Summer Infant, Inc.
Q1 2014 Earnings Call Transcript

Published: 14 May 2014

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant Q1 2014 Earnings Call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions) I'll now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

[David Calusdian:]

Good afternoon and welcome to Summer Infant's first quarter 2014 conference call. On the call today are Chief Executive Officer; Carol Bramson; Chief Financial Officer, Paul Francese; and Chief Operating Officer, David Hemendinger. By now, everyone should have access to the Q1 news release, which went out today at approximately 4 o'clock Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Summer Infant's website at summerinfant.com. This call is being recorded and webcasted, and a replay will be available on the company's website as well. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and that management may make additional forward-looking statements in response to your questions. Forward-looking statements or information are based on a number of estimates and assumptions and are subject to a variety of risks and uncertainties, which could cause actual results or events to materially differ from those reflected in the forward-looking statements or information. Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects or similar references to the future. Examples of forward-looking statements include, but are not limited to, statements management makes regarding the company's future financial performance, business prospects and operating strategies. There are many factors that can result in actual performance differing from projections and forward-looking statements. Please refer to the risk factors detailed on the company's Annual Report on its Form 10-K for the most recent fiscal year and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or should underlying estimates or assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information. The company does not expect to update forward-looking statements or information continually as conditions change. During the call, management will make references to adjusted EBITDA. This metric is a non-GAAP financial measure, which the company believes helps investors to gain a meaningful understanding of changes in Summer Infant's operations. For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures including in today's financial results release. And with that, I'd like to turn the call over to Carol.

[Carol Bramson:]

Thank you, David. Good afternoon, everyone, and thank you for joining us today. I am pleased to have the opportunity to share with you the first quarter financial results and operations update for Summer. We have seen improving trends in our revenues and earnings performance for the first quarter and are happy to report positive net income for the period. We are excited about the order activity we're seeing from our retail partners and consumer demand appears to be improving both in-store and online. As you'll see in the Q1 report, sales increased 14% from Q4 2013. We also improved gross profit, as margins increased 94 basis points and selling expenses decreased by 21% when compared with last year. We achieved this through an improved mix in the products sold, which is in line with our objective to focus on higher margin branded products. In addition, our increased oversight and focus on cost containment, particularly in the areas of cost of goods sold and selling expenses, helped support improving trends in earnings. We expect this sequential improvement to continue in both revenues and earnings for the remaining quarters of the year. We are committed to our mission of providing consumers with safe and innovative products to best serve their child caring needs. With this important value principle in mind, on April 23rd, we issued a voluntary recall of rechargeable batteries found in select video monitors. We had received notice that some consumer incidents involving overheated batteries and experience in increased rate of currents in March of this year. Given our concern for the consumer and with an abundance of caution, we contacted the CPSC and hired a third-party investigator to identify the cause of the incident. The investigator firm carefully reviewed all monitors, batteries and charging devices involved in a recent incident. In each case, the batteries were found to have an internal defect and were determined to be responsible for the overheating incidents. The monitors' charging circuitry and power chords were all found to be working properly. Included in our financial report for Q1 is an accrual of $300,000 to cover expenditures associated with the recall. We are working with our monitor supplier and the battery manufacturer regarding this situation and will seek reimbursement for all costs incurred by Summer in addressing this issue. We are pleased to report that we've received positive support from both parties and will continue to work closely with them throughout this process. To better serve the consumer, we have added resources to our customer relations department and extend our hours of service. We will continue to implement processes and mobilize resources as necessary to improve the experience for consumers whenever they contact Summer with service needs or questions. As I indicated in my opening remarks, we are seeing improving trends in the market demand for our products. The primary areas of growth include

[Paul Francese:]

