Description

I posted TUP about a year ago as a long, and was disastrously wrong.  While I have doubts about the general wisdom of recycling failed longs as shorts, I think there are several factors that point to TUP as a short. 

• Topline declines have accelerated, with no end in sight
• Management strategy is scattershot and unfocused, and key initiatives will have unrecognized negative impacts
• Street consensus has not caught up with reality, with material downside to EBITDA likely in 2020
• The capital structure is a problem.  Dividend will need to be cut again.  Leverage is already >3x, and as EBITDA declines faster than they can repay debt, leverage levels will go up.  They have a $600mm bond due in June, 2021. 

In local currency, topline declined by 5% in 2018, guidance is down 8-10% in 2019, and consensus is -7.5% for 2020.  There is more downside than upside to consensus.

MLMs are by nature momentum businesses.  When revenue is growing, it's easier to add salespeople and thus to grow revenue.  MLMs that unwind are not pretty (e.g. Avon). 

The right question about TUP was asked a year ago by riskintolerance about topline turnaround, and I was just flat out wrong.  My argument was that a significant amount of the topline decline came from beauty and a few idiosyncratic geographies, which would become smaller/less important.  At the same time, a combination of mid-priced China portfolio, experience studio openings, social media selling, and a top management refresh you could see top line grow by 3%+.

It's impossible to argue that anymore.  They guided down again on Oct. 30, with C$ sales guide for 2019 now down 8-10% on top of their -5% in 2018.  The declines in revenue are broad based, and the initiatives that were incremental positives are insufficient to overcome the negative momentum. 

In China, the mid-priced products in isolation performed well, up around 20%, as part of the strategy to become less dependent on the $1,000 water filter type products.  They also started selling other products that are on-trend, but questionably related to their core business (e.g. launching collagen supplements this quarter.)  But still China sales were down 10% this quarter.  They sell there through studios, where they need entrepreneurs to put in capital to grow stores.  New studios were up only ~5% this quarter.  They blame the economic slowdown for most of this, but regardless this is a momentum business and they are going to have a hard time generating the investment dollars to ramp up new stores and drive the model. 

Their other largest markets, Brazil and US/Canada were both down in the 20% range. Experience studios outside China continue to have some potential, but it's not step change.  In an attempt to manage risk, they are limiting the ability to open studios to sales leaders who already have $1mm+ in annual sales.  I had conceptualized they could use this to ramp up new sellers quicker: I might not want to go door to door or host people in my home, but teaching a class in an attractive space could be a pleasant way to earn some extra cash.  The obstacles in place though are high enough that this idea enough will not turn the ship around.  Management initially guided to 1000 studios outside China by 2022, and they are currently at 400. CEO Stitzel said on the latest call "we have said that our goal is to have 1,000 studios, I think we said by the end of 2020. I'll have to verify that, but it was 1,000 studios by the end of 2020. I'll check the timing on that."  The two year mistake in numbers does give some question about the degree to which senior management has their head around the actual implementation of this plan.  She also demurred on the question about sizing the revenue potential from studios.

Part of my prior writeup on TUP was hopefulness on new management.  Unfortunately, I have concluded that the new CEO is not up to the task.  On her first earnings call there was this gem: In Indonesia, while sales were still down 17%, but it's important to note that this represents an 18 percentage point sequential improvement in local currency sales, mitigating the declining trend that we have been experiencing.  I don't mean to just cherry pick bad examples, but read through the transcripts and see if you can escape the sense that there is no real plan, no real data, and a lot of buzzwords.

There was big emphasis on the most recent call on e-commerce, e-tail, and social media, with commentary about a ramp up to make the necessary investments to win on this front.  They ramped up their tech spend by $3.8mm in the first nine months of this year (about 20 bps of revenue) in preparation for the big launch just announced in US/Canada, to be followed soon in Brazil and Mexico.  Browsing their new website, there is an opportunity to purchase a single freezer "large shallow" tupperware (with dimensions nowhere to be found) for $30, plus $11 shipping.  For an even more eye-popping experience, try shopping from a mobile device (as of 11/7, my iphone renders the site with an inexplicable line that moves around randomly, and trying to zoom to see pictures gets me 1/3 to 1/2 of many of the images.) 

Outside of being buzzwords, it's not clear what they hope to accomplish with e-commerce.  They have pointed out the problem of sales force productivity on recent calls, which they hope to offset by just getting a lot more salespeople.  But if salespeople can see that there is, to whatever degree of execution, an attempt to create channel conflict, why do they want to go and sell Tupperware?

The Street has responded with a combination of good cheer and light skepticism.  Consensus revenue is down $137mm in 2020, about half the dollar decline from this year.  This decline comes with 20% decremental margins, vs the 32% that have been reality the past couple years. 

2020 EBITDA is now expected to be $250mm.   But two more years with dollar declines equal to 2019, at historical decremental margins, puts $110mm in EBITDA on the table for 2021.  They do have things they can do to mitigate that.  But to date, management has shown little ability to formulate a workable strategy, or to show command of details that could give hope about execution. 

Cash flow net of investing guidance has a $70mm midpoint for 2019, as they have not yet made headway against severe working capital headwinds.  This barely covers their reduced dividend payout of $52.  They can continue to pay the dividend going forward, as working capital trends can't stay this bad, and also they generate some cash from selling off land (they started selling in 2002, ramped that up recently with $50mm in cash proceeds since the beginning of 2018.  They estimate that there is $70mm left to go.)  But they probably shouldn’t.

Net debt now is $850mm, with a $600 bond paying 4.75% due in June 2021.  The relevant covenant limits consolidated leverage to <3.75x.   Right now they are over 3x, with a goal to pay it down and get to a targeted 2.0x.  But even if they hit consensus for 2020, and manage to repay debt with free cash flow less dividend, their leverage ratio goes up.  My base case for 2021 is two years of -5% revenue and EBITDA of $193. That means they have to pay off $125 of debt over two years to not trip their covenant.  And refinancing the debt sometime in early 2021 with lower EBITDA and less saleable assets should come with a penalty in the form of a higher interest rate.

Catalyst

Another dividend cut

Disappointing 2020 EBITDA guidance given on 4Q call

June 2021 bond maturity