Summer Infant, Inc.
Q4 2012 Earnings Call Transcript

Published: 13 Mar 2013

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant's Fourth Quarter and Year-End 2012 Financial Results Conference Call. Today's call will be recorded. [Operator Instructions] I will now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and reductions. Please go ahead, sir.

[David C. Calusdian:]

Good afternoon, and welcome to Summer Infant's Fourth Quarter and Year-End 2012 Conference Call. On the call for the company are Mr. Jason Macari, Chief Executive Officer; Mr. David Hemendinger, Chief Operating Officer; and Mr. Paul Francese, Chief Financial Officer. By now, everyone should have access to the Q4 news release, which went out today at approximately 4

[Jason P. Macari:]

Thank you, David. Good afternoon, and thank you, everyone, for joining us today. We achieved a 6% increase in revenues in the fourth quarter, demonstrating our ability to drive sales growth amid challenging economic conditions. Revenues were up 4% for the full year. We believe that our sales have stabilized, and we are taking actions to further improve the top line going forward. More about that in a moment. While we reported fourth quarter sales growth, we experienced lower gross margins due to higher-than-normal closeout sales, increases in freight costs due to port issues in California and higher mix of lower margin products. During the year, we took action to reduce certain promotional activities and other selling expenses that do not have a direct and positive effect on our ability to drive sales growth. While total selling expenses were still up on a year-over-year basis for the quarter, we believe they have stabilized and were down in the fourth quarter compared with the sequential third quarter, and we expect that trend to continue. We have an ongoing effort to analyze the effectiveness of our promotional activities and their contribution to our bottom line. I'd like to emphasize that we continue to invest in marketing and advertising to promote our products where we expect these investments to make a real difference. G&A expenses were down on both a sequential and year-over-year basis as a result of the cost-cutting actions we took at the end of Q2. We expect G&A to decrease further in the first half of the year. In addition, the recent refinancing of our debt will result in lower borrowing costs that will positively affect our bottom line going forward. We believe that we now are heading in a positive direction. Accelerating our path to profitable growth and generating enhanced shareholder value is our singular focus. During the past few months, the board and management have been working together to determine the near-term actions to implement in order to move -- to more quickly improve our operating model. At the heart of our strategy is a focus on delivering innovative juvenile products and building brands that bring value to customers and consumers. Our recent discussions are leading us to sharpen that strategy. As a result, this year, we are exploring new opportunities and leaving behind those elements of the strategy that are not contributing to profitable growth. As I discuss our growth strategy today, I'll outline where we've made progress in the past quarter and highlight those areas where we are excited to take the company in new directions. Developing innovative products that delight consumers will always be at the core of what we do at Summer Infant. Success in the juvenile products space is defined by innovation, and our success since the company's inception has been due to our ability to innovate. In the past year, we have solidified our development team, and we expect exciting new products from this team in the second half of 2013 and beyond. In the fourth quarter, we launched a number of new products that demonstrate our innovation. Our new Lil' Luxuries Whirlpool, Bubbling Spa & Shower offers new features designed for parents to pamper their baby. We also introduced our new Born Free 3-stage nursing pillow, which is doing very well at retail. The pillow is fully customizable and provides the right height for feeding baby every time. In the furniture category, we are excited about our new Simple Adjust crib, which allows you to adjust the mattress height easily with the push of a button, instead of having to take the crib apart. The new Resting Up Napper is designed for inclined sleeping in light of the new school of thought that this napping position is more beneficial for baby. We also launched 2 new baby gates with innovative features. We expect to introduce upgraded monitors this quarter and in April, we will relaunch our Prodigy car seat. Later this year, we plan to roll out the second generation of our Peek monitor system, as well as several new Born Free electronic feeding products. The second element of our strategy is aggressive brand building. As a result of our sharpened strategy, we are taking a more streamlined approach on our core brands, Summer and Born Free. As we focus on our own brands, we will be moving out of licensing agreements that do not contribute to the profitability of the company. Our license agreements with Disney and Carter's both will be concluded by the end of 2013, reducing royalty expenses. We estimated licensed brands would have accounted for approximately 15% of 2013 revenues. We expect that approximately 60% of formerly licensed programs could be converted to Summer or Born Free branded programs by the end of 2013. We've already had conversations with our major customers, who are supportive of this move. Our brand now has the strength to carry us into all of our product categories. By simplifying our business model and eliminating