Description

Executive Summary: Cimpress (NASDAQ: CMPR) is an extremely compelling short with 50% downside from today’s level of ~$137/sh, just a couple percent off its 52-wk high. Competition has significantly increased in the last couple of years as barriers to entry have been removed and the Company has failed to invest in technology and innovation to keep up. This is demonstrated in all-time high costs for SEM, credit card data showing CMPR new customer growth -30% yoy, and Google Trends indicating considerable loss of interest from consumers relative to competitors. The stock has increased >50% over the last few months on negligible incremental news, all because the Company has been in the open market every day buying almost 20% of the daily liquidity indiscriminately. The #1 shareholder (15% ownership, Board seat) sold $100m of stock in recent weeks, calling into question how much higher insiders think the stock can run ahead of underlying fundamentals. The Company is overearning today (margins >40% higher than well-funded competitors) and drastically cutting marketing spend, which will soon translate into an evaporating topline. Finally, after the massive buybacks, leverage levels are now less than 1x from breaching their covenant and will become an issue as EBITDA peaks this year (from lapping the advertising cuts) and starts to decline thereafter.

Description: Cimpress created the online mass customization printing space, targeting SMBs in the United States. It has since expanded to Europe and other countries and grown from its core business card offering to brochures, pamphlets, invitations, calendars, signage, etc. CMPR remains the largest player, but the space has become highly competitive with several well-funded competitors including 4Imprint, Minted, and Zazzle among others.

Insider Signals: The crux of this short thesis is around competition, but there are several other factors that make this a very attractive entry point, including the largest shareholder selling $100m worth of stock in recent weeks for the first meaningful sale in the 8yrs that they have been a holder (also have a Board seat on the 5-person Board). This is a signal we have found to be quite meaningful in other stocks we have taken positions in. The top 5 shareholders (including the CEO with 12%) control 60% of the stock and the Board, and operate the Company as a semi-private entity (no quarterly earnings calls, very limited sell-side coverage).

The stock went from $120 to $80 in January ’19 as the Company missed expectations with Vistaprint (>50% of revs / core U.S. SMB online customization platform) organic growth slowing from LDD/HSD in prior years to 3% in their FQ2’19. The Company announced a restructuring/transformation program with severe cuts to advertising/marketing expenses and a focus on the core business after several acquisitions. The stock languished in the $80-$100 range until CMPR initiated (we found out in their FQ1’20 filing on 10/31/19) a huge buyback program, swallowing almost 10% of shares outstanding / 15% of actual float (>2.5m shs) in the open market in a matter of 3mths (August-October). It is no coincidence that the stock went from $100 to $140 over the exact same time frame with no incremental news about the Company given this means that the Company’s buybacks accounted for 18% of the average daily trading volume in an already illiquid stock. According to the 2019 Proxy, management’s long-term incentive plan is solely based on stock price appreciation (not tied to any fundamental metrics). Beginning this year, the CEO receives no cash salary (except for legal minimum) or cash bonus and is now solely compensated on the performance of the stock price.

Competition: Overall industry growth has been and will continue to be +LSD-MSD as price competition offsets volume growth that is supported by low unemployment and a long-running bull market. There are legitimate and well-funded competitors in the space: Moo.com (~$200m sales), Minted (Forbes, Jan. ‘19 – “annual revenues are increasing 39% year-over-year, into the low hundreds of millions… In December, T. Rowe Price and the European private equity firm Permira ploughed an additional $208 million into Minted, bringing its total money raised to nearly $300 million. The company’s valuation is $733 million”), and 4Imprint (LSE: FOUR; $800m sales, growing high-teens) and are all growing topline +high-teens. Highly correlated with gross adds, Google Search trends are +HSD-20% for each of these competitors versus CMPR down -MSD-HSD.

Credit card data shows CMPR’s new customer growth fell off a cliff when they stepped off the gas on advertising spend and are currently running down >-30% yoy. Sales per customer have increased in the same time frame, but at less than half the rate of new customer declines.

Since CMPR first defined the space and enjoyed low SEM / search advertising costs, widely available capital has lowered the barriers to entry and e-commerce standards have risen significantly. From CMPR’s 2019 Annual Report (Risk Factor Section): “The use of mobile devices skyrocketed, but customization on small screens is difficult, hurting our conversion rates. Competitive pressure has increased steadily for both price levels and advertising. The economic expansion that has continued for the last ten years has increased input costs for paper and shipping services.”

