Spark Networks SE (LOV) Contrarian Musings

Introduced to LOV through my ownership of JDate/Spark Network symbol LOV. Affinitas GmbH merged with Spark Network(NYSE:LOV) in 2017. Then, LOV acquired Zoosk in 2019 for $258 million.

Affinitas GmbH was a small, fast-growing private European company. Affinitas's past financial success financed the merger. It listed on NYSE as Spark Networks (LOV). LOV before the merger known for Jdate. Jdate (LOV) had historical periods of outsize free cash flow. During the ~ two years before the merger financial performance faltered from outdated technology. Zoosk was a private, mismanaged, and failed future IPO. But, when managed, online dating is an asset-light FCF machine. Now NYSE: LOV is the second largest online dating company in North America. The new organization has experienced,talented,proven management.

LOV is a falling knife that doesn't screen well. A nano cap,low p/s and down 59% over the past six months with a historical record of strong outsize free cash flow. Spark Networks, NYSE: LOV is now German based headquarter after the merger.

The price decline began after the initial positive reaction for the Zoosk acquisition. LOV stock price crushed from Affinitas and Zoosk few but substantial long term initial investors sold after accruing years of long term gains. Management released an open letter on the stock decline (click). The six-month ~60% price drop creates an excellent buying opportunity.

Spark Networks has over one million global monthly paying subscribers. It also expects to achieve more than $50 million of adjusted EBITDA in 2020.The current 111.84 million market capitalization undervalues those customer metrics. Headquartered in Germany, Spark Networks is now America's second-largest dating company.

Spark Networks (LOV) is a portfolio of dating sites. Zoosk, EliteSingles, Jdate, Christian Mingle, eDarling, JSwipe, SilverSingles, and others encompass the company (click). Spark Networks formed when Affinitas GmbH and Spark Networks merged in 2017.  Zoosk added in 2019. Affinitas GmbH a small German startup with no presence in North America. But, over the last few years created an NYSE-listed business with over $300 million in total revenue. Its now the second-largest player in North America.

Value institutions purchased shares above the current price during the third quarter of 2019. 

Peak6 adds 1,763,185 shares during November 2019 at $5.60. Increase the position to 2,272,485 shares at an average price of $6.99.

Canaan Partner purchased 4,077,777 shares at an average price of $8.23 during quarter 3, 2019. Down -47.14% from current price. LOV represents 70% of its total portfolio value.

HARBOURVEST PARTNERS new holding during 2019, Q3 502,576 shares acquired at an average price of $8.21.

Osmium Partners added 166,332 shares to raise its stake to 1,412,284 shares at an average price of $7.14. Represent 9.77% of its portfolio and or 5.43% of shares outstanding.

Deer VII own 2,045,318 shares at an average price of $8.21 or 7.86% of shares outstanding or 13.06% of their portfolio.

Spark Networks (LOV)could use further analysis, such as the Zoosk financing details(click). But at this time I'm comfortable with the odds of a future higher stock price.

Spark story from their website. 


Long: LOV

Internet Proof Retailer Trading at a Distressed Price Creates Opportunity.

Build-A-Bear Workshop (NYSE: BBW) is an Amazon resistant hands-on interactive retailer offering "make your own stuffed animal" and related products. The company is managed into three segments: direct-to-consumer, international franchising, and commercial. BBW operates 371 stores globally and 104 franchise locations. Also, products sold on the company, third-party, and franchisee e-commerce sites, including retail locations under wholesale agreements. The hands on interactive experience makes Build A Bear Amazon/internet resistant.

Summary

Build a Bear is moving the correct levers (productivity+ profitability+ capital structure)to drive a higher future ROE and stock price.

Historical and relative extreme deep value discounts for sales, book value, and gross profit coupled with an oversold -82% mean-reverting price drop from year end 2016 and -39% over the prior 52 weeks.

A continued successful business strategy push toward lower capital requirements and revenue diversification by leveraging the brand. This profitable plan to be fully realized during 2020 includes the sizable addressable market, growing commercial segment, international and domestic franchising, Walmart expansion, store within a store concept, vacation spots, eCommerce, and others.

Lower future lease costs and impact on EBITDA expansion is material. The opportunity is driven by a 70% expiration of existing store leases over the next three years. Further, negotiating strength is from BBW as a marquee tenant, Walmart expansion, and store within store strategy all reduce or eliminate many lease expenses.

