Summer Infant, Inc. (SUMR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Summer Infant's fourth-quarter and year-end 2012 financial results conference call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks.

(Operator Instructions)

I'll now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

Good afternoon, and welcome to Summer Infant's fourth-quarter and year-end 2012 conference call. On the call for the Company are Mr. Jason Macari, Chief Executive Officer; Mr. David Hemendinger, Chief Operating Officer; and Mr. Paul Francese, Chief Financial Officer.

By now, everyone should have access to the Q4 news release which went out today at approximately 4.00 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 webcasted, and a replay will be available on the Company's website as well.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, and that management may make additional forward-looking statements in response to your questions. 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 results or events to differ from those reflected in the forward-looking statements or information.

Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects, or similar references to the future. Examples of forward-looking statements include, but are not limited to, statements management makes regarding the Company's future financial performance, business prospects, and operating strategies.

There are many factors that can result in actual performance differing from projections and forward-looking statements. Please refer to the Risk Factors detailed in the Company's Annual Report on its form 10K for the most recent fiscal year 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 provide 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. The Company does not expect to update forward-looking statements or information continually as conditions change.

During the call, management will make reference to EBITDA and adjusted EBITDA. These metrics are non-GAAP financial measures, which the Company believes helps investors to gain a meaningful understanding of changes in Summer Infant's operation. For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures included in today's financial results release. And with that, I'd like to turn the call over to Mr. Jason Macari.

Thank you, David. Good afternoon, and thank you everyone for joining us today. We achieved a 6% increase in revenues in the fourth quarter, demonstrating our ability to drive sales growth amid challenging economic conditions. Revenues were up 4% for the full year. We believe that our sales have stabilized, and we are taking actions to further improve the top line going forward. More about that in a moment.

While we reported fourth-quarter sales growth, we experienced lower gross margins due to higher than normal close-out sales, increases in freight costs due to port issues in California, and higher mix of lower margin products. During the year, we took action to reduce certain promotional activities and other selling expenses that do not have a direct and positive effect on our ability to drive sales growth.

While total selling expenses were still up on a year-over-year basis for the quarter, we believe they have stabilized and were down in the fourth quarter compared with the sequential third quarter, and we expect that trend to continue. We have an ongoing effort to analyze the effectiveness of our promotional activities and their contribution to our bottom line. I'd like to emphasize that we continue to invest in marketing and advertising to promote our products where we expect these investments to make a real difference.

G&A expenses were down on both a sequential and year-over-year basis, as a result of the cost-cutting actions we took at the end of Q2. We expect G&A to decrease further in the first half of the year. In addition, the recent refinancing of our debt will result in lower borrowing costs that will positively affect our bottom line going forward. We believe that we now are heading in a positive direction, accelerating our path to profitable growth and generating enhanced shareholder value is our singular focus.

During the past few months, the Board and management have been working together to determine the near-term actions to implement in order to move to more quickly improve our operating model. At the heart of our strategy is a focus on delivering innovative juvenile products and building brands that bring value to customers and consumers. Our recent discussions are leading us to sharpen that strategy.

As a result, this year we are exploring new opportunities, and leaving behind those elements of the strategy that are not contributing to profitable growth. As I discuss our growth strategy today, I'll outline where we've made progress in the past quarter and highlight those areas where we are excited to take the Company in new directions.

Developing innovative products that delight consumers will always be at the core of what we do at Summer Infant. Success in the juvenile product space is defined by innovation, and our success since the Company's inception has been due to our ability to innovate. In the past year, we have solidified our development team, and we expect exciting new products from this team in the second half of 2013 and beyond.

In the fourth quarter, we launched a number of new products that demonstrate our innovation. Our new Lil' Luxuries Whirlpool Bubbling Spa & Shower offers new features designed for parents to pamper their baby. We also introduced our new Born Free three-stage nursing pillow, which is doing very well at retail. The pillow is fully customizable, and provides the right height for feeding baby every time.

In the furniture category, we are excited about our new Simple Adjust crib, which allows you to adjust the mattress height easily with the push of a button, instead of having to take the crib apart. The new Resting Up Napper is designed for inclined sleeping, in light of the new school of thought that this napping position is more beneficial for baby.

We also launched two new baby gates with innovative features. We expect to introduce upgraded monitors this quarter, and in April we will relaunch our Prodigy car seat. Later this year, we plan to roll out the second generation of our Peek monitor system, as well as several new Born Free electronic feeding products.

The second element of our strategy is aggressive brand building. As a result of our sharpened strategy, we are taking a more streamlined approach on our core brands, Summer and Born Free. As we focus on our own brands, we will be moving out of licensing agreements that do not contribute to the profitability of the Company. Our license agreements with Disney and Carters both will be concluded by the end of 2013, reducing royalty expenses.

We estimated license brands would have accounted for approximately 15% of 2013 revenues. We expect that approximately 60% of formally licensed programs could be converted to Summer or Born Free branded programs by the end of 2013. We've already had conversations with our major customers, who are supportive of this move. Our brand now has the strength to carry us into all of our product categories. By simplifying our business model and eliminating royalty expenses, we expect these additional Summer and Born Free branded products will provide improved profitability.

