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


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


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.


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


Cheap Price Makes Francesca's Holdings (FRAN) a Good Asset

Francesca’s Holdings (FRAN) operates a nationwide chain of boutiques. A unique, diverse mix of apparel, jewelry, accessories, and gifts. The Company has 738 boutiques in 47 states with e-commerce.

Francesca is high risk! But, the price trades as if it's a going concern over the next six to twelve months. Francesca’s Holdings is a cheap one plus year option for the bear case but leans toward the bull case as a low probability turnaround.

Third quarter results reported 12/11/2018 — a net loss of $16.2 million, or a 47-cent diluted loss per share. The loss excluding noncash impairment charges was $6 million or 17 cents per share.One strategy offered during the conference call is to close 30 to 40 stores in fiscal year 2019, which begins 02/03/2019. 

The non-apparel merchandise (Jewelry, Gifts, Accessories) makes up 50% of sales. It was up 1% compared to the prior year three quarters ending in 11//2017. Yet, apparel declined 14% over the same three-quarter period. Management recognizes the clothing business remains the biggest challenge. So, FRAN is moving fast to ramp up changes and seen positive customer responses.

The current focus is on expense control, strong balance sheet, real estate portfolio and slow new-store growth. One strategy offered on the conference call. Close 30 to 40 stores versus opening or relocating around ten new boutiques in the fiscal year 2019 which begins 02/03/2019. On a positive note, store remodels performance in 2018 outperformed but put on pause. Projected CapEx for 2019 is $10 million versus $30 million in 2018.

Immediate goal is to improve the business as fast as possible — marketing adjustments, expense reduction, apparel merchandise refinements, and real estate optimization. Impaired boutiques are 129 with 106 having a lease end over the next three years. Closed stores during 2019 reduce fixed boutique costs. But it is coupled with the recapture of the sales in the remaining boutiques. The plan is to close 11 existing boutiques in January 2019. A total of 81 refreshed boutiques during 2018 continue to outperform, but the program is pausing for 2019 until business stabilizes. January has been a seasonal clearance month and will speed up markdowns. Another positive cash impact for 2019 is capital expenditures forecasted at 10M and focused on e-commerce versus store enhancements during 2018 at 30M.

Current Valuation

Positive insider activity for 2018, only buys no sales. Insider shares purchased for 2018 were 47,000 shares purchased for $230,950 or an average price of $4.91 per share.  

Value institutional ownership all adding shares for the most recent reported quarter ending 09/30/18.

PARADIGM CAPITAL (6.76%) ,VANGUARD (6.15%),Chuck Royce (4.81%), AQR CAPITAL (3.20%), HOTCHKIS (2.25%),Parametric (1.28%)


Relative Valuation: FRAN has the lowest valuation in its industry for price to BV, EV to Sales,BV growth, and best cash conversion that doesn't reconcile the industry's weakest stock performance. 

Data in the above taken from Guru Focus

Risk and Opportunity

The risk is clear with little room for error. Closing impaired stores, 14% YOY decline in their largest merchandise category apparel, troubling quick ratio,growing large short position. A low 10M cash balance with 50M in accrued expense and negative cash flow. 

The current price discounts the operational and financial uncertainty. FRAN is an industry outperforming for historical profits and free cash flow. Its unlikely to disappear because of the soft mall traffic. The 38M credit line, A/R from taxes, year end inventory clearance, store closings  and other changes give investors a possible asymmetric payoff.

Long: FRAN