Time To Buy
Trading at 3.0x EV/EBIT, a large potential asset sale, shareholder friendly management team, working capital monetization, two activist shareholders and strong revenue growth
Back in the late days of college I was writing a small blog about value stocks. An inexperienced kid trying to teach myself how to invest through written word. Writing was a way to put my investment ideas from pen to paper and help me better understand the art of value investing. Sometimes I will re-read some of the old posts I made and cringe at the lack of understanding and knowledge that I had as a beginner investor.
As my writing evolved and skills as a self-taught analyst improved, I began connecting with more renowned and experienced investors. I was writing about small stocks not many other bloggers were talking about so if I did an ok enough job hashing out the investment thesis, professional investors reached out to chat with me.
During the last three months of my career as a full-time blogger, I was connecting with hedge fund managers on a weekly basis regarding the research I was putting out online. I remember one hedge fund manager told me they really enjoyed my research and told me to look at the 13Ds they recently filed.
I peeled through all of their 13Ds and spent a lot of time researching the large public positions they held. One name they held really stuck out to me. This was back in 2015. Since then I have continued to follow the name closely without ever taking a position.
After seven years, I started buying this stock last week. The opportunity looks extremely attractive and I have finally purchased the stock.
The thesis is pretty straight forward:
Costs have been slashed (especially high cost operating leases) which has lead to significant operating leverage and historical free cash flow generation.
High margin online sales have grown at triple digit rates and have lead an entire new large total addressable market to grow into.
Physical four-wall store contribution margins have went from 12-13% to highs of 27%. The management team is accelerating store growth to capitalize on strong demand and returns.
A $25 million share repurchase plan was recently completed with a new $50 million repurchase plan reloaded and ready to roll. A $20 million special dividend was returned to investors last year and we could see additional capital returned in the form of dividends or repurchases.
A distribution facility is currently under review to potentially be sold. Proceeds from the sale of the distribution facility will likely be returned to investors.
There are two activist shareholders pressuring the management team to recapitalize the strong balance sheet and further return money to investors.
A small segment is growing at triple digit rates with over 50% contribution margins. While still small, continued growth at this segment could add meaningful value to the enterprise.
Based on full year 2022 guidance, the company is trading at a 3-4x EV/EBITDA ratio.
The stock in this company has sold off like most retailers through 2022 yet absolute performance has kicked ass. If the company continues to perform through 2022 and beyond, the valuation will take care of itself. I like the stock. Let me know your thoughts.
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