| 2017 | 2018 | ||||||
| Price: | 1.16 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 66 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 76 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 51 | EBIT | 0 | 0 | |||
| TEV (in $M): | 127 | TEV/EBIT | 0 | 0 | |||
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I believe EVINE (or the “Company”) is an attractive long investment with at least 50% upside within two years. For context, that return would yield a stock price at roughly the same level where a high-profile investment group bought shares last September as described more below, and the stock is currently available at half the price from where the stock traded within five days after the investment group made their investment last September (i.e., the market initially loved the investment and accorded substantial potential to it). Also for context, the current price is ~15% below the average price paid by insiders who collectively bought over 1.2M shares in the past two years. Insiders are continuing to assert their confidence as evidenced by after-market filings yesterday by five insiders buying stock at $1.15.
Based on the Company’s growth outlook of 11-36% for EBITDA, leading to $18-22M of adjusted EBITDA this fiscal year, EVLV is currently trading at less than 6.5x the midpoint of EBITDA guidance. At the Company’s midpoint of guidance, EVLV is trading at ~10x EBITDA less capital expenditures. On a revenue basis, EVLV is trading at 0.2x. EVINE’s customer file is currently being valued at ~$90 per customer. There is additional value from over $325M of Federal NOLs. Moreover, there is substantial value potential from that which is envisioned and might evolve with the assistance of the strategic investor group, and I believe that none of that potential is being discounted by the current price.
Among the reasons to consider a long investment in EVLV are the following:
EVINE is the third largest home shopping network and a brand, over two years old, that lacks much affinity with the investment community which is of course familiar with QVC and HSN. The Company’s predecessor brands were ValueVision, ShopNBC, and ShopHQ. The Company was founded in 1990 and called ValueVision then. In 2000, NBC purchased a stake in the Company and later that year, ValueVision was rebranded as ShopNBC.
EVINE is distributed to 87M homes via cable and satellite but management is focused on being more than a “television retailer” and has increasingly been driving its content to be distributed through other channels including on-line, mobile, over-the-top, social media, and through strategic partnerships with the “bricks-and-mortar” channel. As described in their most recent earnings release, EVINE “remains focused on building proprietary and exclusive brands as well as using our national multi-platform distribution to showcase lesser known compelling brands that cannot replicate our kind of reach in today’s retail landscape.” Two selected examples of the latter are Beekman 1802 and MacKenzie-Childs. Over half of the Company’s sales mix is generated digitally and 48% of such digital sales were from mobile in the most recent quarter. Measured by its online sales, EVINE was #115 in the Internet Retailer 2016 Top 500. The Company’s total “active customers” amounted to over 1.4M in 2016 and has increased by a CAGR of 6% in the past four years. EVINE’s current core customer is the “baby boomer” generation.
Competition of course includes QVC and HSN as well as the broader set of competitors across the entire retail landscape including Amazon. Within video commerce, Amazon launched a daily program called Style Code Live in 2016; it streams live on-line each weeknight at 9PM EST. While we don’t have any specific metrics for Amazon’s Style Code Live, it’s notable that Amazon is further validating the relevance of video commerce as well as demonstrating that such can be done outside the traditional home shopping network model that was traditionally just on television. For context, Amazon’s Style Code Live has less than 10% Facebook followers relative to EVINE currently. I anticipate that the gap will close but I also believe that EVINE can become more successful through a narrowcasting strategy of on-line video commerce as well as continuing its strategy along the historical television medium.
I know that many investors are already quite familiar with QVC and HSN so I will not spend much time with either here to describe them but for some context I show below a comparison of each company’s product mix by revenue which highlights the magnitude of difference at EVINE in jewelry and watches. On a revenue basis, QVC U.S. is more than 9x the size of EVINE and HSN is almost 4x the size. On a revenue per household basis, QVC generates ~$59, HSN generates ~$27, and EVLV generates less than $8. On both this metric as well as penetration of households, the Company’s performance is very disappointing but therein is a potential growth opportunity.
