Summer Infant (Nasdaq:SUMR) could have been a really interesting growth story. There's certainly a big enough market for infant/child products, and the company's position with Toys R Us gives it a platform whereby acquiring smaller companies (especially those lacking good retail distribution) can be highly leveragable. Unfortunately, it's just not working out to plan, and I have to question whether management is being entirely candid with shareholders as to the company's real problems.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Another Disappointing Quarter
Disappointment has started to become the new norm for Summer Infant, and this second quarter was no exception.

Sales performance wasn't impressive - revenue didn't miss estimates by much, but 1% growth is hardly something to celebrate. Likewise, while companies that depend on sourcing from China have had to absorb higher labor costs (as well as commodity costs), gross margin was actually not terrible - it rose 50 basis points from last year. Operating performance was poor, though, as operating income fell over 80% and adjusted EBITDA dropped by more than half. At the bottom line, the company reported a loss of 0.02 per share instead of the 9-cent profit that analysts expected.

SEE: Understanding The Income Statement

Management's Explanations and Plans Seem Questionable
To me, what's even worse about the quarter is how management looked to explain it. Yet again, Summer Infant management tried to pin its sluggish performance on a "weak retail environment." So why did Hasbro's (Nasdaq:HAS) preschool business (which includes Playskool) see 6% growth? Why did Mattel's (Nasdaq:MAT) Fisher-Price grow 2%? Why did Newell Rubbermaid (NYSE:NWL) see low-teens core revenue growth in its baby and parenting segment?

Likewise, the company talked about retailers delaying purchases ahead of new baby monitor releases in July. Although that may have been at least partially true, retailers also cut back their purchases when they can't sell the product they have. Moreover, why didn't management talk about a big buy-in for those new monitors?

Last and not least, I wonder about management's response to these challenges. I do respect the company's need to cut operating expenses, but cutting promotional and advertising spending seems like a bad idea. If Summer Infant isn't willing or able to invest in in-store promotion for its products at Toys R Us, Walmart (NYSE:WMT) or Target (NYSE:TGT), how are they going to reverse their lagging sales performance?

Where's the Path to Recovery?
For a company/stock I once found potentially interesting, I'm seeing a lot that concerns me today about Summer Infant. The company has a meaningful amount of debt on the balance sheet and the company may not have or get all the time it needs to sort out its operating issues.

At the same time, I'm not sure where the company's core efficiencies lie anymore. There really aren't any notable brands that the company can readily build around and problems with a bad product introduction a little while ago lead me to question the company's ability to execute. Let's also not forget that some key executives left over the past year (the COO in October of 2011 and the CFO early in 2012), and those departures don't really seem ill timed.

The Bottom Line
If Summer Infant can resuscitate its sales growth, there's still a lot of potential for the shares. Unfortunately, it doesn't look at this point, as though the company can take acquired properties and really build upon them. Worse still, Summer Infant doesn't have the "must stock" gravitas of Fisher-Price or other well-known brands and retailers will stop carrying their products if they don't sell.

SEE: 5 Must-Have Metrics For Value Investors

If Summer Infant can generate $350 million in sales in 2017 and lift its free cash flow margin into the mid-single digits, these shares could double from here. Both are looking like increasingly big "ifs," though, and investors looking at Summer Infant as a growth-turnaround story need to appreciate the challenges that management has yet to fully address.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!