Kid Brands' CEO Discusses 2Q 2013 Results - Earnings Call Transcript

Aug.15.13 | About: Kid Brands, (KID)

Kid Brands Inc (NYSE:KID)

2Q 2013 Results - Earnings Call Transcript

August 15, 2013 10:00 AM ET


Jennifer Milan - Investor Relations, FTI Consulting

Raphael Benaroya - President and Chief Executive Officer

Kerry Carr - CFO, COO and Executive Vice President


Isela Soto - Roth Capital Partners

Arnold Brief - Goldsmith and Harris

James Fronda - Sidoti


Good morning ladies and gentlemen and welcome to the Kid Brands Incorporated conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

Any reproduction of this call in whole 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. Ms. Milan please go ahead now.

Jennifer Milan

Thank you, operator. Good morning everyone and welcome to Kid Brands, Inc. second quarter 2013 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 to you 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'd like to turn the call over to Raphael Benaroya, President and Chief Executive Officer of the company. Raphael, go ahead please.

Raphael Benaroya

Hi thank you, Jen, and good morning everybody. I've joined you today to discuss our second quarter 2013 results as well as progress against the priorities we have previously outlined for the remainder of the year.

I will then turn the call over to Kerry Carr, who joined us today in her recently expanded role as CFO in addition to her role as COO. Kerry will provide financial details as well as additional color on the numbers. We'll both of course be available for Q&A afterwards.

Net sales for the quarter were $44.1 million versus $55.5 million for the same period last year. As I mentioned in our press release, we expected sales for the period to fall below the same period last year due in part to sales in the prior year period from inventory closeout, discontinued product lines and brands and the closure of the U.K. operations at the end of 2012.

This in total accounted for $3.5 million of decline in net sales for the second quarter $5 million for the first half. The lion's share of the decline resulted however from sales decline in our Soft Home and LaJobi businesses. These operations still rely on a small number of large customer which have cited and muted overall sales environment, which may have had a negative impact on our orders.

Sassy on the other hand proliferated in both product expansion and customer diversification and experienced a double-digit growth in that sales are compared to the prior year period indicating that the overall strategy is beginning to take hold.

We have taken action during the quarter to address sales at both Soft Home and LaJobi by building up their sales organization including reorganizing the [Red Group], as well as by bringing the broad executives to head up product development, sourcing and product management in each of these businesses.

We expect these among other actions to result in product line expansion and more diversified sales in future periods.

On recent calls I spoke of other areas focus in our efforts to transform the business accordingly, we continue to critically assess every material aspect of the business and making adjustment to our operational platform, reconfiguring it when necessary to help us achieve efficiencies in cost savings overtime.

Specifically, we've been taking action to reduce product and shipping cost headcount and overall expenses. In addition, we continue to take a proactive approach to managing inventory and discontinuing underperforming and low volume products and licenses when needed.

Although individual business units have different points along the path to their transformation, there are bright spots in every business unit, that support my belief in a positive future.

We believe our work to innovate and reposition our core product lines on building a much healthier product assortment that will better position us for our efforts to penetrate underdeveloped customers and new channels overtime.

Our gross profit for the second quarter, reflects increased LaJobi product costs, higher royalty expenses as well as a number of allowances to customers that we do not expect to continue at the same level primarily at Soft Home and LaJobi. These increases were partially offset by improvement in [landed] cost of product as a percent of sales as well as better inbound shipping cost which resulted in a 90 basis points improvement from the second quarter of last year.

In addition, we made continued progress in the control of inventory, with inventory at $37.5 million at quarter end versus $45.7 million at the end of second quarter of 2012. We believe our enhanced process will enable even further improvement in working capital as we go forward.

Let me now turn to performance in our individual businesses, which continued to have as I mentioned mix results. Our Sassy business had a net sales increase of nearly 11% compared to the second quarter of last year. The increase was driven chiefly by new product introduction at key retailers as well as more focus on robust sales effort resulting from previously implemented enhancement in the sales organization, we expect that with a similar approach now at other business units, we are better positioned to achieve improved results there as well.

