Description

**Of note, above capital structure does not include warrants, upon which a full exercise would increase the share count to 198mm and cash on the balance sheet to $237mm for a total enterprise value of $215mm.

1847 Goedeker Inc. (from here out referred to as just Goedeker, Goedekers or GOED) represents one of the more mispriced situations I've come across in some time, especially following the company's Q3 earnings release in November which reflected strong business execution where the company grew revenues, gross profit and adjusted EBITDA yet shares fell 6% following the press release and have declined an additional 26%. RTG123 posted a solid writeup in June but has since recommended exiting the position. Given the management team now in place, I believe GOED warrants another look. In a world where pre-revenue businesses can be granted $65 BILLION dollar valuations, I'm somewhat puzzled by the fact that a fast growing, cash generative e-commerce business with real products, a decent moat around their business and the ability to take share moving forward is left for dead at sub-6x next year's EBITDA. Appliance retailing isn't the sexiest business in the world, but Goedekers is currently being valued as a sub-scale, slow growth appliance manufacturer as opposed to similar e-commerce peers or even building products businesses in the bulk items category such as Wayfair, Overstock and even Lowes/Home Depot.

This investment opportunity has something for everyone, including a merger, a management change, activist involvement and a crazy capital structure that has caused many investors to look the other way. And while GOED is certainly a 'show-me' story, underneath this former special situation lies a pretty good business with high returns on capital, scale advantages, a very good CEO at the helm and an incredible demand environment into which they can continue to grow.

Further weighing on the share price includes a broad small-cap selloff, a sub-$5 share price, horrendous IR efforts until recently, limited following on any of the major investment platforms and a lack of current financials where none of the combined company's financial statements reflect to-date numbers. I believe as the next few quarters pass and the business continues to grow, the market has a chance to digest the new CEO, and efforts are made to appease the capital markets in the form of communication and a potentially cleaned up capital structure, shares could more than double from today's prices with further upside on the back of revenue growth, margin expansion and multiple expansion.

Background

The current 1847 Goedeker Inc. is now one of only three pure play e-commerce retailers of luxury home appliances brought about by a recent acquisition whereby the company acquired one of their largest competitors in Brooklyn-based Appliances Connection in a strange transaction that nearly 6x’d the size of the legacy Goedeker operations. Appliances Connection is a Brooklyn based appliances retailer founded in 1998 that sells over 50,000 SKUs including all standard and luxury brands as well as furniture, fixtures, outdoor appliances and commercial equipment. With warehouses in both Brooklyn and New Jersey, Appliances Connection has a reach to 48 states and grew from modest revenues in 1998 to a few hundred million in 2020. Appliances Connection founder Albert Fouerti sits as the CEO of Goedeker today.

The dynamics of the merger involved massive dilution to legacy Goedeker shareholders, a large warrant issuance, short term trading dynamics, no current financial data on any of the major platforms, and a misunderstood special situation that could morph into an e-commerce growth story. As part of the deal, Goedeker increased its common share count by nearly 15x, from 6.1mm to 102.6mm, plus issued an additional 91mm (one to one) five year warrants, causing the share price to fall from a high of $17.75 to below $2.00. There were many legacy Goedeker investors complaining about the share offering (including the investor who unfortunately was given center stage during the first conference call following the deal announcement) after being diluted massively, but that strikes me as too narrow a view of the deal. Legacy Goedeker was a sub-scale, loss-making appliance retailer who had just raised capital to go public in August 2020, and would likely have not survived were it not for the Appliances Connection deal and subsequent capital raise. Goedeker was run-rating $50mm or so in sales, was reporting a net loss and burning cash, saying nothing about their weak balance sheet. The acquisition gave them $400mm in revenues and FY21E EBITDA of over $21mm...purchased for $210mm. I'd say the deal was incredibly favorable. Following the deal close, pro forma revenue was up 140% for the month of April 2021 and Goedeker is now on track to become a $1B dollar business by 2024. Lastly, 5mm of the 6mm legacy GOED shares outstanding were held by insiders, signaling at the very least that they were on board with the transaction.

