Summer Infant, Inc. (SUMR) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant second quarter fiscal 2011 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 the earnings release, which went out today at approximately 4 PM Eastern time. If you have not received the release, it is available on the Investor Relation's portion of Summer Infant's website at www.summerinfant.com. This call is being recorded and webcasted, 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 question. 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. Forward-looking statements can be identified by words such as anticipate, intend, plan, believes, estimate, expect and similar references to the future. Examples of forward-looking statements include, but are not limited to, statements we make regarding our future financial performance, including guidance for 2011, business prospects and operating strategies. There are many factors that can result in actual performance differing from projections 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 31, 2010 filed on March 22, 2011 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 do not 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 would like to turn the call over to Mr. Jason Macari. Please go ahead, sir.

Thank you. Thank you, everyone. Thank you for joining us today. With me on the call is Joe Driscoll, our CFO.

The sales momentum we experienced in several areas of our business during first quarter carried over, and continued through the second quarter, as we experienced 23% growth in Q2, and on a year-to-date basis, sales were up 28%. We are very pleased to continue to grow the business, given the extremely challenging retail and cost environment that we operate in, which has impacted our gross margins and profitability. In addition to achieving the sales growth, we successfully executed several important initiatives, have strengthened our operating platform, and improved our long-term growth prospects. After I review the highlights for the quarter, Joe will describe our financial results and guidance for the remainder of the year. Then we will be happy to take questions.

As we outlined on our Q1 call, we began the year with significantly increased placement for our product lines. Importantly, the growth over the prior year was broad-based, in terms of categories, customer and geographies. After a strong selling period early in the year, we have witnessed very good sell-through across our major categories including monitors, bath, nursery, furniture and several other categories. The restructuring of our product development team last year has led to much tighter, more focused product lines, and the consumer response has been very favorable.

The sales volume for several innovative new product collections has outpaced our internal projections, and is helping drive very some very positive trends in our business. First, it's increased our importance with several major retailers, as we continue to successfully expand the number of our active product categories. Second, it's further reduced our customer revenue concentration. And third, it's led to very positive discussions about placements for 2012.

Outside the US, we experienced similar results, as we introduced new products, increased shelf space, and continued to build-out distribution in western Europe, Canada and many other countries. International sales during the second quarter increased over 30% versus the same period last year, which follows the 30% increase we reported in Q1. At just 13% of sales in 2010, the foreign markets represent an exciting long-term opportunity for the Company, and we have received, I'm sorry, we have recently put more resources in place to support our international division.

The results thus far have been very encouraging, and I'm confident that we have the right strategy in place to grow the business into a much more meaningful contributor to our overall results. I think our teams did a very good job executing our sales plan during the second quarter, in what continues to be a challenging retail environment. At the same time, we were busy integrating BornFree into our organization, in order to realize the expected cost savings from this deal, while also accelerating the number of new product introductions planned for 2012.

I think we have made great strides on both fronts. We have absorbed BornFree's operations in the US, Canada and the UK, and all product development, sales and marketing, operations and finance are now being handled in a centralized manner. So at this point, most of the heavy lifting is complete, most of the duplicate costs have been removed. And I'm really excited about the progress our newly-formed Feeding team has made, developing new products in such a short period of time.

The collaboration between personnel from Summer Infant and BornFree over the past 90 days has yielded some very innovative new ideas, that we will bring -- that will bring excitement to the marketplace, and help drive additional placement for the brand next year. While still very early, these initial results have us optimistic about our ability to capture a larger percentage of the $1 billion, high margin feeding category into the future.

To update everyone on the status of our new Prodigy Car Seat and Travel System, we remain on schedule to deliver the initial shipments in the third quarter, and would expect the product to be available at retail by the end of September. The car seat has, in fact, passed all safety tests, [infant] tests and ASTM tests. After some additional testing and redesigns, we feel we really have it right, and with this exciting new product feel the features offered, including our proprietary Smart Screen installation technology, SafeGuard and 1-Adjust harness system and belt tightening system, provide the highest quality standards, while also significantly differentiating it from other products currently on the market.

