Summer Infant, Inc. (SUMR) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant First Quarter Fiscal 2010 Earnings Conference Call. On the call for the Company are Mr. Jason Macari, Chief Executive Officer, and Mr. Joe Driscoll, Chief Financial Officer.

By now, everyone should have access to earnings release, which went out today at approximately four PM Eastern Time. If you have not received the release it is available on the Investor Relations' portion of Summer Infant's website at www.summerinfant.com. This call is being recorded and web casted and the replay will be available on the Company's website as well.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. 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 events or results to differ from those reflected in the forward-looking statements or information.

There are many factors that can result in actual performance differing from projects and forward-looking statements. We refer all of you to the risk factors detailed in the Company's annual report on Form 10-K for the fiscal year ended December 31st, 2010, filed on March 10th, 2010 and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or should underlying estimates and assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information.

We cannot expect to update forward-looking statements or information continually as conditions change, except as may be required by law, and you are referred to the full discussion of Summer's business contained in Summer's reports filed with the Securities and Exchange Commission. Additionally, Summer Infant assumes no obligation to revise any forward-looking projections that may be made in today's release or call.

And, with that, I'd like to turn the call over to Mr. Jason Macari. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thanks for joining us. On this call today I would like to discuss our strong start to the New Year and update you on some of the key initiatives and business developments we are working on for this year as well as longer term. Joe will then walk you through the financials and update our outlook for 2010. Then we can take your questions.

Our first quarter results represent a strong improvement over the first quarter of 2009 as sales, margins and earnings were all up significantly. While some of the year-over-year gains in our business can be attributed to the improvement in the overall economy and the easier comparisons we were up against, our better than expected performance reflects the growing demand for our diverse product lines and underscores our ability to further penetrate our retail channels.

Sales for the quarter increased 26.6% to $44.1 million, as we generated strong performance throughout our product line. Consumers are responding favorably to many of our new product introductions and we are also experiencing solid sell through of many core items. This year we have our largest and most diverse SKU count ever, which has led to increased shelf space at major accounts in a wider consumer audience.

Our strategy of becoming a broad supplier of juvenile products, combined with our focus on innovation and quality has strengthened Summer Infant's position in the juvenile industry allowing us to successfully penetrate new categories and quickly gain important market share.

Our strong sales growth, combined with higher gross margins versus the prior year, helped us achieve an 81% increase in EBITDA and helped us more than triple our EPS to $0.11 per share. Gross margins improved by 490 basis points versus Q1 of 2009, as cost reductions achieved in 2009 continue to carry through in the first quarter of 2010.

We are certainly pleased with our performance early in 2010 and feel good about our top-line prospects for the remainder of the year. In addition, our initial meetings with retailers to review our preliminary 2011 product lines have been encouraging and we are becoming more optimistic about our future growth opportunities. To take advantage of this momentum and help us increase our importance to retailers who are adding resources, we are adding resources to our R&D efforts and strengthening in the area of our business that we believe is already a big competitive advantage for us.

For next year we will be looking to increase the shelf space dedicated to our current product categories, while securing additional space with our entrance into new categories. Our organic growth plans are very aggressive and we believe that our focus on creating products that deliver incremental value to the consumer will enable us to continue to be one of the fastest growing companies in the juvenile industry.

Based on the commitments we have already received, we believe we can grow the top line by double-digit percentages in 2011. We have committed resources to strengthening other parts of our business as well in order to build an organization that can profitably handle several hundred million dollars revenue over the next few years.

In the second half of 2009 we hired senior people in the areas of operations, sales, international operations and information technology. In 2010 we have plans to continue to add resources in these areas, particularly in IT, as we believe that by enhancing our existing information systems, with bolt-on applications we will be able to more efficiently handle increased levels of business without adding significantly to payroll inventory levels.

We continue to commit significant support to our resale customers with increases in promotional spending, which we believe are critical to accelerating the positive momentum we have built over the past decade. We are also focusing more investments on building the Summer Infant brand with increasing emphasis on social media, as we believe that we will create significant long-term value by strengthening the Summer brand.

With regard to margin, the first quarter marked our fourth consecutive quarter of gross margin improvement, which is the result of cost reductions that were achieved in the quarters of last year. Starting next quarter we begin to anniversary those savings, while at the same time we, along with the rest of the industry, are now facing rising commodity prices as the global economy begins to recover.