The combined company is now the largest e-commerce storefront for luxury home appliances such as Viking, Bosch, Wolf, and Miele, while the addition of Appliances Connection brought with it a home grown logistics and technology platform which should reduce sales cycle time, improve shipping speed, increase efficiency and provide a margin uplift across the entire business. The plan going forward is to add fulfillment centers to further speed deliveries and reduce costs, achieve better pricing due to scale, offer proprietary financing to customers and extend into the contractor, developer and designer markets.

Business Overview

Goedeker's is an e-commerce appliance retailer that sells standard and luxury appliances, furniture and home goods throughout the US. Goedekers was founded in the 1950s as a brick and mortar appliance retailer and today they carry over 140,000 SKUs with 95% of sales occurring online. Customers can speak with sales and service reps 24/7 as part of the shopping experience which can be a crucial part of selling appliances, and Goedeker has worked to build out their logistics infrastructure which now covers the entire US. The business model utilizes drop shipping whereby inventory is purchased following a sale, and only 65% of appliances flow through the company's warehouse. Prior to the acquisition of Appliances Connection in late 2020, legacy Goedekers was a subscale, loss-making retailer doing around $50mm in sales with a much smaller logistics footprint. The business has now been transformed into a growing, scalable appliance retailer with a bolstered capital structure, increased size and improved profitability. Today around 85% of orders are retail based, while the remaining percentage is made up of government and developer/builder customers. As recently as 2018, Albert Fouerti estimated that AC's developer business could double moving forward as the company pressed harder on this sales channel. I don't estimate or factor this into the overall investments case or valuation, but with continued growth in housing supply those efforts could lead to additional revenues.

Selling appliances is a pretty good business with relatively high returns on capital and the ability to reinvest (take a look at HD / LOW / BBY's efforts in this segment), of which some of those characteristics can be improved further by selling online. As a pure play e-commerce business, I believe GOED can maintain some relatively strong competitive advantages that should allow them to continue to take share from mom and pop retailers as well as compete successfully with large brick and mortar incumbents. It's no secret that the convenience of online shopping heavily outweighs the brick and mortar experience, and even with a product category like appliances, consumers have been more than willing to purchase these products online, the percentage of which should continue to increase moving forward. Goedeker's logistics capabilities, specialized product knowledge, wide selection and above average customer support should aid in their efforts over time.

The sales process for appliances is typically high touch with strict showroom requirements and the need for expert customer service reps or salespeople given product features and complexity. Goedeker has invested in developing and improving their technology, customer support and contact center resources which allow them to provide specific product knowledge and answer customer questions, leading to increased conversion rates, decreased cancellations, increases in average order value and an uptick in repeat purchases. During 2021, its estimated that over 50% of all sales involve orders placed with a sales rep or customer support rep. This dynamic speaks to the e-commerce customer being able to fulfill their needs online and get their questions answered by a support person with specialized product knowledge. I believe this is a favorable argument against the idea that few consumers are willing to purchase appliances online without seeing or touching them first.

Specific logistics capabilities provide another advantage, as Goedeker now has reach to all 50 states and has been focusing their efforts on increasing shipping speeds in order to reduce delivery times and boost customer satisfaction. I believe this element is key to successfully competing against the likes of Home Depot, Best Buy and Lowes, and as investments are made in this area, Goedeker will be able to continue to separate themselves moving forward. The company is in the process of opening another distribution center which management has stated should be able to slightly reduce delivery speed over time. The potential customer satisfaction in this area could have wide-reaching effects as Goedeker would become a preferred online destination for appliance shopping, leading to marketing spend efficiencies over time on the back of increased conversion rates, again, due to closing the gap on shipping times.

While Goedeker has no real logistics advantage versus say the Amazon's of the world, appliance delivery and installation is very specialized depending on the geography and location, and requires additional capabilities that Amazon for example has not invested resources to build. This includes an understanding of certain building codes, in-home delivery and installation, and transportation large enough to carry appliances. I doubt many consumers would be happy with the Amazon van driver dropping a new fridge at their front door and driving away. Furthermore, Goedeker can stock brands that other's can't, including brick and mortar stores, given certain appliance manufacturers unwillingness to provide SKUs to Amazon, and again, the unwillingness of Amazon to handle a more involved logistics process. Furthermore, industry experts have confirmed that luxury appliance manufacturers have an extreme reluctance to sell on Amazon or in brick and mortar stores due to the specific product knowledge required combined with the unwillingness to place their products next to a dinged up GE dishwasher in Best Buy, for example.