royalty expenses, we expect these additional Summer and Born Free branded products will provide improved profitability. Heading up our brand-building efforts will be Elizabeth Jackson, who has been working with us on an interim basis since mid-2011. She will now be fully focused on this initiative as our full-time Chief Marketing Officer. In addition to our marketing consulting work with large companies with strong brands including Procter & Gamble, where she worked on the Pampers brand, Duncan brands and Gillette, Elizabeth has deep experience in the juvenile products market. We're looking forward to her contributions as we focus on strengthening our Summer and Born Free brands. Dovetailing with our brand-building actions, we are also sharpening our focus on our core product categories, including monitors, safety, nursery, furniture, feeding and gear. While we are not getting out of any one particular category, we are continuously evaluating which categories provide the best return on our investments and product development resources, and which categories may need to be streamlined in the future. We've long talked about the need to diversify our customer base, and one way to affect that change is a through geographic expansion. International sales grew 19% year-over-year in the fourth quarter and represented 15% of revenues in 2012, up from 13% in 2011. We are on track to grow international sales to 20% of revenues by 2015 through leveraging current retail relationships and distributors in Canada, the U.K., Australia and targeting new customers in other attractive international markets. We've also been successful in growing the number of our small to midsize customers in the U.S. In 2012, we reported 19% year-over-year revenue growth to approximately 10 million from these specialty retailers. We expect to increase revenues from these customers by 20% in 2013 over 2012. The foundation of all of our efforts is a commitment to Operational Excellence. We're taking several actions that together, will move the needle in our drive to grow margins. As a result of our product line analysis and our rationalization program, we are working to either improve the profitability of our low-margin products or eliminate these items from our offering. For example, our strategy to improve the probability of our furniture product line is to reduce the amount of capital needed for these items by converting to direct import programs, reducing overhead and eliminating licensing fees. In 2012, we implemented a direct import program that we plan to expand in 2013. The direct import program reduces shipping time to our customers and improves profitably. Through this program, products are shipped from the manufacturing site directly to the customers, bypassing our warehouses. We are also in the process of consolidating our overflow warehouse in California into our main warehouse, which we expect will result in an annualized savings of $72,000. We also will be closing our warehouse in France and consolidating inventory into our U.K. warehouse, resulting in annualized savings of another $60,000. By the end of the year, we expect that all 4 of our top customers will be using the direct import program for furniture. In addition, although Carter's is a well recognized brand, our Summer brand has gained acceptance in the furniture category. And we believe that our sharpened focus on our own brand will further strengthen our market presence. This category is strategic and that furniture is one of the first purchases made by new parents. So it is critical -- it is a critical brand-building opportunity with consumers. The actions that we are taking, including growing the direct import program, reducing overhead and moving away from licensed brands will make a measurable difference in the profitability of this category. We also continued to exercise strict financial discipline. We've made progress on reducing general and administrative expenses and will continue to focus on reducing overhead through a number of new actions taken during this first quarter. These include warehouse consolidations, an 8% workforce reduction, a decrease in CEO and board compensation and a temporary moratorium on merit pay increases. Taken in total, we expect that these actions will result in a G&A reduction of 10% year-over-year after 2013. We are also taking actions on the product side to reduce expenses. First, we are evaluating our products to see where we can use reengineering to reduce input costs. In addition, we are lowering costs through the rationalization of SKUs. Our current SKU count is 1,100, down from 2,400 at the end of fiscal 2011. That's a 54% decrease in 1 year. We anticipate reducing our SKU count by an additional 20% to 25% in 2013, which will provide us with a much more efficient overall SKU base. These actions on the product side should result in annualized savings of $2 million and $1 million realized in 2013. I'd like to summarize by saying that while we remain committed to the core elements of our strategy, including product innovation and strong customer relationships, we are strictly focused on increasing margins, generating profit and enhancing shareholder value. That means taking bold new approaches in some areas of the business, while leaving behind other areas that do not contribute to profitable growth. Taken together, we believe that eliminating licensing payments, expanding the direct import program, consolidating locations and reducing corporate overhead will have a real and meaningful effect on our margin performance going forward. After Paul provides a review of our fourth quarter financial performance, I'll be back to offer some color on Q1 and the year ahead. Paul?