In addition to commodity prices, there are other margin pressures we are experiencing in areas, such as increased labor costs in China and potential devaluation of the U.S. dollar versus China's currency. Like we have been able to do in the past, we believe opportunities exist for us to offset price increases to a few different scenarios. One option, and this something we constantly evaluating, is re-engineering our products, finding ways to manufacture products to the same quality standards for less.

We have been very successful at this in the past and I think it goes back to our product development group being extremely focused on continuously trying to improve the products that we have success in the market place. We also continue to seek out improved production pricing. We have a very experienced, well developed team on the ground in Asia that is able to leverage their years in the business to find new manufacturing partners in the region that can provide us with lower cost alternatives.

Finally, the consolidation of our supply base is still under way. In the past year we have significantly reduced the number of manufacturers and we will continue to take that number down. This is accomplished through pushing more volume, obviously, through fewer factories and it should realize meaningful cost savings over time.

Joe will now walk you through the financials.

Thanks, Jason. Net revenues for the first quarter of 2010 were $44.1 million, a 27% increase compared to the year ago quarter. This growth was driven primarily by an expanded product offering at existing customers and penetration into a larger number of stores within existing customer's networks. We continue to benefit from the diversification of our product categories, as our current product offering has resulted in retailers giving us more shelf space versus the prior year due to their desire to consolidate their business with strategic partners who can provide them with broad assortment of product.

Also, the global economy was relatively weak in the first quarter of 2009, which created some softness in revenues for the Company last year. The overall economy has improved in 2010, which contributes to some of the revenue increases noted.

Gross profit for the first quarter of 2010 was $16.9 million, a 45% increase year-over-year. Gross margin in the first quarter was 38.4%, an increase of 490 basis points from 33.5% for the first quarter of 2009. The year-over-year improvement in gross margin was due to the benefit of cost reductions that were negotiated during 2009 and continued cost improvement activities from re-engineering products and re-sourcing our manufacturing. The margin percentage was slightly higher than Q4 of 2009 and this was accomplished in the quarter where commodities costs were rising.

Selling, general and administrative expenses for the first quarter, excluding depreciation, amortization and non-cash stock based compensation expense totaled $12.6 million compared to $9.3 million in last year's first quarter.

SG&A expenses increased year-over-year due to higher variable costs related to increased revenues, increased promotional expense, as retail customers continued to advertise significantly during the quarter, and several key new hires in product development and other areas. As a percentage of revenues, SG&A increased to 28.7% from 26.7% in the year ago quarter. Our goal is to leverage SG&A as a percent of sales as revenues increase in the future.

EBITDA was $4.3 million for the first quarter of 2010, an 81% increase over the $2.4 million for Q1 of 2009. Net income for the first quarter of 2010 was $1.8 million, or $0.11 per share, compared to $0.4 million, or $0.03 per share, in the first quarter of 2009.

For the 12 months ended March 31st, 2010 the Company has generated $162.8 million in net revenues and $16.7 million of EBITDA, which is a significant improvement from the $14.7 million of EBITDA generated for the full year of 2009.

Looking at the balance sheet as of March 31st, 2010, net debt totaled $39.2 million. Our net debt to EBITDA ratio is approximately 2.4 times.

The first quarter of each year historically experiences the highest borrowings from our line of credit due to the impact of Chinese New Year. During this time virtually all of our Asian factories are closed for up to two weeks so we need to bring in more inventory than normal in advance of this holiday. We expect debt to decline from the March 31st levels over the balance of 2010.

Turning to our outlook, based on our first quarter sales performance and our current forecasts, we now expect full-year revenues to be at least $175 million for 2010, an increase from the $170 million we had previously estimated.

In terms of quarterly performance, in 2009 we experienced a significant increase in EPS from $0.03 in Q1 to $0.11 in Q2, primarily due to Q1 being a relatively light quarter due to the weakness in the global economy. For 2010 we expect that the quarterly results for the first two quarters will be in tighter range, as compared to the prior year, since the overall economy has been more stable in 2010.

Looking at gross margins, we are projecting them to decline slightly from Q1 levels over the balance of the year, due the commodity price increases, labor cost pressures and currency issues that Jason mentioned earlier. While we are working hard to offset those increases, many of the steps we are taking cannot be fully realized until next [season] and will be more of a long-term benefit to the Company.

