Description

SharkNinja (SN) is a well-managed compounder that features two increasingly relevant and trusted global consumer brands (you guessed it, Shark and Ninja). It is a new name to the board which started trading in the US markets in late July 2023 upon separation from Hong Kong-listed JS Global. Despite making numerous investments through the P&L (brand-building, salesforce and other costs in sub-scale new international markets, supply-chain revamp and redundancy), SharkNinja still turned in a 15% operating margin in 2023 in a tepid consumer and retail environment. The company boasts a long history of growing the top-line at a 20% CAGR. While the law of large numbers and a larger base of mature products is at work, they do seem to actually have some special sauce (culturally ingrained innovation engine with a ‘maniacal’ focus on what the consumer wants, and more discussed below) and reason to believe there is room to keep growing for a long time (7% small appliance TAM penetration in the US, 3% globally). Our ‘compounder math’ takes the current 2024 earnings yield of ~6% and adds expected organic earnings growth of 12-14% to get to 18-20% annualized return. A number of things could improve that return profile:

• Future sales growth closer to 2023’s 15.4% (note this was achieved with a global consumer facing significant inflation, and with retailers scaling back inventories), and very few people seem to be focusing on it as an indicator of success (or an indicator that they could be low-balling their 7-9% ‘24 revenue guide). It is clear that in North America at least, 2023 point-of sale was higher than sell-in, through I only saw that they sized it up for the back half of the year::

  • Q4 Point-of-sale up “mid-teens” in Q4 vs 8% North America sales growth

  • Q3 Point-of-sale up “HSD” in Q4 vs 2.5% North America sales growth

  • Even if these 2 were the only quarters with a meaningful difference, it would have added 2.75% to the growth rate if sell-in were equal to point-of-sale, so could be thought of as 18.2% organic growth

• Higher margins in a few years from reaching scale in international markets or reduced need for global brand spend

• Use of the 6% earnings yield for share buybacks

The Company had $4.25 billion in 2023 sales, broken into the following categories:

History

The Shark brand dates to 2007, with Ninja launched two years later. Shark is in 13 sub-categories; 6 are new in the last 3 years. Ninja is in 18 sub-categories, with 10 new in the last 3 years.

SharkNinja tends to be the leader in its categories in the US. Shark was the #1 selling floorcare brand in the US in 2022, with the #1 selling Upright Vaccuum, the #1 selling WANDVAC handheld vacuum, and the #1 selling robotic vacuum. Ninja is the #1 selling brand in small kitchen appliances, and is #1 both in blending appliances and ice cream makers. Ninja is also the #1 brand in air fryers, indoor grills, cookware, and cutlery. Beauty is a more recent entry, but the Shark HyperAir hair dryer (2021 launch) quickly became the #1 selling hair dryer in the $100-300 range and has remained so since. Their success since 2020 is shown graphically below, and this is not a cherry-picked chart - these are the meaningful sub-categories.

The JS Global distribution - July 2023

• JS GLobal Lifestyle is a Hong Kong-listed holding company formed in October 2017 when CJ Xuning Wang, founder of Jyoung (a Chinese producer of “healthy diet appliances”, originally soy milk makers) and current SharkNinja Chairman, acquired SharkNinja.

• The stated reason for the separation was the recognition that “continued success in each market requires geographic specific considerations, including consumer habits, localized lifestyle differences, cultural differences and consumer and market preferences”. As such, JS Global would retain the Shark and Ninja brands in APAC, while SharkNinja would have them everywhere else. My suspicion is that there was an unstated reason as well, as JS Global is a Chinese company that had been intimately and financially involved with the almost exclusively Chinese supply chain for SharkNinja’s global operations. Given the uncertain trade relationship and tension between the US and China, it would add more value to SharkNinja if they could diversify their supply base and be independent of a Chinese entity. Since the separation, SharkNinja has indeed made some dramatic supply chain shifts that have both geographically diversified and improved the economics of its supply base.