[Paul Francese:]

Thank you, Jason, and good afternoon, everyone. Net revenues in the fourth quarter of 2012 increased 6% to $58.5 million from $55.4 million in the fourth quarter of 2011. The revenue growth was driven by increases in furniture, safety, play and monitor categories as we continue to launch innovative products and diversify our customer base. Gross profit totaled $18.3 million in the fourth quarter of 2012 compared to $19.5 million in the fourth quarter of 2011. Gross margin in the fourth quarter 2012 was 31.2% of revenue compared with 35.2% in the fourth quarter of 2011. The decline in gross margin was a result of increased retail program costs, increased freight costs, a higher mix of lower margin products and the rationalization of certain product offerings and SKUs that had been removed as active items. As we execute our Operational Excellence strategy, we have been analyzing product offerings, and certain products or SKUS have been removed as active items. These items when sold are typically sold at a lower margin. Selling expenses were $7.3 million in the fourth quarter of 2012 compared to $5.8 million a year ago. This increase is primarily attributable to higher selling costs associated with customer cooperative advertising and other customer promotional expenses and increased licensing costs. G&A expenses decreased from $11.6 million in the fourth quarter of 2011 to $10 million in the fourth quarter of 2012. The fourth quarter of 2011 G&A expense included $1.5 million for a product lawsuit settlement, and fourth quarter 2012 G&A included $0.6 million of expense associated with the compliance to the November 2012 loan amendment and costs associated with our loan refinancing efforts. Interest expense in the 3 months ended December 31, 2012, was $1.6 million compared with $0.7 million for the 3 months ended December 31, 2011. The increase in the fourth quarter 2012 interest expense was due to higher borrowing levels to support the working capital, as well as increased interest expenses resulting from the November 14, 2012, loan amendment, which was at retroactive to October 1, 2012. We reported a net loss of $1.5 million or $0.09 per share in the fourth quarter of 2012 compared with a net loss of $0.4 million or $0.02 per share in the fourth quarter of 2011. The company recorded a tax benefit of $0.9 million in the fourth quarter of 2012 compared with a tax expense of $11,000 in the fourth quarter of 2011. Non-GAAP adjusted EBITDA for the fourth quarter of 2012 was $1.7 million compared with $4.3 million in non-GAAP adjusted EBITDA in the fourth quarter of 2011. Adjusted EBITDA for the fourth quarter of 2012 includes $0.6 million in permitted add back charges compared with $1.9 million in permitted add back charges for the fourth quarter of 2011. Now turning to the balance sheet. As of December 31, 2012, the company had $3.1 million of cash and $64.1 million of bank debt for a net debt balance of $61 million. This compares with $1.2 million of cash and $62 million of bank debt for a net debt balance of $60.8 million in 2011. We reached a major milestone of the end of February when we entered into a new fully underwritten loan and security agreement with Bank of America. The new agreement expires in 2018 and provides for an $80 million asset-based revolving credit facility. The loan bears interest, at the company's option, at a base rate plus 0.25% to 0.75% or at LIBOR plus 1.75% to 2.25%. The agreement includes covenants relating to minimum consolidated EBITDA and the fixed charge ratio, as well as customary affirmative and negative covenants. We also entered into a $15 million term loan agreement with Salus Capital Partners as administrative agent and collateral agent. The principal of that term loan will be repaid on a quarterly basis in installments of $375,000 commencing on the quarter ending September 30, 2013, and matures in 2018. The term loan bears interest at an annual rate equal to LIBOR plus 10% with a LIBOR floor of 1.25%. The term loan contains customary affirmative and negative covenants substantially the same as the Bank of America agreement. We expect that as a result of the refinancing, our interest expense will be reduced by $1.2 million in 2013 from 2012. Management of the company's working capital continues to be a focus in the fourth quarter. Trade receivables as of December 31, 2012, were $45.3 million compared with $47.7 million on December 31, 2011. Inventory at year-end 2012 was $49.9 million compared with $50 million at year-end 2011. Accounts payable was $27 million at year-end 2012 compared to $29.5 million at the end of 2011. The company procures its inventory on credit terms with its vendors and its practice is to submit payments weekly. To improve working capital for management, we are collaborating with our suppliers to amend some of our payment terms. And we also have worked with some our customers to shorten terms with them so we can improve our cash cycle. In the third quarter of 2012, the company recorded the impairment of its goodwill intangible and long-lived assets. The impairment charge resulted in a $61.9 million impairment charge for goodwill and an impairment charge of $7.9 million for intangibles. The impairment charges are included in the company's December 31, 2012, balance sheet. And with that, I turn the call back to Jason for some closing comments.

[Jason P. Macari:]

We are encouraged about our future and excited about the actions we are taking across the business to generate profits and enhance shareholder value. On the sales side, our first quarter year-over-year performance will be affected by a soft retail market, our product rationalization efforts and the reduction in licensing revenue. But our focus is on margin enhancement and profitability, and that is where we expect to see improvement in Q1. For the first quarter, we expect bottom line improvement over the fourth quarter due to our cost reduction initiative, including our efforts to effectively manage promotional and advertising dollars, lower G&A expenses and reduce borrowing costs due to our new credit agreement. Looking at the full year, we expect 2013 to be a turnaround year for us as we execute on our strategy to improve our bottom line results through innovation, building our brand, leveraging customer relationships, diversifying our customer base and achieving operational excellence. With that, Paul, Dave and I would be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question is from James Fronda of Sidoti & Company.

[James Fronda:]

Just in terms of the promotional activity during the quarter. Do you think that was somewhat of a heavy onetime thing for the quarter? Or do you expect a significant promotional sales in 2013?

[Jason P. Macari:]

The sale and the selling cost or promotional dollars that we provided to our customers in 2012 was definitely higher than normal. I mean, we basically -- when you look at the P&L, that was one glaring issue on our P&L was our overall selling cost, which we believe we have most of the worst of it behind us. I think we're actually looking for significant improvements in 2013.

[James Fronda:]

Okay. And in 2013, I guess the newer products that you plan to roll out, do you think you'll be able to sell those at full prices for the most part?

[Jason P. Macari:]

Yes. I think 2012 was somewhat of an exceptional year in that we had a lot of changes going on in the line. We were moving in and out of products and brands. And I think that we -- I think we're in a much more stable position today than we were a year ago in terms of our product line and in terms of our listings.

[Operator:]

[Operator Instructions] The next question is from Sean McGowan of Needham & Company.

[Sean P. McGowan:]

I have a couple and then I'll get back in the line if there is one. First, Jason, generally speaking, can you comment on what your view is of what how the industry is going? We've been hearing about first REITs [ph]. We've been hearing about disruptions at retail and key players donating market share or however you want to put it. But how would you characterize the overall industry? Is it settled? Is it still in flux? And related to that, you mentioned some of the alternative channels. Can you be more specific about what those opportunities are and how quickly you're able to capitalize on them?