Year-end tax-loss selling and temporary pressure from opportunistic shorts create buying opportunity.

A Yelp search shows countless detailed positive reviews from fanatical fans. Parents and kids love their BBW experience. Build-A-Bear brand awareness is in line with much larger companies without the same market value. A staggering over 90% of the BBW brand recognized by Mothers.


Fundamentals are improving from their evolving strategy. Fiscal 2020 should recognize returns from investments and strategy focus versus current extreme negative valuation. The current value is priced for near term death. 


Motivated shareholder-oriented owners, David Kanen filed 13D reporting a 9.70% ownership and now sits on the board. Multiple years of favorable insider activity. Point72 reduced its 14% position to 6%.

Capital structure was improved, reducing the share count by 12.50% from December 2014 balance of 17.37 million to the most recent quarter, 15.22 million. Total liabilities during the same period declined by 26.30% or 114.43 million as of December 2014 to 84.34 million (excluding long-term leases) for the most recent quarter.

Valuation:

The current stock price is $2.69, with an enterprise value of 189.30 million or 58.90 million excluding lease obligations. Market capitalization is 40.94 million.

Summary comments on the table above include the obvious fifteen-year low valuations. The current market capitalization of 40.90 million compares favorably to 142.20 million in trailing twelve months of gross profit, 335 million in sales, 81.90 million in equity, 6.20 million in cash, no debt or credit line borrowings. The current tangible and intangible value does not reconcile with negative -43.01% twelve-month stock return trading near a 52-week low for a successful differentiated brand name retailer.Also note the negative attributes of the Z and F score. 

Third Quarter 2019 and related valuation commentary:

The third quarter of 2019 reported sales growth in direct consumer and commercial segments, coupled with improved gross margins. Operating loss improved by 2.3 million, zero debt, no credit line borrowings, and six million in cash.

The Build-A-Bear brand has remarkable brand recognition, with over 90% of Mothers. Further, over eight million joined their email club, and four million active loyalty members represent 20 million customers. Retail locations attracted 45 million visitors and have an added 110 million digital connections.

The profitability strategy includes diversification beyond the traditional retail model. Commercial revenue from third parties requires no startup store capital, rent, and labor, coupled with the opportunity to leverage retail in tourist locations. Additional diversification includes shops inside shops,select Walmart locations. These business moves supports leveraging real estate plans and expands the brand to a broader consumer base, with approximately 60% of the shoppers newly registered to the bonus clubs. Walmart has 22 locations in operation, with additional locations planned during the next fiscal year.

 The company's goals are to continue building revenue beyond the traditional retail model, diversify retail locations to broaden consumer accessibility, outbound licensing, wholesale, and entertainment. Nearly 70% of store leases expire over the next three years, providing additional negotiating leverage is the Walmart and store within a store relationship.

For the current third quarter ended, 54 locations with third-party retail relationships include Carnival Cruise Lines, Great Wolf Lodge Resorts, Landry's Inc., and Beaches Family Resorts, first two locations within a military base, among others. Only the portion paid for the products, supplies, and fixtures reported as revenue.

Additional monetization of the BBW brand includes commercial revenue segment increased by nearly 20%, and continue to execute against recent agreements tied to entertainment and content development. Warner Music, Sony Pictures, Hallmark Channel, iHeartMedia, they expect to realize financial gains from these new entertainment initiatives, starting later in 2020.

Conclusion and Investment thesis summary

Build a Bear is moving the correct levers (productivity+ profitability+ capital structure)to drive a higher future ROE and stock price. The evolving brand strategy requires fewer assets, diversifies revenue sources, and retail locations. The plan includes expanding international franchising, Walmart, store in store, lower lease costs, deemphasizing the direct ownership of retail stores, vacation spots, eCommerce, outbound licensing, wholesale, and entertainment.

The 12.5% share count reduction from December 2014 and 26.30% total liabilities over the same period demonstrate shareholder-friendly and management’s awareness of capital structure critical role for shareholders. Insider ownership is around 7% coupled with insider buying. The largest shareholder David Kanen at 9.70% is now on the board.

The main short term risk is continued trouble in the UK, Walmart roll out fails, further decline in mall locations.                                                                        
Long BBW                      

Nautilus (NLS), Extreme Value Opportunity

Nautilus established in 1986 is a consumer fitness products company. Business activities cover designing, developing, sourcing and marketing cardio, strength, and accessories. Equipment sold in the U.S.(88%), Canada(5%), and international(7%)under recognized brands. Nautilus ®, Bowflex ®, Octane Fitness ®, Schwinn ®, and Universal ®.