Heading up our brand building efforts will be Elizabeth Jackson, who has been working with us on an interim basis since mid-2011. She will now be fully focused on this initiative as our fulltime Chief Marketing Officer. In addition to our marketing consulting work with large companies with strong brands, including Proctor and Gamble, where she worked on the Pampers brand, Duncan brands, and Gillette, Elizabeth has deep experience in the juvenile products market. We're looking forward to her contributions as we focus on strengthening our Summer and Born Free brands.

Dovetailing with our brand-building actions, we are also sharpening our focus on our core product categories, including monitors, safety, nursery, furniture, feeding, and gear. While we are not getting out of any one particular category, we are continuously evaluating which categories provide the best return on our investments and product development resources, and which categories may need to be streamlined in the future.

We've long talked about the need to diversify our customer base, and one way to affect that change is through geographic expansion. International sales grew 19% year over year in the fourth quarter and represented 15% of revenues in 2012, up from 13% in 2011. We are on track to grow international sales to 20% of revenues by 2015 through leveraging current retail relationships and distributors in Canada, the UK, Australia, and targeting new customers in other attractive international markets.

We've also been successful in growing the number of our small to mid-size customers in the US. In 2012, we reported 19% year-over-year revenue growth to approximately $10 million from these specialty retailers. We expect to increase revenues from these customers by 20% in 2013 over 2012. The foundation of all of our efforts is a commitment to operational excellence. We are taking several actions that, together, will move the needle in our drive to grow margins. As a result of our product line analysis and rationalization program, we are working to either improve the profitability of our low-margin products, or eliminate these items from our offering.

For example, our strategy to improve the profitability of our furniture product line is to reduce the amount of capital needed for these items by converting to direct-import programs, reducing overhead, and eliminating licensing fees. In 2012, we implemented a direct-import program that we plan to expand in 2013. The direct-import program reduces shipping time to our customers and improves profitability. Through this program, products are shipped from the manufacturing site directly to the customer, bypassing our warehouses.

We are also in the process of consolidating our overflow warehouse in California into our main warehouse, which we expect will result in an annualized savings of $72,000. We also will be closing our warehouse in France and consolidating inventory into our UK warehouse, resulting in annualized savings of another $60,000. By the end of the year, we expect that all four of our top customers will be using the direct-import program for furniture.

In addition, although Carters is a well-recognized brand, our Summer brand has gained acceptance in the furniture category, and we believe that our sharpened focus on our own brand will further strengthen our market presence. This category is strategic, in that furniture is one of the first purchases made by new parents. So it is a critical brand-building opportunity with consumers. The actions that we are taking, including growing the direct-import program, reducing overhead, and moving away from licensed brands will make a measurable difference in the profitability of this category.

We also continue to exercise strict financial discipline. We've made progress in reducing general and administrative expenses, and will continue to focus on reducing overhead through a number of new actions taken during this first quarter. These include warehouse consolidations, an 8% workforce reduction, a decrease in CEO and Board compensation, and a temporary moratorium on merit pay increases. Taken in total, we expect that these actions will result in a G&A reduction of 10% year over year for 2013.

We're also taking actions on the product side to reduce expenses. First, we are evaluating our products to see where we can use reengineering to reduce input costs. In addition, we're lowering costs through the rationalization of SKUs. Our current SKU count is 1,100, down from 2,400 at the end of fiscal 2011. That's a 54% decrease in one year. We anticipate reducing our SKU count by an additional 20% to 25% in 2013, which will provide us with a much more efficient overall SKU base. These actions on the product side should result in annualized savings of $2 million, and $1 million realized in 2013.

I'd like to summarize by saying that, while we remain committed to the core elements of our strategy, including product innovation and strong customer relationships, we are strictly focused on increasing margins, generating profits, and enhancing shareholder value. That means taking bold new approaches in some areas of the business, while leaving behind other areas that do not contribute to profitable growth.

Taken together, we believe that eliminating licensing payments, expanding the direct-import program, consolidating locations, and reducing corporate overhead will have a real and meaningful effect on our margin performance going forward. After Paul provides a review of our fourth-quarter financial performance, I'll be back to offer some color on Q1 and the year ahead. Paul?

Thank you Jason, and good afternoon everyone. Net revenues in the fourth quarter of 2012 increased 6% to $58.5 million from $55.4 million in the fourth quarter of 2011. The revenue growth was driven by increases in furniture, safety, play, and monitor categories, as we continue to launch innovative products and diversify our customer base. Gross profit totaled $18.3 million in the fourth quarter of 2012, compared to $19.5 million in the fourth quarter of 2011.

Gross margin in the fourth quarter of 2012 was 31.2% of revenue, compared with 35.2% in the fourth quarter of 2011. The decline in gross margin was the result of increased retail program cost, increased freight cost, a higher mix of lower-margin products, and the rationalization of certain product offerings and SKUs that had been removed as active items.

