Kid Brands' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Kid Brands, (KID)

Kid Brands, Inc. (NYSE:KID)

Q3 2013 Earnings Conference Call

November 19, 2013 10:00 ET


Leigh Parrish - Investor Relations, FTI Consulting

Raphael Benaroya - Chairman and Chief Executive Officer

Kerry Carr - Chief Operating Officer and Chief Financial Officer


Isela Soto - Roth Capital Partners

James Fronda – Sidoti & Company


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. Leigh Parrish of FTI Consulting. Please go ahead.

Leigh Parrish - Investor Relations, FTI Consulting

Thank you. Good morning everyone and welcome to the Kid Brands, Inc. third quarter 2013 conference call. If you have not viewed the related press release and would like to receive one by e-mail, please call FTI at 212-850-5600 and we will have one sent 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.

And now, I would like to turn the call over to Raphael Benaroya, Chairman and Chief Executive Officer of the company. Raphael?

Raphael Benaroya - Chairman and Chief Executive Officer

Hi, thank you, Leigh and good morning everybody. I am pleased to join you all today to discuss our third quarter 2013 results as well as progress against the priorities we have identified is critical to improving our core business. I will then turn the call over to Kerry Carr, our COO and CFO, who will provide financial details as well as additional color of the numbers.

Net sales for the quarter were $46.7 million versus $60.9 million for the prior year period resulting primarily from sales decline in our Soft Home and LaJobi businesses, but partly reflected in new product acceptance and certain short-term execution issues, but they were offset by very strong growth at Sassy. Of note should be that 43% of the sales decline year-over-year was due to discontinuation of product line and brands compared to the closeout of high level of inventory in the third quarter last year and the closure of our UK operations at the end of 2012, all of which accounted for approximately $6 million of the year-over-year decline.

Our Sassy business is clearly a bright spot, grew sales by 23% on a year-over-year basis. In the third quarter, our Sassy business saw increased sales across its customer base led by introduction and acceptance of new products by their key large retailers. We continue to drive the implementation of similar product development and sales intensity in our other businesses. For example, we have added new sales leaders in both our Soft Home and LaJobi businesses; reorganize our web teams; we anticipate the benefits from our new sales organization and they become more apparent in coming quarters. Additionally, we added in-house and freelance product design talent of Soft Home and LaJobi business units to improve new product introductions.

Moving forward, we are focused on the following five objectives: improvement in sales; product margins; operations, including expenses and working capital management; and of course, talent. Let me review each. The first area is sales, which I have emphasized as one of our top priorities, executing on our initiative we placed towards volumes in certain key large customers and spreading concentrated sales from a few to a larger number of customer and channels is taking more than we have originally expected, but I believe that our efforts in this regard will produce positive results and make us a stronger company.

Beyond the changes we have implemented in our sales teams, we will continue efforts to penetrate new channels of distribution including web, specialty, clubs, international. In other area, we have identified as under-penetrated. E-commerce sales both in sites, connected with brick and mortars and those sites that are pure-play have reached close to 20% of our total business. I believe it will grow in future periods as a result of our own improved capabilities in this area and in line with consumer shopping preference that this does not include any activities or sales on our own site. Secondly in the area of products, we believe we had made significant strides to improve our overall offerings. In this regard we are taking actions to improve our talent, product newness and speed to market. At the October ABC show we introduced a completeness under the Sassy brand produced by joint effort of LaJobi, Soft Home and Sassy. This collaboration included furniture, soft products and room décor.

Now separately at Sassy we introduced new products including Sleep Positioner, a baby tub and activity gear. We also designed new food packaging, bundling small products and by offering new larger products in a package, in a box such as activity play mats.We expect to gain additional retail shelf space and higher average product price with this approach compared to our typical peg products display.

The third area of emphasis is that of margins where we continued to seek out what the going to say is with that of margins where we continuing to seek out what’s the reduced product cost. We are reexamining our sourcing methods, negotiating company wide contracts to improve the cost of sales. We have efforts underway designed to reduce product development cycle time by approximately 30% which is intended to allow a higher product introduction rate and faster and more accurate response to changing market trends and demand by fast moving and well informed consumers.

The fourth area of focus is operation and cost management. Now Kerry will cover this area in greater detail, but I wish to highlight about a few initiatives. The first recently announced we have entered into a 3PL agreement to consolidate five distribution centers into one. But in addition to cost savings, we expect to get other benefits for the compressed shorter general supply. In particular faster speed to market and ability to time and coordinate shipping and other services across business units. We also executed a lease on a new office space that combined the LaJobi office and the home office. This new space will include a company wide showroom and a design center in a location in New Jersey that is closer to our key customers. In order to improve our proximity to key customers we also intend to have a senior sales executive of the Soft Home business unit actually move and reside in the East Coast.