Moving forward, Goedeker will be focused on building brand awareness through increased marketing spend (for which I estimate the return on ad spend is very attractive), optimizing warehousing and shipping efforts, increasing distribution capabilities and expanding into the commercial market. Management expects these efforts to pay off in the form of improved customer satisfaction, slightly increased gross margins and increased cash generation. What's most important is that driving the growth runway here are the tailwinds of a strong replacement cycle for appliances combined with limited housing supply which should have the effects of raising both price and volume, while retailers also benefit from increased appliance usage due to work from home trends encouraging upgrades / replacements as well as the general e-commerce trend of increased penetration.

Industry Info

I'd argue that the past year-plus has completely redefined the relationship between people and their homes including how they live, the transformation of the home into an all-in-one hub for work, social and family, and the expectations for comfort and convenience. This includes what consumers now expect from their appliances.

Historically the majority of appliance sales have been replacement or failure based where consumers need to fix or replace a faulty appliance. While COVID combined with the hot housing economy has without a doubt pulled some demand for household appliances forward, there remain structural and lasting forces for increased demand including rising wealth/incomes, increasing home values leading to discretionary investment in the home, willingness to upgrade given more frequent use as work from home continues and a large build cycle moving forward as the US tries to alleviate the shortage in housing supply. In addition, there is a large replacement cycle taking place as the sector saw record-breaking sales from 2004 to 2006, and now consumers are looking to replace some of those aging products. Lastly, manufacturers have introduced some very cool and forward-looking smart products — internet-connected refrigerators, ovens, and cooking gadgets — so the demand isn't just narrowed down to replacements. These aspirational offerings are prompting consumers to buy new appliances with the latest innovations.

Goedeker's efforts should be boosted by these massive secular tailwinds, as the online household appliance market is growing 25% per year as compared to under 3-5% for the industry as a whole. While the household appliance industry has historically been dominated by big box, brick and mortar retailers such as Home Depot, Lowes and Best Buy, Goedeker has an opportunity to take share from the ‘bottom up’ by offering consumers more selection combined with all of the convenience that online shopping affords including free delivery and expert installation. Goedeker’s differentiated model provides relatively high barriers to entry, as they have separated themselves by providing superior selection, specialized logistics and customer service, especially in the area of high end appliances. Mom and pop shops and smaller e-commerce incumbents can’t compete with GOED’s offering, nor can they profitably offer free shipping (a GOED specialty) and installation services along with 24/7 customer support. In line with the business strategy comments above, if GOED can continue to expand its logistics platform, reduce delivery times and maintain their wide selection, they should be able to keep competition at arms-length for the foreseeable future.

It can be hard to get an accurate penetration rate for the percentage of appliances currently sold online. I've seen estimates as low as 13% to as high as 41%. The most useful report from Bain & Company outlined 15% e-commerce penetration which I was able to cross check with experts as well as other industry sources to be at least directionally correct. Bain estimates that the percentage of online appliance sales will increase from that 15% to 40% by 2025, of which GOED will have to capture a portion of that spend to reach $1 billion in revenues, or less than 4% of the market. It's estimated that Home Depot, Lowest and Best Buy control around 70% of the market, leaving $7 billion+ in sales up for grabs compared to Goedeker's projected 2021 revenues of $520-540mm providing plenty of room to continue to grow and take share. I'd be comfortable estimating that while the entire industry will grow at GDP+ like rates of 3-5% moving forward, e-commerce sales will continue to grow at 15-30% through 2026, for an average of 22% per year in order to reach that 40% penetration rate. According to the Washington, D.C.-based AHAM, a June-to-September spike of 23.7% over the same quarter a year ago was largely responsible for an overall year-to-date gain of 26.6% in major appliance shipments compared to the same nine-month period in 2019. I believe the retailers best positioned to show continued growth figures have a combination of scale, logistics density, strong fulfillment capabilities, excellent customer service and a wide selection. GOED checks all of those boxes.

