I recommend a long in Lifetime Brands, a leading provider of kitchenware, tableware and other household consumer products. Please reference Juice835's write-up for an excellent background on the business.
Despite a strong multiyear outlook and meaningful improvements to the operations of the business over the past several years under new leadership, the stock continues to be ignored by investors. There were no Q&A participants on its last earnings call, and the share price is down over the past year and over the past five years. I believe there is a path to a 3-5x multiple-on-capital over the next five years as investors start to pay attention and give credit to the following:
1. New Management has made significant progress on its turnaround plan
Lifetime Brands was formerly a family-run business for the entirety of its operating history prior to 2018 (Seigel family)
The acquisition of competitor Filament Brands from Centre Partners in 2018 was a reverse private equity takeover
Rob Kay who ran Filament for Centre was installed as CEO of Lifetime
Centre Partners rolled their equity in Filament into new Lifetime, installed two of its investment partners onto the Board, and owns 27% of the equity
The former CEO Jeff Siegel, who remains Chairman, has been gradually reducing his stake in the Company
Rob Kay put in place a turnaround plan in 2018 called "Lifetime 2.0" premised on a significant restructuring of Lifetime's operations - reorganizing Lifetime's previously sub-scale European operations, supply chain improvements, rationalizing the product portfolio, improving data-driven marketing processes, realizing cost synergies from the Filament integration, and pursuing large untapped growth opportunities in e-commerce and foodservice
The progress of that restructuring program is visible in the financial results
Organic revenue growth was basically unchanged-to-slightly declining from 2016 to 2018 under previous leadership, but accelerated to ~1% in 2019, ~4.6% in 2020 (same stay at home benefit) and ~14% in 2021. LCUT has been gaining market share across its categories
Revenue and EBITDA has grown from ~$700M of revenues / $65M of EBITDA in 2018 to ~$880M of revenues / ~$90M of EBITDA in 2021 while also absorbing the impacts of tariffs and supply chain disruptions over the same period
At their 2019 Investor Day, they gave 5-year targets of $900M / $90M+ of EBITDA by 2024. They are on track to achieve these targets three years ahead of schedule
Over the same period, the balance sheet has made significant progress as net debt has been reduced from ~$350M in 2018 to ~$240M today
Despite the meaningful debt reduction, EBITDA growth, and improving prospects, the share price of LCUT is virtually unchanged over the past few years. As a result, Lifetime Brands now trades at ~4x 2022 EBITDA, which is pretty much near the lowest multiple in its history as a publicly traded company and a large discount to peers like Newell at ~10x 2022 EBITDA
2. Non-core hidden asset
LCUT currently owns 25% of Grupo Vasconia, the largest housewares company in Mexico (and publicly traded) via an investment made in 2007
Management has started to monetize this non-core asset over the course of 2021 (reducing its ownership from 30% to 25%), most stating recently on its 2Q21 earnings call that: "As Grupo Vasconia is not core to our business and does not contribute materially to our earnings, we will continue to seek opportunities to monetize this asset"
That stake is worth ~$30M at current prices or ~$1.5 per LCUT share after tax, or about ~10% of Lifetime's current market cap
Pro forma for a full Vasconia sale, LCUT will soon be under ~2.5x EBITDA versus their stated 3x leverage target (which represents a significant improvement from the ~5.5x leverage the business ran in 2018 post the acquisition of Filament), positioning the Company to begin to pursue capital returns and accelerate its strategy with accretive M&A
3. The Company has provided a roadmap to 2026 that would result in significant upside
In their latest earnings report, Management raised their five-year organic financial targets to $1.25B of revenues and $145M of EBITDA
This is an increase to their previous five-year targets of $120M of EBITDA, which itself was an increase from $90M EBITDA during their 2019 Investor Day, reflecting the ongoing strength and progress of the Lifetime 2.0 turnaround
The roadmap to 2026 is based on a continuation of their existing operation plan - expanding into adjacent product categories (pet, storage, higher-end cutlery, etc.), a supply chain and operations redesign, investments in distribution center capacity, an improved international go-to-market strategy, expanding into an untapped foodservice market ($100M revenues in five years), and launching new brands and lines of businesses
Given the credibility of the team's execution so far, I believe 2025 targets are achievable
Due to a significant D&A / capex mismatch (cash EPS exceeds GAAP), at the updated guidance, the business should do ~$3.75 of cash EPS in 2026. At a 15x FCF multiple / 10x EBITDA multiple (reasonable for a defensive consumer products business), I think the stock could be ~$55 in the next five years versus ~$15 today
Management's targets are strictly based on organic actions and do not take into account any accretive M&A upside as Lifetime continues to de-lever. At current prices, share repurchases would be the highest and best use of capital but may not be feasible in a meaningful way given the low float / small market cap of the stock today
Given the execution record so far, I think M&A would also be a good use of capital. At 3x target net debt and a ~8x post-synergy acquisition multiple, I estimate acquisitions could add another $1.25 of cash EPS by 2025, creating potential for a $75+ share price in the next five years
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.
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