Summer Infant, Inc.
Q2 2013 Earnings Call Transcript

Published: 14 Aug 2013

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant's Second Quarter 2013 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 introductions. Please go ahead, sir.

[David C. Calusdian:]

Good afternoon. On the call for the company are Mr. Jason Macari, Chief Executive Officer; and Mr. Paul Francese, Chief Financial Officer. By now, everyone should have access to the Q2 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. As I'm sure you all know, we are executing on a new strategy to improve operations and enhance profitability. I'll start the call today by providing an update on our progress with that initiative and then discuss how we plan to grow revenues going forward. Three quarters into our profitability improvement initiative, we are on track and our efforts are being reflected in our Q2 results as we reported higher adjusted EBITDA year-over-year on lower revenue. As part of this initiative, we have taken aggressive steps to lower our cost structure and this has resulted in 28% and 15% year-over-year reductions of Selling and G&A expenses, respectively, for Q2. In addition, we are improving profitability by rationalizing licensed and certain unprofitable or low-margin products. We are now focused on investing in our own core brands, Summer and Born Free. As of today, we no longer have Disney products in inventory, and we expect Carter's inventory will be gone by the end of the year or Q1 '14. Both Disney and Carter's are solid brands, but we are determined -- we have determined it would be more profitable to selectively invest in brand marketing and advertising with a goal of generating greater awareness and sales of our higher-margin core Summer and Born Free-branded products. We've discussed our efforts to reduce SKUs -- SKU count on past calls, and we made additional reductions across all product categories in Q2. When we return to the ABC Kids Expo in Las Vegas in October, we'll be presenting a leaner, more focused product line. Revenues were down 13% year-over-year as a result of lower sales to a large customer, but also to the lower SKU count and elimination of the low-margin licensed products. Most product category sales were flat to slightly down during the quarter with the exception of our core Safety category, which increased from the second quarter of 2012. We had previously discussed the negative but temporary effect that some of our bottom line improvement initiatives would have on the top line. Let me talk for a few minutes about what we're doing to increase the top line as we go forward. The mass merchants we sell to continue to be our largest customers and we're working collaboratively with them to grow sales. We also are working hard to further diversify our customer base and expand distribution of key products. In Q2, sales to small and mid-sized specialty customers, as well as alternative channels, including home centers, increased 20.5% year-over-year. There is significant opportunity for growth in these channels so we are investing in our sales force in order to build new customer relationships. A key component of our customer diversification strategy is to increase our international presence. We have a pretty solid footprint in the U.S., U.K. and Canada, but we are currently targeting new markets with untapped potential. Another future area of growth for us is the Internet. The ease of shopping online has become a very important part of the overall juvenile market and our relationships with the major players in that space have become increasingly important to our success. Since more than 20% of our total business today is Internet-based, we are very focused on leveraging the e-comm space. We have partnered with all of our customers that sell online to promote our products. It has become a significant objective for us to better understand how to leverage our products in a more robust way and to try to maximize our sales online. You may have noticed we launched a new e-commerce website in the past few months. This also serves as a key tool to make it easier for our e-commerce partners to get information and images of our products during the sales process, as well as to support our marketing efforts. Ultimately, delivering innovative products that delight our customers, moms, dads and caregivers is what drives our business. Our development teams are working hard to drive product differentiation and bring new products to categories where we already have a strong presence. We also will consider acquisitions of existing innovative products that we believe will contribute to both our top and bottom lines. For example, in June, we acquired the assets of Little Looster, a designer and manufacturer of the award-winning Little Looster potty-training step stool. The Little Looster is a highly rated mom-invented product that broadens our Safety category. We are confident that through the wider reach of our distribution channel, we can bring this product into significantly more homes around the world. We are now focused on a more narrow group of product categories within a streamlined organization. The categories include Monitors, feeding, Safety, Gear, furniture and Nursery. We have a number of new products coming out across all categories starting in the second half of 2013 and into 2014. We're seeing a lot of excitement in the markets around -- surrounding the launch of our Peek WiFi monitors, which are expected to start shipping in September. The new WiFi monitors are less expensive than the legacy monitor and have more functions including allowing parents to access their camera anywhere in the world through any smartphone, tablet or computer. In addition, we are launching several other upgraded monitors at lower price points. In October, we are returning to the ABC Kids Expo in Las Vegas where we plan to make a splash by introducing many other exciting new products, and we hope to see some of you there as well. Before I turn the call over to Paul for the financial review, I'll conclude by saying that we're on track with our profitability improvement initiatives and that progress is reflected in our financial results this quarter. On the top line, the elimination of licensed products and the reduction in SKU count is having a negative effect on our revenues and we have a few quarters to go before our new products really ramp up and contribute in a meaningful way to sales. In addition, we expect that a major promotion that we are partnering on with a large customer in September will have a short-term drag on gross margin in the third quarter. We expect that this promotion, however, will yield positive top and bottom line results in 2014. This is in line with our strategy to focus only on promotions where we expect to see tangible results in both revenue and profitability. I'll now turn the call over to Paul for a review of our second quarter financial performance. Paul?

