4/17/2017

Cash Rich, Market Ignored Restructuring Opportunity, CafePress (PRSS)

Profile:

CafePress (PRSS) sells customized t-shirts/clothing, bags, drinkware, stationary, cases, home accessories, hobby, and related items. http://www.cafepress.com/. Competition exists in this fragmented industry. More direct competitors are privately held Zazzle (http://bit.ly/1xefWC7) , Society6 (https://society6.com/) , and online Australian retailer Redbubble (http://rdbl.co/1duw5VC). 


Curious about the business of CafePress? Watch this interesting video.

CafePress (PRSS) is an illiquid tiny company and may NOT be suitable for many investors. Further, operations are still a work in progress. However, its 2.5 year turnaround plan became obvious during FY 2016. Particularly, Q4 2016 the business stabilized generating free cash flow. But, the market continues to ignore tangible turn around wins . Although, it has not gone unnoticed by guru micro cap value investor Lloyd Miller. He recently added to his 18% stake on 04/13/17 along with his heavy insider buying during 2016.In addition, the company's 2 founders and now CEO and CMO recognized improvements by adding to their existing large inside ownership throughout 2016.


August 2014, co-founder and former CEO Fred Durham returned as the CEO along with Maheesh (co-founder and prior executive) as Chief Marketing Officer. Durham promised transparency throughout the turnaround process. This included an assurance to reduce expenses with a laser focus on a quick as possible increase in shareholder value. With significant skin in the game, Durham and Maheesh are two of the biggest shareholders and have a strong incentive to align with investors. They now own 15% and 12% respectively.

Part one of the 3-part turnaround plan requires the heaviest lifting before maximizing 2 and 3. Part one is business stabilization.  This means doing more with less. Eliminate unnecessary complexity that has over time diluted and then destroyed the company’s value. The prior CEO’s drive for growth is the most troubling ingredient that destroyed the stock price. The business focus became diluted and the customer experience suffered. Over time, they discovered managing a large group of brands had become counterproductive. So, a goal set to streamline operation, enhance the balance sheet, and unlock value by selling the non-core assets. The long-term growth strategy is the more efficient and profitable realization of a higher portion of repeatable sales.

These are some of the TANGIBLE RESULTS ACHIEVED OVER THEIR RECENT TENURE (2.50 YEARS) TO STABILIZE AND IMPROVE THE BUSINESS.  
Closed the experimental Louisville Kentucky retail store; sold their stationery business (InvitationBox.com); Arts and Groups properties sold for $40 million in cash.

An important valuation comment is the 2015 Art and Group sale (http://on.mktw.net/2oEFf0t). It represent 20% of total CafePress revenue sold during 2015. The most encouraging fact of the sale is it sold for an EV/Sales of around 1.50 versus the PRSS current EV/Sales of .05. I calculated the Arts and Group valuation based on the final 40M cash sale stated by management and financial data in the press release http://on.mktw.net/2oEFf0t 
"The Art business represented approximately 20 percent of CafePress’s total revenues in 2014." PRSS total sales for 2014 was 132.10M hence 20% of sales = 26.42M for the Art Group. Management stated the sale settled for ~40M in cash. So the EV/Sales valuation for the Art group was 40M/26.42M = 1.51 EV/Sales valuation or near this figure. Again the current market value for PRSS EV/Sales is .05 versus Art's sale valuation of ~1.51


The above mentioned asset sales are a key for stabilizing and moving the business forward. 

Furthermore, a reduced number of production facilities enables engineers to focus on CafePress, improve quality and efficiency. Fewer websites means developers can focus on enhancing the customer experience and conversion on CafePress. Fewer marketing systems concentrates the focus on improving marketing efficiency and customer transactions. 

An external consulting firm was used to do an extensive audit of margins, customer satisfaction, site conversion and volume. The discovered results now guide improvements in efficiency, merchandising, pricing and customer experience. Additionally, a review of over 600 products by starting at the bottom 10%, in terms of sales, margin and quality were removed and discontinued on their site.

After the above mentioned asset divestiture, engineering efforts can focus on improving mobile and social technology. The company is constantly looking to leverage technology progress that can cut friction and conversion. These technology improvement efforts will improve the customers experience. Overall, meaningful opportunities exist to drive an improved CafePress as their mobile channel matures and gains scale.

Lets continue reviewing the turnaround plan.  Durham commented an improved customer experience is an important personal area of focus. He promised to drive the team on consumer side quality and encourage a world class customer experience. Customer service now reports directly to Durham.





