2023-07-17 07:07:31 ET
Summary
- Lifetime Brands' stock dropped by more than 40% in the past year.
- International expansion is an opportunity for the firm given the TAM of $82 billion.
- Despite a 22% decline in revenue in 2022, cash flow remained positive.
Thesis
Lifetime Brands ( LCUT ) is a dominant business underpinned by high-quality and well-known brands. The company has very minimal capex, resulting in a 15% cash flow yield. The firm has leading positions across many categories. LCUT does carry risks like any other business, such as debt, exposure to consumer spending, and more. In my opinion, The company is currently trading at an attractive valuation given its long-term earning power. I will explain my thesis's key points in the sections that follow
Company Overview & Outlook
Lifetime Brands designs, sources, and sells branded kitchenware, tableware, and other products. The company owns 13 brands and derives revenue from three segments: kitchenware, tableware, and houseware. The company owns 80% of its products, and the rest are licensed. Its products are sold through Walmart (WMT) , Costco (COST), Target (TGT), US Foods, and more.
LCUT generates high cash flow because it uses third-party contractors to manufacture most of its products, which minimizes spending on manufacturing facilities, thus decreasing CapEx spending. As you can see from the graph below, the company's CapEx has actually been slowly decreasing over the last few years, while cash flow, on the other hand, has been increasing. Despite a decline of 22% in revenue in 2022, cash flow remained positive.
LCUT's products are mainly small gadgets that have a high penetration rate. From time to time, these products break and need to be replaced, and given the low selling point, consumers aren't too sensitive to price changes. Given that 88% of revenue comes from the U.S., the company has said in its investor presentation that there are more opportunities internationally and is looking to expand. LCUT operates in a market with a TAM of $82 billion globally. In fact, In March 2022, a new Netherlands distribution center went live presenting additional opportunities. The company is also looking to expand more into food services, focusing on front-of-house products. This is possible given the firm already has years of experience in back-of-house. Plus, the TAM of food services is $2 billion. I believe a global expansion into new categories will benefit shareholders.
Why this opportunity exists?
The firm's stock has dropped by more than 40% in the past year. I believe this happened mainly because of earnings disappointment. Since Q1 22, the company's sales have been declining quarter after quarter. I like to believe that happened because the consumer is being pressured by high inflation to shift away from durable goods to only necessities. The current macroeconomic condition took everyone by surprise, especially retailers, who are now significantly overstocked. Some might be a little hesitant to place new orders until they start seeing some life from the consumer. As a result, revenue from the whole market declined in 2022, not just LCUT. Plus, the company said it didn't lose market share but actually gained some in Europe.
Valuation
The company's stock is trading near 2020 lows. My fair value of LCUT is $10.65, which equates to an 82% return from the current price of $5.85, reflecting an IRR of 16% in the next five years. I expect revenue to compound at an annual growth rate of about 2.7% over the next five years, with it declining by ~7% in 2023. The main revenue drivers in my model are increased consumer spending and international expansion. In 2022, LCUT generated most of its revenue from U.S. kitchenware, 55%, to be precise. I expect the company to generate $148 million in free cash flow from 2023 to 2027. The firm will probably use a large portion of future cash to reduce debt. In my opinion, the company is currently trading at a discount given its strong brands and free cash flow generation. LCUT has ~22 million shares outstanding, cash of $41 million, debt of $353 million, a share price of $5.85, and an enterprise value of $441 million.
Risks
1) LCUT is exposed to consumer spending, and consumers are heavily influenced by inflation. Although Inflation has dropped significantly over the past year it is still a risk to consider.
2) Customer concentration is also a risk for the firm because, in 2022, Walmart, Amazon, and Costco accounted for 19%, 13%, and 11% of revenue, respectively.
3) Post-COVID demand hasn't picked up yet. The longer it takes for demand to pick up, the more LCUT can suffer.
4) As of Q1 23, LCUT had $13.8 million in short-term operating lease liabilities and $75 million in long-term. A short-term debt of $7.5 million and a long-term debt of $256 million, resulting in a total debt of $352 million. This is a large amount of debt given the fact that the firm's market cap is $126 million and it has averaged an annual free cash flow of $26 million over the past five years.
Conclusion
Lifetime Brands is a market leader underpinned by high-quality brands. The company doesn't own manufacturing plants, so it minimizes spending on CapEx, thus increasing cash flow. The firm is currently experiencing headwinds, but I believe they can overcome them. LCUT still has more room for growth and expansion. In my opinion, the market has mispriced the company's long-term earning power, and deleveraging is also another opportunity for the company to attract more investors.
For further details see:
Lifetime Brands: Attractive Play But There Are Risks