Summer Infant, Inc. (SUMR) 2020 Q1 法說會逐字稿

Good morning. And welcome to the Summer Infant, Inc. Fiscal 2020 First Quarter Call. (Operator Instructions) Please note that this event is being recorded. I'd now like to turn the conference over to Mr. Chris Witty, Investor Relations Moderator. Please go ahead.

Hello. And welcome to the SUMR Brands 2020 First Quarter Conference Call. With me on the call today is the company's Interim CEO, Stuart Noyes; and CFO, Paul Francese.

I would now like to provide a brief safe harbor statement. This call may include forward-looking statements that relate to SUMR Brands' outlook for 2020 and beyond. These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company's annual report on Form 10-K for the year ended December 28, 2019, its quarterly reports on Form 10-Q and in our other filings with the Securities and Exchange Commission.

During the call, management may make references to adjusted EBITDA, adjusted net income and adjusted earnings per share. These metrics are non-GAAP financial measures, which the company believes help investors gain a meaningful understanding of changes in SUMR Brands' operations. For more information on non-GAAP financial measures, please see the table for a reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued yesterday evening.

And with that, I'd like to turn the call over to Stuart. Stuart?

Thanks, Chris. And good morning, everyone. We appreciate you joining our first quarter conference call today. I'll start by providing an overview of the recent developments, after which Paul will go through our financial results in detail. I'm pleased to say that during a rather turbulent economic time in the onset of COVID-19, SUMR Brands has continued its relentless drive to improve operating performance and bottom line results.

While taking all precautions appropriate to safeguard our employees, we have been fortunate that most of our leading retail customers, be it the big-box chains or e-commerce sites, have continued to operate through very challenging circumstances. I'm sure many of our investors know that such chains as Walmart, Home Depot, Target and Lowe's continue to stay open while Amazon has seen a surge in demand. At the same time, our suppliers in China have, for the most part, come back to near-normal levels of production.

We reported net revenue of $40.3 million for the first quarter, down from last year's $42.5 million due mainly to the COVID-19 situation. As Paul will review further in a moment, we saw strength across many areas such as specialty blankets, strollers, boosters and play yards. But overall, sales were negatively impacted by the closure of certain specialty retailers here in the U.S. as well as Toys "R" Us in Canada.

Our products, where available, were often considered by consumers as essential, and this has remained the case in the current quarter. Moms and dads require a variety of items to care for their young shoulder, and in some cases, such products may even be more necessary now with kids staying home rather than being at school or elsewhere.

Overall, I am pleased with our top line performance given what has been an abysmal period for many retailers and product providers. At the same time, we're ahead of schedule with regard to the more than $7.5 million of annualized cost savings from recent streamlining initiatives, including over $6 million this year.

The company recently subleased a portion of its California warehouse, saving over $1 million annually, and adjusted its Woonsocket lease to eliminate space and save an additional $300,000 in annual expense. As a reminder, we also closed our U.K. operations at the end of March, cutting expenses, and our international product distribution is now handled by a third-party facility in China.

Due to such efforts and aggressive management of working capital, SUMR Brands posted greatly improved cash flow from operations of a positive $4.9 million in the first quarter versus a $7.5 million use of cash in 2019 during the same period. We reduced our debt in tandem this year, and we'll continue to do so. I am also pleased with how our products are trending thus far in quarter 2. Point of sales indications are encouraging, and we remain optimistic about the outlook for our core categories across the channels we serve. We have not changed our thought process on attaining profitability later this year.

Before turning the call over to Paul, I'd like to thank him for his dedication in many years of service at SUMR Brands. He was the CFO here from 2012 through 2014, and then he rejoined the company near the end of 2018. He has faced many unexpected challenges, including last year's trade escalation with China and more recently, the onset of COVID-19. And I'm sure that's added a few gray hairs along the way to Paul.

He has decided to retire at the end of the month, and we certainly wish him all the best going forward. He will be replaced by Ed Schwartz, a seasoned financial professional, who I've known for many years. Ed has had considerable experience in financial turnaround situations. In SUMR, you may recall that he was the Interim CFO of Summer Infant in 2012 just before Paul was hired. He'll be an excellent addition as we execute our path to profitability.

Lastly, I wanted to mention that the company has elected to hold its Annual Stockholders' Meeting later than normal this year on September 9, 2020. This is primarily due to the current restrictions on travel and social distancing, but we look forward to seeing you then.