We continue to be encouraged by performance of new products at Sassy with many innovations in the line such as extension of our gear, feeding and bath lines and significant enhancements to packaging that are showing promising results for the balance of the year and beyond.

At LaJobi sales were lower than the second quarter of 2012, chiefly due to declines at two of our top three customers and the specialty stores offset in small part by growth at some other customers. While product and customer expansion have been slower at LaJobi than for Sassy we have made some progress in quality of execution and start to penetrate new distribution channels such as the web.

We're working to improve the breadth of LaJobi product for free. As I mentioned, particularly on the web and would emphasize on better aligning the proportion I would say of value price to higher price products in response to customer demand. We also anticipate the introduction of new (inaudible) line of mattress products in the fourth quarter of this year.

Lastly turning to Soft Home sales for the second quarter again we are below the same period last year chiefly due to lower sales again at a couple of large customers, as well as at specialty. Additionally the sales decrease reflect higher close out sales in the prior year that did not repeat this year, and as I mentioned before, discontinuance of underperforming product and licenses and lower international sales had a foreign subsidiary, here mostly due to the closure of the UK operations at the end of 2012.

As discussed in our prior call, we recently reorganized the rep team at Soft Home, combining it with the LaJobi rep team and building the in-house sales force with a focus on driving business with under developed customers and channel distribution. We're also developing new products to replace what we perceive to be a decline in customer demand for bumpers and blankets that were previously key item included in crib sets. We believe that this decline contributed to a corresponding sales decline in retail and consequently in our Soft Home business.

Looking forward we are taking more expensive view of the Soft Home business as the entire nursery rather been our prior focus on items there are place in the crib. In this regard, we recently produced new decor products that were still early are showing encouraging results. We have also seen some positive result in some new Disney license product that we expect we’ll be shipping in larger quantities over the next two quarters.

For the remainder of 2013, we are continuing to focus steadily on the five key objectives we spoke of, the first being sales and we continue to build and motivate our sales organization, have intensified our focus around increasing sales to that end. As mentioned earlier, we recently reorganize the sales rep teams for Soft Home and LaJobi which includes appointing new sales executives and implementing a rep organization. I think this took place in the May of this year. We are focusing particularly on pursuing and selling challenge in the web environment, specialty clubs, international and other currently under penetrated channels of distribution.

As to product we discuss on prior calls, we have already taken meaningful steps to strengthened our collective creative skills and talent, here we have strengthened our focus on product line extension introducing more frequent innovation, we are levering design column both in-house and externally where are appropriate and I’m personally now involved in product development process as I mentioned earlier. We’ve already introduced new product, bundling and packing improvement particularly in the Soft Home and Sassy respectively and we will continue to focus on these areas moving forward.

[sale area] gross margins in our efforts at reducing product costs, whenever possible continue. We also remain committed to improving other margins elements particularly inbound shipping and other cost of sales. The fourth area is that of operations; we continue our efforts to build on the progress we’ve been making to improve and standardize operational process, controls, and disciplines. In this area we continue to enhance the unified IT environment, reporting platform that we finished implementing in the first quarter this year, and during the second we rolled out a reporting tool for ERP and further develop our reporting metrics.

We also intend to allow new customer service reporting tool in the fourth quarter 2013 that we expect will permit greater granularity in serving customers as well as better responsiveness. And lastly, we moved a couple office personnel, from their office in Irwin into the Kid's land office in Los Angeles also working to combine into one location, LaJobi (inaudible) office in New Jersey with our corporate headquarters.

And finally as far as talent as we work to develop the skills and talent of our organization even further, I'm pleased to report we recently hired two senior executives in the product design and management and one for each both Soft Home and LaJobi, both of these individuals have strong retail backgrounds and will be integral in managing product for these businesses from design to costing through production. And in addition, we recently added to our talent menu Vice President of e-commerce. This newly created role is responsible for driving all web activities throughout all the businesses including development of our brand and corporate side as well as new B2B selling side.