 4Imprint Case Study: There is a little-known public competitor called 4Imprint listed in London ($1bn mkt cap) although the business is overwhelmingly derived from North America. Four sales have consistently been growing >mid-teens. They reported 1H ’19 +17% vs. their call-out of the US market growing 4-5%, so they are very clearly taking share. They reported orders +14% yoy, implying pricing down ~3% yoy. An analyst who covers them: “The Company looks to maintain margins in a comparatively tight band underpinned by its considerable ability to set prices appropriately; at the same time using analytic tools to determine the best use of marketing investment, maximizing its ability to grow sales strongly.” FOUR’s shareholder letter also laid out the case for increasing marketing spend: “…We were confident in our direction, but uncertain of the timeframe over which brand based advertising would produce meaningful revenue benefits… In addition, we were careful to point out that this investment would be incremental and as such would not involve a re-allocation of funds away from our existing, proven marketing engine. In consequence, we guided to 2018 numbers showing continued revenue growth but flat year-on-year operating profit…” Just as powerful, excess profits are reinvested to maintain 6-7% EBITA margins (vs. CMPR >10%):

Contrary to the CMPR business trends, customers acquired at FOUR are up strongly yoy in Q1 & Q2 ‘19:

Advertising Cuts: CMPR is overearning, at peak ROICs today driven by significant marketing spend cuts which have not had time to translate through to top-line and profit erosion. They were a first-mover and reaped the benefits of low-cost digital marketing, but those days are now over. Advertising spend is required to attract new customers to offset the high churn of existing microbusinesses, especially in a customer segment where there is full price transparency as all shopping is done online. This is a business with [Company-stated] a 30% annual retention rate, not an easy business from the start. From a former employee that we spoke with: “It is truly a risk if they cut that marketing too far because the space is very crowded. Quality of the product they produce isn’t that great that somebody else can't do the exact same thing… The nature of the marketplace points to the reality that Vistaprint will continue to decline. New players are coming in and people want something different.” The Company will not see the same growth and margins as a few years ago as the acquisition of customers has grown significantly more competitive. Bullish estimates call for FY20 to be the revenue trough and then re-accelerate to MSD+ with margin expansion. This makes little sense for anyone who is paying attention.

Q1FY20 (10/30/19) Takeaways: The Company just reported earnings that help solidify the short thesis:

1.      Growth in EBITDA driven by advertising cuts (will be a near/medium-term top-line headwind) and one-off benefits from (i) currency derivatives, (ii) restructuring addbacks, and (iii) M&A. Yet, still missed SunTrust estimate by -$12m / -13%:

2.      On a 2yr stack, organic growth decelerated in every single business line

3.      Vistaprint technology still a major work in progress: “Vistaprint's technology team is making steady progress on the multi-year project to rebuild Vistaprint's technology infrastructure… caution that we remain only in the very early stages of this technology development process, and we do not expect launch in our largest (U.S.) market prior to Q3 of FY2021.”

4.      Signs of concern about new customer growth: “In September 2019, Vistaprint tested and rolled out an offer of free standard shipping on all business card orders in the U.S. market…We expect to test similar offers in other geographies over the remainder of the fiscal year.”

5.      No intro needed: “We continue to see very aggressive price competition and online search competition in the upload and print space in Europe. We are committed to defending our price and marketing leadership positions, including continuing price reductions which we have implemented in the recent past. This negatively impacts our revenue and EBITDA, but we are prepared to maintain this defensive stance indefinitely because we believe that, over the long term, it is in the best interests of our customers and our cost structure should allow us to outlast the competition.”

Where we could be wrong: if the Company is able to scale back ad spend and also re-accelerate growth over a meaningful measurement period (~12mths), then we are wrong here. However, given what we know about the industry and how far behind CMPR is from a technology and innovation perspective, this is far more unlikely than a case of eroding margins and top-line accelerating negatively.

Valuation: The Company is really only covered on the sell side by one analyst and he allocates little to no time to this given that the analyst’s coverage includes Amazon, Alphabet, Uber, Peloton, Facebook, Snapchat, and 18 other tech companies that drive more investor interest. Despite the giant miss in FQ1, the review still labeled the quarter as an “operational improvement”. He has a legacy model and put his numbers under review after Q1. He brought down his 2021 EBITDA number by -9% last week.

With deteriorating topline and EBITDA declines after FY20, not to mention increasing competition and heightened execution risks after leveraging the Company up to buyback stock, this business does not deserve a double-digit earnings multiple. My base case has -37% downside and the Bear/Bull cases skew -3.5/1.

Additionally, I ran two different DCFs to sanity check my assumptions. The first was my realistic base case for the Company. Note that they did $210m of normalized FCF in FY19, so my Yr10 of $227m is conservative in my opinion (including assigning them a positive perpetual growth rate), and I still think there is 50% downside:

My second DCF was a WYNTB [“What you need to believe”] to back into today’s price (frequently advocated by the widely respected Michael Mauboussin). The market is pricing in +2-3% topline growth and expanding margins from ~14% today to high-teens a few years out, not to mention more efficient capex spending. Head-scratching.

Catalyst

Top-line accelerates negatively as the credit card data and google search trends indicate.

The Company re-invests in marketing and margins subsequently fall to the industry-level (-40% below CMPR today) at which point leverage becomes a real issue (~2.4x today versus 3.25x Sr Lvg covenant and ~3.3x today versus 4.75x Total Lvg covenant).