Kid Brands' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Kid Brands, (KID)

Kid Brands Inc. (NYSE:KID)

Q4 2012 Earnings Call

April 17, 2013 9:00 am ET


Raphael Benaroya – President, Chief Executive Officer

Kerry Carr – Chief Operating Officer

Guy Paglinco – Chief Financial Officer


James Fronda – Sidoti & Co.

Arnold Brief – Goldsmith and Harris


Good morning ladies and gentlemen and welcome to the Kid Brands Inc. conference call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session, and instructions will follow at that time. Any reproduction of this call in full or in part is not permitted without prior express written authorization of the company. As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today’s conference, Ms. Jennifer Milan of FTI Consulting. Please go ahead.

Jennifer Milan

Thank you, Operator. Good morning everyone and welcome to Kids Brands Inc. Fourth Quarter and Full Year 2012 conference call. If you have not viewed the related press release and would like to receive one by email, please call FTI Consulting at 212-850-5600 and someone will send one immediately. Additionally the earnings release and this webcast can be accessed on the company’s website at The webcast of the call will be archived online shortly after the conference call for 90 days.

We will begin the call with comments from management and then we will open up the line for questions. Before we begin, we would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call.

Now I would like to turn the call over to Raphael Benaroya, President and Chief Executive Officer of the company. Raphael, please go ahead.

Raphael Benaroya

Thank you Jen and good morning everybody. I’m pleased to join you all in my more permanent role as the Chief Executive Officer of Kid Brands. Today I will discuss our performance in 2012, which was a year of transition for the company, as well as our priorities going forward. I will then turn the call over to Kerry Carr, our Chief Operating Officer, who will provide details on progress we have been making with respect to various operational and cost initiatives. Kerry will be followed by Guy Paglinco, our CFO, who will provide details on our fourth quarter and full year results.

First I’d like to acknowledge that our year-end filing was later than I’d like it to be, primarily because late in the process we received product return deductions from payment of outstanding amounts from a large customer that we needed to address. Guy will speak about this further. I also refer you to the press release for additional detail. We are taking steps to compress our financial period closing time and anticipate meaningful improvements in the quarters to come. We intend to share with you the results of the first quarter in three weeks or so.

I would like now to provide an update on 2012, which remained challenging; however, I am pleased with the progress we have made throughout the year and anticipate we will continue to make in transforming and improving the business. At the time I became Kid Brands’ Executive Chairman, the company was facing quite a few challenges. Externally it had been dealing with and continues to deal with a less than ideal business environment, a soft economy, stagnant birth rates, and shifting distribution channels. Shopping patterns were changing with an increased preference towards price value channels and products. We have decided, though, to overcome these issues by addressing our business model with positive actions.

Internally we have been facing a meaningful loss of sales with certain key customers, lower margins as we had increased our dependence on licensed products, and proliferation of products outside our core expertise that resulted in higher costs, higher non-productive inventory, and distraction of attention away from core activities. At the same time, the company’s headquarters were overseeing a decentralized, disparate organization around the country and not leveraging their resources while operationally incurring expenses that were higher than sales and margins justified. Lastly, skills and talents in management, operations and product development all needed attention and improvement. To make matters even more difficult, the company was not adequately financed and has been embroiled in legal and regulatory issues related to U.S. customs matters, particularly at our La Jobi subsidiary.

Facing challenges on all fronts, we began to implement actions intended to achieve the following seven key objectives: one, right-size headcount and expenses in all business units; two, reduce inventory and improve inventory accuracy to achieve faster inventory turn and lower working capital needs; the third, secure a credit line to replace an existing facility; four, rationalize our product offerings to eliminate the negatives and accentuate the positives; five, shift our high sales concentration from a few key customers to a larger number of customers while diversifying our distribution channels; six, plan and begin work on leveraging operational capabilities across our business units, the intent beyond cost was to improve operational efficiencies and competitiveness; and lastly, seven, win with people by addressing skill and talent gaps where deemed necessary throughout the business.

This list of objectives required and continues to require great effort, a back-to-basics approach to lay a solid foundation for future strength and growth; but today, there almost is no longer a mere holding company. We have been transforming, we have detailed involvement in all aspects of our business unit operations while centrally staffing those functions that are being centralized. Let me report to you on progress status in each of these areas.