The new office would also be a first step in consolidating certain financial and operational functions to better control and reduce duplication and costs. For example we expect logistics, IT, e-commerce, human resources, insurance and certain financial functions to be centralized by this year’s end or the end of the first quarter of next year.

With respect to our web consolidation effort, we anticipate that the relaunch of our corporate brand site will go live into the fourth quarter of this year. In addition, we recently rolled out a new internal customer service reporting, capturing and reporting tool if you may which is intended to provide more granularity for us to better serve customer in ways our product safety and compliance awareness capability. Our B2B site is also in development and coming along well. We currently anticipate completion in the first quarter of 2014.

Before turning to our key fifth objective I would also note with regards to our cost control efforts, our numbers that we reported included certain high legal costs and certain costs incurred in connection with our business transformation that we view as short-term in nature. Kerry I guess would talk and get more specific with this number. And finally moving to talent, we brought on board a general merchandise manager in each of the Soft Home and LaJobi business units, but they are both highly skilled product development retail executives with expertise in product costing and sourcing. In addition a new senior sales executive has recently joined the Soft Home business unit at the same time that we have made new hires into key position, we also reduced our overall headcount by 23 since the prior year period to eliminate redundancy and sharpen the agility of the operation.

Overall, despite our sales declined for the quarter and expenses incurred over recent period resulted in both from events that we have been forced to address for example the customer the bank amendments and the shareholder litigation just as few examples. And those resulting from what we perceive to be a needed investment in our business such as the investment in our IT infrastructure consolidation effort. We are encouraged by the results from the initial periods we have implemented this year and continued to have positive long-term outlook for the business.

As one instance of our beginning to move past some of the distraction of recent periods, last Friday, the court of appeal affirmed the district court dismissal of the class action originally filed against the company and certain officers and directors going back to March 2011 and dismissed the appeal dismissal of amended complaint of the shareholder agreement litigation originally instituted in May of 2011, so both of these suits are now behind us with the full clearance of the company and its officers. We have also made an in-person meeting with each of the CPSC at the U.S. Attorney’s office in continued effort to resolve pending issues which we hope will allow us to spend even more time focused on the business time indeed we so preciously need.

Now I would like to turn the call over to Kerry, our CFO and COO for a detailed review of our third quarter financial and discussion of amendments to our credit agreement and then of course we will open it to answer any questions you may have. Kerry?

Kerry Carr - Chief Operating Officer and Chief Financial Officer

Thank you, Raphael and good morning everyone. I am pleased to be speaking with you today to discuss our third quarter 2013 performance. As you know the details of our Q3 results are available in our third quarter 10-Q, which was filed last night and 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 now to provide some additional color around our financial results for the third quarter of 2013. As Raphael discussed our overall sales performance in the third quarter of 2013 was not in line with we would want to see for the business long-term. Although we expected sales declines versus same period last year given a certain actions we implemented have not yet anniversary-ed, we are not yet satisfied with the progress of the Soft Home and LaJobi. However, Sassy continued to perform quite well.

With that said we remain focused on our key initiatives and believe we are continuing to make progress and meeting our operational and cost objectives. Further we are encouraged by our improved metrics we are experiencing in certain areas of our business and continue to be optimistic in our long-term outlook.

Net sales for the third quarter of 2013 declined $14.2 million or 23.4% as compared to the third quarter of 2012. This decrease was primarily the result of sales declines in our Soft Home business and at LaJobi due to significantly lower sales volume at certain large customers. In addition the decline in sales in our Soft Home business was further impacted by the discontinuation of underperforming products and licenses, higher closeout sales in the third quarter of 2012 as well as lower international sales resulting in part from the closure of our UK operations at the end of 2012. Collectively these items accounted for approximately $6 million of the decline over the prior period, roughly 43% of our year-over-year decline.

At LaJobi sales for the third quarter remained soft reflecting declines at our major retailers and certain product availability issues in our specialty channel which we have subsequently resolved. We remain extremely pleased by Sassy’s performance, a unit that has demonstrated ongoing strength in the recent quarters. Sales from this business increased 23% over the prior period and partially offset declines in our other businesses. The sales increase at Sassy was primarily due to the continued acceptance of new products at retail and importantly reflects year-over-year sales growth across all key customers. We remain encouraged by these results which demonstrated the success we can achieve through a high level of innovation and new product development. As Raphael mentioned we are intensifying these same types of efforts at our other business units.