[Jason P. Macari:]

Sure. We -- well, first of all, as far the overall market goes, I would say that third and fourth quarter seem to be kind of a -- I'll call it a settling -- unsettling time, settling time, meaning sales were down in juvenile. I think that the retailers kind of were bracing themselves for a negative selling period or negative economic outlook. And I think that kind of bottomed out in February as you can, when you read from Walmart and a few other major retailers' releases. But I think it has started picking back up, and we have been encouraged recently by the orders coming in. Absolutely, birth rates are down, but they supposedly bottomed out in 2011. All -- everything that we read says that we got a couple percent increase in 2012, which hopefully starts helping us in 2013 for a little wind in our sails. Everyone's still a little jittery about the economy, but I'm cautiously optimistic that we've kind of seen the worst of it and it should start getting a little bit better.

[Sean P. McGowan:]

And the channels?

[Jason P. Macari:]

With respect to the channels, we -- as a company, we've been -- we were focused on one large retailer and a few other larger retailers. So our customer base was not as diversified as maybe some of our competitors who have been in the market longer. And our thoughts are very simple, we certainly want to partner with and take care of our best accounts and biggest accounts. But there are some other opportunities that we are starting to tap into and realize and I think that we've been putting more time and attention into, which international has been growing nicely. As we mentioned in the release, the smaller and midsize customers, our product line in years past probably wasn't well suited to this channel. And some of the development that we've done over the last few years seems to be more suited, better suited, including the new strollers and car seat that we came out with, the new ones that we're shipping kind of as we speak and into second quarter. Some of our more expensive monitors and just in general, we have certain categories that we've skewed towards the high end of the category that can do very well, products can do very well in that channel. So we've been seeing nice gains, and that includes online retailers, such as diapers.com but also includes brick and mortar specialty retailers, which, it's not -- it's a class that has lost its numbers and ranks. But they still are alive and well, and I think there's been a nice movement in the U.S. towards supporting local businesses and those businesses, when they can carry a unique product or a differentiated product from the mass, can do well. So we have, I think, more products to offer where we didn't maybe a couple of years ago.

[Sean P. McGowan:]

Maybe you said it specifically in your comments, but maybe I missed the specifics. You said there was a group of, call it, alternative retailers or whatever you called it, that would -- you expect it to be up 20%. What is that group?

[Jason P. Macari:]

Yes, we refer to them as the specialty group of accounts. But it's kind of a group -- it's some independent retailers, bricks and mortar, it's some Internet retailers, some alternative channels that we normally wouldn't tap into. And they -- we built a bit of a sales team against that over the last couple of years, including some sales reps out in the market. And I think that we're starting to see some nice pickups in business there, although not huge, are important and become something that we can kind of grow, that we can nurture and grow.

[Sean P. McGowan:]

Okay. Maybe these questions will be better for Paul or [indiscernible] to just dovetail in something that you said, Jason. You talked about the G&A cost being lower in the first half. And then later, I think maybe Paul said it, G&A will be cut 10% in 2013. When I put those 2 columns together, are you suggesting that all of the reduction would come in the first half? Or is it going to be down kind of throughout the year?

[Paul Francese:]

We -- our G&A, we believe for the full year 2013, will be down 10% from last year. We -- I would say, in the first quarter and second quarter, it will be a continual, hopefully positive reduction in the overall G&A cost. Some of the -- our cost cutting that we've done started in second quarter of last year. Some of it, quite honestly, is just starting to take effect between tails on different things that we had to do, and we actually have done some reductions on FTEs as well as closing certain facilities and just generally, general overhead reduction over the last even 3 months.

[Jason P. Macari:]

I think that Paul showed it to, just to add to that as well, as we track our G&A monthly, we believe we're going to see a continuous improvement through the first half of the year by month. There are some costs associated with the restructuring that we've accomplished. So as they feed off and end, we'll get to a steady state of what our G&A run rate will be. And we believe that's going to be some time at the tail end of the second quarter.

[Sean P. McGowan:]

Okay. So do I -- am I correct to interpret that you'll see big reductions year-on-year in the first half. But by the time you get to the second half, you'll be anniversarying cuts, so we won't be seeing as much a reduction second half to second half?

[Jason P. Macari:]

That is correct. Our goal is to always have improvements. But I think we see most of those improvements happening and getting steady state by the second half, second quarter this year.

[Sean P. McGowan:]

And last question before I go back in the queue. For you, Paul, you mentioned the lower borrowing cost. And I'm just trying to conceptualize how that can be with what appears to be a higher base. Is it because some of the costs in the -- in the last year were kind of onetime nature that showed up in interest? Or is there a factor expected to be at lower borrowing base throughout 2013?

[Paul Francese:]

It's actually going to be a combination of both. We're going to have a lower borrowing base in 2013 as we better manage our working capital, but also our cost of debt has gone down year-over-year. When we entered into the amendment in November, there were the -- there were 2 things that occurred. One, there was a 2% tick that was added on to the cost, as well as an increase in the borrowing rate, interest rate. Okay. When I look at our current loan structure, the revolver and the term loan, our interest rate is lower than we're experiencing with the old debt structure.

[Sean P. McGowan:]

So it's really related to some of those penalty type things, right, that were place and...