With all these data points in mind, it’s clear that consumers are now more willing than ever to buy appliances online. Best Buy, Lowes and Home Depot have each begun making significant investments in omni-channel capabilities, and have even talked about reducing store footprints to be able to better fulfill online orders and use portions of each store as distribution centers. During their Q3 call, Whirlpool touted their efforts to internally develop a $1 billion in revenue direct to consumer business as these demand trends take shape. This marks a significant shift in consumer behavior that shows consumers are more likely to switch to digital sales channels moving forward powering a growing share of appliance sales online. The shifting landscape is confirmed by the very bullish quarterly call commentary from Best Buy, Home Depot and Lowes surrounding appliance sales as well as shifts in sales emphasis to better serve the digitally focused consumer. Best Buy is even talking about creating an interactive digital-only store.

Best Buy Call Notes Q2 2022

"As it relates to our physical stores and operating model, we are continuing to pilot and test many approaches and formats. Specifically, we are testing more experiential stores, how we can leverage our stores and facilities for more fulfillment purposes and how we can deliver customer experiences with a more flexible, digitally supported and engaged workforce."

"We are not going to outline all of our initiatives today, but I would like to provide a few updates and learnings. We have begun implementing the pilot of our new holistic market approach in Charlotte. As we mentioned last quarter, this pilot is designed to leverage all our assets in a portfolio strategy across stores, fulfillment, services, an outlet, lockers, our digital app and both in-store and In-Home Consultation labor."

"We will be testing an array of different prototypes, including remodeling a number of stores to 15,000, 25,000 and 35,000 square foot stores as well as launching a few new smaller 5,000 square foot stores. We expect the full rollout of the pilot to span a few quarters. And several store remodels are currently underway, including the transition of 1 store into a new type of outlet. Our current 15 outlet stores focus mainly on large appliance and TV open-box product."

"Another pilot that we are excited to launch preholiday is our virtual store. For this, we are building out a physical store in one of our distribution centers that will have merchandising and products and will be staffed by dedicated associates, including vendor-provided expert labor, but it will have no physical customers. Instead, customers can interact with our experts via chat, audio, video and screen sharing depending on their preference and be able to see live demos, displays and physical products."

Moving forward, I'd imagine GOED can continue to successfully take share, especially from mom and pops who lack the product quality and selection, often employ just 1-2 delivery people, and will have a difficult time finding younger generations to take over the family business. In addition, lack of scale and lack of access to public markets should provide barriers to competition. As a sanity test, the largest mom and pop appliance retailer in Spokane does around $20mm in revenues with one warehouse and employs 20 people. The winners in this category will include retailers who can master selection, distribution and customer service.

Management

During the past few months there have been numerous changes to the management team and C-suite which I view as positives for the long term business case. Legacy Goedeker CEO Doug Moore was relieved of his duties in September of this year, leading the way for Albert Fouerti, founder of Appliances Connection and serving as President at the time, to step into the CEO role. Albert founded Appliances Connection in 1998 with his brother Elie and grew the business to over $400mm in annual revenues by 2020. Appliances Connection took advantage of strong industry trends in order to grow their business including increased penetration of appliances purchased online, as well as the struggles and/or bankruptcies of many of their brick and mortar competitors as online shopping began to take hold. I view Albert and smart, tough and scrappy and believe he will be able to navigate the current environment well and move the business forward successfully.

As part of the special situation angle of this investment, there was a short period of activist involvement when in September, Kanen Wealth Management and Cannell Capital (who also teamed up on their Build-A-Bear investment) disclosed stakes of 5.5% and 9%. After some public back and forth regarding changes to the management team and board composition, Goedeker came to an agreement with both parties in October which saw the additions of numerous board members (including Alan Shaw of Electrolux), and key hires initiated which should have the effect of alleviating many of the market's concerns regarding sub-par management. The changes brought about served the purpose of 'right-sizing' the C-suite and Goedeker can now focus on growing the business moving forward. I initially viewed the activist involvement as a positive for two reasons, one, two very smart firms see enough value to accumulate large stakes in the business, and two, there was somewhat of a safety net in place to prevent management from destroying value or at the very least lighting shareholders money on fire. However, as recently as Q3 2021, both firms have been unloading their shares which has contributed greatly to the share price decline. I'm somewhat puzzled by the entire ordeal but believe necessary and positive changes have been made (in October, Kanen told the media that he "got the biggest thing he wanted in August," when Albert Fouerti became chief executive officer, replacing Doug Moore). 