The first was expense and headcount. Selling, general and administrative expenses for 2012 were $57 million or so compared to 66.5 million for 2011. Although the component of such expenses for each period includes some special charges as described in our press release, comparable operating expenses were reduced by approximately $5 million year-over-year. This improvement includes a headcount reduction with headcount at the end of 2012 reduced by 50 as compared with year-end 2011. We expect further reduction of expenses in 2013.

Next was the reduction of inventory. We have reduced inventory over the past three years with inventory at year-end 2010, 2011 and 2012 totaling about 49 million, 43 million, and $40 million respectively. Inventories at the end of the first quarter of 2013 are estimated to come at $33 million versus $44 million at the end of the first quarter 2012. In addition to identifying and clearing slow moving and excess inventory last year, albeit at a loss of margin, we installed a new inventory management process intended to ensure adherence to our desired targets.

Next I’ll cover debt financing. As previously announced, we recently refinanced our credit line, improved our capital structure, and provided the company with greater financial flexibility.

The next area was rationalizing our product offering. In this area, we have discontinued non-performing or low volume products, licensed brands and operations. Accordingly, we no longer market kitchen appliances, handbags, diapers, diaper covers, swaddles, and also three under-performing licenses were terminated. Our U.K. operation was closed down and Kids Line and CoCaLo back office have been combined. Again, there was a margin cost to doing so. Our current focus is dedicated to innovating in products that we know best and in which we have strong capabilities. Going forward before we introduce totally new concepts in product, brands or operations, we will complete a careful analysis of justification, volume potential and capabilities along with market testing, among other steps.

The next objective was the shifting of our high sales concentration. The shift to new customers and distribution channels has been partially successful to date with results that have thus far varied by business unit. In the aggregate, in 2012 we replaced $56 million of annualized lost sales from certain customers with only 25 million of gains. We are in the process of reorganizing our sales team, both the reps and in-house, to pursue aggressive targets in web, specialty, clubs, international and other distribution channels.

As to leveraging our operational capabilities, you have been introduced already to Kerry Carr, our COO who joined us last year and has put in motion an ambitious enterprise-wide plan to unify disciplines, capabilities and platforms. You will hear from Kerry directly in a moment. I anticipate that the unified IT and reporting platform, for example, which we completed in the first quarter of 2013, will give us greater insight into many aspects of our business. I am pleased with Kerry’s progress and most importantly with our associates who may be listening to the call. I know and acknowledge that we are putting tremendous pressure on our associate team with sheer workload and higher standards demand. I’d like to mention to the associates again who are on the call that we recognize their effort and are thankful for it.

Lastly in the area of people, as I discussed on our last call, we are committed to strengthening our organization by upgrading our talent. To this end, we have addressed numerous people skills and talents throughout the business. In particular at Kids Line and CoCaLo, we recently brought a new president, the founder of the original CoCaLo business, a new COO/CFO, a new controller, and a new vice president of sales. At La Jobi, we have added a new vice president of sales, a new design head, and a new COO/CFO. At the home office we have added, as you know, a new COO, a new head of logistics, and a new operations director. We are very pleased to have these individuals join the team to further bolster the company, and welcome them all to the business. Additionally, we have promoted numerous individuals whom we believe were ready for greater responsibilities, including associates in finance, planning, design, and sales. We believe a few have already made solid strides and should continue to work towards building an A-team.

Going forward, we intend to target the following areas for 2013. The first and most importantly, sales – we continue to build and motivate the sales organization. I spoke of a major reorganization underway, and we expect to remain focused on driving business into new channels and new and existing customers. Second area is margins – we are working to reduce even further product costs wherever possible while improving other elements affecting margin, for example, shipping and product quality. The third is the area of product and product development. We intend to continue to strengthen our creative talent with an eye towards superior product development and more frequent introduction of innovative products. Next is operations – we shall continue to work on a number of initiatives intended to deliver improved and more cost-effective operational platforms. Again, Kerry will talk about these in a minute. And lastly talent – we will continue to develop our collective skills and talents to improve capabilities even further.

I hope to achieve better sales, stronger margin and lower expenses as we progress over the next several quarters. I recognize that winning demands preparation, and we are tirelessly approaching this entire process with an eye towards improving and building the business.

Now before I close, I would like to provide a brief update on another area of investor interest where we are still dealing with some clutter resulting from the U.S. customs issues of last year. I expect much of it to subside or to be resolved this year.

I would like now to turn the call over to Kerry, our COO for an update on key operational and cost initiatives. Kerry, please?