[Paul Francese:]

Well, it's also -- it's the tick and it's a lower blended rate that we're incurring this year.

[Operator:]

[Operator Instructions] The next question is from Rob Strauss of Gilford securities.

[Robert D. Strauss:]

I have a few questions. The first, Jason, I just want to ask you, for a long time, you've talked about the challenging market, and I think you've laid out some of the items and reasons for that. What I'm more curious about is when do you consider that challenging market that may be continuing in 2013, what are your assumptions for that challenging market in your own business prospects? And how should we be thinking about this as we model your financials going forward? Whether that challenging market per your assumptions is going to stay the same, if it's going to get tougher or if it's going to get better?

[Jason P. Macari:]

Well, I'm the eternal optimist, so I obviously think it's going to get better. It -- I think the market right now, I feel like has stabilized. I do feel that the worst is behind us. Retail comps are really what I keep an eye on. And when I talk about difficult market conditions or economic conditions, I really am looking at what's selling? And is it the higher-priced goods, or the lower-priced goods or year-over-year comps or even sequential comps is -- what's that trend? And I think that what we've seen it do at retail is, it took a dip in parts of fourth quarter and into January and early February. And I think then we started seeing it turn around. And I think what I was seeing in retail point-of-sales was reflected in comments by a number of major retailers. So what I was seeing was consistent with what they were saying. I do see it having bounced back somewhat and I'm feeling again cautiously optimistic that the worst is behind us and that we'll start seeing turnaround. The challenge -- one of the big challenges, especially when you're talking about the average consumer or the -- it really comes down to what's taking place in their paycheck and with gas prices. Those are the 2 big effects that we've seen. And as one of the major retailers said, when $4 -- when gas hits $4 a gallon, it seems like the consumer puts their wallet in their pocket. So that's definitely an indicator of what's going on, but I do think that the market is stabilized. I do think that that we'll start seeing at least, if not positive comps, stability. And in our business, directly in our business, we feel like we have a solid plan for the year and that in cases -- when we talk about in '07 through -- really, for us '02 through '08 or '09, we were gaining -- not only gaining in sales, but we were gaining in market share. So existing items were selling more, and we were gaining market share. Today, the existing sales seemed to be -- they were declining for a year or 2. And now, they seem to have stabilized. And now hopefully pickups in new market share will be realized positively in our P&L. So we're encouraged, I would say. But it's going to be a different sort of year. When we talk about turnaround, we're less focused on the top line and more focused on the bottom line. And -- so we know that we need to improve our operating performance. And I would say that, as I stated in the release that, we could even see sales dip a little bit based on rationalization of SKUs or dropping items that may be aren't adding to our profitability. So we're really focused on the bottom line, I guess, is what I'm saying.

[Robert D. Strauss:]

And the trends in January and February that you experienced, were those worse from a challenging market standpoint than what you experienced in the fourth quarter?

[Jason P. Macari:]

Our sales in retail I think was. But I think it's picked back up. So it seems to be -- last year, sales started picking up around mid-January, third week in January. Sales this year started picking up around the second week in February, which I think was -- it was just an interesting dynamic on the delay. I don't know if it was weather-related. Yes, it could have been a number of different things, but that's what we saw. And what we have seen is that was starting around mid-February. We started seeing the numbers at retail start picking back up. And a number of the major retailers run baby sales and promotional things starting around that time. So that was a good thing and it started -- kind of jump started our category.

[Robert D. Strauss:]

Would a later tax rebate season impacted your business as well?

[Jason P. Macari:]

Absolutely. There are definitely retailers that that impacts. Not every single one certainly, but certainly the major retailers, yes.

[Robert D. Strauss:]

My next question is more structural and just so I understand your business. When we think about the retail program policy that you have with your customers, tell me about the timing of those retail programs, co-op ad dollars, things like that. Is the timing on as-you-go basis? Or is it on a reset basis? Whether that be every quarter or annual or whatever.

[Jason P. Macari:]

Typically, it's on an ongoing basis. We tend not to do one-hit kind of things where it's at the end of a quarter or at the end of a year. We tend towards pay-as-you-go and provide promotional funds as the retailer kind of executes those programs. One thing I would say about those programs is that we definitely took our pain last year, and I do believe that we will see some significant improvements in that, in the SG&A line. The selling part because we think are just being -- partnering with our retailers in a different way. It's more strategic, less reactionary, more about truly driving incremental sales and less about margin enhancement. And we both win. That's the goal, is having a win-win kind of promotional activity. And then G&A, we outlined some of the cost savings there, but I do believe that our trend is very positive on both fronts.

[Robert D. Strauss:]

At the retail level, what's happening with shelf space that you have? Staying the same? Is it shrinking down a bit? It should shrink down given your SKU rationalization. But what is going on, on the retail shelf space that you have today?

[Jason P. Macari:]

Well, I think it's safe to say that we probably will see some erosion, at least in the first half of the year. And that comes at both the licensed brand products, specifically Disney probably more than Carter's. Carter's, we have a little bit longer in the contract so -- or an agreement with them. So that will take a little bit longer, and we're working with them very closely, both of them. But I do think that we'll start seeing some reductions there. In midyear, we have some new placements with different retailers. So there's some give-and-take going on. But I think net-net, we'll probably see some less shelf. We'll probably lose a little shelf space. But hopefully, the shelf space we're losing are on items that are either poor margin items or poor performers.

