FTLF - Alluvial Capital - FitLife Brands: The Story Is About To Get A Lot More Compelling

Summary

• Alluvial Fund has a meaningful new holding in FitLife Brands.
• Our investment is also a “jockey” bet on FLTF's CEO and controlling shareholder, Dayton Judd.
• FitLife has agreed to buy Mimi’s Rock, a Canadian health foods retailer.
• The Mimi’s Rock acquisition is a big step, and I am excited to be along for the ride.

The following segment was excerpted from this fund letter .

FitLife ( OTCPK:FTLF )

Alluvial Fund has a meaningful new holding in FitLife Brands , a retailer of health and fitness supplements. While the economics are good and the value is compelling, our investment is also a “jockey” bet on FitLife’s CEO and controlling shareholder, Dayton Judd.

In past letters, I have mentioned that within the ecosystem of micro-cap companies, there are a few individuals whose every move is worthy of attention. Mr. Judd is one of those people. I first crossed paths with Mr. Judd years ago, when we were both invested in Otelco, an underperforming telecom provider. We discussed various ways of achieving better outcomes for shareholders. Ultimately, I chose to move on. Mr. Judd got himself appointed to the Otelco board of directors and, eventually, won a reasonable outcome for shareholders despite Otelco being, in retrospect, a weakly-positioned and capital-starved company. Following that, Mr. Judd moved on to new projects, including FitLife.

Over time, Mr. Judd has built FitLife by adding new brands and building new distribution channels, including a healthy e-commerce presence. The returns have been phenomenal. So good, I kick myself for not casting our lot in with FitLife earlier.

Presently, FitLife operates through 9 different brands. The various products are meant to aid bodybuilders and fitness enthusiasts in building muscle and burning fat—think whey protein, creatine, amino acids, pre- and post-workout shakes, etc. Not my thing, but people swear by this stuff and FitLife’s customers give it rave reviews. The biggest distribution channel for FitLife’s products is GNC stores, but the company has been working hard to increase sales through Amazon and direct through its website.

For the 12 trailing months, FitLife recorded revenue of $31.2 million, operating income of $6.5 million, and net income of $5.2 million. The company has $14.9 million in cash and no debt. At the current share price, this works out to 14.3x earnings, or 11.2x earnings backing out the company’s cash. This is a reasonable valuation for a fast-growing, highly profitable, well-managed firm, but the story is about to get a lot more compelling.

FitLife has agreed to buy Mimi’s Rock, a Canadian health foods retailer. While Mimi’s Rock managed to build multiple successful brands, it has long been burdened with excessive overhead and an over-leveraged balance sheet–both problems that Mr. Judd can address. The acquisition will double FitLife’s annual revenue and increase its operating income by at least 50%. FitLife will fund the acquisition with a combination of cash on hand and a moderate amount of low-cost debt, which it expects to pay down completely within a year.

Once the acquisition has been completed and the new brands integrated with FitLife’s platform, I expect the transaction to increase FitLife’s earnings by more than 50%. Beyond the purely financial, this acquisition will also reduce FitLife’s dependence on GNC, cutting GNC sales from two-thirds of revenue to one-third. E-commerce will become a much more substantial portion of FitLife’s distribution.

The Mimi’s Rock acquisition is a big step, but I know Mr. Judd has plenty more building to do. I am excited to be along for the ride.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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