Description
Summer Infant is a designer and marketer of baby products. Their main products are audio/video monitors, baby gates, and durable bath products. These three categories make up approximately 70% of SUMR’s revenue. They also make bed rails, bouncers, soft goods, and other baby products. The market for baby products has so far shown that it is not economically sensitive. Parents have not been trading down to lower-priced products, and tend to want the “best” for their baby. Summer Infant has positioned itself toward the high end of the mass market. They have benefitted from the trend from audio monitors to more expensive infrared video monitors that allow parents to see their babies even while sleeping in a dark room. In the baby gate market, parents have very little ability to distinguish the quality of one brand from another so they tend to use price as a proxy for quality. SUMR tends to make higher quality gates, and sells them for around $20 more than some of their competitors’ products. They have found that most parents think that it’s not too much to spend an extra $20 to ensure their baby doesn’t fall down the stairs. Gates also tend to be a good product category because its small market size ($120MM) discourages larger competitors. Another reason for growth is families are outfitting multiple homes including vacation homes and Grandparents’ homes with duplicative products.
SUMR’s largest customers are Babies R Us, Target, Kmart, and Wal-Mart. Future growth should come from:
- Adding new customers (aprox. 2-3/year). Home improvement retailers, grocery stores, drug stores, and warehouse clubs are all possible places for expansion.
- More SKUs/existing customer. SUMR has had recent success getting more products into Wal-Mart.
- Increased penetration at existing customers. Again, Wal-Mart has been taking SUMR products at more of their stores.
- Grow the international business. Currently, SUMR is focused on the UK and Canada.
- Category growth where SUMR sells well. The trend from audio monitors to video monitors where SUMR has more share has helped the Co.
- New categories. Recent additions have included infant bedding, swings, and high chairs.
SUMR’s stock declined significantly starting in November of 2007 when they disclosed concerns about future gross margins due to higher commodity costs, increased labor cost in China where SUMR outsources manufacturing, and a lower US dollar. Despite these concerns, SUMR maintained their guidance for the year, beat revenue estimates, and made their EBITDA numbers. SUMR has dealt with these headwinds in multiple ways including redesigning products to reduce use of certain commodities and increasing prices selectively. We are hearing that the cost environment for SUMR has stabilized, and that they have been able to make their price increases stick. Again, their customer seems to be much less price sensitive when shopping for baby products.
In addition, due to SUMR’s high revenue growth, margins are actually improving as the decline in SG&A as a percentage of revenue has been greater than the cost pressures mentioned above. Over the past 5 quarters (since SUMR became a public company), revenue growth has been 46%, 55%, 90%, 100%, and 82%. The last two numbers are pro-forma for acquisitions and organic growth for those quarters is approximately 65% and 50%. Clearly, SUMR is having success executing on their growth plans. Over that time, SG&A as a percent of revenue has fallen by 360bp while gross margin has only dropped by 270bp.
We are projecting revenue up approximately 60% this year with a slight improvement in margins which gets us to $.38 in 2008 EPS. This represents 44% growth in EPS over 2007. Cutting the revenue growth rate in half to 30% in 2009 and assuming a small amount of SG&A leverage gets to 2009 earnings of $.60. This means that SUMR has been growing their top line between 40% - 90% and their EPS in the 45% - 55% range, and the stock is trading at approximately 10x this year’s earnings. We see a lot of value here as does the CEO who has been buying shares personally.
We think that the primary reasons for the stock to be trading so cheaply are a lack of liquidity, concern about gross margins, and concern about the economy. As we have already stated in this write-up, the cost environment seems to be stabilizing, and EBITDA margins are improving. And the revenue growth numbers suggest that the company has some credibility when they claim that the consumer has not cut back on baby spending. The stock is illiquid, but we think getting 45% - 55% growth at a 10 multiple is enough compensation to deal with the trading difficulty.
Catalyst
- Continued revenue growth as SUMR signs new customers and expands within existing customers.
- Continued margin improvement as SG&A as a percentage of revenue declines.
- Likely accretive acquisitions.
- We think the most likely end game for SUMR will be a sale of the company in the next few years.