Description

We love situations where there is a very large disconnect between what the market sees and reality. Blyth has no analyst coverage and is perceived to be a declining multi level marketing candle company. It isn’t. Our variant view conservatively values Blyth at 2x today’s price, with the potential to be a home-run, 10x+ investment. 

We started looking at BTH when we saw that CEO Bob Goergen bought $21mil of stock in the open market at $52 in July to increase his stake from 32% to 37% of the Company. Things like this tend to grab our attention, so we tried to understand why.

Goergen loves his own stock because he knows that, in addition to the Partylite candle business that has been Blyth’s historical cash cow, Blyth also owns a 57.5% stake in Visalus (with an option on 100%), whose BodyByVi Challenge is the fastest growing direct sales/MLM business in North America (ever).  Visalus promotes a 90 day “BodyByVi” Health Challenge focused around meal replacement shakes, vitamins, and energy drinks.  

The business has grown and continues to grow at a 20-30% monthly CAGR, going from ~$0.6mm/month in January 2010, to $30mm/month in September 2011.  It looks to be on a path to do well over $100mm this calendar Q4.  We have recently seen tweets about Visalus breaking records by doing $2mm in sales on some days (2 x 30 x 12 = a lot).  

While Visalus sales numbers are buried in the Blyth 10Q, it is actually quite easy to get a proxy for how the business is doing by following the Visalus founders and key distributors on Twitter/facebook. 

Number of people joining the Body By Vi Challenge in 2011: 

January: 14,439
February: 18,019
March: 25,816
April: 32,030
May: 36,619
June: 41,551
July: 49,515
August: 67,184
September: 81,147 

Numbers from BTH 10-Q:

Q1: $20mm, up from $3.6mm YoY
Q2: $40.6mm, up from $6.5mm YoY 

While these growth rates are obviously unsustainable, people in the industry say that current momentum is only building, with a very long growth runway. There is still very little mainstream awareness of the Visalus brand (superstars corporate executives from the largest direct marketing companies are being brought in to change that) and “whales” from other MLMs are only now starting to migrate to Visalus en masse, not to mention international growth that will start in 2012. 

We are very skeptical in general and absolutely hate paying for growth. BTH investors today are paying very little for Visalus and getting a free call option on its future, with both corporate and distributor sights set on breaking into the top tier of global direct selling/MLM businesses (Amway, Herbalife, Mary Kay, Avon, Nu Skin, MonaVie, etc) in the near future.   

Growth in Context

To provide context, Herbalife (HLF, $6.6bn EV) did $2.7bn in 2010 worldwide sales, 62% of which was weight management products, most of which is meal replacement shakes.  Of the $2.7bn, only $614mil was in North America.  Visalus is already on a runrate of over $400mm in North American sales, is planning international expansion for early 2012, and Wall Street has no idea.  Visalus is continuing to compound monthly at double digit % clips, and is aiming to hit $1bn in runrate North American sales by March/April 2012. After demonstrating huge success in the US/Canada, the plan is to launch international markets, with the support and experience of Blyth, which already does a lot of  business internationally.  

Mature MLM businesses typically generate EBIT margins of 15-20% (look at HLF, NUS, USNA, PPD), most of which turns into pretax cash flow, with very little maintenance capex.  It is very easy to see the earnings runway for Blyth if Visalus gets to $1bn in sales, with management hoping to do that in the near future in North America alone, and international growth being incremental to that.  Even if worldwide sales get to $1bn total (they target this in North America alone), a $150mil EBIT business that Blyth will own 100% of will be very valuable and will ultimately have to get valued in BTH stock as Visalus earnings are fully consolidated within Blyth.

Math Part 1 

So what are we paying for Visalus today?  Net of cash and investments, BTH is selling for $367mil.  BTH did LTM EBIT of $42.4mil, of which we think Visalus contributed $5-7mil as it was a much smaller business on average than it is today.  If ex-Visalus Blyth did $35mil of EBIT and is valued at 5x, we are paying 367 – 175 = $192mil for Blyth’s stake in Visalus.  In calendar Q1 2012, Blyth’s ownership in Visalus will increase to 73%. Therefore, we can think of an implied valuation for all of Visalus of $263mil.  We estimate that the payment to go from 57.5% to 73% will be in the ballpark of $30mm, which should be covered by cash generation at Partylite and Visalus over the next 2 quarters.  

What is the range of outcomes for Visalus, and is that worth $263mil?  At its current runrate of $400mil in sales and the low-end of peer EBIT margins at 15%, this is 4x EBIT.  4x would be considered cheap for a steady-state cash cow with very low capex.  However, Visalus is not in steady state and is 1) growing very quickly for a number of reasons, 2) has several key structural points of differentiation vs. peers and 3) has a much larger addressable market. The “Comps” section provides more data points with respect to how peers are valued. 

Structural Difference and Lollapalooza Effects

The pitches to distributors and to end customers have both been designed to be attractive in a weak economy…and to be very disruptive to the MLM industry as a whole, which has been confirmed to us by numerous distributors. In fact, CEO Ryan Blair, who came in as CEO in 2005, had to be convinced by the founders to get involved as he intuitively disliked the MLM business model. This explains why Visalus has been thoughtful and creative about solving the major problems with typical MLMs.  