Below the revenue line, we continue to deal with cost pressures, primarily higher product costs from our third-party suppliers in China and the US. In addition to continued pressure on our wholesale prices given the environment at retail, as we expected gross margins were down from a year ago, as commodity prices and factory wage rates have increased meaningfully over the past 12 months. To mitigate some of the impact, we have executed a number of initiatives, including reengineering certain products, selectively raising prices, and consolidating our US distribution centers. These efforts helped gross margins improve sequentially from the first quarter. And this trend should continue over the remainder of the year, as a few more price increases take effect, and our product mix slightly improves to higher margin products.

Thus far, we have had another strong selling season, in terms of obtaining 2012 product placement at retail. We now have six product development teams, of the six having been BornFree and the Feeding team, that have all been focused on different aspects of the juvenile product strategy, and each team has exciting initiatives in place for next year. Although we do not have all decisions from retailers on next year, we believe we will have another strong growth year in 2012, based on the commitments we have received to date. We will give you additional details in our Q3 call, at which point we'll have -- virtually all our decisions for our 2012 placements. Joe will now walk you through the financials.

Thanks Jason. Net revenues in the second quarter of 2011 increased 23% to $61 million, from $49.5 million in the second quarter of 2010. This growth was driven primarily by an expanded product offering, and penetration into a larger number of stores, within existing customers networks. The increase in revenue was also driven by strength in several key categories, as we continued to successfully diversify our product line.

Approximately $4 million in sales during the second quarter came from BornFree products. For the six months ended June 30, net revenues increased 28% to $119.5 million from $93.6 million in the prior year period. Gross profit in the second quarter of 2011 was $20.2 million or 33.2% of net revenues, compared to $18.5 million or 37.4% of net revenues in the prior year period.

Included in our second quarter 2011 gross margin are two unusual items. We performed an internal review of our customs filings for the past several years, and found one item that we believe should have had a higher duty rate. The total duty owed is estimated to be approximately $500,000. Also, we settled an intellectual property dispute with a competitor, which resulted in an inventory charge of $150,000. The IP dispute has been fully settled, and the customs issue is expected to be resolved within the next month. Excluding these charges, gross margin increased sequentially by 60 basis points to 34.2% in the second quarter.

SG&A expenses, which exclude depreciation, amortization and non-cash stock-based compensation expense, were $15.6 million for the second quarter of 2011, compared to $13.6 million for the second quarter of 2010. The increase in SG&A is primarily due to higher variable SG&A, which is the result of the significant increase in revenues this year. Excluding approximately $200,000 in legal costs associated with the intellectual property dispute previously noted, SG&A improved 230 basis points to $15.4 million, or 25.3% of net revenues from 27.6% in last year's second quarter, due to leveraging of fixed costs on higher revenue.

Adjusted EBITDA, which excludes non-cash stock-based compensation expense, $0.9 million related to the customs charge and IP settlement, and BornFree transition costs, increased to $5.4 million in the second quarter of 2011 from $4.9 million in the second quarter of 2010. Adjusted EBITDA margin in the second quarter of 2011 was 8.9% of revenues, compared to 9.8% in the second quarter of 2010.

Net income in the second quarter of 2011 was $0.9 million, or $0.05 per share, compared to $2.2 million or $0.13 per share in the second quarter of 2010. On a non-GAAP basis, after excluding $1.6 million in pre-tax charges related to the customs charge, IP settlement and transition costs associated with the BornFree acquisition, the Company's second quarter 2011 adjusted net income was $2.2 million or $0.12 per diluted share.

Looking at the balance sheet, as of June 30, 2011, net debt totaled $64.5 million. That's $2.9 million in cash, and $67.4 million in debt. The increase in net debt from December 31, 2010 is primarily attributable to the acquisition of BornFree in March, which included a $14 million cash payment as part of the purchase price. Compared to March 31, 2011, cash increased $2.5 million, and debt decreased $2.8 million for a total positive cash flow of $5.3 million during the second quarter. Inventory as of June 30 was $44.7 million, compared to $45.9 million as of December 31, which is a very positive trend given the increase in sales, plus the inclusion of several million dollars of BornFree inventory as of June 30.