[Robert D. Strauss:]

Okay, last question regarding the direct import program. I don't know what you can share with us, but I was just curious. Right now, your current direct import program, what is the dollar amount as it relates to your sales associated with that program? And what I'm trying to do is get a feel for how far you are with that program and what your eventual target is.

[Jason P. Macari:]

I think we're at probably -- in terms of percentages, I think we're probably 8% or 9%, 8% to 10% of our sales are direct import right now. I think we're probably targeting not much more than 10% or 15%. But it is centered around lower margin goods that we believe are strategic, but that whatever reason, don't carry a higher margin with them. And it just reduces the cost of capital or the capital required to do that business, and it actually streamlines the supply chain, takes cost out for everybody. And I believe it delivers the product on the shelf at a sharper price. So again, I believe that retailers that have the financial capabilities to do it and the operational structure to do it, which are all -- really all of our major customers at this point. It's beneficial to both of us. It reduces the amount of capital that we have in, so that we can in fact deliver the items at the sharpest price, and our return on capital is significantly improved over that. So I would say all in all, it's not meant to be -- we're not saying we're going to do a large portion of our line or -- we're using it in certain categories and selectively around mainly furniture, private label business, and those are the 2 main areas. But if anything else comes up that would be advantageous to do -- to use that program, we have it in place. It does take a bit of time and energy to get it in place because many of the factories have to be approved. There's a quality process that you have to go through. So it's an investment of time and energy. But once you're there, it can be a clean sort of piece of business that everybody wins on.

[Robert D. Strauss:]

Just one more quick question. Obviously, to a lot of us who have been paying attention, big box has been or some big box has been losing market share. Is that market share going to the small and midsized specialty retailers that you're placing a bigger effort on? Or is that big box market share loss going to other big box?

[Jason P. Macari:]

That's a real difficult one to comment on. But I would say generally speaking, the mass merchants are doing well in this economy and they have picked up market share. And I would say that Internet and specialty are holding their own and Internet certainly is growing. It's an interesting dynamic with a mom that's expecting or just had a baby. I mean, there's nothing like sitting there and ordering a product off the Internet so. And having it delivered to the door, especially big bulky heavy items such as furniture or gear. So yes, those particular category of sales continues to grow on the Internet. And I think it just is especially for our demographic, for new moms. It's an awfully convenient way especially with many, many retailers, online retailers offering free shipping and enhancing the deal for moms. So I would say that it's going to a number of different places. I think that many retailers have been very vocal about the whole showrooming aspect of the business and looking for more differentiation, which we support and have tried to support with all of our retail partners. So there is that constant battle between too many products and also giving a retailer some point of difference from the rest of the market. So yes, we -- I would say that it's going to a number of different places, but retail right now is definitely shifting. We all know that. I mean, that's been well-documented in the market or in the news. So everybody's trying to make sure that they're covering it with these multichannel strategies. And so I guess to answer your question, I mean, the market is changing, and it's going in a number of different directions.

[Operator:]

The next question is from Sean McGowan of Needham & Company.

[Sean P. McGowan:]

Hey, I'm back. Just wanted to circle back to the commentary about expectations for the first quarter. Jason, I think you said you expected to show improvement over the fourth quarter. Are you deliberately not saying that you expect it to be profitable?

[Jason P. Macari:]

Well, I think that's a good question. We honestly don't know sitting here. We still have a portion of the month to complete. A portion of the quarter to complete. And it always seems that our last month is our strongest shipping month. So I would refrain from comment. I would say that, it's definitely going to improve from fourth quarter. That we are hopeful that will show an improvement in performance, both EBITDA and hopefully, net income will turn positive, I mean. But we're not commenting on it simply because we're in the thick of it right now.

[Sean P. McGowan:]

Okay. I wanted to go back to the prior question for a moment when you’re talking about direct import. So when you were saying that you expect to increase that, and you made comment that your existing program is with stuff that tends to be lower margin, would you expect that if you increase the amount of business done direct import overall, that it -- the effect on your total gross profit margin percentage would still be negative, but the effect may be on gross profit dollars or operating margin percentage would be positive? Could you help us clarify what the impact is going to be when all the dust settles on that.

[Jason P. Macari:]

Yes, I think that's really a good question, and we've asked ourselves that. The -- it could negatively affect gross margins, but positively affect the gross profit and ultimately net profit. There is -- program costs tend to be different with direct import programs. It tends to be more of a net business versus a program business. And so you could see a negative. I don't think it'll be huge because it's not a huge part of our business. But you could see a tick down in gross margins, but a tick up in net income.

[Sean P. McGowan:]

Okay. And then my final question, regarding getting out of some of these licenses, and I'm particularly interested in your thoughts on the Carter in cribs. Obviously, when you got into that, you thought Carter was a pretty good wedge to get in the marketplace, and that it was a good brand for consumers, and you had a good partnership. Let's just take it for granted that Carter doesn't feel worse any about their license, about their brand than they used to. If somebody else is going to jump in now and you use Carter as wedge, could you wind up facing more competition?