As we execute our operational excellence strategy, we have been analyzing product offerings, and certain products or SKUs have been removed as active items. These items, when sold, are typically sold at a lower margin. Selling expenses were $7.3 million in the fourth quarter of 2012, compared to $5.8 million a year ago. This increase is primarily attributable to higher selling costs associated with customer cooperative advertising and other customer promotional expenses, and increased licensing costs.

G&A expenses decreased from $11.6 million in the fourth quarter of 2011 to $10 million in the fourth quarter of 2012. The fourth-quarter 2011 G&A expense included $1.5 million for a product lawsuit settlement, and fourth-quarter 2012 G&A included $0.6 million of expense associated with the compliance to the November 2012 loan amendment, and costs associated with our loan refinancing efforts.

Interest expense in the three months ended December 31, 2012 was $1.6 million, compared with $0.7 million for the three months ended December 31, 2011. The increase in the fourth-quarter 2012 interest expense was due to higher borrowing levels to support the working capital, as well as increased interest expenses resulting from the November 14, 2012 loan amendment, which was retroactive to October 1, 2012.

We reported a net loss of $1.5 million, or $0.09 per share, in the fourth quarter of 2012, compared with a net loss of $0.4 million, or $0.02 per share, in the fourth quarter of 2011. The Company recorded a tax benefit of $0.9 million in the fourth quarter of 2012, compared with a tax expense of $11,000 in the fourth quarter of 2011.

Non-GAAP adjusted EBITDA for the fourth quarter of 2012 was $1.7 million, compared with $4.3 million in non-GAAP adjusted EBITDA in the fourth quarter of 2011. Adjusted EBITDA for the fourth quarter of 2012 includes $0.6 million in permitted add-back charges, compared with $1.9 million in permitted add-back charges for the fourth quarter of 2011.

Now turning to the balance sheet. As of December 31, 2012, the Company had $3.1 million of cash and $64.1 million of bank debt, for a net debt balance of $61 million. This compares with $1.2 million of cash and $62 million of bank debt for a net debt balance of $60.8 million in 2011.

We reached a major milestone at the end of February, when we entered into a new fully underwritten loan and security agreement with Banc of America. The new agreement expires in 2018, and provides for an $80 million asset base revolving credit facility. The loan bears interest, at the Company's option, at a base rate plus 0.25% to 0.75%, or at LIBOR plus 1.75% to 2.25%. The agreement includes covenants relating to minimum consolidated EBITDA and fixed charge ratio, as well as customary affirmative and negative covenants.

We also entered into a $15 million term loan agreement with Salas Capital Partners as administrative agent and collateral agent. The principal of the term loan will be repaid on a quarterly basis in installments of $375,000, commencing on the quarter ending September 30, 2013, and matures in 2018. The term loan bears interest at an annual rate equal to LIBOR plus 10%, with a LIBOR floor of 1.25%.

The term loan contains customary affirmative and negative covenants, substantially the same as the Banc of America agreement. We expect, as a result of the refinancing, our interest expense will be reduced by $1.2 million in 2013 from 2012. Management of the Company's working capital continued to be a focus in the fourth quarter.

Trade receivables as of December 31, 2012 were $45.3 million, compared with $47.7 million on December 31, 2011. Inventory at year-end 2012 was $49.9 million compared with $50 million at year-end 2011. Accounts payable was $27 million at year-end 2012, compared to $29.5 million at the end of 2011. The Company procures its inventory on credit terms with its vendors, and practices to submit payments weekly. To improve working capital management, we are collaborating with our suppliers to amend some of our payment terms, and we also have worked with some of our customers to shorten terms with them so we can improve our cash cycle.

In the third quarter of 2012, the Company recorded the impairment of its goodwill, intangible and long-lived assets. The impairment charge resulted in a $61.9 million impairment charge for goodwill, and an impairment charge of $7.9 million for intangibles. The impairment charges are included in the Company's December 31, 2012 balance sheet. And with that, I turn the call back to Jason for some closing comments.

We are encouraged about our future, and excited by the actions we are taking across the business to generate profits and enhance shareholder value. On the sales side, our first quarter year-over-year performance will be affected by a soft retail market, our product rationalization efforts, and the reduction in licensing revenue, but our focus is on margin enhancement and profitability, and that is where we expect to see improvement in Q1.

For the first quarter, we expect bottom-line improvement over the fourth quarter, due to our cost reduction initiatives, including our efforts to effectively manage promotional and advertising dollars, lower G&A expenses, and reduce borrowing costs due to our new credit agreement. Looking at the full year, we expect 2013 to be a turnaround year for us, as we execute on our strategy to improve our bottom-line results through innovation, building our brands, leveraging customer relationships, diversifying our customer base, and achieving operational excellence. With that, Paul, Dave, and I would be happy to take your questions.

Thank you.

(Operator Instructions)

James Fronda of Sidoti & Company.

Just in terms of the promotional activity during the quarter. Do you think that was somewhat of a heavy one-time thing for the quarter, or do you expect significant promotional sales in 2013?

