I’m not that excited by Summer Infant now and here’s why.
- The share price has run up since I posted about it earlier.
- They badly need financing.
Summer Infant’s credit facility was extended but designed in a way that becomes increasingly onerous to Summer Infant over time. The bank is scared and wants to get out. It wants Summer Infant to get financing from elsewhere. Summer Infant could have difficulty paying its giant mountain of debt that is due within a year. In a best-case scenario Summer Infant will take years to pay off its debt. The bank does not want to take control of the company because it doesn’t know how to run it and therefore will lose a lot of money if it seizes its collateral (e.g. the bank may sell the company for below-market value). The sooner Summer Infant announces a new source of financing, the better (the terms of the credit facility essentially punish them if this doesn’t happen). The longer Summer Infant does not announce new financing, the antsier I get.
The recent 8-K filing is disappointing and bearish in my opinion. Management knows (A) that they are in trouble and (B) they don’t have anything concrete to announce. Read between the lines:
Summer Infant, Inc. today announced that it is evaluating a range of actions aimed at sharpening its strategy and improving its operating model.
In early February, the Company’s Board of Directors and members of the senior management team held a meeting to review and discuss the Company’s short- and long-term strategy to improve profitability and enhance shareholder value. The Board and management are committed to improving liquidity while pursuing business opportunities and exercising financial discipline that will position the Company for long-term profitable growth. The Company remains focused on delivering innovative juvenile products and building brands that bring value to its customers and consumers.
As part of its ongoing strategic review, the Company will focus on product rationalization, including a review of existing product lines, such as soft lines, gear and furniture, to ensure product offerings are consistent with the Company’s growth strategy. At the same time, it will continue to invest in the innovation of its video monitor, safety, SwaddleMe® and feeding products. The Company also is reviewing its customer relationships and revenue streams, such as licensing agreements, to ensure that each contributes to the profitability of the Company. Summer Infant’s licensing agreement with Disney®, originally set to expire in December 2013, was recently concluded and the Company will continue to sell-through its existing inventory of these products in 2013. In addition to previously announced cost-savings initiatives, the Company is continuing to evaluate additional cost control measures and to right-size the cost structure of its business in order to optimize profitability. The Company expects to provide an update on its growth strategy and profitability enhancement initiatives on its fourth quarter and year-end financial results conference call in March 2013.
Because I don’t know what is going to happen to Summer Infant, I would be inclined to exit the stock to be safe. If Summer Infant announces a new credit facility or debt issuance, it would be great news for Summer Infant and I would re-evaluate the stock.
Buying cigar butts versus quality businesses
I am starting to think that buying quality businesses (especially with superstar managers) would be a much better idea. Those businesses just don’t get into trouble as often. In my opinion, buying quality businesses is why Buffett is brilliant and is something that very few value investors have emulated.
*Disclosure: Currently long SUMR, I will likely sell the position but may not do so (e.g. my limit order may not fill). Do your own research and analysis.
EDIT: When I wrote about it November 13, 2013 it closed at $1.45. On Feb. 12, 2013 the stock closed at $1.85 (+28%).