• Equity incentives - the 2023 Plan made 13.9m shares available for future award grants, and 4.06m were granted in ‘23 (1.3m w/ service-only conditions, 1.67m vest based on metrics like sales, GP, cash flow, and 1.1m were granted to senior executives with conditions tied to market cap over a period of time). These are nicely aligning incentives for the US-based executive team, allowing for a more pure equity linkage to the value creation within their control, as opposed to being granted shares of a Chinese investment company at a time of epic and possibly insurmountable trade tensions, with a Chairman who didn’t seem to mind depressing reported results with lavish pay.  This opened the door to expanding the executive team, and at least 4 were hired in the second half of 2023.

• Chairman Wang has made 2 block sales since the separation, in early December (3.2m shares @ $47) and on 3/18 (4.7m shares @ $57.45). After these sales, he owns 71.4m shares (51% of the Co).

• SharkNinja maintains a Supply Chain Services Agreement, a Product Development Agreement, and the Brand License Agreement with JS Global. 

So what sets SharkNinja apart from the sleepier, accident prone public companies in the Consumer Durables space?

• Culture - Adam Barrocas, who took over as CEO in 2008, likes to say that each and every layer in the organization, they are maniacally focused on understanding consumers. He also likes to say that they built the company one “5-star” review at a time. They are steeped in engineering talent with 800 cross-functional engineers and designers globally, and few competitors can keep pace with their pace of product development (25 new products in 2023).

• Product and Price Segmentation - SharkNinka has proven to have a very effective product segmentation and pricing strategy. Essentially, they tend to be a mid-priced product, which admittedly does not sound that brilliant. But in these categories, there is usually a big spread between the high-end player (often Dyson or to a lesser extent Vitamix) and the mainstream volume units. The mainstream will have something mid-range, but it is typically not much different going from their ‘good’ to ‘better’. This leaves a lot of room for Shark or Ninja brands to pick a price point that makes sense for the relative value of their innovation, and take share from both above and below.

• Virtuous cycle of recycling gross margin $’s into R&D and marketing - with 47% gross margins in ‘23, Shark Ninja can really amp up the Sales & Marketing  (21% of sales last year) and R&D (6%) and make life tougher for its competition. Simply the knowledge that this marketing blitz is coming makes shelf space a much easier conversation with the retailer partner. They have also proven to be quite skilled in digital marketing, with a number of products having gone viral on Tik Tok and Instagram, such as the Shark hair dryer in recent years. Ninja’s CREAMi ice cream maker was an impressive marketing success as they entered a $53m category and in the product’s first year sales were $78m. I have met with a competitor recently who confirmed that SharkNinja is way out in front of the pack in digital marketing and specifically social media.

• A virtually untapped EU opportunity, with the UK business serving as a proven playbook - The UK business, which the company entered in 2014 via acquiring their distributor, had $840m of sales in ‘23. SharkNinja used the same strategy to enter Germany and France (both in 2020) and Spain and Italy (both 2021). The German small appliance market is actually larger than the UK (‘21 6.7B vs 5.9B). France is 4.6 and Italy 3.3. So 14.6B total small appliance market from three of these four newly entered countries. On a GDP basis, the 4 countries represent ~62% of the GDP in the EU, leaving the rest for future opportunity. In Q423 As these 4 countries become a bigger part of the mix in the coming years, they will pull up the overall growth rate. Latin America is also a near-term opportunity for entry.

Small appliance market by European country with local SharkNinja operations

Comps 

Like most well-managed, well-executing compounder-type investments, SharkNinja is not trading at a big discount to peers. This investment is predicated on the compounder framework laid out in the intro.

One thing I would note is that SN just guided to 8% top-line at the midpoint, and I am not sure why consensus is for 6.5% growth. Given it is the management team's first full-year guide in the public markets, I would expect conservatism. I expect SN will end up at the top of this comp list for '24 revenue growth.

Disclaimer: the author of this posting and funds managed by the author have a long position in the security discussed. The author reserves the right to transact in any way in the shares or to change his views without any obligation to inform anyone. Please do your own diligence and consult your financial, legal, and/or tax advisors before acting on any advice. While the author has tried to present facts it believes are accurate, the author makes no representation as to the accuracy or completeness of the analysis herein. Reader waives any cause of action against author related to the analysis above.

Catalyst

- Revenue/earnings beat in '24

- Earnings compounding