentage of sales was 22.2% this year versus 17.6% in 2020, a consequence of the lower revenue base. Interest expense was $0.3 million in the second quarter of 2021 versus $1.1 million in 2020, reflecting lower outstanding debt levels and more attractive interest rates following the company’s refinancing of its credit facilities in the fourth quarter of 2020. The company reported net income of $1.4 million or $0.62 per share in the second quarter of 2021, compared with $1.3 million or $0.61 per share in the prior year period. Note that the fiscal 2021 second quarter included a $2.0 million benefit from the forgiveness of the U.S. Paycheck Protection Program, or PPP loan. The company recorded a tax provision of $0.1 million in the fiscal 2021 second quarter versus $0.4 million in the comparable period of fiscal 2020. Adjusted EBITDA for the second quarter of 2021 was $3.5 million versus $4.3 million in the second quarter of 2020. Adjusted EBITDA in 2021 included the benefit from the forgiveness of the PPP loan and $0.8 million of bank permitted add-back charges compared with $0.7 million in add-backs for the prior year period. Adjusted EBITDA as a percentage of net sales was 11.3% in fiscal 2021 versus 11.4% last year. Turning to the balance sheet, as of July 3, 2021, Summer Infant had approximately $0.5 million of cash and $27.8 million of bank debt, compared with $0.5 million of cash and $30.9 million of bank debt at the beginning of fiscal 2021. We continue to focus on reducing debt and strengthening the balance sheet whenever possible. Inventory at the end of the second quarter was $18.2 million compared with $25.1 million as of January 2, 2021, and our inventory turns were 4.6 versus 4.0 at the beginning of the year. Trade receivables as of July 3, 2021 were $23.8 million compared with $26.0 million at the beginning of fiscal 2021. Days sales outstanding, or DSOs were 70 as compared to 66 at the start of the year. Accounts payable and accrued expenses were $26.2 million as of July 3, 2021 compared with $34.1 million at the beginning of the fiscal year. With that, I’ll turn the call over to the Operator and open it up for questions.

[Operator:]

The first question comes from Eric Beder with SCC Research. Please go ahead.

[Eric Beder:]

Good morning. Congratulations on navigating through very difficult times.

[Stuart Noyes:]

Thank you Eric.

[Eric Beder:]

When you look at a little bit more forward out, you’ve done--you’ve brought in a lot of people here. How do you want to keep the--you know, what innovations do you need to keep the business continuing to have when you do see the return to more normalized shipping, the demand will still be there and your market position will still be there also?

[Stuart Noyes:]

Yes, look - we’re working diligently on our product road maps into ’22 and ’23, which consists of new and refresh product based on the needs of the retailer or the dot-com customer. I think as we look forward, we mentioned pet on this call - you know, an extension there in categories we really already operate in, so there’s a little less start-up and that, we know the categories. But also, we’re looking at line extensions right now, and even a few new categories, but we’ll be very diligent on that. We’ve got leading positions in all of our core categories and we’ll continue to innovate there. We’ve had great success this year in new placements at our major customers, which is really a testament to the product and sales teams and the whole team here at Summer on even with these headwinds, being able to do that.

[Eric Beder:]

Great, and when you look at online versus brick and mortar, what should we be thinking about longer term about where those are going and where percentage the slip should be from those going forward?

[Stuart Noyes:]

Yes, I wish I had that crystal ball based on, you know, obviously with the pandemic, it shook things up and maybe accelerated online sales, as we all know, but I think you heard some recent quarterly announcements from some of the retailers that store traffic is still strong and picking up again, so we really balance both. I do think the dot-com gives you an environment where you can bring products to market quicker, so we’re not potentially waiting for line reviews and/or yearly plan-o-grams, or buy yearly plan-o-grams. Look, all the retail, they’re all pushing dot-com, even the brick and mortar, so we’ll continue to focus on dot-com and make sure we’re there to gain that customer and supply them with new and innovative product. I wish--

[Eric Beder:]

Great, and--I’m sorry?

[Stuart Noyes:]

I wish I knew the breakdown, Eric, but it’s ever changing right now based on what’s going on in the world.

[Eric Beder:]

I hear you. It’s interesting times. Last question, inventories - you know, as you normalize, what should we be thinking about inventories and where they should be?

[Stuart Noyes:]

Yes, so you saw the drop in inventory there. We want to operate a higher level than that, but what I would tell you is I have a very material number on the water right now headed our way, as well as I’ve got inventory over in Asia that’s in the factories that we’re working diligently to get containers to move that. But I think anybody could tell you, whether it be direct import groups that are big massive retailers or production folks, that that is a challenge, getting things out of Asia right now. You saw one port close because of COVID last week - that backs up hundreds of thousands of containers. But we have right now as much on the water that’s finished goods, ready to ship, as we do in our inventory, but we do not want to--I’ll say this, we’re removing more of our business to direct import and we’ve got a decent percent that’s domestic right now, or North America. We want to keep a tight lid on the inventory manage working capital, but you are going to--you should start to see a build, although demand seems to limit a little bit of that build here going forward, because the demand is very, very good right now for our product.

[Eric Beder:]

Well guys, good luck and I hope we see--I hope going forward it gets more normal so we can really see how well Summer can do.

[Stuart Noyes:]

Thank you very much.

[Operator:]

Again if you would like to ask a question, press star then one to join the queue. At this time, there appear to be no further callers in the question queue, so I’ll turn it back over to Mr. Noyes for any closing remarks.

[Stuart Noyes:]

Great, thank you very much. Well, I just want to thank everybody for joining the call today, and we look forward to speaking with you next quarter. Thanks, and have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.