Summer Infant Still Colicky

By Stephen D. Simpson, CFA | August 13, 2012 AAA

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.

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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.

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