Revenue Mix by Product Category
EVINE QVC HSN
Jewelry & Watches 41% 9% 8%
Home & Consumer Electronics 25% 42% 54%
Beauty 16% 17% 23%
Fashion & Accessories 18% 32% 15%
The fourth largest home shopping network is Jewelry Television (“JTV”) owned by Multimedia Commerce Group. Privately-held JTV reaches 86M homes, JTV.com is one of the largest jewelry e-commerce websites in the country, and sales grew nearly 14% in 2016, substantially outpacing each of the other home shopping networks. During JTV’s fiscal year ended June 2016, the number of their customers increased by almost 12%. Although I have not been able to independently confirm this figure, one primary research source said that JTV generated ~$600M of revenue at a 10% EBITDA margin a few years ago.
EVINE is a preferred destination for distinctive jewelry and known for its abundance of INVICTA watches. The Company has been characterized by some as the television shopping channel for jewelry and watches. EVINE’s portfolio in jewelry categories of colored gemstones, diamonds, gold, sterling silver, and pearls spans across almost 55 on-air brands/concepts. The Company’s strength has historically been with its jewelry mix which has attracted a loyal customer base, and although we lack transparency to the Company’s lifetime value analysis, it is certain that the value of the customer who has purchased jewelry and watches is significantly more valuable relative to the customer who has purchased consumer electronics through EVINE. As said by an industry expert regarding EVINE, “its loyal jewelry customer base rivals that of both QVC and HSN.”
Despite the Company’s success with jewelry and watches, management targeted the category to be a smaller fraction of sales. Although this product mix contributes higher than average margins, it also has lower than average purchase frequency and higher return rates. The Company has sought to manage the delicate balance of reducing its jewelry and watch mix without compromising the importance of this loyal customer segment while also improving its customer file and average purchase frequency. EVINE appears to have been successful in this regard as evidenced by the increase to active customers coupled with an increase to purchase frequency while also decreasing the return rate.
It wasn’t until 2013 when EVINE’s sales mix from jewelry and watches fell below 52%. Given the large jewelry and watch mix, the Company’s ASP was relatively high, ranging from $96-176 during the years 2008-2012, but so was the Company’s return rate, ranging from ~20%-31%. Although a very strong component of its business and providing a relatively loyal customer, management decided that by modifying its mix to be somewhat less dependent on jewelry and watches, the Company might benefit from attracting a larger customer base through a broader product mix at lower price points and with some categories like beauty that would generate a higher purchase frequency coupled with a lower return rate. During the past four years, when the Company’s jewelry and watch mix averaged ~41%, EVLV’s ASP averaged ~$67 and its average return rate was below 21%. Their return rate improved in each of those four years and was below 19% in the most recent quarter, improving by 40 basis points a year ago. In addition to being attributed to a targeted change in product mix, return rates have improved significantly because of an improved level of both merchandise quality and operational processes. During the prior four years (2009-2012), when the Company’s jewelry and watch mix averaged 53%, EVLV’s ASP averaged ~$102 and its return rate averaged over 21%.
A key metric of customer engagement is purchase frequency and a higher purchase frequency is also consistent with a higher lifetime customer value. According to a home shopping industry expert who held leadership positions at QVC, HSN and Shop-at-Home, when a customer purchases at least three times per year, the likelihood of that customer becoming “core” is greatly enhanced and core customer activity is four times relative to new customers so there is an importance ascribed to active customer frequency. Since 2012, average frequency has improved each year and increased by 52% from 5.4 in 2012 to 8.2 in 2016. During the past four years, that metric averaged over 7.1x, almost 75% greater than the average annual purchase frequency in the previous four years of higher jewelry and watch mix. During the past two quarters, purchase frequency grew by ~12% which is evidence of the Company’s success at improving the quality of its customer file and lifetime customer value.