Thank you, Carol, and good afternoon, everyone. Details of our results are available on our press release that was issued this evening after the market closed and our Form 10-Q filing with the SEC. And I encourage you to review these documents. Net revenues for the first quarter of 2014 were $50.8 million, up 13.6% compared with $44.7 million in the sequential fourth quarter of 2013 and down 14% compared with $59.1 million in the year-ago quarter. The sequential increase was due to growth in certain customer counts in our core branded product offerings, particularly in our nursery, monitor, gear and safety product categories. The year-over-year decline in revenue was primarily attributable to exiting our licensing arrangements with Carter's and Disney that focused on building our own Summer and Born Free printed products, a decline in monitor sales and phasing out of low-margin furniture items. As of the end of Q1 2014, we no longer have any Carter's or Disney product in our inventory. Gross profit for the first quarter of 2014 was $16.4 million compared with $14.4 million in the fourth quarter of 2013 and $18.6 million in the first quarter of 2013. The sequential improvement in gross profit dollars is attributable to the mix of products sold, primarily driven by the nursery and monitor product categories. The year-over-year decline in gross profit dollars is attributable to lower sales volume, driven by exiting Disney and Carter's and reducing furniture sales of less than 5% of total sales. Gross profit as a percent of net sales was 32.4% for the first quarter 2014 compared with 32.3% in the fourth quarter of 2013 and 31.4% in the first quarter of 2013. The year-over-year improvement was the result of a favorable mix of higher-margin products and improvement in product margins resulting from product cost reductions actions taken in 2013. General and administrative expenses were $9.5 million in the first quarter of 2014 compared with $9.8 million in the fourth quarter and $9.6 million a year ago. Excluding one-time charges associated with our leadership change and other restructuring charges totaling $747,000 in the first quarter 2014, general and administrative expenses declined by 9%, which is attributable to the cost reductions initiated in 2013. Selling expenses were $4.4 million for the first quarter of 2014 compared with $4.8 million in the fourth quarter of 2013 and $5.6 million for the first quarter of 2013. The sequential and year-over-year decrease was primarily attributable to reduced sales and lower royalty cost due to our strategy to discontinue certain licensing agreements. Royalties declined by $510,000 year-over-year and we expect royalty expense will be down by about $2 million for the full year. We also improved control over co-op advertising spend, which was down $635,000 in the quarter. We reported net income of $0.2 million or $0.01 per diluted share in the first quarter of 2014 compared with a net loss of $1.7 million or $0.09 per share in the fourth quarter of 2013 and n et income of $0.4 million or $0.02 per diluted share in the first quarter of 2013. Our net income included a reserve of $300,000 related to the voluntary recall of batteries manufactured in 2010 through 2012 in certain of our video monitors. This expense is related to the battery, postage, shipping, customer care resources, certain professional fees and reflects a shared expense from our monitor supplier. Adjusted EBITDA for the first quarter of 2014 was $3.8 million compared to $0.9 million in the fourth quarter of 2013 and $3.9 million in the first quarter of 2013. Adjusted EBITDA for the first quarter of 2014 includes $1 million in permitted add back charges compared with $0.9 million in the fourth quarter of 2013 and $0.4 million in the first quarter of 2013. Now turning to the balance sheet, as of March 31, 2014, we had $2.6 million of cash and $49.5 million of debt compared with $1.6 million of cash and $49.7 million of debt on December 31, 2013. Since completing the restructuring of our debt in Q1 of 2013, we had been focused on reducing debt and have decreased our debt level by $14.2 million in the past 12 months. Our current borrowing availability at March 31, 2014, was $10.6 million. We're also focused on managing working capital. Inventory at March 31, 2014, was $33.7 million compared with $38.4 million at December 31, 2013. Due to the higher sales in the first quarter, we consumed safety inventory to satisfy customer orders. Some replenishment of safety stock will occur in the second quarter. Inventory turns improved to 4.2 turns in March 2014 compared with 3.3 turns at the end of December 2013. Trade Receivables as of March 31, 2014 was $36.9 million compared with $34.6 million as of December 31, 2013. Days sales outstanding improved to 61 days at the end of March compared with 63 days at the end of December 2013. Accounts payable and accrued expenses as of March 31, 2014, was $29.8 million compared with $31.7 million as of December 31, 2013. We procured inventory on credit terms and our current practice is to submit payments weekly. These working capital improvements reduced the company's year-over-year investment in working capital by $15.0 million. To sum up, we are operating with a much leaner and more streamlined organization today than we were just a year ago. Our strategy is to return to consistent profitable growth, improve margins, enhance shareholder value. We are doing this through a continued focus on leading innovation, strengthening partnerships, promoting core brands and delivering operational excellence. With that, I turn the call over to the operator. Carol and I are ready to take your questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of Steph Wissink with Piper Jaffray.