In terms of our guidance, based on our first half performance and our current revenue projections for the remainder of the year, including the contribution from BornFree, we are raising our full year revenue outlook. We now expect 2011 revenue to be between $240 million and $245 million, up from previous expectation of at least $235 million. We also project that earnings per share will be in the range of $0.55 to $0.61.

Given the continued pressures on gross profit, in addition to the challenging retail environment, we believe it is prudent to maintain a somewhat conservative outlook at this time. As Jason said, we still expect gross margins to increase sequentially, as a result of product reengineering, selective price increases, and the contribution of higher margin sales from the new feeding line, but below the level we previously expected.

We also expect to continue to experience meaningful operating expense leverage on higher sales. Our adjusted SG&A, as a percent of sales, has improved 250 basis points from last year for the first six months of 2011. As Jason noted earlier, we are very pleased with the commitments we have received thus far for new product placements for next year. And we will be in good position to provide initial guidance on our projected revenue growth for 2012, during our Q3 conference call in November. With that, operator, we are now ready to take questions.

(Operator instructions).

We'll go first to Sean McGowan with Needham & Company.

Thank you. A couple, mostly housekeeping type questions. Comments on the tax rate, both in the quarter, and the -- expectation for the rest of the year, Joe?

For the six months ended June 30, we are running at a tax provision of 22.5% of pre-tax income. And we project over the balance of the year that will tick up slightly as the year moves along.

Okay, thanks. And does the EPS guidance that you have of the $0.55 to $0.61, does that include sort of the deal costs and other extraordinary things from both the first quarter and the second quarter?

That's excluding all those costs. The $0.55 to $0.61 would be excluding BornFree costs and the other items we have called out.

Okay. Do you expect there will be any more deal costs related to BornFree taken from the balance of the year? Or is that all taken now?

That should all be taken now.

Okay, And last housekeeping type question, would there be -- would you anticipate that there might be penalties for that customs issue or is that going to be fully behind?

I don't think they -- we are voluntarily coming forward on the issue, so I imagine there could be, but I think they probably look favorably on it, if you come to them, as opposed to the other way around.

Okay. Okay, and then --

Sean, I also think that some of that was estimated into the $500,000.

Oh, okay. And then, Jason, just kind of generally, what would you say is the overall mood in the category among retailers these days?

I would say they are pretty conservative. I think the summer months are always a tough time to get a pulse, because juvenile spending tends to tick down a little bit, and people go on vacation, et cetera. But I think that it was a strong beginning of the year until about June or so. And summer's always tough to get a read.

I think that we'll know that in September, when kids are back to school and the summer vacations are over, and we really get a sense of -- a lot of the retailers run baby sales in that time frame. So I think we'll get a much better read. Right now, everybody is kind of keeping it very close. We know inventories have been reduced for sure, and are -- just -- not, not really, not really bullish, to be honest with you, they are kind of neutral right now, just waiting to see what happens.

Okay, thank you.

We'll go next to recall Rommel Dionisio with Wedbush.

Yes, hi, good afternoon, thanks. In the past, you have talked a little bit about potential cross selling opportunities for some of the customers that BornFree had, that you didn't before. I wonder if you could update us on that? If you seen any progress there, or what the outlook is for that going forward?

Sure. We actually talked about that just before the call. We, they -- first of all, we, as a result, hired a one of our sales -- a new sales person, that specifically comes from that part of the retail world. And we'll be calling on our food and drug customers that are a result of that acquisition. I think that what we are planning on doing, is basically putting a new strategy together for that class of trade, that will be somewhat unique to what we currently offer our juvenile suppliers. So we do believe that there will be upside, but I think it is going to be -- take a little time to realize, because of the difference in product offerings and kind of how they work.

I would tell that you the feeding line has been completely revamped, the packaging, the messaging, the products to some degree, some it is staying the same, and some of it is being updated and revamped. And then, of course, new products. So I think that we are more focused on getting the new line out, than we are, really focused on the other way around, into bringing summer products -- into the juv -- into the food and drug space. But we do have a plan, to put a strategy around that. But I wouldn't put a -- I wouldn't say that is going to result in a quick turnaround, because food and drug tends to make a lot longer to make decisions, and make changes to their plan (inaudible).

