COOK - Katapult Synergy 2023

Summary

• Katapult Has the Best User Experience.
• Sears Hometown Bankruptcy Doesn't Hurt Katapult.
• iBuyPower is a Powerful Addition for Katapult.
• Best Buy, Home Depot, HP Added to Mobile App with Katapult Pay™.
• New CFO Nancy Walsh Takes Reins in First Conference Call for Q4.

Katapult ( KPLT ) is steadily rising; the company has been hammered from their initial $10 SPAC IPO and presents a serious opportunity for retail investors. In my opinion, SPAC investors often expect a Google in a few quarters, and when that doesn't occur, you get what you currently see with Katapult's share price. However, if you pay close attention to Katapult's quarterly operations, you can see growth slowly increasing, albeit lower quarterly revenue in a recessive economy which is forgivable. Last quarter, Katapult could have had an EBITDA profit of $3.1mm had it not been for the ASC 842 accounting rule change which reduced revenue by $5.4mm; the market is expecting the same this quarter, but there's always a chance for a surprise considering Q4 was the Holiday Season.

Katapult Has the Best User Experience

In our digital world, if your user experience at a particular website is unpleasant, there's a chance you may never return. Katapult is very aware of user experience and understands that repeat customers are the lifeblood of their business. Last quarter's repeat business was ~50% of overall revenue; this shows that Katapult is building a strong base of customers who can pay their bills, rebuild their credit, or make a new beginning altogether, coming from no credit. If you look at the comparison below of TrustPilot reviews for Katapult and Affirm ( AFRM ), it's clear that Katapult is the winner; what's interesting is that Katapult deals with subprime and Affirm with prime, so you would expect the group with better credit to leave better reviews, but that's not the case; furthermore, Katapult has 4x the amount of reviews, so it is a microcosm of a much larger audience where Katapult has a serious online presence. According to Experian, about a third of the consumers out there are subprime , and that is Katapult's market.

Sears Hometown Bankruptcy Doesn't Hurt Katapult

Sears Hometown Stores, Inc., the Sears franchise business, recently filed for bankruptcy . Realize that Sears had never been part of Katapult's past revenue, so although the loss is real, Katapult never had anything to lose because Sears was a new merchant acquisition. Sears aka Transform SR Brands LLC (TransformCo) was a supplier to Sears Hometown franchises, so if anything, this channel loss should only strengthen the nascent Katapult-Sears relationship and improve supply to the Sears.com online store and the eight remaining brick-n-mortar stores.

If you look at events leading up to the bankruptcy, you can deduce that the online store really called the shots, and that's where Katapult Pay™ is.

In January 2020, The Wall Street Journal reported that Sears Hometown franchisees were having trouble getting needed inventory from TransformCo and also being penalized if they tried to match prices on products sold on Sears.com.

The Katapult-Sears merchant-acquisition brought Sears onboard as a " direct " customer which meant Katapult got embedded in their online store, as well as the remaining brick-n-mortar stores. With the Sears Hometown bankruptcy, surely many of those customers will switch online to fulfill their needs, so that would still benefit TransformCo and Katapult. The pic below shows Katapult's exclusive deal with Sears.

According to Bill Wright, Director of Investor Relations at Katapult, " direct " has the highest conversion rate when available on a merchant’s website in conjunction with the mobile application and a waterfall agreement versus just Katapult Pay™ virtual credit card, but " direct " also has the biggest tech integration demand of embedding code into a retail system that can be decades old. Customers are much more likely to convert with " direct " integration versus just a waterfall agreement, which may include competitors like Progressive (PGR) or Acima (RCII) in the subprime arena.

Bill says it's not easy to land a " direct " merchant since it's not obvious to them that 30% of consumers have a credit score in the subprime range (according to Experian, there are fewer Subprime Consumers Across U.S. in 2021 ). Katapult’s mission for financial inclusion provides these subprime consumers with access to high-quality merchants. Many of these consumers are limited to shopping at Rent-A-Center, Aarons (AAN) or PRG Gear . Fortunately, more retailers are realizing there's actually big demand from these customers which could incentivize them to go " direct. " Until that happens, the mobile app with Katapult Pay™ offers an excellent way for Katapult to still add new merchants and expand.