[Steph Wissink:]

I noticed in your comments that it sounds like you're really gaining some ground and reestablishing your strategy to kind of rebuild the practice around consumer insights. So wondering if you can talk a little bit about the philosophy of the company and if that was lost or something that you've kind of brought back in terms of the insight in process and then some of the insights that you might have gained from some of these events. How quickly can you react to changes in marketing plans or product development to really respond to some of those insights?

[Carol Bramson:]

Well, I believe that incorporating consumer insights into our innovative activity has always been a part of Summer's strategy. Recognizing that we want to be closer to the consumer going forward and enhance upon that in today's digital world, we are leveraging online capabilities as well as the participation in these events to really learn as much as possible about the trends and let's face it, today's mom is different than she was even a few years ago and particularly in the way that she shops and the types of information that she needs and the information resources she seeks in order to make decisions. So we are utilizing all of our various factors in order to try and gain as much information as possible. We've also kind of reenergized our research capability within Summer, where we're doing targeted research studies in select areas, particularly aligned with our product grouping, to better understand what mom is looking for, how she is making decisions, what type of information resources she has. In addition, we continue to invite moms and babies into our Rhode Island showroom to get direct feedback from them as well as testing of new products, which is hugely beneficial. In today's world, we're fortunate to have the opportunity to react in real time as we get this new information whether it's from one of the events that we're attending or feedback we're getting from some of these survey information and we're incorporating that into our product development teams.

[Steph Wissink:]

It was nice to see the gross margin improvement. I think some of that was from mix. But can you talk a little bit about the pricing strategy year-over-year as you concentrate on these kind of core businesses for the Summer brand?

[Carol Bramson:]

Yeah, we definitely have seen improvement in gross margin associated with our product mix and a reduction in close-out sales volume that we experienced last year. We are carefully reviewing our pricing options relative to our more innovative new products and doing what we can to value price in the marketplace today. We're also very sensitive to our cost position and identifying ways to maintain quality, but also focus on cost savings opportunities where available.

[Steph Wissink:]

I think we talked about this in the past, but looking at a run rate of revenues, is the cost structure in appropriate level now? Or as we start to see the sequential improvements in revenues, are you looking to invest as the sales rebuild and what would be those areas of investment if you were to deploy some capital?

[Paul Francese:]

I mean our focus has been to look at our company and only grow in areas that we can make a reasonable margin and profit. We've reduced the cost structure to a level that we feel comfortable right now. We will though add resources where we need to and we have already done that. We've brought in new talent in our product development area, new talent in our sales organization. So we're going to be very strategic when we do add cost to the organization. But we are going to be very prudent and very diligent in making sure the cost structure is maintained and controlled and it's only going to be in selective areas.

[Operator:]

Our next question comes from the line of Dave King with ROTH Capital Partners.

[Joe Bess:]

This is actually Joe Bess for Dave. I guess my first question is regarding kind of the online business and what percentage of your SKUs right now are offered online and kind of where do you think that could be as we look out this year and maybe into next?

[Carol Bramson:]

A large percentage of our SKUs are offered online today. And that's a good reason for part of the growth that we're seeing. We continue to add SKU proliferation across different online retailers where available, including with some of our brick and mortar retailers as well on their dotcom sites.

[Joe Bess:]

As we move closer to the back half of the year and we look at the topline growth and it sounds like you guys have been seeing some positive trends in nursery and the WiFi monitors. Can you give a little bit more color into what you see is really driving growth? Is it continued positive trends in those categories or new products as well?

[Carol Bramson:]

It's a combination of new products. Clearly, we've seen strong demand in market acceptance of our new monitor launch and we're expecting to continue to see that throughout the year. We've also expanded our footprint, particularly in our nursery segment with select retailers where we have much broader offering to provide including (inaudible) regarding that category. And we're also seeing some additional retailers picking up some of our new innovation, particularly in our 3D lite stroller area.

[Joe Bess:]

As we kind of look at your guys' SG&A and with the growth that you're seeing on the topline, I was just trying to get a sense of what sort of operating leverage we should be seeing in the back half as you guys kind of keep SG&A stabilized. Is there any sort of color you can give around that?