The selling costs or the promotional dollars that we provided to our customers in 2012 was definitely higher than normal. We basically, when you look at the P&L, that was one glaring issue on our P&L, was our overall selling cost, which we believe we have most of the worst of it behind us. I think we're actually look -- are looking for significant improvements in 2013.

Okay and in 2013, I guess the newer products that you plan to roll out, you think you'll be able to sell those at full prices, for the most part?

Yes, I think 2012 was somewhat of an exceptional year in that we had a lot of changes going on in the line. We were moving in and out of products and brands, and I think that we are in a much more stable position today than we were a year ago in terms of our product line and in terms of our listings.

Okay. All right, that's all I had guys, thanks.

Thank you.

(Operator Instructions)

Sean McGowan of Needham & Company.

First Jason, generally speaking, can you comment on what your view is of how the industry is going? We've been hearing about birth rates, we've been hearing about disruptions at retail, and key players donating market share, or however you want to put it, but how would you characterize the overall industry? Is it settled? Is it still in flux? And related to that, you mentioned some of the alternative channels. Can you be more specific about what those opportunities are, and how quickly you're able to capitalize on them?

Sure. Well, first of all, as far as the overall market goes, I would say that third and fourth quarter seemed to be a I'll call it a unsettling time, settling time meaning sales were down in juvenile. I think that the retailers were bracing themselves for a negative selling period or negative economic outlook, and I think that bottomed out in February, as you can -- when you read Wal-Mart and a few other major retailers' releases, but I think it has started picking back up, and we've been encouraged recently by the orders coming in.

Absolutely birth rates are down, but they supposedly bottomed out in 2011, and everything we read says that we've got a couple percent increase in 2012, which hopefully starts helping us in 2013 put a little wind in our sails. Everyone is still a little jittery about the economy, but I'm cautiously optimistic that we've seen the worst of it, and it should start getting a little better.

And the channels?

With respect to the channels, we as a Company, we've been, we were focused on one large retailer and a few other larger retailers who -- our customer base was not as diversified as maybe some of our competitors who have been in the market longer, and our thoughts are very simple. We certainly want to partner with and take care of our best accounts and biggest accounts, but there are some opportunities that we are starting to tap into and realize, andwe've been putting more time and attention into, which international has been growing nicely, as we mentioned in the release.

The smaller and mid-size customers, our product line in years past probably wasn't well-suited to this channel, and some of the development that we've done over the last few years seems to be more suited, better suited, including the new strollers and car seat that we came out with. The new ones that we're shipping, as we speak and into second quarter. Some of our more expensive monitors, and just in general we have certain categories that we've skewed towards the high end of the category that can do very well, products can do very well in that channel.

So we've been seeing nice gains. And that includes online retailers, such as diapers.com, but also includes brick-and-mortar specialty retailers, which it's not -- it's a class that has lost its numbers and ranks, but they still are alive and well, and I think there's been a nice movement in the US towards supporting local businesses, and those businesses, when they can carry a unique product or a differentiated product from the mass can do well. So we have, I think, more products to offer where we didn't a couple years ago.

Maybe you said it specifically in your comments, but maybe I missed the specifics. You said there was a group of alternative retailers, or whatever you called it, that you expected to be up 20%. What is that group?

Yes, we refer to them as the specialty group of accounts, but it's a group, it's some independent retailers, bricks-and-mortar, it's some Internet retailers. It's some alternative channels that we normally wouldn't tap into, and we built a bit of a sales team against that over the last couple of years, including some sales reps out in the market. And I think that we're starting to see some nice pick-ups in business there, although not huge, are important and become something that we can grow, that we can nurture and grow.

Okay, thanks. Maybe these questions would be better for Paul, or not. It does dovetail on something that you said, Jason. You talked about the G&A cost being lower in the first half, and then later, I think maybe Paul said that G&A will be cut 10% in 2013. When I put those two comments together, are you suggesting that all of the reduction would come in the first half, or is it down throughout the year?

Our G&A, we believe, for the full-year 2013 will be down 10% from last year. I would say in the first quarter and second quarter, it will be a continual, hopefully positive, or reduction in the overall G&A cost. Some of the cost-cutting that we've done started in second quarter of last year. Some of it, quite honestly, is just starting to take effect between tails on different things that we had to do, and we actually have done some reductions on FTEs, as well as closing certain facilities and just general overhead reduction over the last even three months.

To answer that as well, as we track our G&A monthly, we believe we're going to see a continuous improvement through the first half of the year by month. There are some costs associated with the restructurings that we've accomplished. So as they feed off and end, we'll get to a steady state of what our G&A run rate will be, and we believe that's going to be some time at the tail end of the second quarter.

Okay. So do I correctly interpret that, that you'll see big reductions year-on-year in the first half, or by the time you get to the second half you'll be anniversarying cuts, so we won't be seeing as much of a reduction second half to second half? Is that right?