Gross profit for the third quarter of 2013 was $6.8 million or 14.6% of net sales as compared to $14.4 million or 23.6% of net sales for the same period of the prior year. The decline in gross profit and margin includes the $4.2 million non-cash impairment charge related to certain of the company’s intangible assets primarily the LaJobi trade name. In addition margin was impacted by lower overall sales. The gross profit declines were partially offset by lower product costs, lower inventory reserves and lower royalty expense. If we were to exclude the non-cash impairment charge, gross profit as a percentage of sales would have been flat to last year at 23.6%.

With respect to product costs both Soft Home and Sassy improved in the quarter while there is still much room for improvement at LaJobi. However, we have taken a proactive approach to improving costs with the LaJobi general merchandise manager scheduled to visit (indiscernible) to renegotiate product costs where possible and identify potentially unnecessary product design costs that can be removed from the process.

SG&A expense for the quarter totaled $14.8 million or 31.7% of net sales as compared to $13.4 million or 22% of net sales for the same period last year. This line item continues to contain certain charges that we have excluded in our calculation of non-GAAP adjusted net loss which are detailed in the reconciliation table in our press release. The year-over-year increase of $1.4 million reflected among other things and impairment costs related to the sale of the Sassy building, higher legal fees and increased sales samples. These increases were offset in part by the reductions we made in marketing costs as well as shipping and warehousing costs as a result of our cost control and sourcing initiatives. Excluding the non-GAAP adjustments from this line item, our operating expenses were down on an absolute dollar basis relative to the prior year.

I would like to point out that our SG&A expenses in the third quarter and year-to-date period include costs relating to adjustments we have chosen to make to help strengthen the business including investments in talent and in improving our IT infrastructure. There are close to $2 million of SG&A expenses in the third quarter and over $5 million in the year-to-date period that we do not expect to repeat in 2014. Overall, once the actions we have taken to restructure the business consolidate certain operations, recruit talent and address litigation are completed, we believe there is opportunity to significantly improve our SG&A run rate in the future.

As Raphael discussed trimming expenses and demonstrating diligent cost control practices continues to be a focal point for the company. We are consistently seeking out areas where we are able to make improvements and we will continue to tightly manage our SG&A expenses through our ongoing operational initiative. One such example is our recently announced new third party logistics agreement. Over the next several quarters we intend to consolidate our five existing distribution facilities into one centralized location at a nationally recognized 3PL facility, which we anticipate will boost our overall efficiencies and generate long-term benefits to operating margin. We expect this initiative to generate approximately $2 million of net savings in steady state to occur in 2015 with benefits beginning to be realized in the back half of 2014.

Other expense totaled $1.3 million for Q3 2013 compared to other expense of $1.4 million for Q3 2012. This improvement primarily reflects a decrease in interest expense due to lower borrowing costs in the period compared to the same period a year ago, partially offset by a foreign currency gain, exchange gain in Q3 2012 but did not recur in Q3 2013. In addition, our income tax provision for the third quarter of 2013 was $191,000, nearly $50 million less than is in the third quarter of 2012.

As a result of the items I just outlined we reported a net loss of $9.5 million or $0.43 per diluted share in Q3, 2013 versus a net loss of $49.6 million or $2.27 per diluted share for the same period in 2012. Adjusting for certain charges as described in the reconciliation table in our press release, non-GAAP adjusted net loss per diluted share was $0.09 for Q3 2013 compared to non-GAAP adjusted net income per diluted share of $0.03 for Q3 2012.

Turning briefly now to the balance sheet. During the quarter, we successfully reduced our inventory levels by $2.9 million or 6.7% to a $40.4 million level for the December 30, 2012 level. Again as Raphael mentioned, we are diligently focused on improving our inventory management, which we expect to generate a positive impact on our working capital and drive margin expansion, as well as reduce the need for future reserves and markdowns. To touch on cash and liquidity, we ended the third quarter with outstanding bank debt of $56.1 million, which represents a decrease of $1.5 million compared to the end of the prior year period. As of September 30, 2013, our loan availability was $4.4 million, which was down from approximately $10 million at the end of the third quarter last year.

We are very pleased to have successfully amended our credit agreement on November 14. The amendment was made to a specified covenant defaults detailed in this Q3, 2013 10-Q and commencing with the month ending November 30, 2013 to eliminate the adjusted EBITDA covenant and the fixed charge coverage ratio covenant and replace them with financial covenants based on average daily availability and gross sales. The amendment also requires delivery of monthly gross sales reports and accelerates the delivery date of the 2014 business plans.

In closing, the third quarter remained challenging for the business. However, while each business unit currently sits at different points along the path to transformation, we remain encouraged by our progress. Our entire organization is motivated and energized to continue working towards efficiently and effectively deliver sustainable improvements in the business. Our efforts remained focused not only on implementing sustainable improvements to our top line, but also on establishing a culture that is driven by efficiency, cost control and operational excellence.