In the most recent quarter, the Company noted an improvement to its wearable category active customer file by 1.4%. The CEO said, “That category has the highest lifetime value for our company.” In the most recent quarter, fashion and accessories comprised 22% of revenue mix and was the Company’s best performing category. Moreover, EVINE’s proprietary apparel brands grew by 14% after growing 39% a year ago. Within the fashion and accessories category, ~80% of product is proprietary and exclusive brands. Although the LTM customer file remains relatively flat, the CEO said “we continue to increase our composition of higher purchase frequency and higher lifetime value customers.” The Company’s largest customer pool and strong new customer acquisition activity is from the home category.
Among the issues that the Company has struggled with recently is an overabundance of sales in the consumer electronics (“CE”) category. The previous CEO directed a higher mix of broadcasting time to lower-margin CE and by using that “shelf space” of broadcasting slots for the CE category, that decision was also diluting the quality of the Company’s customer file. The CEO recently characterized the majority of its CE customers as being “one and done”, and that the broadcasting time allocated to the CE category by the previous management team was inconsistent with a strategy to grow the number of customers who have a higher lifetime value. That is why current management continues to rebalance the size and composition of its consumer electronics category which therefore declined by 53% in 2016, including the fourth quarter decline of 55% when more than two-thirds of the decline was related to not repeating the low margin hoverboard sales from the previous year. Note that consumer electronics was the fastest growing category, at 29% growth, during 2015. During the most recent quarter, management reduced CE category air-time by 38%. Management said the Company’s near the end of right-sizing its consumer electronics business. The second quarter is planned to be the last quarter of pressure caused by a reduction of lower-margin CE revenue.
A key difference from both QVC and HSN is that their cable/satellite distribution fees represent a much lower percentage of sales attributable to their television programming versus EVINE. Their fee arrangements are substantially on a commission basis whereas EVINE’s distribution fees are predominantly on a fixed-cost basis. In the past, the Company suffered from much higher distribution costs per home. During the year ended January 2008, the Company’s peak year of revenue, distribution costs were 22% of sales and more than $2 per home. The Company’s distribution cost per home now averages $1.13.
A key consideration for everyone in regards to cable network business models is cord cutting. Given that EVINE’s current issues are predominantly across a younger demographic that does not overlap as much with EVINE, the fact is in the shorter term, that cord cutting is a net positive to the Company since EVLV won’t have to pay fees for those who cut the cord. Since that demographic has historically been less likely to be watching home shopping networks on television, the fixed expense has been unproductive. However, over the longer term, the Company’s business will have to evolve more effectively towards also attracting the younger demographic through non-television, video commerce. Management is focused on this issue and said “we understand that personal video consumption preferences are evolving and our goal is to remain nimble to engage with all customers using the platforms they prefer.”
A key driver of sales for the home shopping industry has been derived from having HD presence. QVC’s HD presence exceeds 75% of its households and HSN’s exceeds 60% but it’s less than 30% for EVINE. This is expected to improve this coming September and management expects the potential impact could be significant. Management is not as focused on driving further household distribution but instead focused on optimizing its footprint of households and this includes trying to drive a second EVINE network (i.e., more shelf space). For context, QVC has over 90% of its households having a second network and HSN has over 50% but it’s less than 10% for EVINE and this is also expected to improve. In regards to distribution, management said its goal “is to add new targeted television distribution while reducing packets of underperforming television distribution...Our goal is to reach more targeted customers based on the data we have. This is ‘our more channels in the right home’ strategy with a focus on adding secondary channel opportunities if the categories or personalities we are partnering with warrant such a targeted focus,”
Among the Company’s assets is a TV station (WWDP) in the Boston market that was acquired in 2003. The station is being valued on the balance sheet at $12M, this amount ascribed to the FCC broadcasting license. My understanding is the Company paid $33M for the station. Although nothing materialized during the recent spectrum auction as values were below management’s expectations, research from an industry expert who followed the spectrum auction in Boston highlighted that EVLV’s station is worth at least its book value. He noted that WWDP as a VHF high-band station covers ~33M MHz POPs and while Boston UHFs sold for ~$1.25/MHz POP, he anticipates that a full power station in the Boston market in the high Vs (WWDP is digital channel 10) should be worth at least $0.40/MHz POP. During the most recent earnings call, management noted they are now considering several channel share proposals to monetize a portion of the channel spectrum while also preserving the Company’s ability to distribute EVINE programming in Boston through WWDP. I view any monetization of this spectrum as a positive catalyst.
