Description

Lifetime Brands (NASDAQ: LCUT) designs and sells branded kitchenware and other non-electric household goods. Lifetime operates across three major categories/segments: Kitchenware (cutlery, tools & gadgets, kitchen measurement, bakeware), Tableware (dinnerware, stemware, flatware) and Home Solutions (thermal beverageware, bath scales, weather and outdoor products). 80% of company revenue is derived from wholly owned brands, with the balance licensed and private label.  Lifetime generated $690m of revenue and $51m of adjusted EBITDA (7.4% margin) on an LTM (Mar 2023) basis. 

Please refer to the prior write-ups for some helpful background. Since the beginning of 2022, results have been far worse than expected as the consumer durables industry suffered materially from destocking initiatives at retail. Post-COVID, consumer spending habits shifted dramatically (away from certain categories such as hardgoods and apparel), which left retailers significantly over-inventoried due to poor forecasting. This led to physical space constraints (leading to far less frequent re-ordering) and a general desire to hold less inventory until levels improved. These initiatives were implemented top-down across the entire retail industry, and they impacted all categories of goods, regardless of varying degrees of over-inventoried positions. At their worst, LCUT’s “in-stocks” at large retailers declined from the typical 95% level to 85%. Given the macro uncertainty, retailers are naturally pushing working capital back onto vendors to hold on their behalf until visibility improves. Because of all this, there was a large disconnect in 2022 between strong POS trends (“sell-through” to the end consumer) and weak “sell-in” to the retailers as inventory levels were rebalanced. It is important to note that LCUT did not lose any market share or shelf space in 2022. 

In 2023, inventory levels at retailers are closer to desired levels, and ordering patterns have improved somewhat. However, uncertainty remains with regard to end demand. For LCUT, 2023 is forecasted to be slightly down from an already depressed 2022 performance. Nevertheless, LCUT is highly free cash flow generative and was able to produce positive FCF in 2022 ($17m) and will do so in 2023 ($21m forecasted). The harsh environment has also wreaked havoc on its peers. Instant Brands, maker of Instant Pot, Pyrex, Snapware and CorningWare, filed for bankruptcy in June 2023. Instant Brands was purchased by private equity firm, Cornell Capital, in 2017. Bradshaw Home, owner of the GoodCook brand, is another private equity owned company that competes more directly with LCUT. Arbor Investments purchased Bradshaw from Onex in October 2021 for supposedly 10x EBITDA. I do not have any information on Bradshaw’s financial health, but I am guessing they might be in a vulnerable spot if they are a recent leveraged buyout. 

Interestingly, last month, LCUT bought back $47m of its term loan at a slight discount (95 cents). LCUT used available cash to fund the repurchase. LCUT did not have an excess amount of cash on the balance sheet at the end of Q1, so what I believed happened is that LCUT took advantage of seasonal cash flow to retire some debt early at a slight discount, and save some interest expense along the way. LCUT typically generates significant cash in Q1, less so in Q2, consumes a lot of cash in Q3 (building up inventories for the holiday season), and neutral-ish in Q4. LCUT may also have benefited from greater than normal monetization of inventory during the first half of the year, which they have steadily brought down over the past year. In my model, I assume that a portion of this amount is re-drawn via the revolver during Q3. For 2023, I assume the vast majority of FCF ($21m) is used to pay down debt (after paying its modest dividend).  

At what I believe to be trough earnings, LCUT trades at 6.6x 2023 EBITDA, 7x 2023 EBITDA-Capex and a 14.2% equity free cash flow yield. Leverage is not negligible at 4x. However, LCUT is highly free cash flow generative. LCUT does not own any captive manufacturing and therefore capex is minimal. COGS is entirely variable. If I grow top line modestly from trough 2023 levels, and use FCF to pay down debt (after paying $4 mm in dividends - 2.7% yield at current prices), LCUT ends up de-levering by 0.6x each year. 

Bottom-line, I view LCUT as a low growth but generally stable business that should grow at least in-line with GDP over the long term. I view 2020-2022 as wildly distorted due to COVID, where LCUT clearly benefited from stay-at-home trends and consumer stimulus during 2020-2021, and then suffered viciously from retailer de-stocking initiatives and weakening consumer demand during 2022-2023. What is attractive about LCUT’s portfolio is that it consists mostly of tools and gadgets that need to be replaced as things break. The average selling point is ~$10, which also allows some greater price flexibility as the absolute $ spend is quite low. 