[Jason P. Macari:]

Yes, that's definitely a possibility. The one thing I would say about Carter's is that, it's a great brand. It has a great market presence. And in their core categories, they are really the best in the business. On the flip side of that, our categories are about as far afield as they probably have in their licensing pool. Meaning, gear and furniture are probably more unrelated to clothing and softline than most of their key licensees. Now having said that, we had a tremendous success when we first signed up with them. And the first from -- I think we signed up 4-plus years ago. And the first year or 2, we had very good success. The retailers, for whatever reason, seemed to have moved away from that brand and our -- the 2 categories that we have licensed with them, which are predominately furniture and gear, which would be in home gear, such as a high chairs, et cetera. And so it's for us, we have nothing but good things to say about Carter's. We just felt that for us it was time to invest in our brand, and we believe that we have listings. We're able to get listings in the Summer brand in those categories and the sales have been encouraging. So it was for us, I think, the right move to just focus on our own brand, simplify our business model. It does take time and energy to manage licensed brands, which stands to reason, I mean, they have their own internal needs, and you need to be compliant with all the things that they set up for their licensees. So what I would say is, it just simplifies our business model. We think that we won't lose a whole lot of business because of it. There will be some certainly. But net-net, I think that it will be a positive for us, and it really allows us to simplify our business model and focus on our own brand. And much of the crib business for instance will convert over to Summer branded product. The gear, we were honestly had come down to a pretty modest number, and I think that will convert over mostly to Summer. And Disney, there's some pieces of business you just simply can't convert over because it's so unique being character-based. But there is some parts of the Disney business that we've been able to convert over to Summer programs. So I would say that generally, it's difficult to make these types of decisions. But within our current thinking, our Summer brand has gained very good acceptance in the marketplace. It has good brand recognition, and we need to invest in that. And that's awfully difficult to do when we're trying to streamline overhead and streamline our business model and serve multiple masters. So by focusing on Summer and BornFree brands that we're in control of, we think that we can grow much more profitably and ultimately enhance shareholder value because of the strength of our own brands.

[Operator:]

The next question is from Arnold Brief of Smith & Harris.

[Arnold Brief:]

Goldsmith & Harris. I'm a little confused on the crib furniture side of it, where you seem to be going into direct imports. Correct me, I'm sure I'm wrong. But my impression of that business was, you had to really carry a lot of inventory so that you could service the retailers on a timely basis as oppose to the longer lead time required by a direct import. So that's one question, if you could discuss that. The second one is, do you see any stabilization of BRU's private label program, which they've been going into more and more heavily? And do you think that program, along with the impact of someone like Amazon, has really changed the nature of the industry? I ask the question because it seems to me that what BRU is doing is focusing more and more on their own private label, a couple of key brands and then focusing on some major licenses -- licensee programs, particularly Carter and Disney. So I'm a little bit surprised that you're withdrawing from programs which seemingly on the floor of BRU, they're sort of focusing on along with their own private label and a couple of brands. So we have the furniture question and the competitive issue and the private label program with BRU.

[Jason P. Macari:]

Sure. Let me start with the furniture DI. By moving to direct import, it reduces our inventory by shipping product direct from the factory, direct to retail partner. We have a quality group in mainly China, but also Vietnam that makes sure that the product was made to spec. We test it. We inspect it, and then it's shipped to the customer. We never inventory it. So by going to direct import, it reduces the amount of inventory and ultimately, the amount of capital we have in that category. And I think that's the only way really to service the major retailers with their -- the margin requirements needed in those categories. So I think that it's actually a positive pickup from an inventory standpoint when you go to DI.

[Arnold Brief:]

Well, I think -- excuse me, I think it's a positive impact on your inventory and your capital investment. There's no question about that. My question is more to the point of, can you service those people properly without carrying that inventory, particularly if your competition is carrying inventory and willing to carry that inventory? You're forcing the inventory on the retailer and if your competition isn't doing that and can service the retailer, doesn't that weaken competitive position?

[Jason P. Macari:]

Yes, actually, thanks for clarifying it. I didn't quite understand that part of the question. We do, in some cases, hold some kind of safety stock. Oftentimes, retailers, a big ODI will require us to carry a couple of weeks of inventory, so that if they see any spike or if they see anything happen, and we'll cycle that through every 3 or 4 months. That, we do, do that. So it's not the kind of situation where you can totally eliminate carrying some inventory in that category. But I think it's the 80-20 rule. We'll move 80% of it to DI and carry the 20% needed to service the accounts. So I think it's a good question, but I think that they -- most major retailers are comfortable with this type of program in categories that are somewhat predictable, like these types of categories. Did that -- are you comfortable with that?

[Arnold Brief:]

I understand the answer.