As Jason also mentioned, we will be adding to our SG&A this year, specifically in product development, in order to take advantage of major opportunities that are being presented to us by the retailers for 2011. We've also initiated several information system enhancements to support the growth of the Company and to add efficiency to our operations. In addition, we will continue to invest in our brand building and the retailers have maintained significant levels of promotional activity that we noted in 2009.

These additional expenses will add to our 2010 SG&A. However, we are confident that these investments will lead to market share gains and increase our future revenues and profitability. Overall we project that our profitability in 2010 will be in the same range as we initially planned with increased sales being offset by somewhat lower gross margin and higher SG&A. However, our EPS is still projected to grow at a faster percentage rate than the growth in sales for 2010.

We also project that 2011 will have double-digit percentage sales increases based on the feedback we have already received from retailers on new products. Achieving this kind of sales growth should also lead to EPS growing at a faster percentage than sales in 2011 as well.

With that, operator, we are now ready to take questions.

(Operator Instructions). Our first question is from the line of Sean McGowan with Needham and Company.

I have essentially two questions. One, Jason, can you talk about what categories drove the sales growth performance in the first quarter, to the extent that any were growing faster than others? And I guess a somewhat related question and either one of you could tackle it, is to what extent is the strong gross margin in the first quarter a function of favorable product mix or was that not a factor? Was there anything else going on like? Trying to figure can gross margins really stay at this level, if there's assumptions that we make about different product categories.

That's a good question -- I, with regards to what drove the top line, our five categories or our five verticals I would call them; safety, nursery, bedding, gear and furniture, really all were up. I'm just looking t Joe and we're trying to -- I can't think of any that are down. Our core lines, monitors, gates, bath, etcetera, some of the nursery products like swaddling, all were very strong and are all, I think, doing well and sales were us just about across the board.

Some of the new categories that are kicking in that we have been working on over the last couple years, such as baby gear, has stepped up probably even more as a percentage than the core lines. And furniture and bedding continue to kick in and I think those have been more difficult to penetrate but they were up year-over-year and I do think that they will catch on and it's part of the reason why we're making the investments that we're making is to grow some of the areas that we're talking about, some of these new areas that we're talking about.

In terms of margins for the rest of the year, product mix was definitely helpful in Q1. The problem right now is that if commodity prices go up across the board, if you're talking oil, steel, etcetera, it's tough to maintain this level of margin no matter what our product mix is. So that's really what we're facing right now and we're trying to combat it as best we can. It's a -- but in terms of an outlook for the rest of the year, I would say it's more likely that margins would tick down slightly as opposed to tick up.

And that's consistent with what you said. I was just wondering if there was enough tightness there that a product mix could actually help offset some of that. And I just wanted to drill down a little bit more on some of the cost and impact on gross margin. So you have, I'm sure you have agreements with your retail customers as to what you're going to sell them and at what price. Do you no have similar fixed agreements with the factories? So are you really exposed to commodity costs in the short term?

We do have agreements with both factories and customers. However, I would say over the last two years, ever since the fall of '08 -- actually even before that; I take that back. That whole year of '08 commodities were rising faster than factories could make -- they were rising faster than their commitments would allow and many factories came back to us and across the industry asking for price increases, although they had locked in pricing for usually six to 12 months.

This year we're getting a lot of the same phone calls and requests from factories saying, "Hey our pricing is starting to go up." The question really comes down to it is it a bubble or is it something that's going to be sustained because I've heard both. For instance on plastic, it shot way up after hitting record lows at the end of last year. It shot way up at the beginning of this year and we're being told that it might settle down to more reasonable levels so we're not 100% sure sitting here, whether it's going to be a tick up or whether we'll be able to negotiate back down.

I think there is going to be some of both, quite frankly, and it's one of those years that it's not 100% predictable, but I do think that it's not going crazy. Let's put it that way, but there's enough movement to know that hey, we stand the risk of it ticking up a little bit.

Okay, thank you.

Liz Pierce, Roth Capital Partners.

Thank you and nice job on the quarter. I'm curious on you comment on the ability to leverage sales in the future. I mean is there a target that we should be thinking when that -- your increase in the G&A -- excuse me, I think I said it wrong -- the increase in G&A will kind of more closely align to the increase in sales?