Using 2019 as a starting point, I feel that demand will ultimately normalize on a trend line of GDP-like growth. To frame potential upside, extrapolating GDP-like (2%) growth through 2026 gets you to $844m of revenue, $78m of EBITDA, and $2.16m of equity FCF/share. As a frame of reference, LCUT generated $64m of EBITDA in 2019. The business is quite comparable to then; if anything, its market share has only since risen. Using 12x FCF, this equates to a price target of $26 roughly three years from now (59% IRR). If this above analysis proves to be overly optimistic, I believe the current valuation off of beaten-down numbers should offer good downside support. Some may be concerned about the leverage, but the company has shown the ability to generate FCF in very tough environments. 

From a trading perspective, LCUT’s valuation may also relate to the selling pressure stemming from the fact that LCUT was deleted from the R2K. The reconstitution officially happened at the end of June, and the selling pressure most likely started several months prior. It was mentioned in the prior writeups, but it’s worth repeating that Centre Partners still owns 28% of LCUT, exacerbating an already small float. Management has shared that Centre believes LCUT is worth multiples of what it is currently trading for. However, the investment is owned in a 2012 vintage fund. Even if the price is not consistent with what they originally had in mind; at some point over the next several years, Centre may feel compelled to monetize the investment. 

Key Thesis Components:

Low Growth but Stable Free Cash Flow Generative Business: Lifetime operates in a low growth (GDP+) but steady industry. Its products/brands are high-quality, well-known and serve routine, everyday functions with an average price point of just $10. The company has very strong placement across all retail formats as well as online. Lifetime operates a low-CapEx model as it does not own its own manufacturing, resulting in significant free cash flow generation.

Low Absolute Valuation: Lifetime currently trades at a low absolute and relative valuation of 6.6x 2023e EBITDA, 7x 2023e EBITDA-CapEx and a 14% 2023e free cash flow yield, attractive multiples for a stable business with brand value. Comps such as Helen of Troy trade at 10.5x 2023 EBITDA, Newell Rubbermaid at 9x 2023 EBITDA, and SEB SA at 7.8x 2023 EBITDA.

Underfollowed Company with Limited Float: Lifetime is covered by three, smaller sell-side shops - DA Davidson, Sidoti and most recently, Canaccord. Further, its small size renders it uninvestible for most consumer-oriented funds. Finally, 28% of the float is held by Centre Partners. Centre owns the position in a 2012 vintage fund and could be a seller in the future.

“Newish” Management Professionalizing the Company: In 2018, Lifetime acquired Filament (housewares business) from private equity firm Centre Partners, resulting in a larger entity with more scale/clout and Filament’s CEO (Rob Kay) taking over as CEO. Since joining, Rob has professionalized the company (previously run like a family business), significantly broadening its growth strategy, improving operations/margins/product mix and enhancing its digital presence. Many of the planned growth initiatives have been overshadowed/delayed by COVID and its aftermath and thus not fully appreciated, while the expenses to achieve them are burdening the income statement, depressing earnings. 

Untapped Growth Opportunities: Above industry growth in housewares can be achieved via new product introduction, product innovation and entry into new markets. Management sees significant growth opportunities that were neglected by the prior team including expanding into adjacent categories (pet, storage) and expanding its capabilities in the food service (restaurant) industry. Lifetime already has multi-decades experience serving the “back of house” and is looking to break into “front of house”, where smaller competitors have been severely weakened by COVID. Food service is a very large industry and a more “annuity-like” business due to steady replacement demand. Management is targeting <5% market share in over 5 years, equating to $75m of incremental revenue potential and >$10m of incremental EBITDA (20% of 2023 base).  

Potential M&A Target: Lifetime could make for an attractive acquisition target. Larger public peers Helen of Troy and Newell Brands have been acquisitive over time; synergies in consumer products tend to be high as G&A can be substantially reduced and larger product portfolios provide cross-sell opportunities and distribution efficiencies. Private equity has been active in housewares over time given their stability and cash flow generation, coupled with a fragmented industry base providing consolidation opportunity.

Investment Considerations: (i) high degree of customer concentration: 19% Walmart, 13% Costco and 11% Amazon; (ii) inflationary headwinds potentially pressuring margins; and (iii) continued normalization/fall-off in post-COVID demand. 

Summary Financials

Catalyst

• Eventual sale of company
• Company starts to comp positively towards the back half of the year
• Continued paydown of debt