So just to be clear, it doesn't sound like you are incorporating that go into your current or revised guidance for 2011?

Not for 2011, no.

Okay, great. Thanks very much.

(Operator instructions).

We'll go next for Liz Pierce with Roth Capital Partners.

Hi. Thanks. Can you guys hear me? I'm in the car.

Yes. Yes we can, Liz. No problem

Okay. All right, good. Thanks. So just to -- I wanted to touch base, back on Sean's question, on the earnings. So is that a non-GAAP number, the 50 -- I think it's $0.55 to $0.61 or 58? Sorry.

Right, $0.55 to $0.61 would be excluding things like the BornFree charges, and the other items that we have called out.

Right. So basically non-GAAP though?

That's correct.

All right. I wanted to clarify. And then, Jason, in terms of the BornFree repackaging, I haven't necessarily seen a change yet at retail. So is it on the way? I have been trying to get a better sense of, what we should expect and when.

Yes, we are on target for a January launch, which means that all the major retailers that currently are carrying it, that we would have a pretty much a hard cut-in for some of the major retailers, as of January. And then probably a hard cut-in for the balance of the retailers, probably by the end of first quarter. We feel comfortable that we have worked our inventories properly. We, our cut-ins are approximately six months out, and we can work that pretty well. So we don't really end up with any inventory problems. The new packaging, I think is excellent. I think it's current, it fits very well with the other competition. In other words, on the shelf, it will look great. And very happy with it And we're trying to make it a hard cut-in, meaning we're not going to let it filter in, or kind of come in over time. We want to pull stuff off the shelf, and want to get the new stuff on, so we really make a statement at retail.

Okay. That's what I was wondering if -- and I was trying to figure out if you're dwindling the product, and whether it would dwindle in and dwindle out, that you are basically, almost a relaunch?

Absolutely. Yes.

Okay. Okay. And what about some of the -- I guess your -- this new team is also going to be working on new BornFree products? Kind of related products? Does that -- it sounds like maybe that is all for fiscal 2012?

Absolutely. We -- they already are. And what we did, was we did -- we actually started probably two to three months prior to the actual acquisition being completed. We kind of, bet on the comment, that the deal was going to go through. And we had our Vice President of Marketing, Lois Glasgow, she was doing both jobs for a little bit, and now she is fully in -- and responsible for the BornFree team. And she -- and the rest of the team, which she's put together a great team around her. They have already started working on, they started working on at that point, the whole -- they did a whole bunch of marketing studies, went through the packaging, went through the messaging, and the whole branding situation.

They were relaunching all of that. The product line itself, I would say 75% of it is -- what's existing, cleaned up a bit. And then about with 25% new products in January. But then, throughout the year, there's launches of new products throughout the year, including a number of other baby -- but we're really focused on infant, not toddler feeding. So we are going to stay focused on infant for now, and make sure that shine is complete, filled out, and really is a complete offering to our retail partners.

Okay. And it also sounded like, in terms of inventory, we are still seeing some destocking. I mean, it looks to me like some of the major retailers are still -- the shelves just don't look full. So that seems to still be what is going on. And based on what we have seen with obviously retail, things ourselves, not too shocking? But your --

Right.

I guess what I'm trying to establish is the -- do you anticipate that as you get into next year, kind of a change of heart on their part? I mean, how much longer can this go on, before the shelves are empty?

(Laughter). I think that's a great question. And I -- we track the numbers pretty closely. And there are, the major retailers certainly, I kind of have that same question, is, at a certain point you start losing sales? Right?

Right.

So I -- I think they are monitoring it very closely. I think that they're in a sense forced, with the economic outlook to keep it very tight. Maybe too tight in some cases. But at some point in time, hopefully it is with the New Year, I think that they'll -- assuming that we get some positive news in the marketplace that, that and in the economy, that things start getting back on track. I mean I don't think they can reduce it a whole lot less at this point. I think - I don't see how they can do that. But that's just me.