Kerry Carr

Thank you Raphael, and good morning everyone. Since joining Kid Brands as Chief Operating Officer six months ago, I have focused my efforts on driving operational excellence throughout the business specifically in the areas of cost reduction, improving operating processes, margin disciplines, speed to market, and leveraging economies of scale.

On our third quarter call, I noted initiatives we had identified and had begun to implement in three key areas, mainly logistics, operational consolidation, and centralized bidding. I am pleased to say that we have made very good progress in these areas, both in terms of achieving cost savings, driving toward more robust and standardized processes, and strengthening operational controls. Additionally we are planning initiatives intended to bring greater visibility for management into financial and operating metrics and improved speed to market.

Let me begin first with the area of logistics. Here in transportation and distribution center costs, we put various initiatives in place to drive cost savings efficiencies and improve the overall effectiveness of our logistics network with a focus on inbound transportation costs and distribution center costs. Our efforts have already produced tangible results, yielding estimated annualized savings of about $2 million. Specifically, these savings stem from contract renegotiations with our west coast logistics provider, consolidation of spend for ocean cargo to gain volume discounts and better controls, the move to one customs broker for the company, and negotiations with FedEx for a company-wide agreement rather than separate contracts for each of the business units. Next we are progressing to optimize the layout of our distribution centers to enhance operational efficiencies and drive cost savings.

Another area of focus has been operational consolidation. Several initiatives are already underway to consolidate functions and improve our processes. First, the web – we currently have five websites, one for corporate and one for each of our four brands. Each of these is managed and maintained individually. We see an opportunity in centralizing all web activity at the corporate level while retaining each brand’s identity and content. To that end, we are well advanced in our RFP process to consolidate all Kid Brands websites under one common platform. As part of that process, we also intend to redesign our websites and currently anticipate that this will be completed in the fourth quarter of this year. Further, we are considering the development of a direct consumer site for our off-price inventory.

Second in the area of operational consolidation is IT. On prior calls, we mentioned the implications of an important new information systems platform which will provide us with powerful insight into operations and finance across the business units. After successful installation at Sassy during the second quarter of 2012, we implemented our ERP system at La Jobi in February of this year. La Jobi was the last business unit to undergo this migration and we are very excited to now have the entire company on the same powerful platform. In addition, we are in the process of rolling out a reporting tool on sales and cost metrics that will enhance our visibility into the business even further.

Finally, centralized bidding – as I discussed on our last call, we have placed great emphasis on leveraging our economies of scale to realize the benefits and cost savings that come from consolidating our operational practices and buying power, and this emphasis is beginning to deliver results. First, insurance and benefits – additive to the savings from our logistics initiatives that I described earlier, we have also achieved savings in annual insurance costs of over $200,000 and are in the final stages of implementing a company-wide associate benefits plan and 401K plan, both of which are showing the potential to create additional savings. We believe that with this action, we can at least mitigate in part the increasing medical costs under the Affordable Care Act.

Next, we continue to pursue centralized bidding for key expense areas such as printing, packaging and supplies. Ultimately, our goal is to leverage our buying power to, simply put, save money.

Finally in product costs, we are addressing margin opportunities by seeking reductions. On our last call, we discussed the results of our Asia visit where we performed a comprehensive business review of our Asia operations. This trip enabled us to successfully negotiate better payment terms with product vendors. In addition, we had identified numerous opportunities for improvement in sourcing, product cost, quality control, and purchase order management. Since then, we have established a common costing methodology and uniform vendor selection and purchase order processes which we believe will improve the product costing process. In addition, we are currently working to renegotiate product costs with product vendors. We believe that all these initiatives will improve margins in 2013.

There are a couple of other areas that I just want to touch upon briefly before closing. In order to improve speed to market, we recently developed unified practices in the new product development cycle. We anticipate that implementation of these practices will not only improve speed to market but also provide valuable insights by giving us the ability to measure the number of concepts to actual adoption and sell-through. We also rebuilt the budgeting process from the bottom up and developed a new robust budgeting process for 2013 that now provides greater granularity of detail for every line item of the P&L, included detailed methodology and assumptions. We are performing very detailed budget to actual reviews monthly to establish greater accountability, improve controls, and ensure costs and expenses are managed. Finally, we have also established a monthly operations meeting with all business units that focuses on quality control, innovation, customer service metrics, sales performance, budget to actual, cost savings, and internal controls.