The direct business offers products to consumers via television, internet, and catalogs. The retail store sells through a network of independent companies. Further, revenue realized from licensing brands and intellectual property.

Nautilus long-term strategy is marketing to consumers and retail customers by leveraging existing brands. Improve product lines by using engineering to reduce production costs. Continue investment in research activities directed at acquiring or building new technologies. Increase international retail sales. And, maximize royalty revenues from licensing intellectual property.

Product listing below is taken directly from the 10k.

Nautilus ® is corporate umbrella brand and is also used to differentiate certain specialized cardio, treadmills, ellipticals and bike products.

Bowflex ® brand represents a highly-regarded line of fitness equipment comprised of both cardio and strength products, including the Max Trainer ® , TreadClimber ® , HVT ® and LateralX ® specialized cardio machines, PowerRod ® and Revolution ® home gyms and SelectTech ® dumbbells.

Octane Fitness ® brand is known for its innovation around low-impact cardio products, including the perfection of the traditional elliptical machine, along with the creation of new categories of exercise, including the xRide ® recumbent elliptical, the LateralX ® elliptical, and the Zero Runner ® .

Schwinn ® brand is known for its popular line of exercise bikes, including the Airdyne ® , as well as Schwinn-branded treadmills and ellipticals.

Universal ® brand, one of the oldest and most recognized names in the fitness industry, currently offers a line of weight benches.
Source 10K


Opportunities:

New CEO reported last week is a tested digital innovator. His digital strength can prove critical to a significantly higher NLS valuation. New entrant Peloton exercise bike grew into a 4.15 billion enterprise with streaming online subscription workouts after just five years. Peloton valued at $4.15 billion after its latest funding round of $550 million in August 2018 confirmed to CNBC Make it. Peloton projects $700 million in revenue for the fiscal year ending in February versus $370 million prior years. A potential Peloton IPO could arrive this year. But, Peleton declined to comment on the IPO to CNBC Make It.. Peloton IPO provides visibility for the extreme unsustainable valuation discount on NLS. Further,a digital platform is now offered on several Nautilus products. 

The investment story is simple. It has an extreme low historical and relative valuation. No investing advantage from including graphs or statistics on the industry's favorable trends for consumers, growing obesity, disposable income, or forecasted potential competition. These add little or no value to the investment buying decision process. It's all about the price.

Deep valuation discount

Risks:

Alternative fitness choices may negatively impact future growth. For example, budget gyms such as Planet Fitness and new competitor, Peleton.


The present financial position and flexibility materially reduced after several negative quarters of declining revenue and margins. But even with the double-digit decline in YOY revenue comparisons inventory ended up significantly. Inventory to revenue is up 30% from 2015 to the TTM. Negative results attributed to a failed marketing campaign. Management blames the inventory issue on failed advertising resulting in low awareness and insufficient communication of the platform's digital capabilities.

Summary/Catalyst

Mean reverting valuation trading for a 28.30M enterprise value with a TTM revenue of 366.34M, gross profit of 158.71M, and retained earnings of 174.50M. Patents and world recognized brand where the value of the parts are higher than the current enterprise value. Nautilus ®, Bowflex ®, Octane Fitness ®, Schwinn ®, and Universal ®.

New CEO leverages his digital experience to offer subscription-based exercise programs. Subscriptions made a name for Peleton and their expected 4.1B IPO. A Peleton IPO will favorably impact NLS's valuation.

Long: NLS

Idea Discovery using insider activity for the two-year period ending 06/14/19.

The database contains fundamental supporting data. It's for the NYSE, OTC, NASDAQ, and AMEX.

Hover over the values to view fundamental data such as ; Sector,Industry,Exchange, InsiderSharesTrans/Shares Float, Shares Purch, Shares Sold, $ Total Insider Trans, Insider Trans Price, Market Price, ShrsOuts MRQ / ShrsOuts2016, TtlLiab-AccrMRQ / TtlLiab-Accr2016, %Above52WkLow:, %Below52WkHigh, %BelowHighEV/Rev: 1yr Rev Growth Rate, Debt per ShrMRQ / Debt per Shr2016, Financial Strength, 12MonthRet%, Crnt EV/EV 2016, Z Score:, EnterpriseValue$Mil: Market Cap $Mil

InsiderSharesTrans/Shares Float = Sums up the insider shares transacted for the selected year and month and divides by the shares in the float. The ratio measures the insider's conviction.

