Kid Brands. Inc (KID) is a leading designer, importer, marketer and distributor of innovative and fashion-led branded infant and juvenile consumer products across multiple price points, with products focused on newborns to children up to three years of age. Its design-led products are primarily distributed through mass market, baby super stores, specialty, food, drug, independent and e-commerce retailers worldwide. KID's current operating subsidiaries consist of: Kids Line, LLC; LaJobi Inc; Sassy Inc.; and CoCaLo Inc. Through these wholly-owned subsidiaries, it designs, manufactures (through third parties) and markets branded infant and juvenile products in a number of complementary categories including, among others: infant bedding and related nursery accessories and décor, food preparation and nursery appliances, and diaper bags (Kids Line and CoCaLo); nursery furniture and related products (LaJobi); and developmental toys and feeding, bath and baby care items with features that address the various stages of an infant’s early years (Sassy). In addition to its branded products, KID also markets certain categories of products under various licenses, including Carter’s, Disney, Graco and Serta.
Guru and Insider AlertsChuck Royce, currently holds 1,330,950 of KID's shares and added to his position in the fourth quarter of 2012 with a purchase of 240,100 shares at an average price of $1.55. In the third quarter of 2012, Executive Chairman and Acting CEO, Raphael Benaroya, bought 250,000 shares in KID at an average purchase price of $1.55.
Valuation KID currently trades at a P/B of 0.91, a 29% discount to its five year average P/B of 1.29.
KID Historical P/B Valuation
KID has a dismal historical earnings track record with losses in five out of the last 10 years. This is in sharp contrast to its consistent cash flow generation, with positive operating cash flow and positive free cash flow in almost every single year in the past decade, except for 2004. KID's gross margin has declined in every year for the past ten years, falling from 54% in fiscal 2002 to 14% in fiscal 2012. Gross margin 2011 was adversely affected by increased labor and raw materials costs in the PRC, the appreciation of the Chinese Yuan against the U.S. dollar and pressure from major retailers to offer additional mark-downs and other credits or price concessions.
KID Earnings-Cash Flow Comparison
KID Profit Margins Analysis
Financial and Business RisksKID is moderately geared with a debt-to-equity ratio of 43%. Historically, it also does not hold much excess cash on its books.
KID Cash-Debt-Market Capitalization Comparison
KID faces significant customer concentration risk, with Toys “R” Us Inc. and Babies “R” Us Inc., Wal-Mart (WMT) and Target (TGT) accounted for approximately 39.8%, 12.7% and 8.8%, respectively, of its consolidated gross sales for the 2011 calendar year. Large retailers could potentially have a large impact on KID's business, through actions such as store closings, import of products directly from factory sources and sell products under their own private label brands, or the imposition of stricter requirements for infant and juvenile products.
On the supply side, 74% of KID's dollar volume of purchases in 2011 were attributable to manufacturers in the PRC. The largest supplier accounted for approximately 24% and the five largest suppliers accounted for approximately 48% of 2011 fiscal sales.
KID is currently party to litigation that could be costly to defend and distracting to management, including a class action lawsuit, a putative shareholder derivative complaint, U.S. Consumer Product Safety Commission staff investigation and an arbitration proceeding involving a former employee.
KID markets a significant portion of its products through third party licenses, with sales of licensed products representing 45% of its fiscal 2011 sales. These license agreements are generally limited in scope and duration and often require KID to make minimum guaranteed royalty payments.
KID is going through a transition phase with changes in management. On Sept. 12, 2012, KID announced the appointment of Kerry Carr as Executive Vice President and Chief Operating Officer; she has been serving as an operational consultant to KID Brands for the last few months prior to her appointment and has served in various senior level executive positions with Avon Products Inc. from 2003 to April 2012. Renee Pepys Lowe, the founder and ex-President of CoCaLo. returned as President of Kids Line LLC and CoCaLo Inc., KID’s subsidiaries. It also announced the resignation of David C. Sabin as President of Kids Line and CoCaLo, who held the position of President of Kids Line since January 2010 and CoCaLo since September 2010.
KID faces problems maintaining its listed status. On Dec. 20, 2012, KID announced that it has notified the NYSE that it intends to submit, no later than Jan. 28, 2013, a plan that it believes will demonstrate its ability to attain compliance, within 18 months, with the continued listing standards of the NYSE. KID fell short of meeting a NYSE continued listing standard because its average market capitalization was less than $50 million for a 30 trading-day period and its total stockholders’ equity was less than $50 million. Its shareholder equity fell to $40.5 million, primarily as a result of a $45 million increase in KID's non-cash valuation allowance for deferred tax assets recorded during the quarter ended Sep. 30, 2012.
Business Quality and Capital Allocation
The infant and juvenile industry, in which KID operates in, is large and growing. Approximately more than half of KID's products are in categories belonging to baby durables or “must haves” that are recession resistant. Older parents, the increasing proportion of first time births and more grandparents, the second largest group of baby durables, are expected to drive consumer spending in the industry.
By virtue of its operating model, KID generates strong cash flow, validated by an excellent track record of positive free cash flow in nine out of the last 10 years. KID has low capital expenditure requirements and plans and limited seasonal working capital needs.
Notwithstanding the losses, KID has successfully minimized working capital utilization, with inventory and receivable days showing a positive downward trend over the years.
KID Inventory and Receivable Days
Since 2006, KID has stopped paying out dividends to shareholders.
The relative under-valuation of the stock, coupled with recent guru and insider buying, does not sufficiently compensate for the huge risks involved with KID, in my opinion.
DisclosureThe author does not have a position in any of the stocks mentioned.