[Paul Francese:]

Thank you, Jason, and good afternoon, everyone. Details of our results are available in our press release that was issued this evening after the market closed and our Form 10-Q filing with the SEC. I encourage you to review these documents. Net revenues for the 3 months ended June 30, 2013, decreased 13% to $53.8 million from $61.7 million for the same period a year ago. As Jason mentioned, the decline was attributable to sales of discontinued and low-margin product SKUs throughout our product categories. In addition, we saw a decline in sales to a large customer. Gross profit for the second quarter of 2013 decreased to $17 million from $20.8 million a year ago. Gross profit as a percent of net sales decreased to 31.6% in Q2 2013 from 33.7% in Q2 of 2012. The decline in gross profit dollars is attributable to the decline in sales and the mix of products sold. It was a result of the product SKU reductions and activities related to the discontinuation of certain licensing agreements. In the second quarter of 2012, gross profit included the benefit of $628,000 of a supplier volume rebate credit, which did not repeat in 2013. General and administrative expenses decreased to $9.3 million in Q2 2013 compared to $10.9 million in Q2 2012. This 15% decrease in G&A is attributable to the cost reductions we initiated in 2012 and in the first quarter of 2013. Selling expenses decreased by 28% to $5.6 million in the second quarter of 2013. The decrease was due primarily to lower sales, as well as additional cost controls implemented over retail program costs such as promotions, consumer advertising, cooperative advertising, as well as lower royalty costs. Depreciation and amortization decreased 10% year-over-year to $1.6 million for the second quarter of 2013. The decrease is due to a reduction in capital investment as a result of disciplined capital expenditure management. It was partially offset by higher amortization on newly defined finite-lived intangible assets established in the fourth quarter of 2012. Interest expense for Q2 2013 of $0.9 million was up 3% from the same quarter a year ago as a result of higher interest rates. We expect interest expense attributable to our new credit facilities to be lower than our prior loan agreement on similar debt levels going forward. For the second quarter of 2013, we recorded a $0.2 million tax benefit compared with a $0.1 million tax benefit a year ago. We reported a net loss of $0.3 million or $0.02 per share in the second quarter of 2013 compared with a net loss of $0.4 million or $0.02 per share in the second quarter of 2012. Excluding permitted add-back charges and special items in the 2013 period, adjusted net income was $0.2 million or $0.01 per diluted share in the second quarter of 2013. There were no adjustments to net income for the second quarter of 2012. Non-GAAP adjusted EBITDA for the second quarter of 2013 was $3.3 million compared to $2.5 million in non-GAAP adjusted EBITDA in the second quarter of 2012. Adjusted EBITDA for the second quarter of 2013 includes $0.8 million in bank-permitted add-back charges. Now turning to our balance sheet. As of June 30, 2013, the company had $3.5 million of cash and $49 million of debt. This compares to $31 million of cash and $65.5 million of debt at year-end 2012. This represent a $16.5 million reduction in our debt balance. The reduction of our debt has been a key focus of our company and since September 30, 2012, we have reduced our debt level, net of cash, by approximately $20 million and our current borrowing availability at the end of the quarter was over $20 million. The management of the company's working capital has been a key focus. Inventory as of the end of Q2 2013 was $41.7 million compared to $47.3 million a year ago. The inventory reduction is a result of our efforts to transition some category sales to direct import, improved forecasting capabilities and a reduction in SKUs. Trade receivables as of June 30, 2013, was $38.5 million compared to $56.6 million as of June 30, 2012. The accounts receivable reduction is a result of improved payment terms with our customers and centralizing the collections function into our corporate office. Accounts payable and accrued expenses as of June 30, 2013, was $38.5 million compared with $39.2 million as of June 30, 2012. Our company purchases its inventory on credit terms and its current practice is to submit payments weekly. These working capital improvements reduced the company's investment in working capital by $23 million year-over-year. Going into the second half of 2013, we will continue to focus on improving working capital management as we strengthen our partnerships with our suppliers and customers. We are already seeing the benefits of our initiatives to drive profitable growth, and we look forward to updating you on our progress as we finish the year and move into 2014. With that, I will turn the call back to Jason for closing comments.

