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Consumer & Retail Report #1: 7/10 Recap
Summary of the Week in Consumer and Retail
Welcome to the launch of our first weekly Consumer and Retail recap where we share noteworthy headlines, updates, and insights. Never spam.
My latest report (XPOF: Unit Growth the Driver of Operational Leverage) went out at the end of last month. It’s a visual follow on to my original research on XPOF back in February. Hope you enjoy it and comment with any feedback!
Table of Contents:
Update on M&A
Peloton PTON 0.00%↑ sweetens employee pay incentives as it fights to boost morale and stage a turnaround. Under this plan, eligible team members will have their post-IPO options repriced to Peloton’s closing price on July 1 of $9.13. The company is also accelerating the vesting requirement by one year for eligible unvested restricted stock units that have more than eight vesting dates left in their vesting schedule.
Why this matters? - While this may be good for employee morale and retention efforts, it’s terrible for existing equity holders. With more shares potentially hitting the market sooner than anticipated, increased shareholder dilution is to be expected in any event of a turnaround.
Why this matters? - Grove went public through a SPAC and has thus suffered damage for doing so (not that it’s unwarranted). This headline helped push the stock up almost 100% on the news as if it makes sense. Would be an interesting short play if you could get an allocation. I deem this sustainable brand similar to how Honest Co HNST 0.00%↑ played out when they went public, and we shorted that too.
Why this matters? - Kraft Heinz had stopped supplying some products, such as tomato ketchup and baked beans, to Tesco as the supermarket chain resisted charging customers higher prices for them at a time of surging inflation. This deal will bring back long-awaited KHC products to the European market.
Why this matters? - Lululemon has some pretty aggressive growth plans as part of its “Power of Three 2x growth plan which includes a quadrupling of its international revenue from 2021 levels by year-end 2026. Spain is the first new market in Europe for them since 2019 and the company currently operates 40 stores internationally.
Why this matters? – Pet insurance is becoming wildly popular amongst pet parents as they increasingly treat them more like their children than pets. This partnership makes direct payment from Trupanion immediately available to veterinary hospitals across North America using ezyVet’s practice management software. Trupanion insurance is the only provider that can pay the veterinary invoice at the time of check-out, often in seconds, eliminating the cumbersome reimbursement model.
Build-A-Bear Workshop BBW 0.00%↑ received a call for transformative action from Kanen Wealth Management. Kanen owns a 6.5% stake in the company and has suggested that management enact a sale-leaseback in order to unlock a higher level of shareholder value while prices are depressed.
We have obtained a professional valuation of the company’s owned distribution center which suggests a valuation in a sale lease back of at least $31M and an associated lease expense of ~$1.8M. BBW has the opportunity to sell (and lease back) this asset at ~17.2x earnings and repurchase stock at ~3.2x EBITDA, this would be accretive to earnings per share by ~11%.
Update on M&A
Why this matters? - Over recent years, governments have been increasingly scrutinous towards big tech and their acquisitions that appear to reinforce monopolistic behavior. While Lina Khan is head of the FTC here in America, the UK has made the first move when it comes to challenging the deal so far.
If you’re interested in a possible trade idea for this deal, take a look at our write-up using options (call/put) to achieve a decent return here.
Bed Bath & Beyond BBBY 0.00%↑ — Shares of the home goods retailer jumped 27% following the disclosure of several insider purchases, including interim CEO Sue Gove’s purchase of 50,000 shares. Board members Harriet Edelman and Jeff Kirwan each bought 10,000 shares
Why this matters? – Bed Bath & Beyond, a 2021 meme stock, has had a rocky past year with sales declines, inventory buildups, and Ryan Cohen (founder of Chewy) taking an active role in the company to change things around. Insider buys of an arguably dead company have brought hope to bagholders who think that the company’s management feels good about a turnaround.
Altria MO 0.00%↑ Juul ban put on hold as FDA starts additional review. Juul had won a temporary reprieve a couple of weeks ago after a U.S. federal appeals court stayed the FDA's ban following an appeal from the company for an emergency review of the regulator's order.
Why this matters? - Altria has been under pressure from the FDA since its investment into Juul years ago due to its addiction amongst teens. Altria owns a 35% stake in the name (though it’s mostly written down since then) and any movement with Juul directly affects the perceived value of Altria. A more in-depth research post on Altria can be found here.
Commodity prices have come down since reaching their peaks earlier in the year. If trends continue, companies that have direct exposure, think restaurants, consumer packaged goods, etc. will directly benefit. Inflationary pressures will subside (somewhat) and stock prices could stage a comeback – look at Domino’s DPZ 0.00%↑ as an example of companies hit hard by inflation but have since rebounded.
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Until next time,
Paul Cerro | Cedar Grove Capital
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm
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