2023-03-27 12:14:17 ET
Summary
- Tupperware filed a Form 12b-25 with the SEC that gives them an extension of 15 days to file their 10-K.
- They were able to negotiate an amended credit agreement in late February that allows higher debt leverage ratios to avoid a default.
- Interest rates on the new amended credit agreement were significantly increased.
- There were "material weaknesses" in their internal control over financial reporting, according to a recent SEC filing.
- Unit sales were down 22% last year and their sales force was down 18%.
Tupperware Brands ( TUP ) continues to implode, and I worry that it may not be able to survive under its current corporate structure. With this company, it seems that "there is always something". Now they were not able to file their 10-K on time. In February, Management was able to negotiate an amended credit facility to avoid violating covenants, but they continue to burn cash. Sales of Tupperware products in Target ( TGT ) have been significantly less than I expected, amounting to only 1-2% of sales last year. I am downgrading TUP to a sell from a hold.
Tupperware has three critical problems:
1) Very weak financial structure
2) Outdated sales/marketing/distribution business model
3) Products that are no longer price/value competitive
Needing More Time to File 10-K
Tupperware filed a Form 12b-25 on March 16 with the SEC because it was not going to be able to file their 10-K within 90 days from the end of their fiscal year, which will give them an additional 15 days to file. The problems are prior year taxes and "material weaknesses existed in the Company's internal control over financial reporting". The expected changes according to the filing:
To date, the misstatements that originated in periods prior to 2020 are expected to result in a $23-28 million reduction to the previously reported 2020 beginning retained earnings, with such reduction primarily resulting from misstatements related to income taxes. The Company also currently estimates that the net impact of the prior period misstatements on the restated financial statements will result in an increase in net income from continuing operations for the year ended December 26, 2020, and a decrease in net income from continuing operations for the year ended December 31, 2021 and for the 2022 unaudited interim periods. However, such estimates are preliminary and are subject to change as the Company completes its financial close process, and such changes could be significant.
I view this delay as another yellow flag. I also worry that other "misstatements" might be discovered during this intensive review process. I was confused when they reported GAAP $25.6 million income from continuing operations before taxes and $54.0 million income tax, which resulted in a $28.4 million loss in 2022. I am still somewhat confused about the write-down of the deferred tax assets on their income statement. (Note: I am not showing their income statement/balance sheet in this article because the figures might be misleading, and I will wait to see the new adjusted numbers when the 10-K is filed.)
In addition to the SEC's concerns about filing late, their credit agreement has an affirmative covenant Section 5.01(a) that requires filing an annual audited report within 90 days after the end of their fiscal year. Based on my reading of Section 7.01(c) of the agreement, it seems that there is an additional 30 days before there is an "event of default".
New Amended Credit Agreement
Tupperware would have been noncompliant with their credit agreement if they were not able to negotiate new amendments in February. Their 4Q leverage ratio was 4.9x, under the terms of the August credit agreement, which would have been in violation of the 4.25x maximum. This is why management included a "going concern" warning in their 3Q 10-Q. (I covered this warning problem in my November article.) Under the latest amended credit agreement, the maximum leverage ratio was increased to 5.25x for 4Q'22. The maximum is now set at "6.25 for the first, second, and third quarters of 2023, stepping down to 5.75 in the fourth quarter and first quarter and second quarters of 2024, then stepping down to 4.50 for the third quarter and beyond of 2024". This compares to 4.25x in 1Q'23 and 3.75x in 2Q'23 and thereafter under the August amended agreement . In addition, the February amended agreement no longer would reduce total debt by cash, which will mean the leverage ratios will increase because total debt is being used and not "net debt". (Note: the 4.9x in 4Q would have been 5.6x using the new formula under the February amendments.)
These more favorable leverage covenants did not come cheap. The total borrowing commitment was reduced by $30 million to $420 million, the maturity was shortened to July 31, 2025 from November 23, 2025, annual CAPEX was restricted to a maximum of $30 million, and there were other restrictions. The interest rate was increased significantly under the February amended agreement from the SOFR+2.75 under the August agreement. If SOFR is used as opposed to another base rate, the interest rate for the "Term-2 Loan" for 2023 is SOFR+6.25%, +7.5% in 2024, and +8.0% in 2025. This would mean Tupperware would be currently paying an 11.05% interest rate using the latest SOFR rate of 4.80%. That is very expensive for a secured loan and compares to a "weighted average interest rate of 4.39%" as of September 24, 2022.