[Jason P. Macari:]

Thanks, Paul. Looking ahead, we will continue to seek opportunities to improve margins and drive profitability by further streamlining operations. In addition, we are investing in our own Summer and Born Free brands, focusing on core product categories and developing innovative new products to drive growth. We're excited about the new products that we'll be introducing in the second half of the year. We have a strong position in the market, and we believe our strategy will result in a return to sustainable, profitable growth, ultimately translating into improved cash flow and long-term shareholder value. With that, Paul and I will take your questions.

[Operator:]

[Operator Instructions] The first question is from Stephanie Wissink of Piper Jaffray.

[Stephanie S. Wissink:]

We have a few questions, if we may. The first question, just as generally to talk about, if you could. The tone of your retail partners in terms of how they're looking at their current rate of business, how they're planning into the second half. If you give us any insights into just what you're hearing broadly across retail from some of your key big-box and specialty partners, that'd be helpful.

[Jason P. Macari:]

Sure. I think most retailers are planning some pretty significant promotional activity in the back half of the year to try to drive sales. I think there is a very conservative feeling that things might be getting a little better. But baby, as you know, has been hit relatively hard this year. But I do think there's some optimism. I've been to all our major customers, I'd say, in the last 3 months or so and I believe there's a bit of optimism going into the fourth quarter. And because September is typically Baby Safety Month, so most major retailers will try to drive some business through that and through advertising and promoting and try to drive some store traffic. So I think there's a conservative optimism that things are going to finally start turning around.

[Stephanie S. Wissink:]

That's encouraging. And then just one here for you, Paul. Is it possible to quantify that hiccup in sales tied to the large customer in the quarter? Is that business that you pick up in the third quarter or is that, at this point, simply just water under the bridge?

[Paul Francese:]

We believe that there will be a pickup with that large customer in the back end of the year as we introduce some of our newer products.

[Jason P. Macari:]

Yes, I think, to add onto that, I think that as we move away from Disney, we're out of Disney now, and as we move away from Carter's, those did represent some significant dollars in specific categories like Gear and furniture. And as we've moved -- as we announced that we were moving out of those licensed brands, I think that the retailers just reacted probably faster than we anticipated and started moving out of those brands quicker. In turn, I think that there's a little bit more of a gap than we would like, quite honestly, between -- I think in the last call, we said that we felt like we would be able to replace roughly 60% of those listings and I think we will. It's just taking more time than we thought and they kind of got out of those listings faster than we thought. But I do think that towards fourth quarter and first quarter, we'll start seeing some improved listings in those categories as well as others like bath, for instance, where we were pretty heavy in Disney and boosters where we were heavy in Disney.

[Stephanie S. Wissink:]

Okay. Just the last one for us, guys, on the direct import program. Sounds like this is an intriguing initiative. I'm just curious if you'd give us a sense of the percentage of your product mix that, that program touches or what categories you might be emphasizing specifically with the direct import.

