Description

Redbubble (“RBL”) in many ways is the opposite of Sears and other large quasi distressed retailers that swim in the “sea of sameness.” While retailers struggle and drown in this dynamic environment, RBL is well-positioned to catch the next wave by having a sustainable business model that curbs many of the risks susceptible in retail: mall traffic/leasing, A/R, inventory, design, fulfillment, or supplier concentration risks. The company shows has 12 million combination of designs that can go on 62 products that only get produced once the customer pays for the product. RBL business has grown revenue 11x over the last 5 years from $13 million to $144 million. Per capita spend currently ranges from 40 cents in established countries to 15 newer countries that are at 10 cents or less per capita. To put this into an established competitor, Urban Outfitters is at $9.40 in US on per capita spending of which $3.10 is online. Sell side estimates are for 25% growth in the next two years. An investment in RBL has a mix of value (0.9x EV/Sales) , profitability ($12 million EBITDA ex-growth bets), and significant growth 25% growth going forward.  This opportunity exists due to an: A) Australian listing (despite 93% of the revenue is in US and Europe) B) a busted IPO (25% grower vs. 50% projected[1]) C) and not profitable ex-growth bets (guiding to reach sustainable profitability in 6 months or so).  We believe this is a high barrier to entry network effect business in the early days of growth with substantial opportunities run by owner/operator CEO/BOD that owns 40% of the equity with 24% of the company in net cash.

“Sea of Sameness” in Retail

“At the Newport Centre in Jersey City on a recent Friday, a shopper could visit four department-store ‘anchors’ under one roof: Sears, Penney, Kohl’s, and Macy’s. And it didn’t take an expert eye to notice that they were selling much of the same merchandise. Izod polo shirts. Six-packs of Hanes men’s tees. Levi’s jeans. Blah, blah, blah.

Retail connoisseurs have long lamented this “ocean of sameness.” But the problem has gotten steadily worse. Traditional, middle-of-the-road department stores now have a 40% merchandise overlap, according to consultancy AlixPartners—that’s not just product categories (e.g., pants) but specific products (e.g., slate-gray flat-front relaxed-fit Dockers).”

RBL is high-growth online platform/marketplace with a millennial audience in early days of growth where customers can print art, posted digitally by any artist, on any product (clothes, home décor, stationery, accessories, etc.) Redbubble.com is the #1 site for independent artists with about 600,000 artists and 12 million pieces of content that can be printed on 62 products (or 744 million combinations of work). RBL is on a run rate to draw around 200 million visitors a year converting to 3 million customer purchases at just under $50. The business operates with a net cash position and negative cash conversion cycle, where cash is collected upfront, the product is made and delivered within the first 2 weeks, and RBL is left with a float before opex and payables (Slide 39 in March 2017 Investor Deck[2]). RBL has no acquisition costs for its user-generated content, customer acquisition costs that are 8 cents for every dollar of Revenue, and a growing content library that generate 57% of the sales. Furthermore, through fulfillment centers, RBL minimizes capital investments for PP&E and eliminates inventory and warehousing costs. Ex-growth bets RBL is generating $12 million in cash flow annually (Slide 42 in March 2017 Investor Deck[3]). With growth bets, the company is guiding to full year profitability starting 1Q18 (June FY). Other added benefits: management is super transparent (see investor presentations), very willing to engage with shareholders, and has done a great job at investing for future growth (building out Europe and other countries, see RBL IOS app (A+), try ordering, site loading speeds, delivery times, and personalization (Slide 18 in May 2017 Investor Deck[4]).