But I agree. At some point they are going to want the business, to maybe online or some other formats. But that 's what I have been trying to figure out.

Well, I actually think the online business, our online business is way up over last year. So with the majors, and with the -- with retail -- I mean online only retailers, I think it's definitely, that's definitely a concern that I certainly have, and they should have also.

Okay. And then finally just on clarification on the Prodigy, it sounds like it's in production right now? With the -- or is it already --

Yes, yes, it is.

-- and on the boat. Okay. And so --

Well, some of it's shipped, we have shipped some of it. And there's roughly four or five, six or seven S --SKUs, different actual products. There's the base, there's the travel system, there's the stroller and car seat separates. And then there is some online-only fashion that we are working on. So in total, I think there's about the six or seven SKUs -- so that the first shipments have already taken place, the product has been 100% released, and I'm sure that they are still producing. But the major initial shipments, pipeline shipments are going now.

Okay. All very helpful. Thanks, and best of luck.

Thank you.

We'll go next to James Fronda with Sidoti & Co.

Hi, guys, how are you?

Good. How are you doing?

I had a question, in terms of the cash -- are you looking to pay down debt, as you go along, in the next couple of quarter?

Yes. We think by the end of the year, that we can get the debt number down a little bit lower from where it is, where it is now. Some of that is going to be dependent upon how fast we end up growing for this year. So the faster we grow, the tougher it is to pay down a lot of debt, but we think are going to be paying down some more debt by the end of the year.

Okay. And some of this product development team, I mean, are you looking to grow that as you go along as well?

I actually feel like we are holding steady.

Okay.

The one addition that we made, was the feeding team, but that was as a result of the acquisition. So, obviously, there's sales that go along with that. But I feel that in this economy, holding our product development team as is, is the right decision. If we make any additional investments next year, it will be more on the brand side of things, social media, brand building, et cetera. Our product development teams are in really, I think, in very good shape. And we -- so we don't really plan on expanding it to any great degree.

Okay. Thanks guys. Appreciate it.

Thank you.

We'll go next to Lee Giordano with Imperial Capital.

Thanks, good afternoon, everybody. I had a follow-up question on the Prodigy launch. I was wondering if there is going to be any incremental marketing costs associated with the launch, and what plans you might have in store, as far as getting the word out about the new car seat?

The marketing costs of the launch is actually built into the numbers. So there is -- we are definitely putting some money behind it. We'll probably put more money behind it in the first quarter, and try to get the word out. Then also, we'll probably also will be working on additional fashions. We probably -- we are going to try to keep it fresh on the shelf, so that will be something we are working on also. But from a marketing perspective, they already -- we already have the launch planned, and built and baked into the numbers.

Great. And then Joe, how much of the pressure on gross margin relates to cost increases versus markdowns?

Are you looking at year-over-year, or just -- what's your --?

Yes, year-over-year. Year-over-year.

Year-over-year, I'd say more of the issue is going to be commodity prices and labor costs being higher, so just the -- it's kind of the basic input costs. We experienced some significant increases in the last months of 2010, that we are kind of living with now. And there's certainly, markdowns are certainly a part of the equation as well. But I think if you are looking at year-over-year, it is more of the, just the pure commodity and labor costs.

I would agree with Joe. I think also what is putting pressure on our margins is the product mix. Because we received quite a bit of placement in the furniture category this year, which we've said before, but I'll say again, it is definitely a low margin category, which we actually are hoping to innovate and bring some newness to try to help the margin picture, but also to try to stir a category up that is kind of -- hasn't had a lot of innovation over the last -- the standards, obviously, are a big part of what's going on. But I wouldn't call that innovative, per se, from a product features and benefits standpoint to a consumer. It is absolutely from a safety and quality standpoint key, but hasn't really brought, quote, innovation to that category. So that is what we are hoping to bring, and kind of formula to success for that category, which we haven't really done to date. We've brought some nice products, and nice outlooks, but less innovation which is really where we're focused.

Got it. Thanks a lot.

We'll go next to Dan Berner with Oppenheimer.