Despite a challenging sales quarter and management’s focus on efforts resolve much of the clutter, Raphael described in his remarks. We have not lost sight of making improvement to our overall operations. This includes among other items, leveraging our Kid Brands buying power to negotiate companywide contracts in the areas of ocean cargo benefits, customs, FedEx and so on; leveraging our rolled out ERP system for improved financial and operational reporting; consolidation of functions where appropriate; implementation of our customer service reporting to also gain better visibility at the consumer product and service issues; and consolidation of office space to generate cost savings.

I share with Raphael my enthusiasm and confidence in all we have done and in what is ahead of us. While some of our actions are not yet reflected in the top line, we are confident that the actions we have taken and will continue to take will be positive and look forward to realizing long-term sustainable financial benefits in the future.

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

Raphael Benaroya - Chairman and Chief Executive Officer

Well, before we go into closing remarks, why don’t we open the floor for questions and any discussion participants would like to have. Leigh, would you take care of that?

Question-and-Answer Session


Thank you. (Operator Instructions) We will go first to Dave King with Roth Capital Partners.

Isela Soto - Roth Capital Partners

Good morning guys. This is actually Isela Soto on for Dave King. You mentioned sales at LaJobi and the Soft Home Group were impacted by product acceptance and execution issues, can you just give us more color on that and maybe when you expect sales to start to stabilize?

Raphael Benaroya

This is a good question and the product acceptance, there were both of these companies that had a couple of products that did not perform at least to my satisfaction and without going specifically which products, it was a few, but I thought it was very important for me to highlight it, because these are all fixable issues. As far as execution issues, I can give you only a couple of examples. In the furniture area, I believe that the planning of inventory for the specialty store was somewhat lacking. It will end up with short over inventory to satisfy the possible demand by the customers. As a result, we saw a decline in the category of specialty, which we shouldn’t have. There was delay in implementing the drop shipping capability to the e-commerce customers, which also brought about a decline in potential sales. You put all these things together, I am only giving you a couple of examples, they really impacted and created some missed opportunities and these are things that we intend to rectify as we go forward, but they are important issues.

Isela Soto - Roth Capital Partners

Okay, that’s helpful. And then can you just talk about some of the product introductions you have planned for the Soft Home group and the traction you are seeing there?

Raphael Benaroya

Well, in the Soft Home group, we are talking about new collection that’s coming out of CoCaLo mix and match, which is a complete nursery solution, incorporating separates of blankets, basics, and room decor. I like the group, I hope it’s going to do well LaJobi introduced a new Bonavita collection at the ABC show that brings poster look in the – of the adult bedroom furniture into the nursery. The product was well received. It will come out in the first quarter of 2014. LaJobi also displayed a new Graco models in the higher price retail range that was well received there will be some more effort into expand the Graco line to make it a more distinct in the good, better, best category rather than just could be there will be a entry point in the mid-level that it was before in the brand can attract also the customer that would respond to a higher price point and we’re gearing our sales accordingly. Sassy has a wide range of new products, very exciting and I mentioned the area of gear, the area of bath and also some (indiscernible) products, also the new packaging is very exciting, I think as you see it in the stores already at the end of the fourth quarter and into next year. As I said before I believe it also will address higher average retail over our product both for us and the retailers. So this effort will continue and forever we will have new products and new thinking about the existing products

Isela Soto - Roth Capital Partners

Okay, thank you

Raphael Benaroya

Thank you.


(Operator Instructions) We’ll go next to James Fronda with Sidoti & Company.

James Fronda - Sidoti & Company

Hi guys. How are you?

Raphael Benaroya


Kerry Carr

Good morning.

James Fronda – Sidoti & Company

Can you just I guess quantify the additional cost related to the consolidation that will happen in the next two quarters?

Kerry Carr

Do you mean the consolidation of the distribution centers?

James Fronda – Sidoti & Company


Kerry Carr

The total one-time cost will be a $1.7 million, which is made up of both termination benefit, project management cost, moving costs, and some retention bonuses. We expect about $1.5 million of equity expense in the fourth quarter with the balance being expensed in the first half of the year.

James Fronda – Sidoti & Company

Okay, alright, thanks guys.

Raphael Benaroya

Thank you


There are no further questions at this time. I would like to turn it back over to management for any closing comments.

Raphael Benaroya - Chairman and Chief Executive Officer

Well thank you and of course, we will be available if anybody has any more questions or discussions, but before I turn the call off, I’d like to thank everybody for your support and we’re very, very confident that we have a good business and will continue to work diligently to make it also good in the marketplace. So thank you again.

Kerry Carr - Chief Operating Officer and Chief Financial Officer

Thank you everybody.


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

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