That is correct. Our goal is to always have improvements, but we foresee most of those improvements happening and getting steady state by the second quarter of this year.

Okay, thanks. And then last question before I get back in the queue, for you, Paul. You mentioned the lower borrowing cost, and I'm just trying to conceptualize how that can be with what appears to be a higher base. Is it because some of the costs in last year were one-time nature that showed up in interest, or is there in fact expected to be a lower borrowing base throughout 2013?

It's actually going to be a combination of both. We're going to have a lower borrowing base in 2013 as we better manage our working capital, but also our cost of debt has gone down year over year. When we entered into the amendment in November, there were two things that occurred. One, there was a 2% pick that was added onto the cost, as well as an increase in the borrowing rate, interest rate.

Right, okay.

When I look at our current loan structure, the revolver in the term loan, our interest rate is lower than we're experiencing with the old debt structure.

It's really related to some of those penalty-type things, right, that were in place?

Well it's the pick, and it's also a lower blended rate that we're incurring this year.

Okay, thank you. I'll get back in the queue.

Thank you.

(Operator Instructions)

Rob Straus of Gilford Securities.

Jason, I just want to ask you, for a long time you've talked about a challenging market, and I think you've laid out some of the items and reasons for that. What I'm more curious about is when you consider that challenging market that maybe continuing in 2013, what are your assumptions for that challenging market in your own business prospects? And how should we be thinking about this as we model your financials going forward, whether that challenging market per your assumptions is going to stay the same, if it's going to get tougher, or if it's going to get better?

Well, I'm the eternal optimist, so I always think it's going to get better. I think the market right now, I feel like has stabilized. I do feel that the worst is behind us. Retail comps are really what I keep an eye on, and when I talk about difficult market conditions or economic conditions, I really am looking at what's selling and is it the higher-priced goods, or the lower-priced goods, or year-over-year comps, or even sequential comps, is what's the trend?

And I think that what we've seen it do at retail is it took a dip in parts of fourth quarter and into January and early February, and then we started seeing it turn around. And what I was seeing in retail point-of-sales was reflected in comments by a number of major retailers. So what I was seeing was consistent with what they were saying. I do see it having bounced back somewhat, and feeling, again, cautiously optimistic that the worst is behind us and that we'll start seeing it turn around.

One of the big challenges, especially when you're talking about the average consumer, or it really comes down to what's taken place in their paycheck and with gas prices. Those are the two big effects that we've seen, and as one of the major retailers said, when gas hits $4 a gallon, it seems like the consumer puts their wallet in their pocket. And so that's definitely an indicator of what's going on.

I do think that the market is stabilized. I think we'll start seeing, at least if not positive comp stability, and in our business, directly in our business, we feel like we have a solid plan for the year, and that in cases, when we talk about in '07 through well really for us, '02 through '08 or '09, we were -- not only gaining in sales, but we were gaining in market share. So existing items were selling more and we were gaining market share. Today, the existing sales seemed to be, they were declining for a year or two, and now they seem to have stabilized. And now, hopefully, pick-ups in new market share will be realized positively in our P&L.

So we're encouraged, I would say, but it's going to be a different sort of year. When we talk about turnaround, we're less focused on the top line and more focused on the bottom line. And so we know that we need to improve our operating performance, and I would say that, as I stated in the release, that we could even see sales dip a little bit, based on rationalization of SKUs or dropping items that maybe aren't adding to our profitability. So we're really focused on the bottom line, is what I'm saying.

And the trends in January and February that you experienced, were those worse from a challenging market standpoint than what you experienced in the fourth quarter?

Our sales were not. Retail was, but it has picked back up. So it seems to be, last year sales started picking up around mid-January, third week in January. Sales this year started picking up around the second week in February, which I think was just an interesting dynamic on the delay. I don't know if it was weather-related. It could have been a number of different things, but that's what we saw.

What we have seen, though, is starting around mid-February, we've started seeing the numbers at retail start picking back up, and a number of the major retailers run baby sales and promotional things starting around that time. So that was a good thing, and it started kind of jump started our categories.

Would a later tax rebate season impact your business as well?

Absolutely. There are definitely retailers that impacts. Not every single one, certainly, but certainly the major retailers, yes.

My next question is more structural, and just so I understand your business. When we think about the retail program policy that you have with your customers, tell me about the timing of those retail programs, the co-op ad dollars and things like that. Is the timing on an as-you-go basis, or is it on a reset basis, whether that be every quarter or annual or whatever?

Typically, it's on an ongoing basis. We tend not to do one-hit kind of things where it's at the end of a quarter or at the end of a year. We tend towards pay-as-you-go, and provide promotional funds as the retailer executes those programs. One thing I would say about those programs is that we definitely took our pain last year, and I do believe that we will see some significant improvements in that in the SG&A lines.

The selling part, because we are just being partnering with our retailers in a different way, it's more strategic, less reactionary, more about truly driving incremental sales, and less about margin enhancement, and we both win. That's the goal, is having a win-win promotional activity. And then G&A, we outlined some of the cost savings there, but I do believe that our trend is very positive on both fronts.

