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Thursday, May 29, 1997

Safety 1st, Inc.
(Nasdaq: SAFT)
Phone: 617-964-7744
Price (5/29/97): $6 3/8

HOW DID IT FIND TROUBLE?

Safety 1st made a name for itself convincing America's parents that even child's play has its risks. Perhaps this maker of child safety products should have made some safety gear for its investors, too. After topping out at $32 in the fall of 1994, this stock has left stockholders battered and bruised.

The recent trouble began last June. After gobbling up a number of smaller companies, management began to feel queasy at the thought of so many products leading to so little profit. So the company decided to write off $13.8 million in assets in an effort to reduce and refocus its product offerings. That sent the stock tumbling from $13 to $7.

A profitable third quarter propped the shares up. But the shares were banged up again following the December 12th pre-announcement of a loss for the fourth quarter due to another restructuring -- this time, a pre-tax charge of $32.7 million.

Goldman Sachs was hired to "explore various alternatives to enhance shareholder value," leading to some speculative volatility around year-end. But a January 24 announcement that the loss for the fourth quarter would be larger than expected left investors sobbing as the shares skidded to a painful March low of $5.

BUSINESS DESCRIPTION

Safety 1st, based in Chestnut Hill, Massachusetts, develops and markets child care products, particularly safety gear like stove guards, toilet lid locks, covers for bathtub spouts, and backseat baby mirrors. The company also offers a line of home security hardware products. After making an initial splash with those once ubiquitous "Baby on Board" signs for car windows, the company has expanded its offerings to include over 375 products (down from 650) sold in 600 different SKUs, or "stock keeping units" (down from 2,300), through 2,500 retailers.

In the fourth quarter alone, the company eliminated 350 products representing about 20% of sales ($20 million) but just 4% of gross profit. Its remaining products accounted for $86 million in sales for FY96 and generated the highest gross margins and lowest customer return rates. The company expects $20 million in sales of new products introduced this year, down from $33 million last year.

FINANCIAL FACTS

Income Statement

      12-month sales: $98.1 million
      12-month income: ($46.3 million)*
      12-month EPS: ($6.47)*
      Profit Margin: N/A
      Market Cap: $45.9 million
      (*Includes non-recurring charges)

      Balance Sheet
      Cash: $1.7 million
      Current Assets: $39.9 million
      Current Liabilities: $64.2 million
      Long-term Debt: $0.2 million

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: 0.5

HOW COULD YOU HAVE SEEN IT COMING?

When aggressive growth leads to a major product write-off, additional charges are often not far behind. Sometimes managers are just not as smart as they think they are, and it takes a while for them to admit it. The anemic third quarter results did little to dispel a skeptic's doubts. The December announcement of more charges should have been enough to predict that Safety 1st was headed for trouble.

WHERE TO FROM HERE?

Making a child's world a little bit safer can make a parent feel good. Plus, it's not too expensive. So Safety 1st has found a nice niche. Whether the company can manage its business, though, is another question. The company did name a new chief operating officer in February. And CEO Michael Lerner said he was pleased with first quarter 1997 results as "sales to date are tracking in line with our plan." Still, revenue dropped to $24.3 million from $32 million in the year-ago period as earnings per share sank to $0.03 from $0.24.

The analyst earnings estimates look a little too screwy to rely on: $0.21 per share for FY97 (one analyst projecting break-even results, another projecting $0.42 per share) and $0.25 for FY98 (one analyst), with long-term growth of 15%. In its best years, Safety 1st turned in profit margins over 9%. Those days are gone, but if the company can manage half-decent margins on around $100 million in sales, the shares could have some room to recover.

At the moment, though, Safety 1st has negative net tangible assets (total assets less total liabilities and goodwill), putting the company in danger of being delisted from Nasdaq's national market; however, Nasdaq can be awfully lenient with its children. But if the stock were to be dropped from the national market, investors might seek safety first by jumping overboard.

-Louis Corrigan (RgeSeymour@aol.com)

 

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