I view compensation as fair for Albert and team, and the board has called for a significant increase to the employee stock compensation plan which should help further align management with shareholders. In addition to the cash payment following the Appliances Connection acquisition, multiple board members purchased shares and warrants, while Albert purchased $1.0mm in stock during the month of September. 

Valuation

To summarize some of the above, investors have the opportunity to purchase a scaled e-commerce appliance retailer that is well capitalized, growing in excess of 30% per year, the beneficiary of incredibly strong economic / industry tailwinds, with levers to pull to improve their own business in the form of increased marketing spend, improved brand awareness, and better distribution capabilities. As the penetration of e-commerce appliance sales continues to grow, GOED will only have to capture a small portion of that incremental spend to continue growing 20% or more per year moving forward. In a base case scenario, it wouldn't be difficult to imagine - especially as supply chains normalize - GOED growing orders and revenue above 20%, with slight upticks in gross margins and some opex leverage. This could lead to EBITDA in the range of $65-85mm over the next few years, on a $355mm EV stock (taking into account a full exercise of the warrants). I don't believe paying 4-5x EBITDA is very demanding for a business with the above characteristics. Nor do I believe that price fully reflects what GOED should be worth. The peer median EV/EBITDA multiple on estimates for FY22 is 13.6x, and A.O. World specifically trades at 14.5x, with the percentage of appliance sales purchased online in the UK already around 60% indicating a much smaller growth runway.

During Q3, Goedeker reaffirmed full year 2021 guidance, calling for revenue on a proforma basis to be between $520mm and $550mm, gross margin on a proforma basis to be between 22.5% to 24.5%, and proforma adjusted EBITDA margins to be between 9.5% to 11%. Using the mid-points of revenue and adjusted EBITDA, GOED should finish the year with $535mm in revenues and around $55mm in adjusted EBITDA. I'd argue that 10% or greater EBITDA margins are most likely not sustainable, but leaves room for that possibility in a bull case scenario.

Here's what 2021 should end up looking like, with a quick snapshot of the share price at a market multiple, representing over 100% upside. The valuation below assumes all warrants are exercised.

Moving forward, I'd argue margins are hard to estimate given the abnormality of what's going on in the world and internally with Goedeker. Abnormally lower ad spend, reduced fill rates, a distribution center buildout, and current lack of vendor discounts point to margin uncertainty moving forward. Following the first quarter post-acquisition that reflected pro forma results, former CEO Doug Moore indicated that GOED would be able to post 26% gross margins from here on out and that's how they were planning to run the business. I think that number may end up being high, but with 20% gross margins being too low in a base case scenario. Reality is probably somewhere in between 21-24% longer term. Also during the Q3 results presentation, management provided a glimpse into the fully diluted capital structure taking into account a full warrant exercise.

Shares trade around $2.00 as of today, making the enterprise value $210mm. This for a business expected to do around $55mm in EBITDA this year. I outline a few different valuation scenarios below, with assumptions for order growth, revenue growth, gross margins and EBITDA margins moving forward. Even in my bear case scenario looking a few years out, I arrive at a share price higher than today's valuation.

Bull Case

My bull case scenario is somewhat pie-in-the-sky in terms of sales growth rates and margin targets, and would involve Goedeker's fill rate returning to 80-85% historical averages in line with supply chain normalization, as well orders and revenues continuing their recent trajectories. Here I estimate 35% revenue growth through 2024, 23.5% GMs, and 10% EBITDA margins. Where the returns could become very attractive from here would be with a normalization of fill rate trends, increased growth and as a result an expanded multiple. I believe a 15x EBITDA multiple in this case would be warranted, resulting in a potential stock price of greater than $10.00/share by 2024.