In the Katapult Q3 earnings call , CEO Orlando Zayas mentioned that Sears could " become one of [their] top merchant partners in 2023 ". Sears, along with the latest merchant additions, gives more resiliency to Katapult's revenue should one merchant perform badly, go out of business, etc. Recall last year when Wayfair ( W ), Katapult's top " direct " merchant, announced lower revenue that this negatively affected them. Maybe now with merchant additions like Sears, Best Buy, Home Depot et al, the health of Wayfair isn't as critical to Katapult as it once was. Decentralizing the customer base amongst many is the safe route that Katapult continues to take.

iBuyPower is a Powerful Addition for Katapult

Katapult announced on December 20th the completion of a new " direct " merchant acquisition with iBuyPower.com, a leading gamer; iBuyPower's website claims they offer the " best prebuilt gaming PC's out there " with the " most advanced graphics for gamers ". For subprime customers without a lot of cash, staying at home playing video games is entertainment they can afford. In 2022, iBuyPower Computer raked in over $8.6mm in revenue , so this merchant acquisition by Katapult was meaningful.

Best Buy, Home Depot, HP, Mattress Firm, Traeger Grills Added to Mobile App with Katapult Pay™.

Recall that last quarter, the Katapult Pay™ virtual credit card was released offering a new revenue stream for the company, so Q4 will be the first full quarter that Katapult Pay™ has been in use. With Katapult Pay™, the revenue is realized immediately versus a " direct " customer acquisition which can take months to embed. Katapult stated they had " 20 merchants enabled with Katapult Pay™, including Best Buy, Mattress Firm, Traeger Grills and HP ". Home Depot was also recently added to the mobile app. Consider some of the latest merchant additions below, and realize that Katapult has been growing. All of these merchants have a strong online presence.

1. BestBuy ( BBY ) is one of the biggest consumer electronics retailers in the US. Best Buy generated revenue of $47.8B in 2022 and operated 1,144 stores in 2022; that number has declined from 1,779 in 2013 which portends the increase in BestBuy online sales where Katapult Pay™ virtual credit card is used.
2. Mattress Firm ( MFRM ) is the largest mattress specialty retailer in the US with revenue of $4.3B in 2021.
3. Traeger Grills ( COOK ) " invented the original wood-fired grill over 30 years ago in Mt. Angel, Oregon; they continue to lead the industry as the world’s #1 selling wood-fired grill, perfected by decades of mastering the craft of wood-fired cooking "; they had $785mm in revenue in 2022 .
4. HP ( HPQ ) is one of the largest online computer resellers with revenue of ~$63B in 2022.
5. Home Depot ( HD ) is the largest home improvement retailer in the US and had ~$151B in revenue with 1,994 stores in 2022.

If you were to take just 0.01% of these merchants' annual revenue, that's ~$266mm, so these additions are meaningful for Katapult. The key thing for investors to understand about these merchant additions is that with Katapult Pay™, revenue occurs immediately, so it should affect the bottom line in Q4.

Risks

Katapult had ~$96mm at the end of last year in cash, but that's down to ~$81mm as of September 30th. Share count is ~98mm fully diluted with ~13mm in outstanding warrants. Katapult has a revolving loan out for ~$50mm, and a note due at the end of this year for ~$43mm of which ~$4mm a quarter is being paid; their cash and debt is basically a wash.

In my view, Katapult is a prime target for an acquisition; should they start a trend of profitable quarters, then that is always a possibility. In my opinion, the company will continue to see growth in this economy where money is tight because merchants are looking for new ways to generate revenue, and Katapult offers a sizable untapped channel. Katapult's biggest priority right now is to show profitability which they almost did last quarter. Once Katapult can have a profitable quarter and continue that trend, then this should pay off for investors.

Epilogue.

In summary, the Q4 earnings call in March should be interesting; this will be the first full quarter for veteran CFO, Nancy Walsh , who has over 30-years experience as a finance executive. In addition, Katapult will still have CFO Karissa Capito onboard in a senior advisory role through March, and two CFO's are better than one. The large merchant additions of BestBuy, Home Depot, HP et al, as well as online merchant iBuyPower, all increase Katapult's bottom line; it demonstrates continued growth in a recessive economy. For the longterm investor out there, average down if you can, but definitely hold on to what you've got. Realize that Katapult insiders like Lee Einbinder, CEO of FinServ ( FSRX ), and others bought shares this past quarter which is always a good sign. As always, please do your own due diligence and good luck.

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