Lastly, as we also announced this morning, I'm very pleased to have Jodie Simon Friedman to have joined us as our new General Counsel and Corporate Secretary. Overall while we are not pleased with the specifics of the second quarter performance, our results are not indicative of our near or long term view of the business or of our belief in the progress made towards the key objective. We continue to take steps in all of our initiatives, which are intended to build a solid scalable and cost effective platforms throughout the business, while systematically building what we believe to be strong product and sales pillars in each of our business units.

We also continue to execute on our enterprise wide frame to unify disciplines, capabilities and platform providing greater efficiencies. There’s still much work to be done. But I'm encouraged by the bright spots we see in certain areas of our business as we are positioning the company for the long term growth. I believe the business will remain soft in the third quarter, but show relatively improvement meaningfully in the fourth quarter.

I view our new products as well as the new efforts to expand growth channel improve product cost and lower expenses is promising and believe the value of this initiatives will become quite apparent overtime. What I would like to do now is turn the call over to Kerry our CFO, COO for detailed review of our second quarter financials. Kerry will also discuss the letter of agreement we have signed with [Salas] which provides for a specific covenant relief as noted in our press release and the 10-Q and then of course we’ll available to answer any questions you may have. Kerry would you?

Kerry Carr

Thank you, Raphael and good morning. I am pleased to be speaking with you today in my recently expanded role of Kid Brands as CFO in addition to my continuing role as COO. As you know the details of our Q2 results are available is our second quarter 10-Q which was filed last night and in our press release which we issued before the market opened this morning. I encourage you to review these documents for more detail.

I would like to provide some additional insight into our financial results for the second quarter of 2013. As Raphael discussed, we are disappointed with our overall sales performance during the second quarter. 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 our performance.

Net sales for the second quarter of 2013 declined by 11.4 million. Our Soft Home business which was particularly weak was impacted by sales decline in two of our top three customers and specialty channels.

In addition, as Raphael mentioned, our Soft Homes results have reflect about $3 million related to close out sales, the discontinuation of certain underperforming products and licenses and the closure of our former UK operations, all of which were included in last year’s second quarter. We have been focused on new product innovation and believe we're beginning to see some improvement in Soft Home at one of our major customers.

At LaJobi, the weak sales performance during the second quarter was driven primarily by declines of two large customers and in the specialty channel. New products introduction and distribution channel expansion needs to be more significantly improved both for LaJobi and in our Soft Home business.

However, on a positive note, we're pleased with our continued success of Sassy which delivered a sales increase of 10.6% over the prior year driven by strong product innovation and gains at key retailers. We're encouraged by these results and anticipate that a similar focus on product innovations will position us to replicate the success we've seen at Sassy at both LaJobi and Soft Home over time.

Our gross profit was $11.1 million or 25.1% of net sales in the second quarter of 2013 as compared to $14.4 million or 25.9% of net sales for the same period of the prior year. The decline in gross margins reflects an increase in LaJobi’s product cost and an increase in royalty expense compared to the prior year period. There were also a number of larger than usual allowances in the quarter. These increases were offset in part by lower inventory reserves, product cost reductions at Sassy and to a lesser degree at Soft Home. Inbound shipping cost reductions as well as a number of other items of smaller magnitude including a lower level of close out sales.

SG&A expense for Q2, 2013 totaled $14.7 million or 33.3% of net sales as compared to $13.5 million or 24.3% of net sales for the prior year period. These line items continue to contain certain of the charges that are excluded in our calculation of non-GAAP adjusted net loss as detailed in the reconciliation table in our press release. With a year-over-year increase in SG&A reflecting among other smaller items meant in our 10-Q higher legal fees, a legal related settlements and accrual for settlement proposals as well as investments and product development in Sassy, we are working to build upon the successes we have seen in this business.

These increases will partially offset among other item detailed in our 10-Q by savings and salaries related to headcount reductions as well as decreased third-party logistics cost and lower marketing and insurance cost due to renegotiations.

Excluding non-GAAP adjustments to decline item included and describe in a reconciliation table in our press release, our operating expenses were down relative to the prior year period in absolute dollars.