At the retail level, what's happening with shelf space that you have, staying the same, is it shrinking down a bit? It should shrink down, given your SKU rationalization, but what is going on on the retail shelf space that you have today?

I think it's safe to say that we probably will see some erosion, at least in the first half of the year, and that comes at both the license brands products, specifically Disney probably more than Carters. Carters, we have a little bit longer in the contract, or in agreement with them. So that will take a little bit longer, and we're working with them very closely, both of them. But I do think that we'll start seeing some reductions there.

In mid-year we have some new placements with different retailers. So there's some give-and-take going on, but I think net-net we'll probably see some less shelf -- we'll probably lose a little shelf space, but hopefully the shelf space we're losing are on items that are either poor margin items or poor performers.

Last question, regarding the direct-import program. I don't know what you can share with us, but I was just curious. Right now, your current direct-import program, what is the dollar amount as it relates to your sales associated with that program? And what I'm trying to do is get a feel for how far you are with that program, and what your eventual target is.

I think we're probably, in terms of percentages, we're probably 8% or 9%, 8% to 10% of our sales are direct-import right now. I think we're probably targeting not much more than 10% or 15%, but it is centered around lower-margin goods that we believe are strategic, but that for whatever reason, don't carry a high margin with them. And it just reduces the cost of capital, or the capital required to do that business, and it actually streamlines the supply chain, takes cost out for everybody. And I believe that it delivers the product on the shelf at a sharper price.

I believe that retailers that have the financial capabilities to do it and the operational structure to do it, which are all, really, all of our major customers at this point, it's beneficial to both of us. It reduces the amount of capital that we have in so that we can in fact deliver the items at the sharpest price, and our return on capital is significantly improved over that.

I would say all in all, it's not meant to be -- we're not saying we're going to do a large portion of our line. We're using it in certain categories and selectively around mainly furniture, private label business, and those are the two main areas, but if anything else comes up that would be advantageous to use that program, we have it in place. It does take a bit of time and energy to get it in place, because many of the factories have to be approved. There's a quality process you have to go through. So it's an investment of time and energy, but once you're there, it can be a clean, smooth piece of business that everybody wins on.

Just one more quick question. Obviously, to a lot of us who have been paying attention, big box has been, or some big box, has been losing market share. Is that market share going to the small and mid-size specialty retailers that you're placing the bigger effort on, or is that big box market share loss going to other big box?

That's a real difficult one to comment on, but I would say generally speaking, the mass merchants are doing well in this economy, and they have picked up market share. And I would say that Internet and specialty are holding their own, and Internet certainly is growing. It's an interesting dynamic with a mom that's expecting or just had a baby. There's nothing like sitting there and ordering a product off the Internet, so -- and having it delivered to the door, especially big, bulky, heavy items such as furniture or gear.

So those particular category sales continues to grow on the Internet, and I think it is just, especially for our demographic, for new moms, it's a awfully convenient way, especially with many retailers online, retailers offering free shipping and enhancing the deal for moms. So I would say that it's gone a number of different places.

I think that many retailers have been very vocal about the whole show rooming aspect of the business, and looking for more differentiation, which we support and have tried to support with, but with all of our retail partners. So there's that constant battle between too many products, and also giving a retailer some point of difference from the rest of the market.

So I would say that it's going in a number of different places, but retail right now is definitely shifting. We all know that. That's been well-documented in the market, well,in the news. So everybody is trying to make sure that they're covering it with these multi-channel strategies, and so to answer your question, the market's changing, and it's going in a number of different directions.

Thank you very much for your time, and good luck.

Sean McGowan of Needham & Company.

Just wanted to circle back to the commentary about expectations for the first quarter, Jason. I think you said you expected to show improvement over the fourth quarter. Are you deliberately not saying that you expect it to be profitable?

That's a good question. We honestly don't know sitting here. We still have a portion of the month to complete, a portion of the quarter to complete, and it always seems that our last month is our strongest shipping month. So I would refrain from commenting. I would just say that it's definitely going to improve from fourth quarter, that we're hopeful that we will show an improvement in performance, both EBITDA, and hopefully net income will turn positive. But we're not commenting on it, simply because we're in the thick of it right now.

Okay, I wanted to go back to the prior question for a moment, when you're talking about direct import. When you were saying that you expect to increase that, and you made comment that your existing program is with stuff that tends to be lower margin, would you expect that if you increase the amount of business done direct import overall, that the effect on the total gross profit margin percentage would still be negative, but the effect maybe on gross profit dollars, or operating margin percentage would be positive? Could you help us clarify what the impact is going to be, when all of the dust settles on that?

That's really a good question, and we've asked ourselves that. It could negatively affect gross margins but positively affect the gross profit, and ultimately net profit. Program costs tend to be different with direct-import programs. It tends to be more of a net business versus a program business, and so you could see a negative. I don't think it will be huge, because it's not a huge part of our business, but you could see a tick down in gross margins but a tick up in net income.

