Description

Blyth designs manufactures markets and distributes candles and decorative fragrance products in the United States and Europe. Its primary channels of distribution are specialty retail/department stores (15%), mass merchandisers (10%), institutional (5%), and a direct-selling division (Partylite- 45%). International sales are approximately 25% (Partylite Europe-15%, retail- 10%). Approximately half of BTH’s sales are wax-related products (scented and non-scented candles). The other half includes potpourri (#1 market share as measured by IRI), portable heating oil (Sterno brand) for the institutional market, and candle-related accessories (half of PL’s sales).
Revenues and earnings increased greater than 25% per year for the last 5 years, through both acquisitions (mostly) and internal growth (estimate industry growth between 10-12%). Operating margins improved every year and approximate 15% currently. Further gains are limited due to investments in all-important product development, sales and marketing, and PP&E. BTH’s investment levels in all the above are considerably higher than its competition, a gap that is increasing each year and one source of competitive advantage. Management's Feb ‘01 guidance suggests that BTH will report trailing earnings (year-end Jan) of about $1.95 excluding one-time (BTH has no history of taking extraordinary charges to operations) restructuring adjustments (~$22MM) and expects EPS gains of ~13% next year assuming no further share repurchases or acquisitions (more on this later). 12.2x trailing/10.8x forward earnings for a consumer products company with its growth record and prospects, 15% operating margins, minimal debt and considerable borrowing capacity, high-teens ROIC (~$125MM CFFO with modest maint capx/~$685 IC) even in a challenging year like ’00 seems cheap.
The stock is weak for multiples reasons: 1) soft economy/weak consumer retail (temporary and already priced into share price); 2) concerns about commoditization, imitation, substitution/etc. risk of its core candle product (overblown); 3) slowing growth in its PL division (uneven but upward); and 4) BTH’s acquisition pace has slowed to a stop last 18 months.
Lacking better uses of its cash, BTH has repurchased 5% of its outstanding and recently authorized an additional million share buyback.
BTH will continue to grow, without acquisitions, at about 8% top line, manage the business to a 15% operating margin, and boost EPS through reduced interest/lower tax rate (increasing portion of foreign revenues)/share repurchases. Management continues to look hard at accretive acquisitions outside the candle business consistent with its track record of buying highly profitable niche products/brands to run through its diversified distribution channels.
Bob Goergen, BTH’s founder, Chairman and CEO, was a partner at McKinsey and co-founder of the Sprout Group at DLJ. His family owns 28% of BTH’s common shares. Sales of stock by the Goergen family (none recently) have been limited to charitable gifts. Neither of his two sons are directly involved with the company.

Catalyst

1) recent hires of several senior marketing/sales people from Bath & Body Works/White Barn Candle/other will repeat highly successful introduction of Colonial at Home in other brands/sub-brands and revitalize the PL holiday product offering for ’01; supports future growth/differentiation in key premium candle segment 2) shakeout in industry will yield further market share gains and highlight BTH’s category leadership; 3) BTH’s revenue/margins/EPS guidance appears conservative and absorbes temporary challenges.