That's something we've been talking about, really for a number of years, that we feel that, as we grow the top line, that our bottom line should be increasing at a faster pace. So our EBITDA as a percentage should be going up and, quite frankly, it's kind of stayed around the 10% or 11% range and we, as the management team, have been talking about that. And the opportunities that have been presented to us in 2010 for 2011 we feel are worth the investment to see that kind of stay where it's at or maybe even slide back a hair because of the investment in infrastructure and the investment in building or developing these lines.

On the flip side of that, we kind of feel that, as a team, 2011 we should start seeing that tick up rather than kind of stay the same. So I would tell you that our focus for pressing that model into action and seeing the bottom line be leveraged by the top line would be 2011.

That's kind -- I guess what I was -- let me be a little more specific. With the spread that we saw this past quarter at 38% or excuse me, 26% in sales and 36% increase in G&A, I'm just trying to get a sense on order of magnitude. Is that the kind of spread that we should be looking at for the rest of the year?

Yes, I'm sorry yes. Yes I think yes. There's a--

So like a 1,000 basis points between the two?

Well there's a variable component in our sales, in our SG&A, which that variable piece has really gone up over the last 12 months whereas a year ago it might have been 11% or 12% variable. Now it seems it's more like 14% or 15% variable so that's a piece and that's really tied to the retailers and how they've promoted their products, frankly, over the last 12 months where they've really done a lot more in that area. So, if you're looking purely at the kind of the Q1 results, I mean Q1 a year ago the level of promotional activity wasn't nearly as intense as it is now. So that's one piece that -- I guess for the near future it would appear that it's going to continue. We'd like to think at some point that's going to slow down a bit.

I -- to Joe's point, and Sean asked the question about don't we have agreements with our customers on promotional activity and we do. However, there are opportunities that come available throughout the year to drive your product and your brand that are over and above, if you will, the normal level of promotions. So I would tell you that we are taking advantage of those and I think it has really solidified our position in a number of categories, that it's really put us in a leadership position in a number of categories that otherwise we might not have been.

Okay and then but your comment on earnings that we shouldn't see the same year-over-year pattern, whether it's Q1, Q2 over Q1 last year or Q1 over Q1 year-over-year this year. I just I guess I want a little bit of clarification on, between all these different moving parts, what you're seeing on rising commodity prices, retailers asking for more promotions, building their infrastructure, what that really boils down to for Q2 on earnings. Are we talking about a down quarter?

No, we'd not be talking about a down quarter. The only comment there was that Q1 to Q2 last year was a substantial increase, really. If you're trying to use that as a guide, then that's not a good guide to use because we see Q2 to be a nice strong quarter. It's just not going to be -- you're not going to go from $0.11 -- it's not going to increase by that kind of a number I guess is the overall point.

Q1 of 2010 we believe is more normalized, whereas 2009 was a little bit of an aberration.

Right, but when you talking and I think maybe this is what Sean was talking about. When you're talking about gross margin, the 38.4 not being sustainable, but if you look at it year-over-year is that -- should we be thinking down from last year's 35.5?

No, no, no. I'd say it would be a touch down from the 38.4 that we achieved in the first quarter. And that's the number that's going to be hard to sustain for the balance of the year, not impossible but with the commodity prices that we're seeing right now, we would see that there's some pressure there but no we would not see it going down to 35%.

So that -- yes I think that clarifies a lot because you're talking basically sequential pressure versus year-over-year.

Yes. That definitely, yes.

Okay and then just in terms of on number of factories, Jason, do you -- again not, but it would seem to me, are you going to back yourself into a corner where you're too dependent and if you continue to narrow down the number of factories that you can't more or less play one against the other and you're going to be beholden to.

I think part of the issue it kind of developed as we have -- we did four or five acquisitions over the last couple of years and I think part of the expansion of supplies was due to those acquisitions. We also went into categories that we traditionally haven't been in and every business has a strategy and our strategy is relatively broad, which means that we have to have, by nature, a larger number of factories because most factories specialize in one type of manufacture.

So, for instance, a wood furniture factory is going to be very different than a metals factory versus a plastic factory, etcetera or a cut and sew and those types of things and it's kind of only natural that after we did those acquisitions that we would now kind of try to bring it back to a more manageable vendor base and that's and win, so to speak. So I think some of the gross margin improvement comes at moving things to the best factories and the ones that are most cost effective but also developing and have kind of the whole package. They also do a little product development. They'll -- a good factory has good costs but also works with you to develop more cost-effective product, which we're engineering based Company so that something we look for in a factory.

