Description

Description: 

Lifetime Brands is a value investment in traditional terms: it’s a collection of defensive consumer product lines selling at a very low multiple of near term free cash flow (7.6x 2021) with a decent medium term runway for growth that is far off most investors’ radar screens. In addition, the company doesn’t screen as cheap as it is given that FCF greatly exceeds earnings. As well, Lifetime’s business and balance sheet have been significantly cleaned up in recent years and investors are primed to benefit from the company’s recent partial deleveraging and streamlined platform going forward.

The company has the #1 position across a number of consumer products including kitchen tools and gadgets, cutlery, barware accessories and bath scales. They also have the #2 position in various tabletop categories. The company owns 80% of its products and licenses the rest. It also has 2 million square feet of warehouse and manufacturing space across North America, Europe and China

For reference, Its brands include:

Distribution: 

The company is well diversified across its distribution channels with a presence across mass market, discount, department stores, specialty retailers, warehouse, e-commerce, supermarkets etc. Their e-commerce business is split between pure play, omni channel and direct to consumer.

Recent repositioning and reorganizing of company: Investors have yet to give the company any credit but it has been significantly transformed in recent years since Rob Kay became CEO in the first quarter of 2018. This includes the successful large integration of Filament Brands (a housewares company that Kay was CEO of whose shareholders got 27% of the combined entity in the deal), the realization of $12mm of cost efficiencies and an enhanced presence and platform online. The company also restructured its UK business which was previously unprofitable.

Covid 19 Impact: 

During the last year, Lifetime’s results illustrate the resilience of its platform of products. While some products saw surges in sales as more people ate and entertained at home, certain other categories lagged. Rolling it all together, the company achieved slightly higher growth (4.7% year over year in 2020) than it had the previous year (4.3%). This steady growth should enable the company to achieve a significantly higher multiple as investors start to realize the nature of the free cash flow production that is likely over the coming years. 

Growth Targets:

The company has set what should be very achievable growth targets for 2024. It is targeting 5% revenue growth on an annualized basis (slightly ahead of trend) along with slightly improving margins and consistent capex of $6-8mm which is well below D&A of around $17mm resulting in significant free cash flow. The revenue growth is built primarily on channel and geographic expansion of its existing products. Additional M&A could be a source of further upside.

Balance Sheet:

Lifetime has deleveraged its balance sheet significantly since the Filament deal taking net debt / EBITDA from 4.7x to its current 3.3x level. In addition the company has no required debt amortization (term loan due 2025)  and no financial maintenance covenants. This should allow the company to invest in the business where it sees opportunities and to consider acquisitions.

Valuation:

Lifetime is extremely cheap on the only metric that ought to really matter: free cash flow. Assuming no further debt paydown or deals, the company should generate around $1.93 per share in FCF in 2021 (assuming $82mm of EBITDA, $17mm of taxes, $17mm of LTM interest expense and $6mm of maintenance capex) on a stock price of $14.58. In addition, if the company hits the rather modest growth targets outlined above, it will produce recurring free cash flow well north of $2.00 per share in the coming years. This seems extremely cheap(!!) given the steady growth and defensive characteristics that the company has demonstrated along with the cleaned up balance sheet. 

MGMT:

I would also note that interests between shareholders are well aligned in this company as the Chairman and former CEO Jeffrey Siegel owns over 5% of the company personally. CEO Kay also owns 1.4%.

Catalyst

Company proves out its ability generate significantly free cash flow on a steadily growing basis in the coming years