In closing, I'm pleased to say that SUMR Brands is holding its own in the face of a very unusual and difficult -- in very difficult conditions worldwide. We applaud the efforts by government and medical professionals alike in battling this pandemic, and we believe the company is well positioned to manage its way through this storm.

We are much leaner and innovative organization with products that parents appreciate perhaps now more than ever and are considered essential for the children even in challenging times such as this. I'm proud of our products, our people and the outlook for the company as we approach the midpoint of 2020.

With that, I'll turn it over to Paul to review our financial results in detail. Paul?

Thanks, Stuart, and good morning, everyone. As a reminder, our 10-Q and related press release was issued last night. In addition to listening to this conference call, I encourage you to review our filings.

First quarter net sales were $40.3 million compared to $42.5 million for the same quarter of fiscal 2019. As Stuart mentioned, the company saw growth across many product categories, such as specialty blankets, strollers, boosters and play yards, driven by double-digit growth in our e-commerce channels, including Amazon. However, we were negatively impacted with softness within certain markets, including Canada, and lower sales of some brick-and-mortar specialty retailers due to COVID-19 restrictions.

Gross profit was $12.5 million for the first quarter of fiscal 2020 versus $13.5 million in 2019. And our gross margin as a percent of sales was 31% in 2020 versus 31.6% last year. The lower gross margin largely reflected product mix and the impact of closeout sales, including some related to our closure of the U.K. facility.

Selling expense was $3.4 million in the first quarters of both 2020 and 2019 and as a percent of net sales, was 8.5% this year versus 7.9% in 2019. The increase year-over-year as a percent of sales was primarily due to higher cooperative advertising, digital marketing costs and freight costs.

General and administrative expenses were $8.1 million in the first quarter versus $9.4 million in the prior year period. And G&A as a percent of sales was 20.2% this year versus 22% in 2019. The year-over-year change reflects lower labor and other costs due to the many streamlining initiatives untaken by the company.

As Stuart mentioned, we subleased a portion of our California warehouse this quarter, which will save over $1 million annually, and more recently, adjusted the footprint of our Woonsocket lease to save an additional $300,000 per year. All other cost savings initiatives are on track, and we anticipate savings of approximately $6 million this year.

Interest expense was $1.4 million in the first quarter of 2020 versus $1.2 million last year. The company reported a net loss of $1.2 million or $0.57 per share in the first quarter of 2020 compared with a net loss of $1.4 million or $0.67 per share in the prior year period.

Adjusted EBITDA for the first quarter of 2020 was $1.8 million versus $1.5 million for the first quarter of 2019. Adjusted EBITDA in 2020 included $0.9 million and bank-committed add-back charges compared with $0.7 million in the prior year period. And adjusted EBITDA as a percent of net sales was 4.6% in fiscal 2020 versus 3.4% last year.

Now turning to the balance sheet. As of March 28, 2020, Summer Infant had approximately $0.7 million of cash and $44.7 million of bank debt compared with $0.4 million of cash and $48.6 million of bank debt at the beginning of the fiscal 2020. Our banks recently allowed for an additional amendment to provide flexibility, if needed, during the COVID-19 pandemic, for which we are very grateful.

Inventory at the end of fiscal first quarter was $25.2 million compared with $28.1 million as of December 28, 2019, reflecting ongoing working capital management, and inventory turns increased to 4.4.

Trade receivables at the end of March were $30.5 million compared with $32.8 million at the beginning of fiscal 2020. Days sales outstanding, or DSO, was 68 as compared to 70 at the end of the fourth quarter. Accounts payable and accrued expenses were $33 million as of March 28, 2020, compared to $32.7 million at the beginning of the fiscal year.

The company generated approximately $4.9 million of cash from operations during the first quarter. As Stuart indicated, and at the end of March, we had approximately $5.6 million of availability under our line of credit. We will continue with the paydown of debt, delever the balance sheet as much as possible going forward. Working capital management, cash generation, debt reduction will remain a key priority for us.

Before turning the call over for questions, let me just say that I feel the company is in good shape as I get ready for retirement in the coming weeks. I will be working with Ed to ensure a smooth and orderly transition with my last day in the office being June 30. I will be leaving SUMR Brands knowing that we've made a lot of progress, streamlining our operations and investing in some great product categories, which will make SUMR Brands a much more profitable company. I've enjoyed working with the entire team, the Board and our investors through some very challenging times.

With that, I'd like to turn the call over to the operator and open it up for questions.