That makes sense. And in terms of the retailers and what things you alluded to in the press release, the weekly sell throughs are looking good. You feel like you've pulled any kind of sales forward, and as we think about the back half of the year, or is this just they are still in levels that are anemic, even by kind of the new normal standard?

We haven't pulled any sales forward. I think they're just -- the numbers that we achieved in the first quarter are really kind of replenishment based numbers and those have all been solid throughout the first quarter so there was no real bulge in the first quarter or anything like that so we're feeling pretty good about it right now.

Okay. All right I could follow up with you off line. Thanks and best of luck.

Scott Van Winkle, Canaccord Adams.

Congratulations, guys. A quick question, on the incremental spending, if you had to call the dollar amount of incremental spending this year, how much have you already kind of put into the model? And what I mean there is, I mean, have you done substantially all your hiring? If we saw an extra $1 million or so this quarter, should we expect that extra $1 million to continue quarter, each quarter the rest of the year, or are we going to see incremental sequential increases in G&A from here over and above sales?

I think the dollars would go up in the SG&A. In our SG&A we really do have kind of two pieces, variable portion based on sales, so that will vary at 14% or 15% of sales and then the rest would be what we considered more fixed, which is payroll, rent, things like that, so we do plan on adding more people, I guess, is the short answer, as the year progresses. So but hopefully, you know, there were quite a few hires in the first quarter or late fourth quarter last year, so I think that number might -- would slow down but we -- our plan right now is to really try to take advantage of these product development opportunities we have so we will be adding to the G&A number, as the year progresses.

Yes and, just to add to that I think that in the first quarter there was definitely -- we definitely spent more than we had planned and I think that will continue. I'm not so sure that it will continue at any faster pace than the first quarter but the first quarter did include overspending. And it was almost exclusively -- well, it was on a few things, but mostly product development and we went outside. We brought people in. We did whatever we had to do to deliver the lines that were in front of us and opportunities with all of our retail partners.

And how did you identify the incremental opportunities to go out there and develop product and expand? Was it pulled by the retailers from you and asking you or did you just kind of go into the quarter and you realized that let's double the opportunity? I am wondering how that manifested itself over the last few months.

I think it's both, Scott. We are pushing the envelope as far as broadening our categories. I mean there aren't a lot of juvenile customer or companies that are as broadly based as we are, meaning us having products in over 20 categories in the industry, having five different verticals as we see it, so that unto itself opens up opportunities and some of the new acquisitions, even like Butterfly that was really, you know, it's not even a year old, some of the even more recent was the small acquisition of Classy Kids.

They're just little opportunities but they all add up and so we're pushing it on the one hand by bringing opportunities and new designs to our customers but they are also, I think, pushing us and pulling things from us saying hey, you know, you're someone that we can grow within your more of a consol -- obviously they see the acquisitions too and they believe I think that we're more of a consolidator in the industry. And our goal is obviously to make their lives easier by providing a great set of lines, a great brand, great product lines, new product development.

We do have a tendency to look at things a little differently that I think that our competitors that when we go into a category the first question we ask typically isn't what's everybody else doing. It's more let's put the blinders on almost and let's what can we do? What innovation can we bring to a category that no one else has thought about or that may make sense for our category that just hasn't had a lot happen within it over the last number of years, so it's kind of a fun way to look at things and I do think that we have a very creative staff.

And when we brainstorm and we then bring those ideas to our customers I think they sometimes reply or respond, I should say, very well and this just happens to be one of those years that it's a kind of a both parties are wanting to do more and bringing a lot to the table that are worthwhile projects to pursue. So it's just sometimes timing you have a year that's kind of slow and sometimes you have a year that's just everybody, everything seems to click and I think what we're telling you folks is that seems to be clicking and we want to follow that. We don't want to try to artificially walk away from those opportunities when we have them in front of us but it's going to take some resources.

And just you've done several small acquisitions. You've expanded your product categories. What do you think today of the brand, the Summer Infant brand that you maybe didn't know a year or two ago? Can you assign a value to putting your brand on an acquired company's products or into a new category? Is it easier and I am just wondering what your thoughts are and what that Summer Infant brand means today relative to what you thought a few years ago.