[Jason P. Macari:]

Well, it was primarily furniture to start with and I think that it's spread a little bit more towards some of the private label business that we've been doing. And in general, furniture and Gear are the bigger, bulkier items that certainly higher cube, less units per container. So it's easier to go direct to a retailer, especially the major retailers, when -- with that equation. Whereas the smaller stuff, we really need to bring into our warehouse and distribute from there. So it's in the bigger, bulkier products and in private label where direct import makes a lot of sense.

[Operator:]

The next question is from Dave King of Roth Capital.

[David M. King:]

I guess, just first off, on the outlook for revenues for the back half. It sounds like just from your comments and then also just from the release that you expect some pretty good growth there still. And in terms of that, I just, I guess I was curious. Is that going to be more on a sequential basis, on a year-over-year basis? How should we think about that? And then with the new products that are coming out, it sounds like those are more slated for September or October. So should we think about that as being more back end-loaded or not over the course of the second half? And then how much traction are you seeing so far in the third quarter as we're about halfway through now?

[Jason P. Macari:]

Yes, I would say that third and fourth quarter are going to be -- personally, I think that they're going to be somewhat flat to where we've been. But towards the end of fourth quarter, I think that we're going to start picking up because most of the major retailers, when they reset, it's not for -- you do get some resets for September because of Baby Safety Month. But January is really when you're shipping. So it's kind of like you're shipping in November, December for January sets. So I wouldn't say that we're going to get large lifts in third and fourth quarter. In fact, we still might be dampened by the Carter's situation where we're exiting some of those categories and whatnot. But I do think that our cost control will stay where it's at. I think our selling costs, other than the one big promo I mentioned, I think will be intact and we're definitely managing to a leaner way of working. And it does feel good in the sense that we're not trying to apply gas to a fire that just isn't burning. We're putting gas where it belongs. And we also are really circling the wagons around our best products and some of these bigger categories like furniture, for instance, there were some listings that just weren't producing any profits. So those are -- we're exiting and that's a lot of the Carter's business, quite frankly. So there's, I think, some real good positive things happening, but I also don't want to oversell it because I really think that there are some things that we're doing that will be dampening our efforts in third and fourth quarter. But the good news is it's getting back to our core, which I think is the right thing to do right now.

[David M. King:]

Absolutely, no, and that's fair. And that actually touches on my next question a bit. So on the expense side, I do think that progress is extremely encouraging. Is it fair then to still kind of assume $16 million in annual EBITDA run rate by the fourth quarter? Or is the thought that maybe that's going to be more first quarter given the Disney and Carter's stuff that you mentioned from the top line?

[Jason P. Macari:]

I think we're still -- our forecast is still basically saying that we're going to get there. But I think both Paul and I feel better about the first quarter than we do about third and fourth just simply because in some of the -- in second quarter, we had to sell some Disney stock at pretty heavily discounted rates. And it's right now kind of unknown how much of that will have to do with Carter's and a few other lines that we're getting out of. So there might be some dampening effect in trying to move through some of the discontinued lines.

[Operator:]

[Operator Instructions] The next question comes from James Fronda of Sidoti & Company.

[James Fronda:]

I guess in terms of investing in your sales force for international growth, do you think that might negatively affect some of the savings that you're achieving right now? Or if it does, it might not affect you till 2014?

[Jason P. Macari:]

I think it's a good question because we've been -- because we're operating, I think, very cautiously, trying to make sure that every dollar is spent in the right way, I would tell you that I don't think it will affect us negatively because we still have a little bit of a tail on some -- certain costs that we have discontinued. So as those kind of taper off, I think that -- and we're not talking about huge resources. We're probably talking about 2 to 4 individuals that we want to apply to certain markets and certain segments of the U.S. business.

[Operator:]

We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

[Jason P. Macari:]

I just thank everybody for joining us today on today's call, and we look forward to speaking with you next quarter. Thanks very much.

[Operator:]

Thank you. Ladies and gentlemen, and that concludes our conference call. Thank you for joining us today. You may disconnect your lines at this time.