Candles, supplements, and acai berry juice are discretionary; $1.87 for a meal replacement isn’t. This has contributed to Vi’s ability to thrive in a weak economy.  Many regular families we have spoken to treat the protein shakes as healthy, cheap meal replacements, which has made it easy for soccer moms around the country to promote them in their communities based on both nutritional and economic benefits. At $1.87 a pop people are actually saving money.  Given how poorly Americans eat on average, it is not surprising that many people are losing weight when consuming fewer calories.  

Only 4% of the population has either been previously involved in MLM or has a positive view of it. The remaining 96% therefore either know nothing or view it negatively. Visalus’s main product is the Body By Vi 90 Day Challenge. All MLM companies require their distributors to face an awkward selling situation, where a person would have to pitch friends on a generic business opportunity. Prior to the introduction of the Challenge, Visalus faced the same problem. The Challenge allows regular people to engage in normal, personal conversation about getting in shape, rather than a “selling opportunity.”  Importantly, when someone loses 15 pounds by replacing large meals with shakes, friends notice and ask “how did you lose weight?” which creates a much more natural selling opportunity. 

Visalus management is very focused on tailoring all aspects of the business to the 96%, rather than the 4% who typically churn in and out of other MLMs. So far this has proven very successful, as half of the top producers at Visalus today are actually new to direct sales, as are most end customers. One number we heard is that 83% of the people at the most recent national convention of 10,000 people were new to MLM, which says a lot about a structural difference between Visalus and other MLMs.

Also, key Visalus selling points are the ability for customers (not distributors) to get their product for free by introducing it to three customers.  Once Joe Smith starts to receive his products (food) for free, he is much more sticky and is likely to make sure that the 3 people he introduced to Visalus remain customers.  If one happens to leave, he is very incentivized to find a replacement in order to keep the food on “autoship” for free. For this reason, the distributor to customer ratio for Visalus is over 4:1, and customer product revenue per distributor is more than 2x that of even the best MLMs, at $428 per month and rising.  This creates a more lucrative opportunity to be a distributor, and is a self-fulfilling prophecy. This dynamic is very powerful, and is driving enormous momentum of “whales” and their sales organizations jumping ship to Visalus. 

The other innovation is the ability for regular people to quickly qualify for a free BMW (technically, a $600/month payment towards a lease or purchase). This is compelling because a lease is a real financial commitment, and everyone who qualifies (company is averaging 1 new qualifier every hour) is incentivized to keep the $600/month subsidy by continuing to produce for Visalus.  With 755 people qualifying for this BMW susbsidy per month (and growing), Visalus is meaningful to BMW’s North American sales of ~21k vehicles per month. Driving a shiny new BMW also allows Joe Smith to brag about how he got it, facilitating another sales opportunity as he describes either his transformation (body and/or lifestyle) to his network/friends. 

Although the above factors do not individually seem revolutionary, the buzz in the space is that Visalus is changing the game. These fundamental tweaks to the business model, coupled with very strong people at every level, are coming together in a lollapalooza to create the staggering growth rates we are seeing. For what it’s worth, distributors at the top of the pyramid think that they are still just scratching the surface of the opportunity. 

People

The owners of Visalus (the three founders, Blyth, and Ropart Asset Management) are hiring senior execs away from multi-billion dollar MLM companies because they are serious about creating something with sustainability, scale, and global infrastructure. 

Below are some of the industry veterans who are running ViSalus: 

-  John Purdy, President and COO of Visalus as of February 2010, spent 15 years at Herbalife and 15 years at Amway, most recently as head of all International markets for Herbalife.
-  Janice Jackson, Chief Brand Officer at Visalus as of a month ago, was the Director of Marketing at Amway and Vorwerk & Co (JAFRA Cosmetics)
-  Audrey Sommerfeld, SVP of Marketing of Visalus, former VP of Global Marketing at Herbalife and was upper management at Neutrogena, Proctor & Gamble, J&J.
-  John Tolmie, CFO at Visalus, former head of North America Financial Operations for Allied Domecq
-  Other ViSalus Executives include a former head of Herbalife International Licensing Team, Herbalife Global Logistics, ACN Business Analyst, Herbalife Event Production Team, and Herbalife R&D members. 

At the distributor level, talent is moving to Visalus after recognizing its to-date growth and very large market opportunity. Large distributor “teams” are coming over from the top MLM companies to run with the Visalus opportunity and they all see it as a structurally more profitable and exciting opportunity than their existing MLM. They also see people with no prior MLM experience rising to the higher “Ambassador” levels at Visalus, and saying to themselves that even “newbies” are managing to build large sales organizations and make a lot of money.

“Smart Money” view on MLM 

While the MLM/direct selling business model has a stigma and visceral discomfort attached to it, smart money has continued to gravitate towards its generation of free cash flow with little or no capital requirements, and a highly variable cost model.

