2023-06-30 13:35:27 ET
Summary
- I consider Tupperware to be a "dead" stock, with its market cap falling to less than $40M. The issues include weak financials, a legacy sales model, and products that are no longer competitive due to their high price point compared to alternatives.
- Tupperware's financial distress is evident in its negative net margins, non-compliance listing from the NYSE, and the need to seek financing to survive.
- Despite securing some financing, the company's unsustainable 11%+ interest rate is set to climb further, indicating a massive risk in investment.
- I believe that Tupperware's business model no longer works, as it requires customers to pay a premium for commoditized plastic containers and related items.
- This company marks my second-ever "SELL" rating on Seeking Alpha and unless something happens, it will be the last time I cover it, removing it from my list.
Dear readers/followers,
I now consider Tupperware ( TUP ) to be an essentially "dead" stock. My last article before this one was written almost a year ago when I considered the company not to be attractive and argued against investing. Since that time, the stock has dropped 87.6%. It's not an unsurprising development to me, and I don't feel that rating warrants any sort of massive highlighting - plenty of analysts were bearish on the stock.
The last bullish article on TUP on SA was almost 2 years ago, and the RoR from that particular rating was a 96.52% drop or almost complete destruction of capital.
In this article, I will review what was once an interesting company, but what has gone down to less than $40M in market capitalization to give you my "final" rating for this stock.
Tupperware - Once upon a time, it was an interesting business
It's hard to say what Tupperware could have done differently to stave off its demise. The simple fact is that in a globalized economy with the sort of trends we have, it's hard selling premiumized plastic containers and related products - because you're competing with people and companies selling the same products at 5-15% of the price of your own products.
Tupperware has had structural problems for years, but the company's issues became clearer back in 2017 when the company went net-negative for the first time. Since then, it's been a story of decline and issue after issue.
Plenty of investors, including well-known people like Paul Tudor Jones, Chuck Royce and Jeremy Grantham have lost money on the stock - often over 80%. Some of the aforementioned investors waited until 2023 in March to sell out the last of their overall positions in the business. There was in fact insider buying as recently as January of this year, though I don't really see the turnaround potential in the company in any way.
Things went from bad to worse when interest rates started to climb. The company's financial condition which already was bad, became worse when facts came to light that the company is looking at selling off real estate, selling off fixed assets as well as various other restructuring activities which most often are associated with a company heading for bankruptcy - though TUP has not mentioned this latter part, just their need to seek financing to even survive - and also admitted to a probable violation of their financial covenants for their credit facility - though they later did manage to at least get some financing.
So, there are plenty of issues here.
The company does have revenue in the billion/s - but this doesn't help when there is very little or no income to show for it - and the company's net margins went down to negative 1.36%, with an RoA of negative 1.59%, and an ROIC of negative 16.64%. These numbers should be enough to imply the state of financial distress that we are in. Of course, the company also got a non-compliance listing from the NYSE. The latest communication to the SEC from the company stated that it:
“will be unable, without unreasonable effort or expense, to complete and file the Form 10-Q within the prescribed time period”
This is because the company is seeking to review and restate prior earnings. This alone caused the stock to slide double digits almost 2 months back - and we've yet to see improvements from that.
So despite managing to get some financing, the company continues to behave like a dying business - because, simply put, in my opinion it is.
The company's issues can be boiled down to a few, but the more relevant ones include as I've already alluded to:
- Weak Fundamentals, meaning financials.
- Products that are sold in a legacy sales mode, without the products themselves being competitive to the degree they're premiumized.
The fact is that Tupperware sells plastic containers priced at between $50-$90 for a set when you can walk into any standard store and buy a competitive glass container for $6 or a plastic one for $2-$3. I can accept premiumization as long as the products warrant it, but this no longer does.
This is a very good example of a business model no longer working. At one time, the company's sales model together with its products actually worked - but this is no longer the case, and I don't see this changing either.
Inflation and overall price increases have made customers very price-sensitive and much more cautious in their purchase habits - there's less money to go around, and I speculate that one of the first things to go might be not buying plastic containers at $50+ for 5 pcs. The sales numbers would agree with this assertion.
The company's new financing came at an expensive price in the form of adjusted covenants, as well as significant interest rate increases which means that the company currently pays an unsustainable 11%+ interest rate that's set to climb even further as the interest rate goes up, given that it's a SOFR +6.25%, that's set to climb to SOFR + 8.0% in 2025E. So you can see an avenue to the company paying over 14% in interest rate for its debt - which by the way of yield/interest rate costs implies in itself a massive risk in this investment, which I also consider to be quite relevant. The bonds for the company tumbled by 50% in one day alone after it became known that the company had engaged financial advisors to secure financing.