The Company’s financial performance has been dismal. In the past decade, sales peaked ten years ago at ~$782M versus ~$666M this past fiscal year. Sales growth is expected to be slightly positive this year. During the past five years, on an adjusted basis excluding non-recurring expenses, EBITDA has ranged from $4.5M-$22.8M (averaging $14.1M) and EBIT has ranged from negative $8.9M-$13.9M (averaging $2.9M). On a reported basis, the Company has generated FCF in just one of the past ten years. Given these metrics, the stock obviously does not screen well. However, the investment thesis is premised on an improving outlook in the near-term coupled with what might evolve longer-term with the help of the strategic investment group but for which is not being discounted by the current stock price. Moreover, given the historical pattern of financial performance, expectations are notably very low but there is evidence of numerous performance improvements being generated by the Company which will become more apparent in financial performance soon.
Management’s ambition to drive a sustainable pattern of profitability lacks investor credibility given the pattern of over-promising and under-delivering. It would not be cynical to doubt the potential that EVINE can orchestrate meaningful improvements to its business. Given prior attempts by the Company, it is indeed appropriate to apply such cynicism. However, at the current stock price, an investment is being made near tangible book value and I believe the Company is near an inflection point of achieving growth and generating FCF this year. The risk/reward is favorable and the set-up dynamics are very attractive.
Although the investment is not premised on the notion that the Company will ever achieve EBITDA margins similar to either QVC (over 23% in 2016) or HSN (over 10% in 2016), it is notable that in the past three years, EVLV’s average gross margin was 35.7%, just 100 basis points below the overall QVC gross margin average of 36.7% and above HSN at 33.9%. The expectation bar is low for management and there are numerous positive improvements already being evidenced coupled with numerous opportunities for efficiencies to be gained as well as the potential for top-line growth that is not being discounted by the current price.
Among the reasons I am ascribing confidence to an improved level of performance is a change in culture at the Company to one that is much more data-driven and disciplined with “the surgical planning of gross profit.” Having followed this company for several years, I have heard management mention lifetime customer value and return on investment more during the past year while being led by the current CEO relative to the preceding five years, in aggregate, under two other CEOs. A key ingredient to the change is the data-driven mentality of CEO Bob Rosenblatt who was educated as an accountant and earned his stripes within the retail universe through the financial arena, including CFO roles at Bloomingdale’s/Macy’s and HSN, before moving towards more operational and leadership roles at those companies as well as Tommy Hilfiger Corporation where he was Group President and COO. A primary research source highlighted that while at Hilfiger Corporation, Rosenblatt was integral in developing processes to manage the delicate balance of creativity and fashion risk with the importance of inventory management, gross profit contribution, and a focus on FCF generation.
In addition to the improved execution at EVLV being led by CEO Rosenblatt, there have been several changes to operating management including the hiring of Michael Henry as Chief Merchandising Officer (Rosenblatt worked with him at HSN), Sunil Verma as Chief Digital Officer (Rosenblatt worked with him at Ideeli.com, now owned by Groupon), and Nicole Ostoya as Chief Marketing Officer (she worked for Nordstrom, LVMH, and QVC).
Another reason I am confident that the Company is on the cusp of improved profitability is the evidence from the numerous metrics already described pertaining to customer activity, the anniversary of the CE category overhang, the improvements anticipated from optimizing distribution and from broadcasting via HD, and the numerous operational improvement initiatives that are demonstrating benefits which should continue and some of which will further accelerate. For example, during the most recent quarter, the following key performance indicators showed substantial improvement from the prior year:
· 12% reduction in transaction cost per unit
· 40 basis point reduction in variable cost percentage
· 230 basis point reduction in live agent contact rate which measures post-sales support calls compared to units sold
· 10% productivity improvement from fulfillment center which had its first full quarter of using a new warehouse management system
· 220 basis point increase to private label credit card penetration
Several of the noted operational improvements are derived from past capital investments that have just begun to yield benefits. EVINE made significant investments to improve efficiencies from its fulfillment center. During FY2015, the Company expanded its 262 KSF distribution facility to its current 600 KSF facility. The total cost of the expansion, new sortation equipment and call center facility was ~$25M ($14.9M incurred in FY2014, $10.1M incurred in FY2015). The Company also incurred ~$2M of additional non-recurring expenses from such expansion/upgrade during both 2015 and 2016.