In short, our mindset is to create operating platforms that are cost effective, operationally effective, and scalable for long-term growth. Our plan is to have unified platforms in place, many of which will be led by key talent in a centralized way. We have already begun implementation of these platforms in web, logistics and IT, and work is underway in many other areas as well. While these efforts are driven by the corporate office, it takes more than just one individual to accomplish what we are accomplishing. Our progress could not be achieved without the engagement and contributions of the many associates in the business units whom we have engaged in all these initiatives. I want to personally thank all those associates who have been working with me tirelessly to drive improvements across the company.

In conclusion, we are relentless in our persistence to drive a higher level of performance in every area of the company. We remain laser-focused on reducing costs, improving margins, strengthening our processes, improving reporting metrics, and elevating our attention to detail in every facet of the business. Our efforts in all these areas further reinforce our commitment towards operational excellence and establishing a culture of cost and expense management. I believe that this level of attention to detail is essential to driving cost reduction, speed to market, and improving operations. It is all about executional excellence, delivering on our commitments, and improving the business to better position the company for long-term growth. I am thrilled to be here as a member of the team, and although there is much more work to do, I am pleased with our progress to date. I look forward to updating you on our progress on future calls.

With that, I will now turn the call over to Guy, our CFO to provide you with a detailed review of fourth quarter and 2012 financials. Guy?

Guy Paglinco

Thanks Kerry. Details of our results are available in our 2012 10-K, which we filed after the market closed yesterday, and our press release which we issued this morning before the market opened. I would encourage you to review these documents.

I’d like to provide some additional financial insight into a few specific areas of our results. The fourth quarter 2012 remained challenging for Kid Brands; however, we are encouraged to see continued progress in certain areas of our business and remain focused on a number of initiatives designed to improve performance.

Before I proceed with the discussion of our financial results, I’d like to highlight a few points. First as we described in our press release and 10-K, we have received additional information regarding the deduction by a large customer of ours from its payment of outstanding amounts due, and we have determined that the deduction represents the customer’s annual accounting of product returns. We have initiated a dispute process and we currently believe that this matter can be successfully resolved without the need to accrue any additional amounts, although there can be assurances that this will be the case.

As the matter has not been resolved, we executed an amendment to the Salus agreement with the agent to amend the definition of adjusted EBITDA for purposes of determining compliance with our financial covenants to include an additional add-back to net income for the amount of any additional expense or accrual in excess of the company’s existing product return reserve in connection with this deduction, up to a maximum aggregate amount of $600,000.

Second, I would like to note that our previously reported results reflected an immaterial misclassification of certain shipping and handling fees and cost of goods sold which should have been reported SG&A. This adjustment was corrected for all the periods that we have reported. The impact of this correction for the full year of 2011 was to reduce cost of goods sold by 5.4 million and increase SG&A by 5.4 million, and for Q4 2011 the impact was to reduce cost of goods sold by 1.3 million and increase SG&A by 1.3 million. Note that these revisions were contained to the cost of goods sold line and the SG&A line and had no impact on previously reported income or loss from operations, or any line items below income or loss from operations.

We reported a net loss of $0.18 per diluted share for the fourth quarter of 2012 and a net loss of $2.48 per diluted share for the full year, which compares to net loss of $1.63 per diluted share for the fourth quarter 2011 and $1.78 per diluted share for the full year 2011. Adjusting for special items as described in our press release, non-GAAP adjusted net loss per diluted share was $0.03 for the fourth quarter 2012 versus non-GAAP adjusted net loss of $0.01 per diluted share for the fourth quarter 2011. For the full year, non-GAAP adjusted net income per diluted share was $0.03 for 2012 compared to non-GAAP adjusted net income of $0.26 for 2011.

Net sales for the fourth quarter of 2012 totaled 57.9 million, which represents a decline of 8.1% as compared to 63.0 million in the fourth quarter of 2011. This year-over-year decrease in sales in Q4 was primarily the result of lower sales volume to certain large customers for Kids Line, which reported a 27.6% decline in sales, La Jobi which was down 8.5%, and CoCaLo which was down 6.65. That being said, Sassy continues to make very nice progress and generated a sales increase of 26.4% primarily due to increases at two large customers and higher sales of Carters-branded product.