Well, we clearly have learned a lot. I mean, it's not 100% fool proof. I mean, sometimes when you put your brand of a product maybe that little niche brand had a real strong brand and you don't get uptick but then there have been several occasions where we've put the brand on where we've seen very large upticks, so I think it depends on the category and the kind of where it sits in the store. We have, traditionally have, strong brand in hard lines and I think those lines tend to do very well when we brand on it. Soft lines are a little trickier and we -- one of the reasons that the licenses that we have in Carter's and the other one in Disney have helped us in some of those areas that traditionally are more soft and more kind of have a fashion element to it.

But we, as a brand, I think are gaining strength certainly and we are definitely seeing where we take a smaller competitor and put our line of very specifically in hards lines for sure but I think our goal is to do just that, is to expand the brand and to get into more doors. So it's twofold. It's broader categories, more doors and keep on pounding away with the promotional/advertising/social media side so that mom, before she ever walks in that door, knows our brand.

And last question is back on the gross margin, if you turn your inventory I'll call it 3.5 times a year and you started to see or hear from your manufacturing partners of higher commodities and higher costs somewhere in the middle of Q1, is it really going to be Q2 that we'll see the higher cost or are we really going to see that kind of run in in Q3?

Probably going to be eight mid to late to Q2 so I don't think you'd have a full impact of that in Q2 because there is a lag. We've already got deals that are out there that are being honored at whatever the price is that when we placed the PO.

Okay thank you.

(Operator Instructions). Lee Giordano, Imperial Capital.

Thanks. Good afternoon and congratulations, guys. A couple of questions here, first can you talk a little bit about the environment for acquisitions out there? Are you seeing any interesting opportunities come to you? And then secondly, on that front, what other categories are you looking to expand into and where do you see the growth coming from down the road?

Regarding acquisitions, we definitely are active there. We've talked to a lot of different competitors and people in the industry. We will continue to talk to them. We are remaining disciplined in our approach. We -- it's tough to overpay and we're not going to unless it's something really we see, something that we can leverage significantly, we're going to stay true to kind of our approach to acquisitions. So, if I was to be real blunt about it, I would say that right now there is a bit of an inflated opinion of what companies are looking for for acquisition prices, which has slowed down what we're doing. Otherwise I think we'd probably be doing a few things right as we speak but we're not going to overpay for something that we don't believe should get that.

So acquisition wise we are active but there's nothing imminent and I think the pricing is really the question. The market has driven down the multiples and we're not going to overpay for something unless, again as I say, it just has intrinsic value that is just going to give us a bigger multiple with us, with that in our hands. On categories and expanding categories, my position right now is that we aren't really expanding categories beyond the five verticals that we are in, mainly because I feel like we have those safety, nursery, bedding, gear and furniture. Those five areas we are not fully developed and so I am really pushing the teams to focus on those and really drive growth in those areas.

There, I'm sure there's a category here or there that are slightly left or slightly right of those, of the categories we're in and within those areas, but we're not venturing way out. We're really staying within those teams and pushing that and I keep the accelerated pedal on those groups, rather than give them something brand new that we feel like is maybe out a year or two. So, if we want to get into other areas, just to use some examples, if we wanted to get into feeding, for instance, which we're really not in, I think that's -- that might be a more of an acquisition kind of opportunity, whereas if we're getting into a category that's left or right of the categories we're in, then that might be something we'd develop organically so, just to use some examples, and I hope that answers your question.

Yes that's very helpful. Thanks a lot.

Robert Straus, Gilford Securities.

Congratulations on your numbers. Just a few follow-up questions, first of all, you spoke earlier in the call about I guess adding incremental space. Components of that are expansion of existing products but also the introduction of some new ones out there and also getting into new retail locations. Can you give us a little bit more of a sense of that mix and what the driver is going to be, any additional color that you can give us on that?

In terms of what categories we're going to go into or where we're experiencing--?

In terms of driving sales, the mix that that sale, that incremental sale will come from, whether it be additional existing products or new storefronts?

I think right now our growth is more from expanding our categories within existing customers. We do business with most to major retailers in the U.S. and I think where we're experiencing our best growth are the people that have gotten us this far, our partners that are really well developed, if you will, and the top ten retailers in the country kind of thing. And the reason for that is because, for instance, a customer may be very familiar with us for monitors, bedrails and gates and bathtubs.

