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Summer Infant - It's Snowing

November 26, 2012 | About:
Summer Infant Inc. (SUMR) a designer, marketer and distributor of branded durable juvenile health, safety and wellness products (for ages 0 to 3 years), which are sold principally to large U.S. retailers. The company currently sells proprietary products in a number of different categories, including nursery audio/video monitors, safety gates, durable bath products, bed rails, nursery products, booster and potty seats, swaddling blankets, bouncers, travel accessories, highchairs, swings, nursery furniture, infant feeding products and car seats.

Valuation

Based on the financial results from the last financial year, SUMR is trading at a current P/E of 7.1 and EV/EBITDA of 6.4. SUMR suffered losses in the first nine months of 2012, due to a goodwill and intangible impairment charge of $70.2 million in connection with the Born Free acquisition and an increase in selling, general & administrative expenses attributable to increase in sales, promotional costs related to customer cooperative advertising, placement of consumer ads, freight expense and licensing costs. SUMR achieved a five-year average ROE of 7.0% and a five-year book value per share CAGR of 2.9%.

Financial and Business Risks

SUMR is highly geared with a debt-to-equity ratio of 249% and a net gearing of 211%.

SUMR's top seven customers in aggregate comprised over 75% of its sales in fiscal 2011. These customers include Babies R Us/Toys R Us, Target, K-Mart, Buy Buy Baby, Amazon.com, Burlington Coat Factory, and Wal-Mart. This is the nature of the industry, as juvenile products are mainly sold through major retailers and infant specialty stores primarily in the U.S., UK and Canada and concentrated in the hands of 7-10 retailers.

Although SUMR see significant acquisition opportunities in the highly fragmented market with a majority of the 400 or more infant product companies with under $10 million in sales, acquisition-driven growth is inherently risky. In the third quarter of 2012, SUMR recognized an estimated goodwill writedown of of $61.9 million. Born Free, acquired by SUMR in March 2011, is the original manufacturer of BPA-free bottles and a leading innovator in the feeding category. SUMR's rationale for the acquisition was to leverage existing retail relationships and expand distribution of both SUMR and Born Free product portfolios.

Business Quality and Capital Allocation

SUMR is one of the few if not only listed juvenile products pure play. It is a designer, marketer and distributor of branded juvenile health, safety and wellness products which are sold principally to large North American and UK retailers. The juvenile products market is estimated to be $12 billion worldwide and baseline demand is well supported by annual U.S. birth rate of at least 4 million per year. SUMR's juvenile products business is somewhat resistant to economic downturns, due to the non-discretionary nature of its products. Infant health and wellness products are a spending priority for consumers and they are one of the last few product categories that consumers cut back on in a crisis.

SUMR's strategy is driven by product innovation and a focus on quality. It internally develops 30 to 50 new products every year and implement stringent testing and quality standards for all products. Based on SUMR's experience, retailers are loyal to product innovators and are willing to pay a price premium for differentiated products. SUMR has also successfully diversified its product mix with new products and categories. For example, gates and bath now represent 48% of sales, compared with 70% of 2007 sales.

SUMR still sees opportunities for organic growth. SUMR’s products currently address less than 30% of the $12 billion market and SUMR is looking to capitalize on multiple category expansion opportunities.

SUMR does not pay a dividend.

Conclusion

In addition to a weak balance sheet, the impairment of goodwill and the increase in SG&A costs show how difficult SUMR's business is. I will pass on this one.



Disclosure


The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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