Mohawk Grp (MWK) - The Renaissance Technologies of CPG E-commerce

Mohawk Group Holdings (MWK) is SPECULATIVE!  Deloitte issued a going concern qualification raising doubt regarding MWK's ability to continue next year. 

High risk with an asymmetric expected reward.

Recognized for exceptional growth and innovation (Inc. 5000 2019 as Fastest Growing Companies ranked 622, Financial Times ranked 114).

Google-backed technology-driven consumer products company. Insider ownership is 55%, showing management's interests align with shareholders.

Consistent high double-digit top-line growth selling for an enterprise value to sales of .37. TTM gross profit of 45.04 million versus prior year of 25.98 million with the current enterprise value of 42 million.

A lucrative SaaS opportunity exists for 2020, management priority.

Revenues increased 56% to $114.50 million from the prior year's $73 million. New 2020 product launch double prior year coupled with SaaS offering. Management projects 2020 revenue of $160 to $170 million. Positive estimated adjusted EBITDA for the third quarter.
                                                                                                                                            

Description:

Mohawk (MWK) is a Google-backed technology-driven consumer products company. The company leverages its proprietary AI research to automate eCommerce tasks - discovering new market opportunities, introducing new brands, and managing the fast-evolving complexity of marketing. MWK sells home appliances, kitchenware, dehumidifiers, air conditioners, related products, and consumer electronics. Products sold under the hOmeLabs, Vremi, Xtava, and RIF6 brands. Online consumers buy through Amazon and other e-commerce platforms, coupled with their websites.

Before Mohawk's IPO in June 2019, Mohawk was one of the fastest-growing private consumer companies recording +100% year or year revenue growth since founding in April 2014. 

 "Our proprietary AIMEE software ideation platform allows us to bring research-driven products directly to consumers quickly and we have a significant opportunity to continue scaling our portfolio and SaaS offerings as consumer online spending habits continue to shift." CEO Y Sarig

Founded= 2014 ; Employees= 156 ; CEO/Founder= Yaniv Sarig   

Market Cap = 37.87M ; Enterprise Value = 42.64M ; Cash per share = 2.01 ; Debt per share = 1.97  Shares outstanding = 17.74M ; Float = 4.99M ; Revenue (ttm) = 114.45M ; 52 Week Chg = -78.60%

MWK develops proprietary technology, AIMEE™.  AIMEE leverages millions of data points during the customers' decision-making and buying process. Artificial intelligence from AIMEE discovers new products and creates an optimal selling process.

AIMEE™ (AI Mohawk E-commerce Engine) is an E-commerce platform that grows Mohawk's owned and operated consumer product brands. Mohawk began Q1 2020 selling AIMEE™ as a SAAS offering. A rigorous data-first approach, coupled with their proven technology and collective experience, generates actionable executable opportunities for other third party brands. Google Ventures's investment in Mohawk is not an eCommerce consumer product vendor. The more in-depth story is their proven technology.

Slides are taken from January 2020 Investor presentation prepared by Mohawk.

Mohawk's opportunities exist for profitable high growth include higher-value products, broader markets (China), monetize AIMEE to third party brands, new products through acquisition, lower manufacturing, and supply chain costs.

 AIMEE™ is the name of their proprietary AI/ML internally developed E-commerce platform.

AIMEE™ = Research + Financials + Trading

RESEARCH = AIMEE explores online channels to discover opportunities for new and existing products. NLP (Natural Language Processing) used to analyze customer feedback. This customer analysis delivers insight into product improvements. Further, AIMEE™ uncovers trends by monitoring the features and functionality of the top-selling products.

   FINANCIALS = AIMEE™'s tracks new product planning, financial projections, inventory, media expenses, real-time income statements, and more.

   TRADING = AIMEE™'s automates marketing strategies and improves with each iteration. The result is an algorithmic solution to maximize product sales.

For more information and a video demonstration visit Mohawk Group. 

Operating results discussed on the March 10, 2020 year-end conference call.

For the fiscal year ended, 12/31/2019 revenues increased 56% to $114.50 million from $73 million for the prior year. Thirty-two new products versus eleven for the previous year. Eighteen new products launched in the fourth quarter of 2019. Also, revenue increasing by 26.6 million or 30% compared to the prior year's fourth quarter. In Q4 2019, 18 new products, though the majority in late December versus three for Q3 2019.

The fixed cost for 2019 was 19.3% as a percentage of revenue or $22.1 million versus 28.70% or $21 million in 2018. The automated business model led to improvement as a percentage of revenue. EBITDA for the fiscal year 2019 improved to a LOSS $19.5 million from minus $28.6 million loss in 2018.

The year 2019-year end cash balance was $30.4 million versus December 31, 2018, a balance of $35.7 million. Operation cash affected by inventory increase from Chinese New Year and potential tariffs. The debt was $37.9 million from a revolving credit facility and a $50 million term loan as of December 31, 2019. Compared to the debt of $30.1 million at the end of the third quarter of 2019. The expected change reflects a planned increased inventory.

A separate SaaS revenue line item reporting in future periods. CEO Yaniv promising comments on their SaaS opportunity.

"very,very excited about the SaaS opportunity, it is - and it's very much of high priority for us

We're having active conversation and negotiations with approximately 46 different companies across a variety of product categories that include large - larger brands and some digital native brands.We already signed a couple of contracts in the first two months of the year. And we really are going to continue to invest in the side of the business and expect to see the base picking up in Q2 and beyond. So very much a priority. We're investing in edge. We've made again a few changes to our product and offering and on the conversations,  we're having so far is exciting."

Management expects 20 new products in the first quarter of 2020. And double the products launched in 2019. For 2020, management is projecting revenue of $160 million to $170 million, and expects a positive adjusted EBITDA in the third quarter of 2020.

Conclusion:

I'm bullish on speculative Mohawk Group. They push past the auditor's negative opinion with their double-digit growth, unique proprietary artificial intelligence coupled with management's industry expertise.

Future dilution is possible to secure management talent and finance growth. However, the predicted value is an asymmetric payoff: short term, contingent on corona's impact on timely manufacturing and new product launches. The fiscal 2020 goal is to reach positive EBITDA.


Note: The April 29, 8k published after article.

“FURTHER, WE ARE CURRENTLY SEEKING TO PRESERVE OUR LIQUIDITY AND CAPITAL RESOURCES THROUGH VARIOUS ACTIONS WHICH MAY INCLUDE NEGOTIATING THE DELAY OF PAYMENTS TO CERTAIN VENDORS THE EFFECT OF WHICH COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS, INCLUDING OUR RELATIONSHIPS WITH THESE VENDORS.”

This significantly raises the risk of holding or buying the stock!

Long: MWK

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.