2023-11-21 17:01:50 ET
Summary
- Lifetime Brands sells commodity-type kitchen products to a very broad range of retailers.
- Financial metrics raise concerns about their long-term viability, including very high borrowing interest rates and accounts receivable issues.
- The company needs to be bought by a large consumer company that is able to negotiate better pricing with major retailers, such as Walmart.
Lifetime Brands ( LCUT ) is one of many companies that sell commodity-type products that consumers expect to buy at discounted prices and that reality is reflected in their relatively low stock price. While LCUT's stock price has risen about 30% over the last month, it is still down sharply from its high reached near the end of the pandemic when people were stuck at home and buying "stuff" for their homes. There are some financial metrics that raise yellow flags about their long-term viability. Shareholders' only real hope is that some other company comes in and rescues them. Because there is a realistic potential of being bought out, I rate LCUT a hold.
Lifetime Brands-Unknown Consumer Company
Lifetime Brands is not a company that most people, including investors, are familiar with, but their product line includes some very well-known brands such as KitchenAid. Lifetime Brands, however, only sells a limited product line of KitchenAid tools and gadgets used mostly in the kitchen. They do not sell KitchenAid appliances - those are sold by Whirlpool ( WHR ) that owns the KitchenAid brand name. Lifetime just has a license to sell certain types of kitchen gadgets. Other brands include Farberware, Wallace, Kizmos, Gorham, Mikasa, Bombay, and many others.
Walmart ( WMT ) accounts for 19% of their sales, Costco ( COST ) 13%, and Amazon ( AMZN ) 11%. Lifetime products are also sold in department stores and discount store chains. I often see many of their products in "dollar" stores in New York at relatively cheap prices. They have extensive foreign sales that have been weak lately because of geo-political events.
Accounts Receivable Problem
There is an interesting financial metric that I consider a yellow flag that is not immediately obvious to many investors. That is the relationship of accounts receivable at the end of a quarter compared to revenue for that quarter. While Lifetime does periodically sell their accounts receivables to a bank, the overall long-term growth of accounts receivable to the growth in revenue indicates, as can be seen by the chart below, that there is a potential problem, in my opinion. Quarterly revenue has only grown 16.26% over the last 10 years, but account receivables have grown 75.95%. Quarterly revenue in inflation adjusted terms actually decreased over the last 10 because the CPI Index rose 31.5% from September 2013 to September 2023.
For 3Q 2023 the ending net accounts receivable were $153.5 million compared to net sales for 3Q of $191.7 million. That is 80.0% of net sales compared to 3Q 2013 when accounts receivable was 65.5% of net sales. In addition, the allowance for doubtful accounts was 9.9% of gross accounts receivables in 3Q 2023 compared to only 4.9% in 3Q 2013. Collectively these two metrics indicate that there is a serious issue getting paid and paid in a timely manner for goods shipped. This long-term trend puts a serious strain on their financial position because they are forced to cover their expenses by borrowing instead of using cash paid for their shipped products.
Long-Term Debt Is Very Expensive
Long-term debt has increased sharply over the last 10 years compared to total shareholder equity. There has been a decrease over the last few years, but Lifetime Brands is still highly leveraged.
I think that their recent negotiated extension of their term loan maturity from February 2025 to August 2027 is indicative of their current financial condition. The interest rate on this term loan was increased to SOFR+550 from SOFR+350. That is a very high borrowing cost and indicates a high risk. This $150 million term loan has a leverage covenant of 5.0x. Currently it is 4.2 x. I worry that if the economy heads into a decline caused by high interest rates and geo-political issues, EBITDA may decline, and borrowings may increase because buyers are not making timely payments. A waiver on this 5.0x covenant might be needed late next year, which often means additional fees and/or restrictions.
Third Quarter Results
While the 3Q did show some net sales increase from 3Q 2022, it was actually down a little if you adjust for inflation. At least they generated a positive cash flow from operations of $16.961 million for the first nine months of 2023 compared to burning $20.085 million for the first nine months of 2022.
3Q Income Statement
3Q Balance Sheet
Consumers Want to Buy at a Discount
One problem that Lifetime Brands is facing is not unique just to them. Many consumers want quality name brands that are cheap and many also prefer quality brand names over store brands. What happened with Bed Bath & Beyond is an example. BBBY moved away from selling a wide selection of quality brand names in their stores and instead expanded their store brands, which resulted in unhappy potential customers who wanted the quality brands. BBBY revenue dropped as result.
Customers now often buy the quality brand name products at steep discounts at discount retailers that offer prices cheaper than even Walmart. The trend for buying their products at low prices at discount stores was mentioned by management during their recent conference call: "the end market is still not robust. We're seeing pickups in certain channels like off-price".
This may seem inconsistent, but many consumers view products sold by Lifetime as commodity/generic products, but at the same time want a known brand without having to pay up for it. This commodity concept is reinforced by looking at where the item was made. All Lifetime's products, except sterling silver items, are made in China. They don't manufacture anything, except sterling silver. It is all sourced from manufacturers in China.
Having almost all their products manufactured in China could be a huge issue in the future, in my opinion. I am expecting very difficult relations with China within the next few years. Besides potential problems over Taiwan, I expect a potential trade war with China, especially if Donald Trump is elected and the Republicans control Congress. This risk alone would keep me from buying LCUT stock.
2023 Updated Guidance
Lifetime Brands Needs to Be Bought Out
The reality is that Lifetime Brands needs to be bought out. They need to be bought by a major consumer company that has greater bargaining power with major retail store chains, such as Walmart. Lifetime has many brands but because of its relatively small size it is bargaining from a weak position. In addition, a financially strong large consumer company would be able to get rid of Lifetime's very expensive debt. Plus, a major consumer company might also be able to be more aggressive in getting paid and reduce the accounts receivable, which would improve their financial position.
Lifetime Brands currently has a $373.6 million enterprise value using $6.70 LCUT stock price and the pro forma net debt after the recent term loan deal. Using the $53.5 million midpoint of their 2023 EBITDA guidance, their enterprise value/EBITDA multiple is 7.0x. That is not cheap, especially considering its high financial leverage. If a larger consumer company was able to negotiate better pricing for Lifetime's products of an average increase of 3% and assuming the same number of unit sales, the EBITDA would be $73.9 million. Using $73.9 million, the enterprise value/EBITDA multiple is 5.1x. A potential buyer would not just look at their current operations, they would look at what they could do to improve results. There is significant potential, in my opinion.
In 2017 Mill Road Capital offered $20 per share, but that was rejected by management, including the Seigel family - founders of Lifetime Brands. The Seigel family still owns just under 10%, but Centre Partners is the major holder currently with 27.5% of stock.
Conclusion
Lifetime Brands is a member of a long list of companies that received buyout offers significantly above the market price at that time but were rejected by management and then subsequently their stock price plunged to very low levels. The $20 per share offer now looks great compared to the current stock price of $6.70.
To get better returns for their portfolio of brand names they need to sell the company to a very strong consumer company with the muscle to negotiate better deals with major retailers. If they don't sell, in my opinion, they will drift over time into extinction. They got a shot in the arm during the pandemic, but their future is not very bright, especially with their high financial leverage and consumers being more price sensitive for commodity/generic type products. In addition, there is the China risk.
I rate Lifetime Brands stock a hold only because of the buyout potential. Without that potential I would rate LCUT a sell.
For further details see:
Lifetime Brands Needs To Be Bought Out