[Jason P. Macari:]

Okay. Babies "R" Us private label, I know that they continue to develop private label products. We certainly participate, I think as I mentioned in the past, in their private label program. I honestly can't predict the future. All I can tell you is that, we're very happy with our level of -- the level of commitment from Babies "R" Us with our branded merchandise, and we're here to support their needs. They're a great partner and we'll continue to, I think, grow with them. So it's a part of their business, not their whole business. And I think that they recognize the need for a balance between national brand and private label. So I can't predict where it's going to go, what kind of balance they'll strike. But I can tell you that they've been very supportive of our brand and of our product development efforts and within our key categories. So I'm happy with that. The license product piece is an interesting comment. If you look back, I would agree with you. If look in the rearview mirror, I would agree with you. But not everything has worked in that arena, and I can only comment on our piece of business. And not everything that was licensed was working. And in addition to that, when we've moved from a licensed product to a branded product, our brands or even private label, I can tell you, our brands in some cases have worked much, much better. So not everything works when you license products. It's -- I can just tell you that everything we touched that we've licensed did not work. And I think sometimes, our brand actually performs better in certain categories. Just to give you a simple example, our bath line, we think, performs extremely well at retail. And some of the brand -- the licensed product that we put on the shelf did not perform nearly as well. And just the way it is, and so we're encouraged by that.

[Arnold Brief:]

Could I squeeze in one more question?

[Jason P. Macari:]

Yes, you're asking about Amazon too. The thing about Amazon changing the nature of -- I mean, the Internet and web sales absolutely is changing the nature of the business. Amazon is a good customer, too. And I think the challenge there is -- I don't know if there's any secret, but there's a third-party aspect of Amazon that sometimes drives prices down and hurts everyone. And that's the -- I think that's the challenge for most branded companies today is how to manage that and not let it hurt your -- the customers that are kind of full priced customers. So that's the challenge, right, by full price, I mean, full retail price. That's the challenge, is not letting discounting hurt you in the Internet space.

[Arnold Brief:]

Last question. When you go into the store, you can see your strengths in safety, bath, monitors, a few categories like that. I think historically you've been strong. I'm just wondering, your venture into some of the soft goods, the SwaddleMe line, bedding, you have some bedding on the back wall now. Are those lines successful enough to be encouraging and expect them to continue? Or are they some of the SKUs that you're cutting back on?

[Jason P. Macari:]

I think that's a great question. No, that's a great question. Because in our 8-K that we put out, there were some question about specifically furniture, gear, and we call it softlines. And furniture and gear, we are invested in. We are continuing to develop in. We're gauging our investment because we have many products that are already developed that we just simply want to sell, so that doesn't require any additional development investment. But we're going to strategically invest. On the flip side of that, the softlines has been our excellent performer. I mean our SwaddleMe line of products is #1 in the marketplace in swaddling. It's really become, I think, a brand of choice, and I think it's a great part of our business. And we're going to continue growing that and developing that. And I think softlines in general has been a successful area for us, and we plan on investing. On the flip side of that, you mentioned back wall bedding and fashion bedding. We're going to be really selective in any bedding that we do. We're -- I would say that we're not " a fashion house", although we are fashionable. We have a fashion team, and we are focused on that. But we are -- I think it's unrealistic for us to try to compete in the fashion business. And so SwaddleMe, although it's fashion, is a very fashionable business. It really is an engineered product that we have. And we'll continue to invest in as I said, and come up with brand extensions and product extensions. So hopefully that answers your question on how we see those categories and how we're going to -- I think the 8-K may have led some people to believe that we wouldn't invest in those categories. That's not what we -- we really were saying was that, we are evaluating them and analyzing the return and adjusting our investments accordingly. But then we have some great products. Our new car seat and stroller, I think, is awesome. Not to get everybody too excited, but I really think it's a great product. I'm excited to see that out on the floor and see it sell, and I'm really excited. The SwaddleMe line is doing extremely well, so I'm happy with that. And our furniture line, the model that we are building I think will -- if we can get everything converted over, I think it's going to be a very successful piece of the business. And one of the key things that we as a company believe in is first touch products with mom. And so we want mom and dad when they're seeking out their first products prenatally or after baby is born, we want them to be looking for Summer products. So although furniture is a low margin business, we do believe it strategically can help us, our brand building and help the business. And deliver profitability.

[Arnold Brief:]

Okay. I guess what I was sort of fishing around a little bit is that when I go through the store, a lot of your presentation today is focusing on core products and reducing SKUs. And it sounds like you want to be in the products where you have some critical mass and brand strength, et cetera. And when you go through the store, you see that in the monitors or the bath, the safety. You see it in the SwaddleMe line. When you look at the cribs, I think in BRU the last I saw I think it was 1 crib, 1 SKU of a crib on the floor. And going to bedding, there's 1 SKU. It's really not a critical mass in terms of presentation on the floor versus your competition versus the licensed brand versus Heidi Klum, et cetera. So I was a little surprised that you're still focusing on some SKU areas, which you don't seem to have the same strength as you do in some of your other areas.

[Jason P. Macari:]

Yes, I think that's a fair comment, but I think if you -- your numbers probably aren't quite accurate. We actually have multiple programs that they've addressed in both bedding and furniture. We also have programs with other retailers and as we convert the licensed products into Summer brand I think you'll see a greater presence in those categories.

[Operator:]

We have no other further questions in queue at this time. I'd like to turn the floor back over to Mr. Macari for any additional remarks.

[Jason P. Macari:]

Thank you, all, for joining us on today's call. And we look forward to speaking with you in the next couple of months for the first quarter release. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.