*Assumes all warrants are exercised.

Base Case

The more realistic base case assumes orders and revenues grow 25% through 2024, gross margin decreases from FY21 to 22.5% moving forward, and there is limited leverage on opex as a percentage of revenues. I estimate 8% EBITDA margins in this scenario below FY21, below brick and mortar competitors and in line with AO World commentary for their long term margin targets.

*Assumes all warrants are exercised.

At 12x 2024E EBITDA, conservative for a profitable, fast growing e-commerce business, shares would be worth over 3x today's price. Furthermore, offsetting any gross margin decreases and SG&A increases could be shipping and logistics efficiencies, lowered ad spend on the back of increased brand awareness and a return to vendor discounting / purchasing advantages, not factored in to my valuation.

Bear Case

In what I would view to be a wildly pessimistic scenario, revenue growth would slow to 20% through 2024, fill rate would remain at 60% of order value, gross profit would decrease to 20% and remain through 2024, and EBITDA margins would decrease to 4% and remain there despite increased scale, potential cost efficiencies and industry growth. Even in this scenario, at a multiple lower than peers, I end up with a share price higher than today's valuation. In addition, assuming all warrants are exercised, GOED would have $200mm in cash on the balance sheet, or $1.00/share, significantly capping the downside.

*Assumes all warrants are exercised.

Putting it all together, if GOED can continue to execute by growing orders and revenues at historical rates (not accounting for recent increased growth), and maintain flat-ish margins over the next three years, they should be able to generate somewhere in the neighborhood of $70-100mm in EBITDA by 2024, making the current fully diluted enterprise value of $355mm look very cheap.

Two points worth mentioning again are that outside of the bull case scenario, none of my estimates include any improvements in the company’s fill rate. Currently, due to ongoing supply chain issues, GOED’s current fill rate (the percentage of orders received that they actually fulfill outside of cancellations / changes) sits at 62%. Even during the Q3 call, despite 38% revenue growth YoY, management mentioned that the fill rate touched 55% during the quarter. Management claims the normalized historical fill rate is above 85%. Should the fill rate return to levels in line with management’s expectations, Goedeker would experience significant additional revenue growth. Similarly, and also not accounted for, should GOED accelerate their marketing spend (currently at 60% of capacity given lower adwords purchases due to inability to fulfill demand from supply chain issues) AND reach order fill rate normalization, there remains the potential for explosive top line growth way in excess of my estimates.

Ownership of the warrants (five year with a strike of $2.25) provide further upside with very little downside skew, providing the opportunity for increased returns in the event of any further increases in the stock price. The warrants call for a one-to-one exchange for common shares and are non-redeemable, providing a five year look at the business execution with the potential to return multiples of the price paid.

Risks / Mitigants

Competitive dynamics between GOED and brick and mortars - discussed above, but GOED is taking share from mom and pops less focused on e-commerce

Goedeker can't achieve scale - no signs that this isn't currently achievable / happening, AND fill rates remain way below historical averages

Overearning during current demand boom - they are growing faster than the entire industry and taking share with no signs of slowing down. At this price, overearning won't matter even if they are

Market never comes around to viewing this as an e-commerce growth story - this remains a risk, and if one were to focus on share price performance alone, you would see a 'broken stock'

Fill rate never normalizes / supply chain issues - unpredictable yet valid risk. The silver lining would be that it affects everyone including mom and pops who already struggle with online transactions

Hot housing economy slows - third party estimates / data indicate trends of higher home prices should continue through 2022

E-commerce appliance sales penetration doesn't move - I believe electronics and furniture provide somewhat of a sanity test here, with penetration rates of 45% and 30-35%, compared to appliances at 15%.

CPC inflation - a risk as demand is strong, but management has said GOED is at 100% demand with 60% ad spend, meaning they are not buying adwords because they can’t fulfill the deliveries with supply chain constraints. Again, improved supply chains + increased spend should lead to site session increases, high conversion and order growth

Catalyst

Continued growth, IR efforts, warrant exercise, capital structure improvements, margin expansion