Because we don't have current financial numbers, it's difficult to work with the company's valuation and potential up or downside. We're going to have to use what I consider to be uncertain or "guesstimated" numbers, which in itself is a problem - but it works to show you why I don't consider investing in Tupperware a good idea here, or at any time going forward.
Whenever a company faces a fundamental decline in its entire business model, this brings with it consideration as to what the company would have to do to actually turn these trends around - and for Tupperware, I consider this to be impossible.
Its entire operation structure is based on a business model that requires customers to pay a premium for what are essentially commoditized plastic containers and related items. The latest idea that I read was introducing Tupperware plastic bags. I looked in my kitchen cupboard and found a 100-pack of resealable for less than $3. Call me negative, but I don't believe resealable plastic bags - or anything the company can come up with can really save its business model here.
The reason, in the end, why I consider this company destined for the graveyard is that its business model no longer works. It's not quite the horse-drawn carriage companies in the midst of automotive business emergence, but it's not far removed from such a comparison either. While there may be people out there that view Tupperware products as so amazing in quality as to justify that price tag, I don't see that.
With a business model that no longer works, the company breaks the cardinal rule #1 Omega of all companies and businesses. Without a working business model where you can conceivably turn $100 of revenue into profit over time, the entire idea of the company falls apart. And with borrowing costs, management, and other things weighing the company down, I do not see a good avenue for how they might survive this.
Let's move to valuation.
Tupperware valuation
We're not in a position to work confidently with any valuation for Tupperware here, given the restating of the company's earnings. With a negative-considered current net asset value due to debt, same with the tangible book, the only saving grace the company could present its earnings - meaning positive GAAP. The likelihood of significant, positive GAAP for TUP though is reflected in the less-than-a-dollar share price we're currently at - so I'm not exactly confident here. By significant I mean anything comparable to historical numbers, which is unlikely here, given that in 2020 we saw GAAP of $2.14 and the most positive S&P Global 2023E calls for around 36 cents.
Tupperware is a B+ rated former impressive company in the US that currently trades at 1.66x blended P/E. The next-year estimates consider it likely for the company, from a FactSet point of view, that EPS will improve to the single-dollar level on an adjusted EPS basis.
Such a development would bring about a 3-year RoR of 1,358.23%.
How likely do we consider this development?
A few ways exist to answer this. The company's analyst accuracy is less than 46%, meaning it's a coin flip even with a 10-20% margin of error with some misses as high as 76% on the negative side.
The company has stopped providing investor materials in conjunction with earnings calls - instead providing only transcripts of the earnings calls. This alone should signify how bad things could be, in the company's own view. Usually, a company wants to argue as to why their business is a good investment. TUP no longer effectively does this from this context.
What the company says for its 2023E focus - though this is now several months old - is B2B channel expansion, optimizing cost structure, and improving WC to improve cash flow. The company has created a new space for members to make money from Day 1 working for Tupperware, which it expects will improve retention, productivity, and sales. New marketing pushes across main markets, and improved service makes the company expects growth toward 2H23.
I do not agree with this assessment.
My assessment is that between increased borrowing costs and double-digit debt service costs as well as the inflation (cost, wages, and others) we're seeing across our entire society and globally, together with the fact that people seem less likely to spend, means that no amount of improvement in the company's sales structure can make up for these costs, let alone turn the company around to a degree that would make it interesting as an investment for me.
It's simple. If we're talking NYSE compliance notices, I usually am out of such an investment - and not interested in going back in. There's too much risk in such a play for me to make it interesting to any extent.
For that reason, here is my current thesis on Tupperware.
Thesis
- I now believe Tupperware to be in realistic chance/danger of actual bankruptcy. This is due to unfavorable lending and debt servicing costs combined with a fundamental decline in the company's business model. In essence, the company's way of doing things no longer works, and I don't see a realistic avenue for that to be restored or recovered.
- Because of this, I view Tupperware as an unfavorable investment in any context - I would not invest here, and I am no longer giving the company a price target. The variables are too uncertain, and given the company's lack of data, I see forecasts as too uncertain.
- This company now marks my second-ever "SELL" rating on Seeking Alpha and unless something happens, it will be the last time I cover the company, removing it from my list.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
The company fulfills none of my criteria - one of the first-ever companies to do so - and because of this, i don't view it as a "BUY", but a "SELL".
For further details see:
Tupperware: A 'Final' Analysis And Autopsy (Rating Downgrade)