We continue to tightly manage our SG&A expenses and the initiatives we have been implementing are beginning to have an impact. Our focus on right sizing our organization, negotiating companywide agreements for services and managing both inventory and discretionary expenses are helping to partially offset the sales declines.

Other income total $238,000 for Q2 2013 compared to other expense of $1.6 million for Q2 2012, primarily reflect in a $1.2 million gain on the sale of intangibles related to the recently reported sale of the "Russ" and "Applause" trademarks and trade names and associated will as well as favorable variance in foreign currency exchange relative to the prior year period and lower interest expense.

As a result of the items outlined above, we reported net loss per diluted share of $0.16 for the second quarter of 2013, versus net income $0.01 per diluted share for Q2, 2012. Adjusting for certain charges are described in the reconciliation table in our press release. Non-GAAP adjusted net loss per diluted share was $0.04 for Q2, 2013 compared to non-GAAP adjusted net income per diluted share of $0.01 for Q2, 2012.

Turning briefly to the balance sheet, as noted on prior calls, we have been aggressively managing our inventory and continue to make progress in this area. During the quarter, we were successful on reducing our inventory levels by $8.2 million or 17.9% to $37.5 million from the June 30, 2012 levels.

We are encouraged by these positive results and remain acutely focused on approving inventory management. Well there is still much work to be done, we believe the initiatives we have in place will help us to increase our terms or reducing the need for reserves and markdown all of which are designed to help and improve margins and working capital overtime.

Turning to cash and liquidity, we ended the second quarter of 2013 with outstanding bank debt of $50.4 million which represents an increase of $2.7 million compared to the end of the prior period. As of June 30, 2013 our loan availability was $10 million and we were in compliance with the financial covenants in our credit agreement.

On August 13, 2013 however, we signed a letter agreement with the agent under our credit and new current quarter agreement eliminating the requirement to comply with the specified new minimum monthly adjusted EBITDA level for the period ending July 31, 2013 and August 31, 2013.

Monthly testing of such covenant resumed after the occurrence of a specified trigger event related to the availability as of July 1, 2013 where we just fairly missed the required availability level. The letter of agreement also addresses certain parameters and anticipated amendment to our credit agreement including provisions among other things to increase the applicable margin with respect to loans under [trans] A revolver by 50 basis points and reset the minimum adjusted EBITDA levels required for future monthly testing period in 2013 based on a revised business plan as classified in the agreement.

The circumstances acquiring the letter agreement, a detail description of its terms and a description of a potential consequences of the company should we fail to secure the anticipated amendment on acceptable terms or maintain compliance of our financial covenants are provided in Q2 10-Q under the caption liquidity and capital resources. We continue to be pleased with the support and flexibility our lenders have demonstrated thus far as they continue our efforts to improve the business.

Lastly on the area of cash and liquidity, as recently announced, we monetized the "Russ" and "Applause" trademarks and trade names. The total purchase price was $1.25 million, $750,000 of which was paid in July and the remaining $500,000 which is payable by promissory note and specified installments over four year period.

In closing, the second quarter remained challenging and certain parts of our business are further along the transformation curve and others. We are focusing our efforts on driving top line improvement, while continuing to embed a culture of cost controls, expense management and operational excellence in the business. All of this takes time but we believe we are making progress.

I'm thrilled to take on extended leadership role as to continue to our efforts to better position the company for long-term growth.

With that I would like to turn the call back to Raphael for some closing remarks. Raphael?

Raphael Benaroya

Thank you Kerry and before I turn the call over to your questions, I'd like again to convey my continued trust and belief in our initiatives, we have outlined to effect improvement in the business. This tremendous amount of significant work being done and we have seen some promising results in certain areas and we are working quickly to effect similar positive changes throughout the organization.

With that, let’s open up the line for questions.

Question-And-Answer Session


Thank you. (Operator Instructions) And for our first question we go to Dave King with Roth Capital Partners.