[Paul Francese:]

Joe, one thing to keep in mind is that if you're doing year-over-year comparison, in 2013, we had approximately $18 million of sales in branded products, Disney and Carter's that are not going to be in our numbers again this year. So we're not anticipating sales growth, because we're seeing some headwinds because of that year-over-year comparison. We're going to grow our business in our core categories using our own brand Summer and Born Free. And we are planning on leveraging our SG&A as we grow the business in the future. I don't feel a lot of leveraging this year because of the year-over-year comparison I just mentioned.

[Operator:]

Our next question comes from the line of James Fronda with Sidoti & Company.

[James Fronda:]

Are you guys seeing any benefit at all from weather right now?

[Carol Bramson:]

That's interesting. We've seen some increase in our order activity as we commented earlier. Clearly it's kind of stroller season and we're noticing the volume there. We also have a very attractive new playard gate that we're offering and we're seeing strong demand from our retailers in terms of interest and putting that in their stores this summer.

[James Fronda:]

And, Paul, the decline in the D&A for the quarter, what was that in relation to?

[Paul Francese:]

If you remember, back in 2012 and 2013, we started to limit our investment in new CapEx projects. So what you're seeing is that because we hadn't invested heavily in those two years that our D&A has actually been reduced this year.

[James Fronda:]

And is there any chance, I guess, with the new products development team that you guys eventually lay off from the core products and introduce new categories?

[Carol Bramson:]

Our focus is on our core categories today, demonstrating the strength that we have there and continuing to develop our brands and the reputation for quality products in most categories. So we're very much focused on where we're winning and SKU extension and product additions that enhance that positioning.

[Operator:]

Our next question comes from the line of Robert Straus with Gilford Securities.

[Robert Straus:]

I have a few questions. And the first one is what percentage of your first quarter revenue was generated by new product introductions?

[Paul Francese:]

It all depends, Robert, on how you measure that. The way that we've measured is if it's a new item number in the last six months, then the sales in the first quarter was about $8 million.

[Robert Straus:]

And the inventory limitations that you discussed earlier in the call, was that only in WiFi monitors or also other products?

[Carol Bramson:]

It was in WiFi monitors definitely, but also in some other more popular products.

[Robert Straus:]

Have you estimated how much that shortage of inventory hurt sales in the quarter?

[Carol Bramson:]

We have begun to do some of our own calculations and haven't really zeroed in on the exact number on that. But it would have been a meaningful contribution to the quarter.

[Robert Straus:]

Where we are today, where is the demand/supply ratio for those products that you saw limitations in the first quarter, are we in line now or are we still catching up?

[Carol Bramson:]

So we are anticipating being pretty much in line by mid to late-May with all of those products and the very strong demand we're seeing from our WiFi product offerings. We'll continue to experience some limitations just as we're trying to catching up with that demand.

[Robert Straus:]

And then just to stick with revenues also for a second, if we were to think about the small business customer that you have specialty online retailer, what percent of revenues did they generate in the first quarter?

[Paul Francese:]

When we look at our specialty accounts, they're still a smaller part of our business, about 5%. But if you want to look at some of the real growth areas, Robert, we look at international and a segment of our international business called APLA, Asia Pacific Latin America, grew by 25% in the first quarter. We've had a very nice growth in those areas and they've been almost untouched by us in previous years. So we expect that growth to continue. Also, our e-comm sales, as Carol mentioned earlier, grew by 11%. But if you dig deeper into that number, our largest e-comm retailer grew by 19%. So I think there's tremendous growth in our e-comm business and we expect that to accelerate in the year.

[Robert Straus:]

And what percent of sales was international and then separately e-commerce?

[Paul Francese:]

International was normally about 15% of our business and e-comm in the first quarter was 15% of our overall business. And that was actually up by 4% year-over-year.

[Robert Straus:]

Did you say both of them were 15%?

[Paul Francese:]

That's correct.

[Robert Straus:]

Last question from me regarding gross profit margin, I see that increased year-over-year to 32.4%. Just give us some guidance of what do you think will occur going forward over the remainder of this year. I think Carol had said that revenues and earnings will improve sequentially. Is that the trend expected on the gross profit margin line?

[Carol Bramson:]

It is expected on the gross profit margin line, definitely. We are forecasting improvements above the 32.4% which we have reported for this quarter.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Ms. Carol Bramson for closing comments.

[Carol Bramson:]

Thank you and thank you all for joining us for today's call. We look forward to speaking with you next quarter. Take care.

[Operator:]

Thank you. That concludes our conference call. Thank you for joining us today.