For the full year, net sales decreased 9.2% to 229.5 million compared to 252.6 million for 2011. This decrease was primarily the result of lower sales at Kids Line, which was down 20.1%, CoCaLo which was down 13.9%, and La Jobi which was down 6.8%. Such decreases were partially offset by growth at Sassy, which had a sales increase of 10.1%.

Our gross profit was 13.8 million or 23.8% of net sales for the three months ended December 31, 2012 as compared to gross loss of 13.8 million for the three months ended December 31, 2011. Gross profit increased primarily as a result of several impairment charges in Q4 2011 which included the impairment charge to the La Jobi trade name and Kids Line customer relationships, which aggregated 28.9 million which did not recur in Q4 2012. Gross margins also benefited from the impact of lower markdowns and allowances as well as lower inventory reserves and amortization costs, which was partially offset by lower sales and higher cost of products.

As noted on our prior calls, we have been experiencing greater traction in our opening price point products, especially those sold by La Jobi. While this success in our opening price point product continues to negatively impact our margins, we believe it reflects market demand and has been an important factor in our top line performance.

For the full year 2012, gross profit was 57.8 million or 25.2% of net sales as compared to gross profit of 41.3 million or 16.3% of net sales for 2011. In both absolute terms and as a percentage of sales, gross profit increased primarily as a result of the specialty charges in 2011 as outlined above that did not recur in 2012. Additionally, gross margins for 2012 benefited from lower amortization of intangibles and lower markdowns and allowances, which were partially offset by lower gross profit dollars as a result of lower sales, higher landed cost of products, and increase in inventory reserves.

SG&A expense for Q4 2012 totaled 14.2 million or 24.5% of net sales as compared to 16.1 million or 25.5% of net sales for Q4 2011. In both absolute terms and as a percentage of sales, the decrease in SG&A was primarily the result of decreased professional fees related to custom matters and related litigation, lower compensation expense related to headcount reductions and lower bonus accruals, lower share-based compensation expense and a reduction in product development costs. These decreases were partially offset by increases in professional fees and trade show-related costs due to the timing of the show this year relative to last year.

SG&A expense for the full year 2012 was 56.9 million or 24.8% of net sales as compared to 66.5 million or 26.3% of net sales for fiscal 2011. SG&A expense for the full year 2012 was down in both absolute terms and as a percentage of sales largely as a result of decreased professional fees related to custom matters and related litigation, decreased commissions and freight out costs, and accrual for contingent liability in connection with the lease assigned to TRC recorded in Q4 2011 which did not recur in Q4 2012. Additionally, SG&A declined due to lower share-based compensation expense, decreased product development costs, lower trade show costs, and expense reduction initiatives that resulted in aggregate savings of $2 million. These decreases were offset in part by professional fees incurred in connection with amendments to the refinancing of the company’s senior credit facility and other company initiatives.

Other operating expenses of 2.5 million for the quarter ended December 31, 2012 included a 1.4 million non-cash charge for the write-off of unamortized deferred financing costs in connection with the execution of our new credit facility in December 2012, which I will talk more about in just a moment, in addition to higher borrowing costs. Other operating expenses of 6.2 million for the full year 2012 include an aggregate of 3.3 million in amortization of financing costs and write-offs pertaining to unamortized deferred financing costs related to prior credit facilities partially offset by lower borrowing and lower borrowing costs in the 2012 full-year period.

Turning briefly to the balance sheet, as Raphael noted, we have been aggressively managing our inventory and continue to make progress in this area. Some of the actions we have taken come with associated costs, as previously discussed; but some positive results can be seen in our inventory balances at December 31, 2012. During the quarter ended December 31, 2012, we were successful in reducing our inventory levels by 2.7 million or 6.4% to 40 million from December 31, 2011 levels. We are focused on inventory management and anticipate that our new initiatives in this regard will help us improve inventory turns and reduce the need for reserves and markdowns, which should help improve margins and working capital over time.

Turning to cash and availability, touching on liquidity, as previously announced we refinanced our credit facility in December, entering into an agreement with Salus Capital Partners. Our new credit facility provides for an aggregate maximum $80 million revolver consisting of a $60 million tranche and a $20 million first-in, last-out tranche. In connection with this new credit facility, we wrote off in the fourth quarter an additional 1.4 million in unamortized deferred financing costs originally incurred in connection with the terminated facility. We are pleased with the improved financial flexibility that we believe this new credit facility provides and the relationship we have established with Salus Capital in a short period of time.