(Operator Instructions) Our first question comes from Mr. [Ed Reese], a private investor.

Yes. Stuart and Paul, congratulations on the quarter. Great job getting through a very difficult period. And Paul, just wanted to tell you good luck in your retirement. And I just got a couple of questions to ask you guys.

I know you clearly indicated that the latter part of March, obviously, you saw -- started to see the impact of COVID-19. Stuart and Paul, can you give us an idea, how are sales trending, say, in January, February before you started to see the impact? And can you give us an indication kind of -- you indicated things have kind of been fairly strong here in April and into the first half of May. But if you could give us an update on the sales trends there, that would be helpful.

Yes. I can take that, Paul, and you can add. But look, Ed, thanks for the questions and thanks for dialing in. The -- we see a very resilient business right now. I think it surpassed our expectations to date. We plan for, I don't want to call it the worst, but we plan very conservatively in the second quarter. And we're outpacing what we thought was going to happen as a management team.

Obviously, our customer base has been -- we've been very fortunate to be with some of the majors that are open right now. And as an essential products, that's really played well for us versus some of the real tough times that many retail and suppliers are facing out there right now. So we feel decently optimistic about the second quarter at this point.

Ed, when you look at the first quarter, really was -- really 2 stories in the first quarter. One is that January and February were rather good months for us. In March, we saw a slowdown, but it was really, really focused on only certain categories and channels within our business. It was mostly affecting the mid-tier accounts, the smaller accounts and the specialty accounts and our international accounts. But our other larger retailers, actually, we're still continuing to do very well.

And so we -- going into the second quarter, rather optimistic about our revenue or top line. It's kind of interesting, Ed, when you look at our customers, our top 3 customers make up 74% of our business. And those top 3 customers never close their stores. And they are, if you remember, it's Amazon, Walmart and Target. They've done fairly well during this pandemic. Their stores remain open. And we've seen their e-comm platforms do very well as well as people move to buying online.

So we're optimistic about the second quarter. But I would say, in the first quarter, March definitely was an uncertain month for us as we adjusted to how retail is being impacted by the virus.

Okay. That's great to hear. You guys have maintained that kind of performance. That's just fantastic. The another question I had is when you look at the $6 million of cost savings that you've said that you will likely get this year, how is that going to -- do we get any of that, that will carry over into the second half of the year? Or is most of that going to be realized here in the first half of 2020?

No. No. Look, the second half will be better. Obviously, we didn't start some of this until February, March, the least portion of it, some of the overhead/staffing reductions, things like that. So we'll continue to see that in the third and fourth quarters, Ed.

Okay. Okay. And the last question I had is when -- Stuart, when you've obviously come into the company and you guys have done a fantastic job about managing working capital, doing a lot of cost reduction efforts. And when you look at kind of where the company stands today, how much more can you do on that front in terms of getting more cost out, maybe continuing to work on working capital versus maybe at some point, having to really see the top line start to grow?

Yes. Look, I feel comfortable that we still can find more and get more efficient. You see our inventory numbers come down, maybe we can get better at that, better turns, maybe more direct import as a percent of total in the business. So I do think we still have room there to increase, what I'll call, positive working capital. And we'll continue to work at that.

Look, a lot of little things add up to big things. And I think as we go through the business, we are laser-focused on managing cash for a few reasons, one, though, being this pandemic. I mean, I think everybody out there, any business needed to focus on cash to make sure they were set up to manage through what was a very -- it was an unknown time. So we feel good about that. But we do feel good we could continue to chip away at some of that.

I do not think it is affecting our growth. I think we're just getting more efficient at what we're doing. I think our product teams have done a great job really upping the, what I'll call, pressure on new innovation and things like that, that we're excited about right now, and many of those are in front of retailers and being considered for sets going into late in the year and next year.

Our next question is from [Scott Epstein], private investor.

Stuart and Paul, I'd like to echo Ed and offer my congratulations for a great start to the year, and also wishing Paul his best as he moves on to the next chapter. So it's great to see the sustained performance keep up since the end of last year and obviously going forward into 2020. So that's great to hear.

Okay. So I guess my first question is just on the sales side, the inventory is down to $25 million. And so I guess the question I had was, can you -- it seems like you're confident that you can run the business with inventory at that level or perhaps even lower. And given the traffic in your top 3 customers, I mean, did you see -- are you stocked out in any areas where you feel like you're missing out on some sales? Or do you feel like demand was pulled forward just because the traffic in those channels was so much higher than it had been basically year-over-year?

