With revenues growing from 68.1M to 194.5M in FY10 and 182.8M YTD11 SUMR has been a rapidly growing designer and distributor of branded infant health, safety, and wellness products. Spending on infants is a retail segment less likely to be impacted by any downturn in consumer spending, although a quick google search shows that SUMR’s products appear to be priced at the high end.
The company’s growth has been primarily fueled through acquisition as laid out below:
4/1/08 6.5M for Basic Comfort 4/21/08 12.4M for Kiddopotamus 7/22/09 for Butterfly Living 12/8/09 for Classy Kid Inc 3/28/11 for Bornfree Holdings
The acquisitions were paid for with borrowed money and company stock, which resulted in shares outstanding growing from 11.2M to 15.5M and long term debt growing from 4M to 52M from 2005-2010.
This externally funded growth and accumulation of debt may be explained by the fact that management’s discretionary bonus is based on EBITDA – with an extra emphasis on “before interest.”
On the bright side and probably outweighing management’s questionable bonus incentive is the fact that insiders own more than 21% of the company – specifically the CEO owns almost 20%.
The company sold off hard in early January when they provided updated guidance for FY11 of $238M in revenues and EPS in the range of .42 – .44 / share, a disappointed vs. 2010 FY earnings of .46/share and a clear disruption of the company’s growth trajectory.
So. The question becomes – is this temporary setback in growth an opportunity to pick up a growing retailer at a discount?
A steady state business probably deserves a valuation of 10x EPS, and SUMR is hardly a steady state business despite recent performance. At current prices of 4.80/share it is trading at ~11x the midpoint of FY guidance – cheap at a glance.
A quick over view of the company shows attention to innovation which is attractive as well.
However, the company is facing wage and cost inflation, and while they are attempting to build a moat through brand recognition, it is not there yet. They have a limited amount of distribution through a hand full of retailers, and any change in status w/ one of those retailers could really hurt the top line.
Furthermore, the company is not producing FCF in any reliable way – although if you back their acquisitions out of the FCF the story changes a bit.
I do find roll ups with increasing debt loads interesting however because at some point the market begins to price in a default due to the debt, while the nature of the roll up provides assets / business lines that could be potentially sold off to pay off the debt. I don’t think this is overly likely at this point, but if the company stumbles through next year, it will be worth taking a look.
For now, I’ll put the name on my watch list with a $4 wake up and maybe take a deeper look as the company approaches 9x 2011 expected eps.