The Company has suffered through numerous changes in management, costing the Company ~$13.5M during fiscal years 2014-2016 for severance and transition costs, and has been a target of activism by several investment funds in past years.
During 2013, the Clinton Group and Cannell Capital, together owning ~11%, targeted the Company to remove five of its incumbent directors including then Chairman Randy Ronning and CEO Keith Stewart. In a letter dated October 30, 2013, the Clinton Group noted that Stewart missed nearly every long-term projection and metric he offered during his tenure including Stewart’s goal for revenue of more than $1B with 8-12% EBITDA margins by the time the letter was filed in a 13D. As reinforcement of their commitment to the Company over the longer-term, the Clinton Group indicated its interest of investing at least an incremental $25M (subject to additional due diligence) “at a substantial premium to the stock price”. The letter also highlighted that “we are aware of several other industry players and investors who would strongly consider investing alongside us in such a transaction”. On that date (October 30, 2013) of the Clinton letter, the stock closed at $5.15.
The Company failed to accept the call for governance change from Clinton and Cannell and incurred (or better said “wasted”) over $5.6M of “activist shareholder response costs” during the fiscal years ended January 2014 and 2015. In spite of the Board’s resistance to change, on June 23, 2014, the Company’s Board was reconstituted with four nominees of the Clinton Group being elected and a fifth nominee from Clinton being appointed. Three of those nominees are still serving as described more below.
When I saw the $10M strategic investment being made by successful individuals who I thought had relevant experiences to assist and influence a better trajectory for EVINE, it prompted me to evaluate the Company as a potential investment again (I owned the stock in the past when it traded under the ticker VVTV).
On September 14th of 2016, the Company secured a $10M strategic investment led by Tommy Hilfiger, Tommy Mottola, and Morris Goldfarb. The initial $10M investment was at $1.68 for ~5.95M shares and the negotiated investment includes warrants to purchase ~3M shares at $2.90 (a 50% premium to EVLV’s stock price one-day prior to the announced investment) and options by which certain investors may purchase additional shares of stock and warrants. The total potential shares to be issued, including the purchase of shares and exercise of the option and warrants, will not collectively exceed 19.99%. In connection with their investment, Hilfiger and Mottola agreed to join EVLV’s newly-formed Brand Building Advisory Committee, a non-board committee that will advise the Board, including on matters related to brand strategy. The equity market initially perceived the investment as being very positive. Pursuant to the announcement, EVLV’s stock traded up 9% the next day to close at $2.10 and within five days the stock had closed at $2.32.
In the press release, Hilfiger noted, “Given what I see happening in today’s changing retail landscape, as well as the interactive video commerce world and social media explosion, I believe EVINE has the competencies to become the bridge between bricks and mortar and ecommerce for today’s consumer. I look forward to bringing vision and relationships in the celebrity world to this team to help transform its growth path.”
EVINE’s CEO already knows Tommy Hilfiger well from the time he served as COO and President of Tommy Hilfiger Corporation before its sale to APAX. It is my understanding that the investment group pro-actively approached the Company to express their interest to make the investment. In regards to the “strategic investment”, CEO Rosenblatt said it would give the Company access to many of the people who have been in the pop culture world and enable EVINE to broaden its audience through access to some of the personalities and brands that the investment principals know. The CEO has been speaking with members of the investment group multiple times each week. Although the magnitude of the investment is clearly just a rounding error for each principal, they are indeed engaged to effectuate longer-term improvements. I understand that multiple “doors have been opened by them” with various vendors and brick-and-mortar retailers. The specifics of potential improvements from the investment group are not yet clear but since the stock price does not discount any such impact, that “option” is free.