Hi, guys. I'm a bit new to the story, if perhaps you could just go back and explain what enabled the tax rate to fall from 30%, back in 2009 to 34% to the present?

We have really been undergoing a pretty significant transfer pricing strategy over the last year or two. We have operations in many different geographies right now. And so there has kind of been a kind of whole planning effort that's gone in place, to try to kind of maximize income in lower tax jurisdictions, I guess what it comes down to at the end of the day.

Okay. And regarding the Prodigy launch, actually I watched the presentation online. It was pretty impressive. I'm the father of two young kids myself What is the weight of the car seat sans the base?

That's a good question, I should know that, but offhand, I don't remember. I think it is equivalent to the [Kiko], but I'm going to misquote, so I am not going to -- I'm not going to say. I'll have to get back to you on that one.

Fair enough. And are you guys able to disclose at this point, what percentage of revenue are still going to your largest customer?

Go ahead, Jason.

I think it is down by high single digits. I think that is probably the best answer I can give you.

Sequentially,.

Year-over-year.

Yes, versus 2010.

Okay.

And just -- and I think it is worth saying that our intent is to continue to service all our customers, and grow certainly as fast as we can with all of our major customers. So it is not by design. It is simply we are working real hard with all of our customers. And it just so happens in the year 2011, the growth is not coming from our top customer, it's coming from many other customers.

Okay.

And regions for that matter, and also geographies.

Okay. And guys, if I could just rehash a bit about the cross selling? As I remember reading through the last conference call, I think you guys cited about 19,000 locations that are new to Summer that Born was distributed in? Does that sound right?

That's correct.

Yes, if you add up all the individual stores in the drug chains that they were doing business with, that's correct.

So I was listening to what you guys were saying earlier. Is there any way you could give us a little more granularity, in terms of the timing? When might we see any of your products distributed or cross sold in a CVS, or in a Walgreens, or something like this? I know it is sort of in the works, but should we not count this in, until 2012, second half or?

I think that is a great question, and, yes, absolutely a little bit more granularity. We have, within the summer line, there are products that do make sense for food and drug. It's a class of trade we haven't focused on in the past to a great degree. With the acquisitions, and now being a vendor of record and having sales into those customers (inaudible) around our sales talent, we actually, one of our Vice Presidents in sales, does have strong relationships within that class of trade, having called on them in the past. But we wanted a person that actually could dedicate 100% of their resource to that.

So from a sales perspective, we kind of feel like we have a good, solid team to call on that class of trade. From a product standpoint, we have BornFree, we're going to relaunch it. So I'd say by end of first quarter, early second quarter, all those doors food and drug, specifically we will work through and work into the new line. As I mentioned to Liz earlier, our goal is a fairly hard cut-in, so we get the new packaging and the new product out on the shelves with new messaging. So that is priority number one.

Priority number two, would then be, come up with a marketing strategy which we've already started working on, take some our lines and bring them into food and drug. It is an interesting study though, because their selling efforts, the customer that walks in the doors, is different than the customers that walks into the one of the major retailers, one of our major retailers partners. So you have to customize the product line a little bit.

Even if it's not a difference in product, it could be a difference in packaging and style, meaning more compact, smaller tighter footprint. It might very much have a different program, look and feel. So there are things we want to do from a marketing perspective to get our act together, to be able to attack that class of trade, and do what's right for their customer, and do what's right for their shelf. So I would say that's probably a mid 2012 kind of initiative, meaning that's when we would be looking to -- but a lot of it depends on their timing also.

Because, especially the drug stores don't change their [plan-a-grams] often. They may be on a, one year or two year, or even, I've experienced a three year programs, so I wouldn't say that is going to be an overnight kind of happening. But our strategy will certainly be in place, really by then of this year. And product will hopefully will get some listings, with some of the customers that do in fact start, their selection processes -- end of this year, early this year. And hopefully we'll have some action there, and get some incremental business.