In my opinion, they were lucky they were not currently trying to renegotiate their credit agreement because it seems many banks have become much stricter in their lending standards over the last two-three weeks.
Tupperware's operations used $53.4 million in cash in 2022 compared to generating $111.4 million in 2021. Since borrowing has become so expensive and there are legitimate concerns that it could still have covenant issues, raising new additional cash by selling stock, in my opinion, should be considered. AMC Entertainment ( AMC ) and Bed Bath & Beyond ( BBBY ) did that to avoid bankruptcy. As of October 31, 2022, they had 44,478,026 shares outstanding, but they have 600 million shares authorized. This would allow them to issue a large number of new shares, in theory, without needing shareholder approval. This would, of course, cause massive dilution. Current shareholders most likely would rather be diluted than wiped out completely in bankruptcy. I suggested selling new shares to raise cash in my November article when the stock price was much higher and as the stock price continues to drop the window is closing on their ability to even sell new shares.
Business Model Is Outdated
This is not a typical retailer that has stores. It has over three million salespeople, but only a small percent of that total number is usually planning or holding Tupperware parties. Management stated in their latest conference call that their direct sales force declined 18% last year.
According to people I talked with in the past, they often felt compelled to buy something if they attended one of these Tupperware parties at a friend's or relative's house. They said they would have felt awkward if they agreed to attend and left without ordering something. The younger generations of today do not seem into having/attending a party to buy something. They would rather interact via social media and buy online.
Tupperware does have a website to sell their various products, but even then, the website includes notices of upcoming nearby Tupperware parties and a process to RSVP to attend. Recently, they started selling a limited product line in Target stores, but those sales have only been 1-2% of their total revenue. In hindsight, this Target deal is a terrible idea, in my opinion. Tupperware salespeople are now worried about their future and are less likely to even become involved with the company, fearing that the Tupperware party sales/distribution model might become obsolete. The reality is that the sales via Target are not worth all the negatives perceived by their direct sales force. Tupperware parties as a means to sell/distribute products are becoming the milkman and breadman of a few decades ago - no longer a viable business model.
Tupperware Products Are Too Expensive
Tupperware sells a very wide range of products beyond the traditional plastic storage items such as pots and pans. They are currently planning to expand into reusable plastic bags. These items, in my opinion, are all grossly overpriced. They may last for a long time, but it is more rational to pay a much cheaper price and replace it with a new, fresh item every so often. Below is an example of some plastic containers offered on their website for $88 for the five-piece set. There are containers sold at dollar stores for $1.00 each that are just as functionable as Tupperware's, in my opinion.
Even in other countries, the products seem very expensive. Looking at one of their websites in Brazil, which is a major foreign market for Tupperware, a container costs 49.90 Brazilian Real or about $9.48.
tupperware.com.br
Unlike many retailers, I do not see any price cutting or sale pricing such as 50% off or other specials. I am not sure if they would improve their bottom line by reducing prices because the price cuts may not increase unit volume enough to actually increase profits.
The high rate of inflation over the last two years has made many consumers much more price sensitive. This may explain why the company had a 22% decline in unit volume in 2022. Tupperware has been considered a quality brand by some consumers, but going forward, I question if younger consumers will be willing to pay top dollar (or top real) for their effectively generic products.
Conclusion
I have not included any TUP valuation numbers because it would be inappropriate without knowing what the actual updated financial numbers actually are after prior misstatements, which is the same reason why none of their financial statements are included in this article.
Because the amended credit agreement is much worse than I expected, their sales at Target are much lower than I expected, and they do not seem willing to raise much-needed cash via a stock sale, I have reduced my rating to sell from a hold.
For further details see:
Tupperware Has Serious Problems Besides Needing An Extension To File Their 10-K