Yes. Look, the -- and I appreciate the question too, Scott. The trick to any business, I think, especially when you're importing is the whole buy, the forecast/the demand, right, and how good are you at it. And I think our teams, with the renewed focus there between our operations team and our sales teams, are -- they meet very frequently and they do deep dives by SKU.

Look, do we miss stuff? Of course, we do. I think I'd be kidding you if I said we hit everything 100%. And one of the things that did surprise us in this quarter and moving ahead right now is the POS data out there, really, it's green all over the place in many of our categories, which, again, going into the pandemic, we probably would have not guessed that. We'd have thought things would have been tightened up.

So do we have to scramble now and then for product? For sure, we do. But I think the company as a whole, the discipline on the demand and the forecasting now has become much better, which helps us, right? It helps us try not to lose any sales or have lost sales. But we can get better at that, too.

I still -- I don't think the inventory is too low. I don't think that's just a drain of cash if you've got stuff sitting around and you're not turning it. So we'll continue to review, get better at it, pull in inventory when we need to. But we want to continue to up the turns here to a level that we can manage and manage it efficiently on the top line.

Okay. That's great. Sorry, go ahead.

Scott, there are several -- yes, Scott, there are several things that we've done that have allowed us to get our inventory turns up to 4.4 turns. It's really amazing when we look back a year ago, they were 3.4. At the year-end, they were 4.1. And now, they're 4.4. But a lot of work went into getting us to this position.

I mean one of the things to remember is that we've actually looked at our SKUs, and we have cut back our number of SKUs. We have closed our U.K. warehouse. We had $2.5 million of inventory in that warehouse, and we replaced with a 3PL with only about $0.5 million of inventory, servicing our same customers. And we're pushing more of our orders to DI. And I think we've improved our ability to forecast.

So when you collectively look at all that, 4.4 turns is what we've gotten to. Stuart and I both think we can do better, that we could probably get even a higher inventory turn number, but a lot of work went into getting us to where we are today. And we think we can do a little bit better.

Okay. That's great. And obviously, as a long-time investor and hearing about things like this for -- I don't even know how many years, it's great to finally see some of this basically become reality. That's great.

Next question was, so you mentioned the U.K. warehouse and the drag on gross margins in Q1. Are we pretty much through that pain? Do you see a similar amount of closeouts happening in the balance of the year? Or should the gross margin picture improve a little bit? I know mix plays a role here, but just in general, in terms of the closeout impact.

Paul, if you want to take that?

Sure. Yes. No. We believe a lot of -- while all the closeouts for the U.K. warehouse are certainly behind us, that -- all of that inventory was sold off in the month of March. So we felt that pain already. Looking forward, as we kind of reduced our SKU count and as we looked at better turns of our inventory, we did do a lot of inventory cleansing. So I don't believe we'll see very much closeouts in the future.

Also, we are seeing the benefit, as we talked about before, on the tariffs that we were burdened with last year. We've been able to get exclusions for some of our items. So that will also improve our margins going forward as the exclusion of those items go into effect. So I believe that you'll see margins either stabilize or even improve slightly as we get into the year.

Okay. That's fantastic. And then looking at the G&A, and I just want to -- I don't know if I'm looking at this correctly or not, but I basically took the reported amount and then I backed out basically all the EBITDA exclusions to come out to a figure of like $7.2 million. Is that -- am I too low there? And I guess, it sounds like the bulk of the $6 million in savings is going to come in the balance of the year post Q1, and I know that some of that's going to hit in the gross margin line. But I'm just trying to see if I'm thinking about that correctly or if I've got it too low.

Yes. Do you want me to take that, Stuart?

Yes. Yes.

Yes. Scott, your number is pretty close. I think one of the earlier questions was whether or not we've seen a lot of the restructuring savings in the first quarter. And the answer is that we only started seeing it in the first quarter. Remember, we did our restructuring efforts in February and March. So you're going to see more improvement in G&A in the second and third quarter.

Right now, we're projecting that our G&A cost will be around $7 million going forward. So your number, I think you said $7.2 million, we're expecting around $7 million in G&A. And so a lot of those savings will start occurring in our results starting in Q2.

(Operator Instructions) This concludes our question-and-answer session. I'd now like to turn the conference over to Mr. Noyes for any closing remarks. Please go ahead.

I just want to thank everybody for joining today's call, and we look forward to speaking with you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.