ShrsOuts MRQ / ShrsOuts2016 = Takes the shares outstanding for the MRQ and divides by shares outstanding for the fiscal year ending 2016. Useful ratio to remove ideas with excessive dilution or focus on companies buying back shares with insider buying.

TtlLiab-AccrMRQ / TtlLiab-Accr2016 = Takes the total liabilities less accruals for the MRQ and divides by the total liabilities less accruals for the fiscal year ending 2016. Useful ratio to remove ideas with excessive accumulation of liabilities or focus on companies reducing liabilities with insider buying.

Crnt EV/EV 2016 = measures the increase or decrease in the enterprise value from the year ending 2016 to 06/14/19.

Buffet Would Buy this Specialty Retailer

Its an extreme value opportunity in this overpriced market. Buffet along with most institutions cant. The barriers to entry for institutional investors help create this unique opportunity.

Tandy Leather Factory (TLF) is an illiquid (286 shareholders) micro-cap. A specialty physical store retailer in the dying niche of leather crafting. But, I see a consistently profitable,  ignored and oversold opportunity driven by a new CEO with a board of prudent patient strategic capital allocators. TLF sells leather, leather crafts, and related supplies. It's in 42 states, 7 Canadian provinces, 115 North American stores.  Spain is the only remaining location outside North America.

Note the extremely low valuation not just today but over the profitable past + ten years. Price alone would be sufficient due diligence. However, opportunity enhanced with the new CEO discussed below.

Summary comments, why Tandy is Deep Value Cheap: 

The book value per share increased from 2.83 at the end of 2010 to its recent quarter's balance of 6.63. Further, retained earnings balance at the end of 2010, 26.42M versus the most recent quarterly balance of 66.189M. These results achieved with consistent positive cash flow,48.436M in cash flow from operations over that same multi year period and 30.43M in free cash flow. Debt reduction, and share buybacks. Yet the stock trades at the current EV per share price of $3.12 versus  $4.47 EV per share at the end of 2010.

Undiscovered, ignored, illiquid, with zero analyst coverage. A few conference call questions from individual investors, no institutions.

New CEO Janet Carr after six months develops a logical, strategic value enhancing path with reported tangible progress.

Tandy is the sole retail national brand in their highly fragmented industry. Small enterprises and commercial entities often buy inventory from Tandy.

Amazon resistant as the customer wants to touch, smell, and feel the product. Stores offer a continuous flow of classes, hands-on help with projects/repairs from a skilled staff - endless positive 4.75 average customer reviews on Yelp. "level of service is unheard of these days", "Never met more kind and helpful employees in retail", "people are fantastic."" "Go-Tandy-Go-Tandy!"

Years of compounding intrinsic value versus a falling price/enterprise value.

Management owns 42.20% of the shares outstanding. Board member and value investors Jeff Gramm/ Bandera Partners( 32% at average price of ~ $8.44): Board member James Pappas/ JCP Investments (9.60% at average price of $7.50).

During the most recent reported quarter, the outstanding debt of $9 million paid and bought back $714,000 of outstanding shares. Actions bring cash to $17.68 million at the end of the 2019 first quarter. On June 4, 2019, the Board of Directors expanded the Company's stock repurchase plan to increase the present size of the plan to 1 million shares.

Deep absolute,historical and relative valuation discount. Price/Net Current asset value = 1.22, EV/Revenue  = .34, EV/EBIT = 8.29, EV/GP = .56

CEO, Janet Carr's updates rationale, progress and actions on strategic initiatives to drive longer term earnings growth in the short two months since her first call.

Initially, my investment in TLF solely based on price, discounted absolute,historical and relative valuation. But after six months on the job, CEO Janet Carr's presented and implemented an impressive strategic plan. I'm persuaded Tandy can transform into an unexpected highly profitable / growth success story.

Commentary taken from the Q1 2019 conference call.

Two different business models now developed for commercial and retail. The infrastructures, processes, talent, data, and systems built. "The how-to" as they are calling it is to make it all happen with an optimal economic return. The strategy will re-establish brand credentials, build a compelling leather crafting retail experience, and create the right proposition to entice business customers back.