And the 19,000 doors is including new doors in Canada, new doors certainly in the US, certainly with CVS and Walgreens, and a number of other, drug stores. But then also a few -- in the UK also. So there are different, a different mix of customers. But I think one that we can definitely leverage. But I don't want to, I think Joe and I want to set the expectations properly, to not expect a big windfall overnight. It's going to take a little bit of time and work to make sure that we do what's right for them as customers.

Fair enough. And just to be clear, the guidance you guys offered on the call today that includes some contribution from Prodigy for Q4 is that correct.

That's correct.

Okay. I'll hop back in queue.

We'll take a follow-up question from Sean McGowan from Needham & Co.

Thanks. Joe, I just wanted to clarify that of the $1.6 million in kind of one-time charges there, is that 0.7 of that is in COGs, and 0.2 is in SG&A? And that the 0.8 is specifically broken out as a deal-related costs?

Yes. Do you have, if you see the actual release, the very last section is kind of that that GAAP to non-GAAP reconciliation. So it's -- $650,000 would be in gross profit, $199,000 in SG&A, and the balance broken out separately as BornFree.

Okay. And Jason any comments about crib markets specifically, has it gotten a lot more competitive, are margins getting squeezed more there than the rest of the business?

Well, it is certainly a competitive category. There are definitely other well-entrenched competitors, that we are working against. But I think the new standards change, in my estimation will shake out some players, not necessarily big players in the market and in the industry, but certainly some of the smaller players, because it's simply getting too costly, and too difficult to get your product qualified, make sure it meets all the standards.

And then, certainly with the majors retailers -- prices, there has been some price compression, meaning the lower cost products in the category are selling the best. So and I think that's economically related. So I think the challenge for us, is how do we bring something new to the category, and bring newness and freshness that allows both the retail and us to make a little bit more money? So that's the challenge.

Thank you.

(Operator Instructions).

We'll go next to Rob Straus with Gilford Securities.

Hi, guys. How are you doing today?

Great. Thank you.

Just a few follow-up questions. So first of all, regarding BornFree, what percentage of their sales came from the food and drug channel?

It's not a big proportion of their sales. Most of their sales would be to mass -- to mass merchants or larger specialty retailers. So I'm -- let me estimate it is about 15%, 20%.

Okay. And we all know that retail traffic has been choppy and challenging. But if you can maybe give us some information on the trends in your core product areas, such as the monitors and what the traffic and sales trends look like for those categories? And also, if you are seeing any difference in geographies?

Well, regarding our existing lines, I guess the best word I can use is steady. I wouldn't say that they are up. Our sales per item are monthly trends, if you will. I wouldn't say they are up, but they are definitely holding steady.

And I think where the upside for us is coming is mostly new placements, whereas a year ago, I probably would have said that some of it is coming from a tick up in sales, with existing items. So it's kind of a fickle market. I would totally agree with that, Rob And I would -- it 's tough to predict where it's all going to go. But we are hoping, obviously, for a steady or uptick certainly in the fall.

Yes. And obviously gross profit margins are under pressure, and you have discussed the reasons for that. Jason, when you think of this business longer term, and the type of Company that you are putting together, and how you are growing it -- and I'm talking about over the course of, not the next couple quarter, but over the course of, let's call it, the next two or three years. Talk to us a little bit about the gross profit margin opportunity there, and where you think the opportunities are, and where you think that might be able to trend?

That is a great question, Rob. I'll actually, well, I'll answer that by talking a little bit about the six different areas that we are focused in. Yes, we definitely -- our -- the basie of our Company is innovation, innovative product, innovative features, good quality and high volume. So we're not -- our products tend to be better, best kind of positioning and higher price points. It is not because of the brand per se, like a designer brand, but it's more about the value you are getting, there's a lot more features and benefits.

So having said that, within our -- the real opportunity for margin is within, with innovation. So we are launching our new heat monitor, which was our internet-based upon more. It does not use Skype, like most of our competition. It's a totally ground-up product that we have been working on, for at least two or three years. And that is going to be very exciting in the marketplace.

We have a number of new bath products within the safety team, as well as gates, et cetera. Within our nursery team, we are really going after the safe sleep initiatives. We are certainly doing great within the specialty blankets, the SwaddleMe line of products. But we are also expanding it to other categories within the soft lines, and within travel safety.