They now know that we sell Swaddle Me and that we sell travel accessories, etcetera, but they didn't know that we are now doing furniture or they didn't know that we were developing a line of gear products, so I think what's happening is is that our strength and our depth in certain core categories we're trying to leverage all the new categories that we've gone into off of that and the core categories are still growing. They may not be growing as fast as the other new categories but they still are growing, which is really, really nice.

Categories that we and our retail partners thought might be mature, year after year we continue to see growth, so we are not, by any means, saying that we've somehow capped out our core categories. We haven't and we continue to push those and try to grow those. But the new areas are definitely being well received and I think my sense is is that our retail partners are pleased with us for going into multiple categories, as long as we can continue to develop those and deliver those with the same quality and the same timeliness and the same -- you know, that we stand behind it the way we have with all the rest of our product line.

So I think they're looking for us to continue to do this. They just don't want to see us get ahead of ourselves and get into something that for some reason we don't know well enough or don't have the expertise and that's one of the reasons why the acquisitions have been so nice is that we not only have acquired lines or sales, we've acquired talent and we've brought in talent into the Company, such as the furniture, such as gear or bedding or the nursery lines that has helped us grow in our ability to deliver a broader product line. So it's not just us kind of learning, cutting our teeth on a new category, it's us bringing in the talent that knows that category.

And just in terms of new customers, I mean we are experiencing some nice growth internationally as well. It's international for us, which is really Canada, the U.K. for the most part and then a little bit all other parts of the world. That's growing nicely. It's still a much smaller piece of the overall business than the U.S. but we're seeing some new doors being opened internationally, which we hope that's going to continue.

One of the things that you had mentioned was that you did, in fact, bring on some new hires, some new talent, and you certainly have done that with regard to your international strategy. Can you expand a little bit on the developments that you've seen over the last quarter or so for your international strategy and, more importantly, perhaps it's an opportunity for you to itemize some of your goals for this year for that international category?

Well, the two areas that -- the two markets that we have had the most success in, obviously are U.K. and Canada and the folks that have come into those organizations have continued to solidify the business and grow the business. The areas that we're still kind of sorting out and trying to stabilize and grow would be Europe, what we call all of international, which is really a combination of the Pacific Rim and South and Central America and those are areas that we do see growth in but it's not the levels that we would like and so those are the challenges.

But the U.K. and Canada, really the talent that we've brought in that really has -- those markets are very strong for us and they're stable, which is really what we wanted to make sure that with the growth that we've experienced in those markets that we didn't want to see ourselves slide back, so the people that have come in have really strengthened the team and they're deep relationships and it's the right combination. We have organized a little differently our international efforts and I think I've commented on that before but it's worth saying that the two individuals, [Denis Horton] and Steve Orleans that we brought on board are also looking in other markets as well so, in other words, they are looking to help us strengthen our international business.

For the international market particularly, as you expand certainly past the U.K. and Canada, I guess it's my understanding that some of those markets will have different product development requirements upon you. Speak to that point and also to the degree that you have to incrementally change your manufacturing sources to satisfy that demand of those international markets.

Well, I think moist of those markets, especially when you start getting going down the list on the size of the market, are usually they adopt one of the standards that we are [versionally] would do the U.S. standards or the European standards. When that happens, the development piece of it isn't necessarily that big. Oftentimes it's more of a packaging exercise. Sometimes color or fashion, but I think with a lot of the harmonized standards around the world it is getting a little bit better, certainly in the last 15 years that I have been in this industry. It's gotten a little better to market and sell the same products that you sell in the U.S. and Europe to other international, into other international markets. So I think the product development effort isn't quite as great on that international piece.

I would say that the challenge there is establishing the relationships with what I would call top rated either distributors or retailers in each of their respective markets and that's really the tougher challenge is to -- you need the time and energy and be willing to invest in that to really solidify those and get those moving. And we've done it in the past but I think that we've made the investment just recently within the last 13 months and I do think that we will start seeing some rewards for that but it's slow going. Those are not markets that are easily tapped into.

Hey, Joe, just a couple of follow-up financial questions and then I'll turn the call over. Regarding your comments on the EPS first quarter move to second quarter sequentially, I understand what you said on 2009. For 2010 are you willing to go out to the point where you can tell us on the call today that the second quarter EPS will be higher than the first quarter that you just reported?

Yes it should be. We're not going to go out with formal guidance at this time but it should be.

Okay and do have cash flow from operations at hand for the quarter and CapEx for the quarter?