Isela Soto - Roth Capital Partners

Good morning guys. This is actually Isela Soto on for Dave King. First off, we were just wondering if you could talk about the retail environment overall, are you starting to see some improvements? And then maybe if you could talk specifically about your large customers and any signs of improvement there?

Raphael Benaroya

Well, I think overall the retail environment for the second quarter was somewhat muted and I share various write-ups that are from analysts on particularly the large customers. I believe that they are dealing with purchases with great deal of cautions. I believe that they feel effected by particularly traffic into the store, payroll tax increase and variety of other economical factors that affect especially the lower mass customer. So…

Unidentified Analyst

That’s helpful and then you mentioned several factors that impacted gross margin. Can you talk about the specific impact of each? Which one had the largest impact and do you expect any of those continuing to the third quarter?

Raphael Benaroya

Well, I have before Kerry answers it, I think the largest impact is the decline in sales. I mean without a question and beyond that, I'll let Kerry go in to that effect. As I believe we have fairly good control on various element over the course of goods sold and there is one unit that would like to get some more improvement of course but the margins were mostly affected by the decline in sale in a couple of other regions.

Kerry Carr

Yeah, I would agree with Raphael. The largest driver of the margin change was the declining in sales. In terms of some of the elements of our gross margin, we're actually seeing improvements in our overall landed cost. As a business year-over-year, largely driven by inbound shipping negotiations as we’ve talked about on prior calls.

We have been trying to go to market as a combined Kid brands company to negotiate goods and services until we're seeing the benefits of that. We're also starting to see product cost improvements at Sassy and to a lesser degree at Soft Home, so that’s helping. We still have some work to do on product cost at LaJobi and we did see some increases in royalty expense this quarter.

So those are the major elements in terms of some other smaller items as we noted in the Q, we had some positive movement in some of the other elements of cost of sales where we've already been acutely focused on managing margins.

Raphael Benaroya

So I think it'll be safe for you to expect improvement as we go forward beyond the improvements we saw in the second quarter?

Kerry Carr

That’s right.


(Operator Instructions) We go next to Arnold Brief with Goldsmith and Harris.

Arnold Brief - Goldsmith and Harris

Yeah. I got a couple of, I haven’t been able to pull out the 10-Q yet and it may be mentioned in there, but you haven’t made any mention of new LaJobi lawsuit, has that arbitrage [been solved]?

Raphael Benaroya

Let me first of all, I'm sorry that the Q, I understand, came out late, I'm told that, not late it was marked the 14th, but it came out early this morning, I was told that there were some issue with the SEC website that did not accept the records. And it was resolved and I think everybody should have the 10-Q as of this morning, but we filed on time.

Now as far as arbitration of LaJobi, there was no news, I think I mentioned too that we expect to some resolution by the begin of August, but the arbitration panel actually pushed the deal I think to the latter part of book September. We continue to feel pretty strong about our position, so there is really no news to report since the last time we spoke.

Arnold Brief - Goldsmith and Harris

Okay, the second question relates to your sales. I understand what’s is going in the industry but decline in sales from the second quarter from the first quarter sequentially was a bit surprising number one. Number two your sales decline was worst, so are you going to adjust this for the UK situation and your perfectly owned competitors. We’ve heard for sometime new channels new product I wish you could elaborate a little bit more at this point in time to give some signs of encouragement, by the way you mentioned LaJobi and mattresses impacting the fourth quarter. That’s already in the BRU stores. I was in the store week ago and that’s on the floor now?

Raphael Benaroya

I was talking there start from the end, I was talking about there about the new line that’s coming out launched in the fourth quarter, they leave a lot of more impact in 2014 and beyond but it will be launched in the fourth quarter.

Arnold Brief - Goldsmith and Harris

As a part of LaJobi mattresses here on the point now.

Raphael Benaroya

Well, I mean we have the third mattress line, which is a premier line and that’s in BRU in the floor now, as it is in other retailers but the new line is going to be extended beyond that open to be incremental in terms of business.