-       Berkshire Hathaway acquired Pampered Chef in 2002.  Pampered Chef is the largest direct seller of housewares in the U.S.  Buffett referred to it as an “absolutely wonderful business”
-       Herbalife (HLF) was acquired by Golden Gate Capital in 2002
-       Prepaid Legal (PPD) was acquired by MidOcean Partners in July 2011
-       Sequoia Capital funded Stella and Dot at $370mil valuation in January 2011.
-       Lia Sophia is owned and operated by the family of Victor Kiam (Remmington Razors and Lady Remmington) 

Blyth has been an aggressive, opportunistic repurchaser of stock (tender offers and open market) over the years, when its stock got cheap. Bob Goergen has only purchased stock in the open market once prior to this purchase in July 2011 – in January of 2009, Goergen purchased approximately $250,000 worth of stock at around $16. 

Goergen and his foundation are active philanthropists, giving many millions of dollars to the Arts, The University of Rochester and the Wharton School at the University of Pennsylvania where Goergen endowed the Goergen Entrepreneurial Management Program.   

Variant View

It is very hard for Wall Street to figure this out without any analyst coverage, no earnings calls, and the company not talking to investors.  We had to become distributors, attend a national event (http://bit.ly/qIc05w), and talk to the higher-level distributors to understand the growth drivers and the sustainability of that growth.  However, even at today’s runrate, Visalus earnings will become a significant contributor to Blyth and will force investors to revalue the company. 

What the market is missing, aside from the fact that Visalus exists, is that the Challenge concept has made Visalus structurally more profitable for distributors, with a much higher distributor-to-customer ratio and higher customer sales per distributor. This structural difference is key to understanding why Visalus has grown the way it has, and why industry “whales” are switching their teams from other MLMs to Visalus, 

Math Part 2 

So: where should BTH trade?  We assume that Visalus falls short of its $1bn goal and gets to a $800mil runrate sometime in 2012.  Keep in mind, that the international opportunity for successful MLM is much bigger than it is in North America (as evidenced by HLF doing $0.6bn in North America and $2.1bn int’l in 2010).  At 15% EBIT margins, this is a $120mil EBIT business that we think has significant growth potential.  At 8x EBIT, this is a ~$1bn EV business, of which BTH will own 73% early next year and 100% in 2013 (it will be paying 8x trailing EBITDA for these incremental step-ups).  At 73%, it is worth ~$700mil to Blyth, or $84 per BTH share.  To get to total BTH stock price, we add $84/share to $100mil in today’s cash/investments, and $175mil for the ex-Visalus operations, for a total of ~$33 for ex-Visalus BTH (which compares to $30-35 where BTH traded before Visalus), and get $117/share, more than 2x current.

This math assumes that Visalus falls far short of its estimates, and that it only trades 8x EBIT despite a very significant growth opportunity internationally.  John Purdy, the President and COO of Visalus, is the perfect guy to lead int’l expansion, having done it very successfully in Asia and Eastern Europe for Herbalife and Amway.  

If Visalus is successful in breaking into the top tier rank, it is very easy to pencil out a 10x scenario for BTH stock. We never bet on these outcomes but it is rare to see a very realistic runway for getting there without a miracle.  Given that Visalus already does roughly 65% of Herbalife’s sales in North America, it is perfectly conceivable that over the next 5-10 years it can become a similar-sized business internationally.  

Comps 

We never use comps to value businesses, but it is an interesting reference point in thinking about where Blyth could/would trade if the market was informed about stand-alone Visalus.  With a $400mil+ run-rate and growth rates much higher than any of the listed comps, we think that buying Visalus at under 0.7x runrate sales is a bargain.

LifeVantage, which is a smaller but rapidly growing company (though slower than Visalus) has a $140mm EV, trades roughly 3x runrate sales, yet sold about as much TTM as Visalus should do this month alone. 

Links 

To gain conviction, we encourage investors to dig deep and spend time really understanding what’s happening at Visalus. We were very skeptical at first but a lot of due diligence has convinced us that Visalus is actually changing the industry, which is why it has experienced unprecedented growth rates. 

To try the product or become a distributor, we would appreciate it if you ordered from our site (we signed up as distributors to understand the business): http://bscwinner.myvi.net. 

A set of videos that Blake Mallen, Chief Marketing Officer, of ViSalus recently conducted with a group of potential “whale” promoters from other networks:

http://nextgenerationofliving.com/instant-page-squeeze-11-2011-06-21-001315/visalus-dreamteam/

A snippet of what people closest to the business are saying in social media (while keeping in mind a big component of this is promotion):

Rich Pala (@richpala)
10/23/11 9:19 PM
March to a Billion! We will hit a billion by march. Fact :) 20k people in Kansas city @NickSarnicola@BlakeMallen@RyanBlair

 NickSarnicola.com
Congrats to my brother Ryan Blair and Blake Mallen along side of all of our superstar leaders and Ambassadors and the ENTIRE Visalus community for our first ever $2,000,000 DAY yesterday!!!!
View Post · October 20 at 9:55am 

We have seen many more videos, tweets, and fb updates, and are happy to share in Q&A if people are interested.

Catalyst