The cash flow from operations would have been a net borrowing, so we would have -- Q1 was a big working capital quarter for us, as it always historically is, so you're probably talking about a $4 million, $4 million to $5 million, net borrowing from operations in the first quarter and then CapEx would have been a little over $1 million.

Okay thank you very much. Good luck in the future, guys.

Our last question is from the line of [Arnold Brief] with Goldsmith and Harris.

It looks to me like the consumer is starting to spend more. At the same time retailers may be trying to build inventories, after cutting them for so long. Would you comment on that, whether you see retailers trying to build inventories or just replenish the sales, as they move out, or whether you see them still cutting inventories? And then the second question is I understand some of the pressure on margins from -- is voluntary from investments that you wish to make, but some of it to me, as I follow the industry a little bit, it seems to be that the major retailers are so dominant in the distribution system that they seem to have a little power over the flexibility of pricing from their vendors, so would you comment on that?

And then finally, the last question is I understand the importance of the one brand in terms of going to the consumer but I am wondering to what extent that's a problem in going to the retailers with different price points and different products with the same brand name. Could you discuss that please?

Well, regarding the inventories, what I've seen is that the retailers are actually consolidating themselves on suppliers and they may be increasing inventories on individual specific best sellers but I don't see them necessarily increasing the inventories in general. My readings on the economy is that they're not necessarily building inventories but focusing is more the kind of the buzz. But anyway, so I don't see us, in other words, our first quarter I don't think popped necessarily because of inventory building. Because we work very, very closely with the retailers. We know what their inventories are and I would dare say that I don't think they were any different from the beginning to the end of the quarter.

From margin standpoint there's no doubt that the major retailers have a significant say on what the margins are in an industry and that's why the basis of our business has been innovating and developing new and our goal is to try to stay one step ahead of that process and continually put products on the shelf that they really need to get from us in order to deliver the differentiation and innovation that they want for their and also to separate themselves from their competitors. So there's no doubt about the margin pressure.

I think, to add to that, I think that retailers from the last year or two with the economy have been very focused on promotional and advertising activity and I am not so sure that they really want to slow down on that, although that the economy is picking back up, so that's really a -- you know, how long is that tail I guess is the question and we don't really see an end to it in 2010. I guess that's the point we were making earlier.

As far as one brand goes, we really don't have one brand, although our major brand is Summer and that's really the one that we focus on advertising and promoting. We do have licensed brands, including Carter's and Disney, and those brands sell very, very well and we're happy with the performance and with the positioning that it allows us.

We have looked at developing secondary brands ourselves and, for instance, one of the acquisitions that we made, Kiddopotamus, we merely put that brand back out in a different format and we still own the brand and still can do that but I think if we made an acquisition that had a brand that, for instance, had a different positioning than us or a different place in the market or strength in a different group of categories, I think we would be absolutely open to multiple brands. I think, to date, we've just made the strategic decision to fold most of the acquisitions under the Summer brand. So it's not that we're obsessed with one brand but we definitely see it right now to date as a core strength.

Just go back to the inventories that a lot of that promotion, when you go back to '08 and '09, did relate to sharp reductions in inventory throughout the whole retail system. I mean that was obvious that was going on. I would think that, as the economy recovers, that there would be somewhat less promotion and some effort to rebuild the inventories but you don't see that?

I don't disagree with your point. We just haven't seen it yet and the -- I think the reduction of inventories, we saw that in early '09 and our first quarter '09 reflected that but since then we feel -- I'm looking at it and I believe that the retailers kind of have maintained their position and haven't really expanded inventories. I think they're all trying -- and our largest three or four customers are working every day. It seems like day and night, to make sure that they keep their keep their inventories very sharp, not the other way around, not expand them but, getting back to the promotional activity, I would agree that you would think that you would stop seeing it slowing down. We just haven't yet.

Thank you.

At this time I would like to turn the conference back to Mr. Macari for any closing remarks.

Thank you for those questions and I would just like to thank everyone for participating in the call today. I would also like to thank all of our employees and all our stakeholders for supporting Summer Infant and making it one of the fastest growing Companies in the industry. We look forward to speaking with everyone on our second quarter conference call. Thank you very much.

Ladies and gentlemen, this concludes the Summer Infant first quarter fiscal 2010 earnings conference call. Thank you for your participation. You may now disconnect.