Furniture, I think that's -- if I stopped there, furniture, feeding, play, our play lines, our feeding lines, our furniture lines, and our gear line. Other than gear, the other three are new within the last year or two, and maybe two years. And so to us, those are kind of the growth categories, and where we see that right now, where we are at is kind of a baseline.

And what we are trying to do, is we're trying to now innovate right into those categories, like the furniture category, like gear where we are launching a new product, like feeding where we are going to launch a completely new line probably mid-year. So we have a whole host of probably a dozen new products that we are really excited about, launching into the BornFree. And so, yes, that is really where our value, as a Company lies.

And meanwhile, so having said all of that about innovating within our key areas of focus, we also want to do some more work with our brands. So we are then building a strong strategy around our brands, both our three owned brands, and our two licensed brands, Carters and Disney. Within the Summer portfolio, there is Summer First, BornFree, and we are looking to relaunch our Kiddopotamus brand.

So I would say, we're going to -- but our goal -- and I think Joe has said this, and I have said this a number of times over the years, is our goal at this point -- and we have been saying it, but now we want to do it, is actually leverage our SG&A. So we don't necessary want to spend more than we are spending today, we simply want get more leverage with it. So more doors, greater placement, and continue the pace that we are at, where we introduce a fair number of new products every year.

Great. Thank you very much.

Thanks.

We'll go next to Dan Berner with Oppenheimer.

Hi, guys. I'm sorry, but going to follow-up a question on gross margins if you don't mind. Your third-party suppliers, do you guys have a sense -- and I only ask this question because, obviously, commodities are coming down quite a bit, as is pretty much all asset classes. Do you guys have I sense of how often they negotiate their contract prices for commodity costs?

Yes, that is a really good question. I mean, in China, our team over there tells us that over the last couple of years, it's practically gotten down to a weekly monthly kind of thing. And a lot of it has reverted back to cash. So in other words, not a lot of credit being given from commodity suppliers to our manufacturers, our third-party manufacturers.

So it's has certainly been a challenge on a variety of fronts for our manufacturers. So I -- actually commodity prices coming down is certainly good news. And if that sticks, I think that will give us some leverage over the following six months to negotiate more for the 2012 pricing, as we kind of work with our partners to establish 2012 pricing.

So far, we have been hearing 3% to 5%, but so much of the news coming out right now, and the mood out there both within China and within the US, I don't see, a lot of opportunity to raise prices, quite frankly. So we are going to be holding the line, just as I'm sure our competitors and other retail partners are going to be holding the line. It is going to be only as an absolute necessity, are we going to be allowing prices to rise or raising our prices.

So what about prices falling potentially, if their costs are going down? I mean, do you guys negotiate with your third-party manufacturers annually or quarterly?

Yes, yes. We negotiate annually for annual contracts, but they do fluctuate within that, based on commodities. The two caveats that most -- that certainly savvy manufacturers in China are holding out on are currency, and commodities. And usually, it depends on which goods you are talking about, whether it's a cotton-based good, or whether it's a plastics or metals or whatever.

So it really comes down to the individual items. I would say, just in general, if prices come down, then that is certainly, like I say, is good news. And I don't think anybody is going to be -- as there's been such compression within the industry, I don't think -- I don't think it's -- that you are going to see it at retail. But I do think that it will help us offset some of the pressure we have had over the last year or two.

And just looking back, you guys managed -- and (inaudible) still relatively new, but during the 2008, 2009 recession you guys managed pretty well to grow sales year over year. Now we may be entering or may not be entering a similar type of situation, gauging from the stock market of late, I mean, have you seen any kind of fall off in ordering the last couple of weeks, with the stock market capitulating?

We have not. I -- it's -- I would say, no.

Okay. Thanks, guys.

And we have no further questions at this time. I'll turn the conference back over Mr. Macari for any additional or closing comments.

I would just take a moment to thank everyone for joining us today on this call. Thank you for your continued support of Summer Infant over the years, and we certainly look forward to speaking with everyone on our third quarter call.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We would like to thank you all for your participation.