We ended fiscal 2012 with outstanding bank debt of 57.5 million and revolving loan availability of 11.4 million. As of December 31, we were in compliance with the financial covenants in our credit agreement. Due to certain provisions in our banking agreement, accounting standards require that we reflect all of our bank debt as current, although the credit facility is a four-year facility.

In closing, while we recognize there is a lot of work to be done, we believe we have made progress throughout the year. We have improved our financial flexibility and we are working to realign our expense structure. We are pleased to see the benefits of the actions taking hold and look forward to building on this progress to further improve the business in 2013.

Now I’d like to turn the call back to Raphael.

Raphael Benaroya

Thank you Guy. Before I turn the call over to you for questions, I’d like again to convey my continued optimism. We have seen benefits of the corrective actions we have initiated as they start to take hold, and we believe these benefits will become even more apparent in coming years.

Why don’t we open up for questions, please.

Question and Answer Session


Thank you. [Operator instructions]

We’ll take our first question from James Fronda from Sidoti & Company.

James Fronda – Sidoti & Company

Hey guys, how are you?

Raphael Benaroya

Hi, how are you?

James Fronda – Sidoti & Company

Pretty good. Could you just talk about the products going forward and why Sassy is doing so much better than your other products?

Raphael Benaroya

Going forward we are putting emphasis on new products. Sassy has been ahead of the curve in terms of design and product development – that’s the simple answer. They have excelled with launching of new product. They have done well with products like the play mat. They had a whole line of Disney products they have put out that’s doing quite well, both in selling product such as cups and Disney bath products. So I’m very pleased with the design team we have there. The design teams and the product development on the other two business units are building strength. There are some new products on the drawing board at La Jobi that are going to be quite exciting and create differentiation. Soft Home was very busy cleaning up some of their product clutter throughout the year and they are a lot more focused now as we go forward. I have great expectations there, both from the CoCaLo brand, Kids Line, and of course they have had new products coming up at Carter’s—the Carter license that I think are going to do quite well in 2013.

James Fronda – Sidoti & Company

Okay. And I guess you suspect that the new products will definitely, or more likely result in improved gross margin going forward for 2013?

Raphael Benaroya

Well, that’s always the intent. I have yet to find a merchant that doesn’t like the product they are about to put in the market and doesn’t have euphoric expectations of it; but I’m just being realistic. Yes, the answer is that we do expect that the new products will make an impact. Don’t forget we have an issue here also of differentiation by customer as we launch products. Everybody, especially the large customer, wants to have an exclusive and especially in light of people doing a lot of comparative shopping at stores, buying at the Internet and so on. This demand is heightened by our key important customers and we took steps to be able to create the exclusive differentiation as needed. There is good work being done in both product development and sales, as I was talking about.

James Fronda – Sidoti & Company

Okay. And could you talk a little bit about the strike nowadays with the mom and pop stores lately?

Raphael Benaroya

I am identifying this area as an important area that we are beginning to pay a lot more attention to than we have in the past. I was not very happy at the beginning of last year, or last year at all with the effort we’re making and the way we manage our rep organization that sold to the specialty stores, and we’re putting a lot more emphasis on this channel distribution.

The view again here is differentiated product – I mean, they cannot be a specialty by being a generalist, and they need a truly standout assortment to justify their existence to begin with, and our response has to be in accordance with that.

James Fronda – Sidoti & Company

Okay. All right, thanks guys.


Once again if you have a question, you will need to press the star key followed by the digit one on your telephone keypad. We’ll take our next question from Arnold Brief from Goldsmith & Harris.

Arnold Brief – Goldsmith & Harris

Just a couple questions. Being in the store lately, it was obvious that you had increased your shelf space on the back wall with your major customer. Am I right in making that conclusion, number one? And number two, is it enough for you to at this point believe that your business with that customer can—how can I put it, level off?

Raphael Benaroya

I am hoping, and I’ll guess which customer you are talking about—

Arnold Brief – Goldsmith & Harris

The back wall is BRU, obviously.

Raphael Benaroya

Yeah, yeah. I am hoping that we’ve taken the right steps to satisfy their needs and their customers’ needs, and we do have good penetration and a good relationship with BRU. I believe that we have all the reasons to do better with BRU than we’ve done before.

Arnold Brief – Goldsmith & Harris

I am right that you have increased the space on the back wall, aren’t I? Counting the bins, it looked to me like CoCaLo, which is your highest margin product, had a lot more space on the back wall.