RBL is a broken IPO since going public in May 2016, the stock fell from $1.40 to $.85 a share on missed first year projections of 50% growth and fear of declining growth. However, we believe the company will continue on its 25-30% revenue growth trajectory with the possibility of substantial incremental margins given their European expansion, product/category expansion, net cash position to grow/acquire, and, operating leverage. Redbubble is in 20 countries that all grew more than 40% in 2016. Per capita spend by country shows that RBL is just getting started with US spending the highest at 27 cents per capita today (March IR deck Page 10).  15 countries (early days for nearly all) have 10 cents or less per capita spend, with Australia, their first market, at 38 cents, UK at 35 cents, and US at 27 cents. RBL is growing quickly and has a lot of room left to grow in its existing ($22B) and addressable ($42B) markets. Europe grew 40%+ in 2016 and we believe it should become the size of the US over the next couple years. We think over the next 24 months RBL will grow to $225-250+ million in revenue. Hitting this target is largely scaling up Europe to look more like the US (would add $80 million to top line). Note, this growth excludes new product growth (approximately 1 per month) which will appeal to more consumers, translating into more transactions. There is substantial scale in the markets that Redbubble is targeting: Homewares, Apparel, Wall Art, Tech, and I think a lot more to come. Insiders own 40% of the company, 25% of the market cap is net cash, the business is valued at .75x EV/Sales on 2018E Sales. Finally, we believe that RBL has a lot of embedded call options and that this business will be revalued more like its peers at 2.0-3.0x EV/Sales vs. 1.0x EV/Sales. With scale through 25% revenue growth and achieving month to month profitability, we believe investors will revalue RBL to a valuation that is more like 1.5x EV/SLS 2018 (FY June) or $1.55 or close to +100% from current prices. In short with 25% revenue growth and growing cash flow the multiple should expand from 1.0x EV/SLS to its peers. Recently, June 2017, WMT paid $310M or ~2X Sales for online retailer, Bonobos which had $150M in 2017E Revenue and growing 30% year over year.[5]

We believe it is very difficult to successfully scale this type of platform with high barriers to entry. First it is very difficult to establish a network/ecosystem online, but even harder to maintain and scale globally the network effects necessary to drive the business:

A.      Marketplace consisting of artists, customers, and third-party-fulfillers.

B.      Evergreen growing content library (many designs from 2012 still sell well in 2017; existing content generates ~60% of sales)

C.      Increasing Product/Categories (increasing consumer interest as categories increase; 1 new product category a month)

D.      Global expansion and Distribution (currently in 14 European countries, 2 Asian countries, 2 Oceanic countries, US and Canada).

Many have tried few have succeed both from a public comp, Cafepress (PRSS), to many private companies. Amazon has Amazon by Merch, which is only t-shirt focused and doing well from what we can tell. Amazon by Merch charges the $9.80 for the T-Shirt and gives the artist whatever is left over what they want to sell it for. There are several other print-on-demand online services but none are growing as quickly or as efficiently as RBL. Retail is highly competitive, huge addressable market and RBL definitely faces risks. However, we see a highly fragmented industry structure, high online growth rates, a very deep content library, global distribution, and an extremely focused and transparent CEO. Our belief is that the value wheel to customers (see increasing NPS scores), Artists (acquisition cost is zero), employees, and shareholders (constructive strategy for growing network effects and the marketplace) is spinning very well in this model.

Why Own?

A)      Low risk business model: Scaling, core cash generative, belief that there are very high incremental margin opportunities, highly competent and incentivized management team, low valuation for high barrier to entry business, highly attentive to shareholders in communication and action.

Useful Redbubble Investor Presentations:

May 2017: http://shareholders.redbubble.com/irm/PDF/1294_0/InvestorPresentationMorgansTechnologyConference

March 2017: http://shareholders.redbubble.com/irm/PDF/1258_0/Investorupdate

[1] http://shareholders.redbubble.com/irm/PDF/1014_0/Prospectus

[2] http://shareholders.redbubble.com/irm/PDF/1258_0/Investorupdate

[3] “~30% of annualized Gross Transaction Value  is in November & December”. On average 1H is 58% of GTV which flows to GP and then to Underlying Profit. RBL had an underlying profit of 6.8M in the 1st Half of  2017. 2017 Expected EBITDA (ex-growth bets): 6.8/0.58 = 11.7M

[4] http://shareholders.redbubble.com/irm/PDF/1294_0/InvestorPresentationMorgansTechnologyConference

[5] https://www.recode.net/2017/6/16/15815178/walmart-bonobos-acquisition-price-310-million

Catalyst

Catalysts:

1.       Taking some risk in the supply chain

2.       Fulfillment is 45% of revenue, we have heard that RBL is between 15-35% of each fulfillers total revenue. Take high margin items in house or get deeper price breaks with scale and supplier side concentration.

3.       A number of high margin new products: Watch faces, Wallpaper, and other categories.

4.       IP auction platform possible

5.       Resumes growth in the 30% range from higher conversion, Europe growing rapidly, new products, and other catalysts (see PPT)

6.       Reaches full year profitability

7.       M&A options to reach scale faster with better margins. We believe there is no shortage of opportunities.