2023-08-07 02:00:51 ET
Summary
- Lifetime Brands reported solid Q2 earnings, beating revenue and EPS expectations.
- The company paid down $44 million of debt in the second quarter and generated positive free cash flow.
- I maintaining my buy rating and believe that LCUT stock offers great value at the current price.
Introduction
About two weeks ago I initiated my coverage of Lifetime Brands ( LCUT ). The company reported second-quarter earnings on August 3rd, 2023. In this analysis, I will explain my thesis in small detail and take a deep dive into the company's Q2 earnings.
Reaffirming The Investment Thesis
LCUT is a leading manufacturer and seller of kitchen products, underpinned by high-quality and well-known brands, with multi-channel growth opportunities. The company mostly uses third-party contractors to manufacture its products, which minimizes CapEx spending. As a result, the firm has a 15% free cash flow yield.
LCUT does carry a significant amount of debt on its balance sheet, but I think its high cash generation should allow them to keep up with debt repayments. The firm's stock dropped significantly over the past year as there was less order flow coming from retailers, pressure on the consumer, and more.
In my opinion, LCUT is still trading at a deep discount considering its long-term earning power.
Second Quarter Earnings
LCUT reported Q2 earnings that beat expectations on both revenue and EPS. The company reported a revenue of $146.4 million beating FactSet's estimate of $136.3 million. Non-GAAP or Adjusted EPS of $-0.02 beating estimates of $-0.19. Sales in the U.S. segment dropped by 1.6% and international sales by 18.88% year over year.
In the second quarter, demand seemed to start improving, as the company attributed the revenue beat to oversupply issues that are continuing to subside for retailers and order flow improving. Order flow and overstocking are what really hurt the company in the past year, It's a good sign to finally start seeing some life from the consumer.
Profitability has improved, LCUT reported $4.4 million in operating profit compared to $-0.5 million at the same time last year. Gross margin improved by 170 bps due to lower inbound freight costs and product mix. Most importantly, the company generated cash, In Q2-22, Free cash flow was $-23.36 million, and in Q2-23 $28 million.
I said in my last analysis that I expected the company to use its free cash flow to pay down its debt, and it did just that in the second quarter, The company paid down $44 million of debt in Q2.
Overall, I believe the company had a good second quarter. It looks like demand is picking up in the U.S. while the international segment is still struggling with revenue down by ~19% year over year. The most crucial thing I believe was cash generation which enabled the firm to pay down some of its debt. In my last analysis, I mentioned that debt was one of the major risks to LCUT.
Guidance
The slide on the left is the guidance from Q2-23, and the one on the right is from Q1-23. LCUT maintained its 2023 outlook for revenue and adjusted operating income, while revising its adjusted EPS guidance and adjusted net income for an equity loss in Grupo Vasconia (based in Mexico).
My take on the tweaked guidance is that the change isn't that significant because I don't think it can affect the firm in the long run. Despite the impairment loss recorded in the second quarter, the company still managed to keep its head above water and beat expectations.
Valuation
My fair value of LCUT is $10.71, which equates to an 89% upside from the current price. I project 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 drivers in the model are increased retail order flow, international expansion, and increased consumer spending.
My fair valuation did jump from $10.65 to $10.71 because my revenue projection for Q2 was $132 million so since the company beat my estimate by $14 million, As I updated my model, total revenue for 2023 jumped by $14 million from $670 million to $684 million.
For 2023 my revenue estimate is $684, which is in line with the company's guidance of $660–$720 million. I estimate an adjusted operating income of ~$37 million and an adjusted net income of ~$12 million.
As for the third quarter, My revenue estimate is $182 million, Adjusted operating income of $13.8 million, and an adjusted EPS of $0.31. Consensus is $184.8 million in revenue, and $0.28 in adjusted EPS.
LCUT had 21.8 million shares outstanding, cash of $15.1 million, debt of $309.4 million, a share price of $5.67, and an enterprise value of $419 Million.
Takeaway
The bottom line is that LCUT's second-quarter earnings came in above expectations. It seems like the company's long-term earning power is starting to slowly come to light, and the worst is likely behind us. I expect the company to keep generating cash flow. I project the firm to generate $33 million in free cash flow in 2023. According to my valuation, The firm is still trading at a deep discount. All in all, the market has simply misinterpreted LCUT's long-term potential.
For further details see:
Lifetime Brands: Strong Q2 Earnings Suggest The Worst Is Likely Over