The initiatives begin with pricing. They are calling it "Everyday Honest Prices," phased in globally over the last six weeks. It simplifies earlier complex and confusing price tiers. Pricing is now transparent to customers and makes prices more competitive for every customer.

Competitive benchmarking on every skew proved regular retail pricing complicated and many items too high. For this reason, prices lowered on every skew for both retail and manufacturing customers. A commercial division launched to serve the most significant customers with pricing targeted against Tandy's wholesale competitors. Further, a reseller license agreement implemented for the resellers that helps maintain brand and price integrity.

The new pricing program launched with a full marketing campaign with in-store, direct mail, digital, social, and even direct personal outreach to the largest customers. Longer term expectation for increased sales, gross margin dollars and positive brand perception. The goal is to increase customer spend and to bring lapsed customers back into the brand.

The second major initiative since the March call is launch of a commercial division. This division is targeting the most significant commercial customers. These customers need products not carried in retail stores but can quickly source. A consistent supply and quality required with tailored shipping options. Consequently, a small team now focused on shifting larger customers from retail store relationship to the commercial account representatives. A dedicated Operations Manager is handling leather choice, order management, and selling support. Customer feedback is especially positive.

Management is appraising the 4-wall cash flow performance of stores as a critical metric in developing the fleet of stores. Bonus target set for inventory turns. But, opportunity with inventory requires merchandise planning capabilities not currently available. They need to evaluate product development, merchandising, merchandise planning, sourcing, and in-house manufacturing capabilities and figure where to invest and divest. When these tools and capabilities in place, inventory managed to the right levels.

Factory workforce reduced by 75% with assigned inventory positions in products produced in the factory. Management is evaluating lower cost outsourced options. Unfortunately, they could not support the factory staff at current levels. Difficult decisions needed on the path to growth and improved profitability. A critical, crucial senior leader is now overseeing the merchandising and commercial functions.

Financial commentary from the first quarter 2019 earnings call provide additional color to current and future value.

Progress and profits for Q1 2019 include rightsizing the store fleet realized by closing three underperforming stores. Sales improved 2.40% year over year - the launch of a new sewing machine contributing $500,000 in new sales. And, higher clearance and promotional activities, including inventory sold from closing the Australia store. Gross profits declined, and operating earnings fell 34% as progress made towards strategic initiatives intended to provide future earnings growth. The new operating model may continue to impact results for 2019. Promotional activities favorably impacted sales. But, a $400,000 decline to gross profit due to promotional events, customer/product mix, and higher freight costs. Onetime cost of 155,000 for closure for three underperforming stores and 100,000 related to eliminating positions at the corporate office. Further, an increase of $156,000 in noncash share-based compensation.

Gross profit declined $400,000 and operating expenses increased $200,000. This negatively impacted operating income by $600,000 to $1,169,000 compared to 2018, $1,769,000. The expected 33.9% decrease in operating earnings was significant. As reviewed in the prior earnings call, 2019 will be a year of significant investment. Painful in the short term, but these investments needed for long term earnings growth. During the first quarter, fully repaid outstanding debt, which helped reduce interest expense by $33,000 this quarter compared to the last quarter.

Cash flow from operations remains strong, which was $3 million for the quarter driven primarily from the $3.3 million reductions in inventory. This reduction in inventory was the result of 3 store closures this quarter as well as our efforts to clear out damaged/ excess inventory. Outstanding debt of $9 million paid and bought back $714,000 of outstanding shares. These actions bring cash to $12.7 million at the end of the first quarter.

Risk: Sales stagnate as niche continues to shrink. Difficulty in finding skilled labor and higher associated payroll costs, growing retail storefront lease expense.

Opportunity: Corporate action such as going private or sale if profitable growth not realized. Time is on the side of the new CEO as the company has a strong balance sheet and cash flow. Financial strength allows the implementation of corporate strategy. Special dividend, continued share buybacks and slow compounding of intrinsic value.  Absolute, relative, and historical valuation is deeply discounted and will not go unnoticed forever. You can't ask for a better board and CEO in terms of capital allocation.

In conclusion,TLF offers a large margin of safety, deep discounted extreme valuation in this overpriced market. Price alone would be sufficient due diligence. However, opportunity enhanced with the new CEO.  Additionally, investors can wait for market recognition, mean reversion, or certain longer-term favorable corporate action.

Long: TLF