For those not familiar with Tommy Mottola, he was previously the CEO of Sony Music Entertainment for fifteen years and is credited with signing and developing such artists as Celine Dion, Mariah Carey, Beyonce, Jennifer Lopez, Shakira, Bruce Springsteen, Ricky Martin, Gloria Estefan, Marc Anthony, Barbara Streisand, Harry Connick Jr., the Dixie Chicks, and Billy Joel. Under his leadership, revenues increased by ten-fold from $800M to over $8B per annum. He is currently the Chairman of Mottola Media Group, a company that specializes in multimedia, entertainment, communications, branding, licensing and consulting. He is also a partner with Dodger Theatricals, among the largest producers of Broadway shows, a senior advisor to L Catterton, and has served on the Board of Restoration Hardware. L Catteron is a partnership between the private equity firm Catterton which has long focused on strong consumer brands, and with LVMH and Groupe Arnault’s private equity interests in Europe and Asia. It is notable that EVINE is something Mottola has explored in the past as he was among the Clinton Group’s nominees to the Board in June of 2014. I understand that Mottola and Hilfiger have long been friends and that Mottola is “ruthlessly commercial and makes things happen.”
Morris Goldfarb is the Chairman and CEO of G-III Apparel Group and has served as an executive since the company was formed in 1974 by his father. GIII’s apparel, handbags, footwear, and accessories are sold under owned brands that include Andrew Marc, Vilebrequin, Bass, Wilsons Leather, and Jessica Howard, as well as licensed brands that include Tommy Hilfilger, Calvin Klein, Karl Lagerfeld, Guess, Kenneth Cole, Levi’s, Cole Haan, Vince Camuto, Jessica Simpson, and Ivanka Trump. The fifth member of the investment group (by magnitude of shares owned) is GIII’s Vice Chairman Sammy Aaron who also oversees the operations of GIII’s Calvin Klein business.
As for the investment made by Towerview’s Daniel Tisch as part of the investment group, it’s interesting to highlight that Tisch is no stranger to the home shopping universe. As described in a New York Times article from 1994, Daniel Tisch (then leading a risk arbitrage investment firm called Mentor Partners) “apparently played a role in the merger of CBS and QVC” when it was announced that Daniel’s father Laurence Tisch (then Chairman of CBS) and Barry Diller (then Chairman of QVC) had reached a tentative agreement to merge the two companies. QVC was instead acquired by both Comcast and Liberty Media less than a year later. As of the latest 13F filings, Towerview owned stock of both EVINE and QVC.
Among the current Directors, four were appointed nominees from the Clinton Group. This includes CEO Bob Rosenblatt, Thomas Beers, Fred Siegel and most recently Scott Arnold. The most recent appointment was made through a Cooperation Agreement (dated March 24, 2017) between the Company and both the Clinton Group and GlassBridge Enterprises which owned ~2.3M shares of EVLV. A brief summary of each Director’s background is described below and I believe is demonstrative of strong experiences and particularly for a company of this size. The descriptions that follow are shown based on the most recent effective date of each Director. It is notable that each Director, with the exception of Scott Arnold, has bought EVLV shares.
· Scott Arnold (as of April 2017): Managing Director/Senior Portfolio Manager in ABS and Private Equity and new business development with the Clinton Group.
· Marc Holdsworth (as of November 2016): Co-foudner/operating partner of Tennenbaum Capital with ~$6.5B of AUM. This week Holdsworth purchased 87K shares at $1.15.
· Neal Grabell (as of September 2016): General Counsel of QVC from 1987-2008. This past week Grabell purchased over 17K shares at $1.15.
· Lisa Letizo (as of July 2015): Chief Human Resource officer at HSN from 1998-2014. During the past two years, Letizo purchased over 40K shares at an average $1.36.
· CEO Robert Rosenblatt (Director as of June 2014; CEO as of August 2016, was interim since February 2016): Former Group President/COO of Tommy Hilfiger Corporation; also served as CFO/COO of HSN and CFO of Bloomingdale’s. During the past two years, Rosenblatt purchased over 450K shares at an average $1.09.
