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. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  9. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center