Okay, and then my final question, regarding getting out of some of these licenses, and I'm particularly interested in your thoughts on the Carter and cribs. Obviously when you got into that, you thought Carter was a pretty good wedge to get in the marketplace, and that it was a good brand for consumers, and you had a good partnership. Let's just take it for granted that Carter doesn't feel any worse about their license, about their brand than they used to. Is somebody else going to jump in now and use Carter as a wedge, and could you wind up facing more competition?

Yes, that's definitely a possibility. The one thing I would say about Carters is that it's a great brand. It has great market presence, and in their core categories, they're really the best in the business. On the flip side of that, our categories are about as far afield as we can -- as they probably have in their licensing pool, meaning gear and furniture are probably more unrelated to clothing and soft lines than most of their key licensees.

Now having said that, we had tremendous success when we first signed up with them, and from -- I think we signed up four-plus years ago, and the first year or two we had very good success. The retailers, for whatever reason, seem to have moved away from that brand in the two categories that we have licensed with them, which are predominantly furniture and gear, which would be in home gear, such as high chairs, et cetera.

And so it's for us, we have nothing but good things to say about Carters. We just felt that, for us, it was time to invest in our brand, and we believe that we have listings, or were able to get listings in the Summer brand in those categories, and the sales have been encouraging. So it was, for us the right move to just focus on our own brand, simplify our business model.

It does take time and energy to manage license brands, which stands to reason. They have their own internal needs, and you need to be compliant with all of the things that they set up for their licensees. So what I would say is, it just simplifies our business model. We think that we won't lose a whole lot of business because of it. There will be some certainly, but net-net it will be a positive for us. And it really allows us to simplify our business model and focus on our own brand, and much of the crib business, for instance, will convert over to Summer branded product.

The gear, we were, honestly, come down to a pretty modest number, and I think that will convert over to mostly to Summer. And Disney, there's some piece of the business you just simply can't convert over, because it's so unique being character-based, but there is some parts of the Disney business that we've been able to convert over to Summer programs.

So I would say that generally it's difficult to make these types of decisions, but within our current thinking, our Summer brand has gained very good acceptance in the marketplace, has good brand recognition, and we need to invest in that. And it's awfully difficult to do when we're trying to streamline overhead, and streamline our business model, and serve multiple masters. So by focusing on Summer and Born Free, brands that we're in control of, we think that we can grow much more profitably, and ultimately enhance shareholder value, because of the strength of our own brands.

Okay, thank you.

Arnold Brief of Smith and Harris.

Goldsmith and Harris. I'm a little confused on the crib furniture side of it, where you seem to be going into direct imports. Correct me, I'm sure I'm wrong, but my impression of that business was you had to really carry a lot of inventory so you could service the retailers on a timely basis as opposed to the longer lead time required by a direct import. So that's one question, if you discuss that.

The second one is do you see any stabilization of BRU's private label program, which they've been going into more and more heavily, and do you think that program, along with the impact someone like Amazon has really changed the nature of the industry? I ask the question because it seems to me that what BRU is doing is focusing more and more on their own private label, a couple of key brands, and then focusing on some major licenses, licensee programs, particularly Carter and Disney. I'm a little bit surprised you're withdrawing from programs which, seemingly on the floor BRU, they are focusing on, along with their own private label and a couple of brands.

Sure, let me start with the furniture DI. By moving to direct import, it reduces our inventory by shipping product direct from the factory direct to our retail partner. We have a quality group in mainly China, but also Vietnam, that makes sure that the product was made to spec. We test it, we inspect it, and then it ships to the customer. We never inventory it.

So by going to direct import, it reduces the amount of inventory, and ultimately the amount of capital we have in that category. I think that's the only way, really, to service the major retailers with the margin requirements needed in those categories. So I think that it's actually a positive pick-up from an inventory standpoint when you go to DI.

Well, I think it's a -- excuse me, I think it's a positive impact on your inventory, on your capital investment. There's no question about that. My question is more to the point of, can you service those people properly without carrying that inventory, particularly if your competition is carrying inventory and willing to carry that inventory? You're forcing the inventory on the retailer, and if your competition isn't doing that and can service the retailer, doesn't it weaken your competitive position?

Yes, actually thanks for clarifying. I didn't quite understand that part of the question. We do, in some cases, hold somesafety stock. Oftentimes retailers, if they go DI, will require us to carry a couple weeks of inventory, so if we see any spike or they see anything happen, then we'll cycle that through every three or four months. We do that.

So it's not this situation where you can totally eliminate carrying some inventory in that category, but it's the 80/20 rule. We'll move 80% of it to DI and carry the 20% needed to service the accounts. It's a good question, but most major retailers are comfortable with this type of program in categories that are somewhat predictable, like these types of categories. You comfortable with that?

I understand the answer.

Okay. Babies "R" Us private label, I know that they continue to develop private label products. We certainly participate, I think as I've mentioned in the past, in their private label program. I honestly can't predict the future. All I can tell you is that we're very happy with our level of -- the level of commitment from Babies "R" Us with our branded merchandise, and we're here to support their needs. They are a great partner, and we'll continue to, I think, grow with them.