· Thomas Beers (as of June 2014): CEO of Fremantle Media North America where he is noted as being responsible for the development/production of more than 600 hours of programming including “American Idol”, “America’s Got Talent,” and “The X Factor.” During the past two years, Beers purchased ~ 195K shares at an average $1.68.
· Fred Siegel (as of June 2014): SVP/CMO at QVC from 1993-1998; also oversaw all marketing activities for Excite and Excite @ Home. During the past two years, Siegel purchased 44K shares at an average $1.45.
· Chairman Landel Hobbs (Director as of March 2014, Chairman as of August 2016): COO at Time Warner Cable from 2005-2010, CFO from 2001-2005. During the past two years, Hobbs purchased over 100K shares at an average $1.85.
· Lowell Robinson (as of March 2014): CFO of online advertising network MIVA, CFO of HotJobs. During the past two years, Robinson purchased over 10K shares at an average $1.15.
As of March 2017, the Company’s net debt was ~$56M but pro forma for an offering this week, net debt is ~$50M. I anticipate the balance sheet will improve by year-end as EBITDA and FCF accelerate. Capital spending is expected to be $8M this year (down more than 20% from last year) and almost half was already incurred this past quarter as the Company gets prepared for its transition to broadcast in full High Definition this coming Fall. In addition to an expectation that FCF will improve from operations and lower capital spending, the Company’s interest expense will be declining from the recent $9.5M pay-down (~60%) of its high interest term loan with Great American Capital Partners. The imputed effective interest rate on that loan was 14.8% at the end of January. I estimate the Company will save over $800,000 of interest expense during the remainder of this year by using its lower interest PNC Credit Facility (matures May 2020) to fund part of the pay-down. Another improvement to FCF will likely come from improved working capital/inventory management. Serving as collateral for its credit facility are the Company’s owned properties which includes two commercial buildings occupying almost 210 KSF and related land at EVLV’s headquarters in Eden Prairie, MN (a suburb of Minneapolis). The properties in MN are said to be worth at least $25M but I have not allocated anytime yet to independently evaluate the underlying potential value of the properties.
One might wonder whether EVLV could be a consolidation candidate by QVC or HSN. I won’t speculate about the possibility but will note that when I briefly spoke about the concept with Greg Maffei a few years ago in early 2014 at an investment conference (the stock was ~$5.50 then), he did acknowledge it was something they have considered in the past. I will also note that I am familiar with more than one private equity firm that has considered an acquisition of the Company in the past. An acquisition by Amazon would of course be a rounding error. The possibility of consolidation serves as additional downside protection as well as upside potential.
There are of course numerous risks including the historical pattern of operating losses, historical management turnover, Amazon, structural home shopping network issues, potential credit deterioration from the Company’s ValuePay installment program, and the inherent risks of selling consumer-related merchandise that comes with fashion-related and inventory obsolescence risks. Another near-term issue is that Comcast still owns 2.7M shares (per January 31st filing) pursuant to their sale of a 4.4M block to the Company for $1.12. The position is clearly non-core to Comcast and it’s an overhang for a stock that trades ~175K shares on a three-month average. The illiquidity of the stock is of course a risk for less-than-patient investors (i.e., “traders”).
With any turnaround, there is substantial volatility and I am not asserting a smooth pattern upward from here but the investment logic starts with downside protection and I am comforted by the stock trading near tangible book value and I am confident in the upside potential given the numerous examples of positive developments, the potential that might evolve with the assistance and alignment of the strategic investor group and the fact that I am not over-paying for the turnaround potential.
Selected Catalysts
· Potential for increased household penetration and increased revenue per household
· Improved execution including higher productivity, lower return rates, inventory management, transaction cost per unit, all contributing to a higher margin
· Monetization of spectrum from Boston TV station
· Improving balance sheet from continued pay-down of high interest Great American loan
· Improved distribution footprint
· Evidence of specific vendor and/or partner relationships capable of enhancing EVINE’s brand and customer activity
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