The tables below show Quarterly and Annual financial results. This underscores CafePress' deep asset value discount to its current market price, coupled with a stabilizing and improving 2016 financial results.











































 





Only Insider Buying no Selling from 2015 to 04/13/2014






















04/13/17 Valuation:  Market Cap = 48.10M, Enterprise Value = 4.66M, P/B = 1.08, EV/Sales = .05, YOY qtrly revenue growth = 6.06%, Total Cash = 43.79M, Cash per share = 2.63, 52 Week High = $3.82, 52 Week Low = $2.78, Share Outstanding = 16.64M, Float = 7.94M, % held by insiders = 46.33%, % held by institutions = 22.10%






Opportunities

Deep discount to its historical and relative valuation. To repeat the above comment, Arts and Groups properties sold during February 2015 had an EV/Sales valuation sale price ~ = 1.50. This compares favorably to PRSS current EV/Sale value of .05

It’s too cheap to ignore. A 04/13/17 closing price of $2.85 and  an enterprise value per share =.33 versus cash per share = 2.62, no debt, TTM gross profit per share = 2.51 and net cash per share = 1.52.

Large federal and state operating loss carry forwards available to reduce future taxable income. 25.2 million of Federal and $19.0 million for the State.

The original founders came back to turn the company around with skin in the game.Their combined ownership is over 25% TSO. They continued insider buying since their 2014 rearrival.

Successful small cap activist Lloyd Miller can’t get enough shares , 18% of TSO with additional buys reported on 04/13/17.

Major turnaround activities completed. FY 2016 shows tangible signs of improvements. "Year-over-year revenue growth improved each quarter from negative 23% in Q1 to positive 7.5% in Q4". Positive CFFO during FY 2016 Quarters 3 and 4. Positive FCF in quarter 4 2016. 


Mean reverting price attributes with 52 week market price change of -23%, -64% drop in the enterprise value from the 2014 value of 15.37M to 04/13/17 value of 5.54M.

Aggressive share buyback program, year end 2013 17.17M shares outstanding versus the MRQ reduced balance of 16.66M

Three new industry proven board members. Ken McBride is the CEO of Stamps.com. "He played a crucial role in the company's turnaround and has since lead it through steady improvements to impressive success." Nick Swinmurn, the founder of Zappos, is "a pioneer in consumer e-commerce and brings valuable consumer centric experience and creativity to the company".  Tony Allen is the CFO of Sypris Solutions and brings extensive financial experience and expertise to our Board.

Acquisition target, going private transaction or special cash dividend based with the 2.62 per share in cash. Activist Lloyd has a history of forcing special dividends. These are all high probabilistic events ignored by the market.
 
Risk
Lacks a strong moat.

Illiquid nano cap deters institutional ownership and lacks strong Wall Street coverage.

Closely held with 46% held by insiders.

May be unable to generate sustainable consistent profits and could be adversely impacted by competition.


Long: PRSS

5 comments:

Anonymous said...

Thanks for the interesting idea. A few questions for you, if you don't mind:

1. Is it really fair to consider the cash flow generation in the most recent quarter as a sign of business stabilization when Q4 of 2015 was even stronger? In other words, isn't this just a really seasonal retail business highly levered to the Christmas shopping season that just posted a weaker Q4 than a year ago?

2. How is PRSS differentiated from Zazzle, Printfection and Spreadshirt? Do you have any data points from artist/designer sellers indicating a preference for PRSS relative to those others?

3. Despite not having a strong moat, are they insulated from the impact of AMZN bv just being in a really small and kitschy niche?

4. In the Q4 conference call, the CEO talked about excessive discounting representing an unforced error on the part of the company. Given this red flag, is there a way to rule out the headwind risk that PRSS is facing significant pricing pressure in its business?

Thanks in advance for your thoughts.

ShadowStock said...

Anonymous, thanks of the polite response! There is not much I can add that was not mentioned in the post.

1)Revenue in the 4th Qtr. 2016 increased by 6.64% of 2.81M. 4th Qtr. 2015 = 42.31M versus Qtr. 4 2016 = 45.124M. Management commented during the 4th quarter conference call "Year-over-year revenue growth improved each quarter from negative 23% in Q1 to positive 7.5% in Q4". Further Qtr. 4 and 3 posted cash increases.

2)Sorry I don’t have data points on artist’s preference. Café from what I see is not on focused on working with artists. There are other vendors such as https://www.threadless.com/artist-shops/signup.

3)CafePress sells on Amazon.
http://amzn.to/2pz4OhT

For me it’s cheap based on all the items I mentioned. The valuation on the 2015 sale of Art and group was multiple times higher than the company’s current valuation.

Good Luck

ValueOak said...

Did you check how can they survive with CMPR aggressive model print model?

Anonymous said...

Given the cash on balance sheet, would not the CEO and founders have an incentive to find a way to pay themselves handsomely rather than this cash going to shareholders? this would drwarf any potential upside in equity value.

bart said...

WTF