Lifetime Brands LCUT
December 27, 2006 - 6:27pm EST by
2006 2007
Price: 16.21 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 219 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Lifetime Brands, Inc. (Ticker: LCUT) is a leading designer, developer and marketer of a broad range of branded consumer products used in the home, including kitchenware, cutlery and cutting boards, bakeware and cookware, pantryware and spices, tabletop, home décor, picture frames and bath accessories.  The company sells and markets its products under the following brands and trademarks, which are either owned or licensed: Farberware, KitchenAid, Pfaltzgraff, Cuisinart, Block China and Crystal, Calvin Klein, CasaModa, Cuisine de France, Hoffritz, International Silver, Joseph Abboud, Kamenstein, Kenneth Cole Reaction, Melannco, Nautica, Pedrini, Rochard, Roshco, Sabatier, Sasaki, Towle Silversmiths, Tuttle, Wallace, and :USE.  The company’s products are distributed through most major retailers in the United States.


The stock got walloped late last week when the company surprised investors by lowering its guidance for 2006 (ending December 31).  It is now trading at its low for the year.  In particular, management took revenue guidance down by about 7% to $450-455 million from the previous level of $480-490 million and took EPS guidance down by about 25% to $1.10-1.15 from the previous level of $1.45-1.55.  Based on the new expectations, LCUT at the current quote of $16 is now trading for 0.7X sales, 9X EBITDA, 11X EBIT, and 14X EPS for 2006 estimates and 0.6X sales, 7X EBITDA, 9X EBIT, and 11-12X EPS for 2007 estimates. 


The company has done a lot of acquisitions in the last couple of years, thereby significantly increasing the extent to which results are driven by yearend holiday shopping.  It is important not to over-react to the weakness the company is experiencing in the second half of Q4.  While consumers are responding well to LCUT’s product offerings (according to POS data received by the company), many retailers have elected to take a more cautious stance with respect to their inventory levels in all product categories.  Importantly, the company continues to be well-positioned and still expects to grow revenues in excess of 15% organically for the next several years.  It is also likely that management will be able to attain margin improvement on higher volumes and integration.  As recently as 3Q, they were talking about hitting $1.0 billion in sales in 2009 (largely organic).  Even if we dial those aspirations down quite a bit, it appears that LCUT will grow EPS well into the high double digits over the next few years.


LCUT operates in two reportable business segments, wholesale and direct-to-consumer (DTC).  The wholesale segment (over 80% of sales) is comprised of the company’s business that designs, markets and distributes household products to retailers and distributors.  It operates in three sectors: (1) food preparation (kitchenware, cutlery, bakeware and pantryware), (2) tabletop (dinnerware, glassware and flatware), and (3) home décor (nonelectric lighting, home and garden accessories and picture frames). 


Food prep is the company’s oldest, largest and fastest growing business.  In particular, sales of Farberware, KitchenAid and Cuisinart branded food prep products have been growing at an excellent pace.  Although this market is mature, but the company believes that it can grow the business by continuing to introduce new products. 


LCUT entered tabletop, now its second largest business, in 2004 with the acquisition of Excel.  In 2005, LCUT acquired the Pfaltzgraff brand as well as Calvin Klein and other key tabletop brands from Salton.  In 2006, LCUT rounded out its lines by acquiring the Wallace, Towle and International Silver Company flatware business from Syratech Corporation.  Management is expected to gain share in this space in 2007.


LCUT’s key home décor categories were acquired earlier this year from Syratech.  According to management, the key to success here are having strong design capabilities and advanced sourcing expertise.  Unlike in the other two segments, here management will be required to introduce entirely new collections every three months.  The company ought to be well-positioned because it already has an in-house design and development team that consists of a 90-person internal design staff and 150 sourcing professionals, making it the leading player in the industry.  Moreover, LCUT has been sourcing products in Asia for over 40 years and, as of information from the latest 10K, sourced from 137 suppliers located primarily in China.


The direct-to-consumer segment (under 20% of sales) is comprised of the company’s business that sells household products directly to the consumer through company-operated retail outlet stores (both Farberware and Pfaltzgraff), catalog and Internet operations.  While management began the year expecting to lose money in the first half, it had expected to break even for the full year.  However, by the summer it was becoming clear to management that this business was performing below expectations.  On the Q3 conference call, management acknowledged that results were “disappointing and unacceptable” and stated that the business was experiencing “a number of inventory and merchandising problems, which frankly were self-inflicted.”  Accordingly, management swiftly replaced the leadership of the DTC division in August as soon as problems became apparent.  The new head of retail, Bill Margulies, has been in the business for 30 years (former executive with Federated Department Stores; most recently, he has been LCUT’s VP of Special Projects for last several years).  In addition, management has taken steps to strengthen its financial oversight team and bolster merchandising staff. 


The key growth drivers of DTC over the next few years will probably be the Internet and catalog businesses.  Management has stated that they do not intend to grow the retail stores beyond the 84 outlets already in place.  Internet and catalog sales will carry more attractive margins, especially as they reach critical mass beyond their currently under-developed state.  Getting to profitability will be a nice boost to consolidated results of operations.


The senior management team has been running this business for years.  The Chairman/CEO, Jeffrey Siegel (65 years old), owns just under 9% of company.  Various other family members own a lot of stock and are heavily involved in managing the business.  Although stock options issuance has been very high (averaging over 3% of outstanding per year) and salaries are probably above what you’d like to see in a company of this size, the family is heavily incented to get the stock price up by creating shareholder value over time.


Continued strong topline growth (management is targeting in excess of 15%)
Possible future acquisitions
Improvement in direct-to-consumer business
Use of strong balance sheet to buy in shares? (No comments that they are considering this step, but they have the capacity to do it and there is a lot of incentive for management to get the stock price up)
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