So it's a part of their business, not the whole business, and I think that they recognize the need for a balance between national brands and private label. So I can't predict where it's going to go, what kind of balance they will strike, but I can tell you that they've been very supportive of our brand and of our product-development efforts, and within our key categories. So I'm happy with that.

The license product piece is an interesting comment. If you look back, I would agree with you. If you look in the rearview mirror, I would agree with you, but not everything has worked in that arena. And I can only comment on our piece of business, and not everything that was licensed was working. And in addition to that, when we've moved from license product to branded product, our brands, or even private label, I can tell you our brands, in some cases, have worked much, much better.

So not everything works when you license products. I can just tell you that everything we touched that we licensed did not work, and sometimes our brand actually performs better in certain categories. Just to give you a simple example. Our bath line, we think, performs extremely well at retail, and some of the license product that we put on the shelf did not perform nearly as well, and it's just the way it is. So we're encouraged by that.

Could I squeeze in one more question?

Yes, you were asking about Amazon, too.

Yes.

The thing about Amazon changing the nature of it, the Internet and web sales absolutely is changing the nature of the business. Amazon is a good customer too, and the challenge there is, and I don't think this is any secret, but there's a third-party aspect of Amazon that sometimes drives prices down and hurts everyone, and that's the challenge for most branded companies today, is how to manage that and not let it hurt your customers that are full-priced customers. So that's the challenge. When I say full-priced, I mean full retail priced. So that's the challenge, is not letting discounting hurt you in the internet space.

Last question. When you go into the store, you can see your strength in safety, bath, monitors, a few categories like that where I think historically you've been strong. I'm just wondering, your venture into some of the soft goods, the Swaddle Me line, bedding, you have some bedding on the back wall now. Are those lines successful enough to be encouraging, and expect them to continue, or are they some of the SKUs that you're cutting back on?

I think that's a great question. No, that's a great question, because in our 8-K that we put out, there was some question about specifically furniture gear, and we called it soft lines, and furniture and gear, we are invested in, we continue to develop in. We're gauging our investment because of, we have many products that are already developed that we just simply want to sell. So that it doesn't require any additional development investment, but we're going to strategically invest.

On the flip side of that, the soft line has been our excellent performer. Our Swaddle Me line of products is number one in the marketplace in swaddling. Its really become, I think, a brand of choice, and it's a great part of our business. And we're going to continue growing that and developing that, and soft lines in general has been a successful area for us, and we plan on investing.

On the flip side of that, you mentioned back-wall bedding and fashion bedding. We're going to be really selective in any bedding that we do, where I would say that we're not, quote unquote, a fashion house, although we are fashionable. We have a fashion team and we are focused on that, but I think it's unrealistic for us to try to compete in the fashion business. And so Swaddle Me, although it's fashion, it's a very fashionable business. It really is an engineered product that we have and will continue to invest in, as I said, and come up with brand extensions and product extensions.

So hopefully that answers your question, and how we see those categories and how we're going to. I think the 8-K may have lead some people to believe that we wouldn't invest in those categories. That's not what -- really we're saying was that we are evaluating them, and analyzing the return, and adjusting our investments accordingly, but that we have some great products.

Our new car seat and stroller, I think is awesome, not to get everybody too excited, but I really think it's a great product. I'm excited to see that out on the floor, and see it sell and I'm really -- Swaddle Me line is doing extremely well. So I'm happy with that. And our furniture line, the model that we're building, if we can get everything converted over, it's going to be a very successful piece of business.

One of the key things that we, as a Company, believe in is first-touch products with mom. And so we want mom and dad, when they are seeking out their first products, when prenatally or after baby's born, we want them to be looking for Summer products. So although furniture is a low-margin business, we do believe it strategically can help us our brand building, and help the business, and deliver profitability.

Okay. What I'm fishing around a little bit is that when I go through the store, a lot of your presentation today is focusing on core products and reducing SKUs, and it sounds like you want to be in the products where you have some critical mass and brand strength, et cetera. And when you go through the store, you see that in the monitors or the bath, the safety. You see it in the Swaddle Me line. When you look at the cribs, you've got, I think in BRU, the last I saw, I think it was one SKU of a crib on the floor.

You go in the bedding, there's one SKU. It's really not at critical mass in terms of presentation on the floor versus the competition versus the license brands versus Heidi Klum, et cetera. So I was a little surprised that you're so focusing on some SKU areas, which you don't seem to have the same strength as you do in some of your other areas.

I think that's a fair comment, but I think if you -- your numbers probably aren't quite accurate. We actually have multiple programs at Babies "R" Us in both bedding and furniture. We also have programs with other retailers, and as we convert the license products into Summer brand, I think you'll see a greater presence in those categories.

Okay, thank you very much.

Thank you, Arnold.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to Mr. Macari for any additional remarks.

Thank you all for joining us on today's call. We look forward to speaking with you in the next couple of months for the first-quarter release. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.