Arnold Brief - Goldsmith and Harris

In any way when a mini store, the backlog on BRU seems to be constant LaJobi store space seems to be constant. Could you give us some flavor to what extent your sales decline is reflecting consumer takeaway, to what extent it's reflecting reduction in inventories, and to what extent it's reflecting low shelf space, because you seems to have lost market share and the trend from the first quarter is very negative. So could you

Raphael Benaroya

I mean the primary effect on the second quarter was the loss of sales or reorders from one large very large customer, and I believe that there was a effect there that resulted from maybe a change of management and kind of holding off on ordering of existing merchandize until the re-merchandizing takes place. That's my view and I don't want to be specific as to the name, you can guess. And overall, we still have a very strong position on the floor, don't have any indication that this position is going to diminish. I think much of it has to do with sales at retail, and the demand that they experience.

I will tell you so, it unfairly encourages a look forward. I mean I think that better merchandizing with this particular retailer will be quite favorable an effect on us and other people as well. I am looking forward to the new products, the same kind of measures that we affected the Sassy I think are taking place right now at both LaJobi and Soft Home, and I think this result will be quite apparent with the shift that I expected in the fourth quarter.

Arnold Brief - Goldsmith and Harris

Would it be fair to say that the second quarter sales will be the low point of the year?

Raphael Benaroya

On a relative basis yes, but keep in mind that this lost special sales that we had in 2012 continue into the third quarter and fourth quarter, but I expect that the new products and sales into new channels for example the web will have more favorable offset as we go forward. In fact, the second half of the year and I mentioned $5 million, $8.5 million or the $5 million for the first half. For the second half this number is approaching $14 million, but I think more of it will be made up with sales compared to what took place in the first half of the year.

Arnold Brief - Goldsmith and Harris

Did you just say that the sales in the second half of the year were $14 million at the UK?

Raphael Benaroya

No I did not said just the UK. What I mentioned was sales of absolute inventory, discontinued brands and product lines. You will recall last year we still have appliances, electric devices and so on in the UK. If you put all of them together, it was $5 million for the first half and about $13 million, $14 million in the second half. So we have to overcome more of a hurdle in the second half than the first half and I think that more of it will be overcome as the total percent in the second half.


(Operator Instructions) We will go next to James Fronda with Sidoti.

James Fronda - Sidoti

With the transition of new sales force, do you think that will result in higher SG&A going forward or do you think there is still, I guess, cost savings there available?

Raphael Benaroya

I think we're pretty safe as the SG&A. We plan to an increase at this stage with good control of headcounts. As you know, we got some 50 position in headcounts between the beginning of last year and the beginning of this year. This sales force will have good part of the compensation on performance and I am sure sales, don’t want to call it commission. There will be sales bonus if you may and so I don’t expect much of the change in the SG&A.

James Fronda - Sidoti


Raphael Benaroya

It would mind these positions in the sales organization were introduced, I apologize I haven’t been on the call, so I sound a little (inaudible) but of these positions were introduced in the latter part of the second quarter. And I think that we’ll see a fairly positive effect as we go forward. And now visited the couple of key accounts with them in the last month or so, and we have some very important visitors as we go forward then I am quite encouraged of the kind of appointments and discussions we are having with other channels, such as clubs and web both a brick and motor webs, ecommerce and pure play brick and motors.

I mean the web is becoming a quickly a very important percent of the total business, which make sense especially at the larger products, so penetration for example, let LaJobi into the web channels would be quite meaningful and I expect that to have a fairly positive effect as we go forward.

James Fronda - Sidoti

Okay. And Kerry the $1.3 million in interest expense, is there any one-time things in that or can we forecast that I guess going forward?

Kerry Carr

That maybe about $100,000 that maybe one-time, but most of it is about the same.


And there are no further questions. Please continue with any closing comments.

Raphael Benaroya

Well, again thank you and I cannot iterate strongly enough all the positive view, we have in the business. I think we are going to see some great year for Sassy and continued improvement as we go forward with both LaJobi and Soft Home. So with that, I would like to thank you for joining the call and little bit of patience and we will talk again soon, thank you.


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

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