Raphael Benaroya

We had more space, but I cannot speak to their numbers. I mean—

Arnold Brief – Goldsmith & Harris

No, no, I’m not asking you to predict sales, just the space.

Raphael Benaroya

I believe we have more space than we had before with them, before being the year before and the year before that, so.

Arnold Brief – Goldsmith & Harris

Yeah, okay. Second question – you indicated that your sales—excuse me, your inventories of the first quarter of 2013 would take a rather sharp decrease. I think it was from 39 million to 33 million—39 million at year-end—

Raphael Benaroya

From 40-plus—

Arnold Brief – Goldsmith & Harris

From 40 to 33 million.

Raphael Benaroya


Arnold Brief – Goldsmith & Harris

I would assume that would have—to make that kind of reduction, I’m assuming that would have a negative impact on your gross margins in the first quarter and then put you in a position to show substantially improved gross margins during the rest of the year.

Raphael Benaroya

No, I mean, this is not the case. We did not affect in a negative way our margin in the first quarter. Don’t draw me into a discussion of the numbers there, but I’m saying this assumption in this particular case would not be valid.

Arnold Brief – Goldsmith & Harris

Good. You said something about a new Carter license. Could you give—

Raphael Benaroya

The Carter license is not new. I am saying that we have efforts to renew the product line, refresh the product line. Sassy is putting tremendous effort in the Carter license at the Carter stores and the Carter channels of distribution. They are very happy with the results of that. We have had great cooperation with Carter’s. Carter’s is a great, great brand and we are pleased with where we are going with the product development, with the packaging, the branding and everything else that surrounds this important license.

Arnold Brief – Goldsmith & Harris

There’s no expansion of the license, though, into new products, into other products or other product categories? Let me put it that way.

Raphael Benaroya

No, there is no expansion at this stage into new product categories.

Arnold Brief – Goldsmith & Harris

Okay. Finally, could you—the SG&A line is hard to work with because there are so many, I think, either non-recurring or non-operational segments in it that weren’t completely broken out. It showed the difference between 2011 and 2012, but not the actual expenses that are still being incurred. Can you give us some idea of what the run rate in SG&A is now ex-the unusual expenses, and how much further reductions you expect in 2013?

Raphael Benaroya

Would you like to comment on that, Guy?

Guy Paglinco


Raphael Benaroya

I’d like to say the answer that when I said $5 million reduction in 2011 to 2012, that’s exactly the number I was focused on in terms of reduction and what you would call the run rate or the operating expenses that are recurring operating expenses. But I’ll let Guy answer in more detail. I am focused on this number very much, as you would imagine.

Guy Paglinco

Yeah, good morning Arnie. What Raphael was saying, if you go back and take a look at the reported numbers that we have in our K and then the items specifically, such as the special investigation, any type of severance or the TRC-type adjustment in ’11, you’ll see as far as a—that $5 million decrease from ’11 to ’12. When you take a look and do the same type of exercise back in December, you’ll see a drop of approximately $1 million from the fourth quarter of ’11 to ’12, and again, that’s based upon a lot of the programs, the headcount reductions and the various things that you can see.

So for the most part, why some of it is variable, a little portion – I mean, you’re running at under 14 million, and the way the programs and Kerry’s different initiatives and the company’s various initiatives, you’re going to see that being reduced from that end, Arnie.

Arnold Brief – Goldsmith & Harris

Could you give us some idea of how much?

Guy Paglinco

No, I mean, it depends upon the timing of it. There’s always sometimes little blips here and there from that standpoint—

Arnold Brief – Goldsmith & Harris

No, no, I’m not asking you to give an estimate of what the actual expense will be in 2013. As you point out, it will roll through the year; but when we finish the year, how much lower do you expect it to be going into 2014?

Guy Paglinco

Yeah, it will be lower than our current. Again, part of it is also a little variable in nature, but it will be lower than what we ended the year for 2012. The end of 2013 will be lower than what we are today.

Arnold Brief – Goldsmith & Harris

Okay, thank you.


There are no further questions. Please continue with any closing comments.

Raphael Benaroya

Again, I’d like to thank you and note that as we strengthen our management team and improve the process and intensifying the focus on sales and product, I believe that we will continue progressively to see better results as we roll through 2013 and beyond. So I’d like again to thank you very much for participating in the call and hope we talk again within the next two or three weeks. Thank you very much.


Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect. Thank you for participating.

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