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Thursday, March 11, 2010

BIDZ - Execution Critical to Show/Realize Durable Earnings Power Like QVC/HSN; Risks Remain

Per our post Monday, Bidz.com (BIDZ) reported results Tuesday afternoon. We expected revenue might come in short given continued consumer weakness and it did, along with lower-than-expected March quarter guidance - here's a brief summary from Eric Savitz of Barron's.com:
Bidz.com (BIDZ), the online jewelery retailer, posted Q4 revenue of $27.5 million, below the Street at $30 million, and falling short of the company’s guidance range of $28 million to $32 million. The company posted a profit of a penny a share, at the low end of its guidance of 1-4 cents....
For Q1, BIDZ sees revenue of $26 million to $28 million, with gross margin of 24%-26%, down from 29.6% in the fourth quarter, “as the company will push for market share to get back on a growth curve.” The company expects to break-even in the quarter on a pre-tax basis. The Street has been expecting profits of a nickel a share....
SO, at least two risk factors are seemingly impacting the company: the weak consumer economy and a competitive marketplace, both of which are leading to margin compression. We need to monitor these risks as investors don't like to see lower revenue and lower margins (and a lower bottom-line).

Here are key operating metrics from 4Q09 - ASP and average items per transaction higher Y/Y, but other metrics lower Y/Y:

AND, from the company's 10-K, a five-year summary of selected financial data (click to enlarge):

Despite the 4Q/1Q revenue shortfall and Y/Y declines in key metrics, we are pleased that the company maintained profitability for the quarter, albeit slight. Many retailers swung to huge losses during the recession and are now only returning to break-even or better. Management indicated on the conference call that earnings per share were negatively impacted by one cent because of ongoing legal expenses, but that legal costs should be much lower going forward (recall recent settlement of shareholder suit). We look for additional, near-term resolution related to various investigations/suits, which may prove positive catalysts.

Further, management also relayed on the call that it expects March quarter revenue to be the "low point" for 2010 quarterly revenue with Q/Q improvement through the year as new initiatives and increased marketing are expected to bring higher revenue. The company expects to sacrifice margins somewhat to ignite growth.

We don't think results/commentary answered our key question presented on Monday:
  • The key question is this: is Bidz.com a truly durable franchise with real earnings power?
  • i.e., can Bidz.com achieve consistent margins/results such as QVC (LINTA) and HSN (HSNI), which propelled both names significantly higher over the past year? Many investors favor these companies for their asset-light business models and large free cash flow. Plus, customers keep coming back for more even amidst a weak consumer environment -- amazing, right? Both QVC and HSN seem to have the secret sauce, established over many years. Is [much smaller] Bidz.com of the same ilk?
As discussed in the past, we think established Internet franchises are more difficult to replicate than most persons/investors realize. Bidz.com has spent millions of dollars over the past decade building a brand and international online retail platform. During the process, the company succeeded in building tangible shareholder equity (please see financial data above). At this point, we believe the heavy lifting is complete, although execution is critical and economic conditions are a key risk. Based on recent signals and actions, we believe a return to profitable growth and renewed increases shareholder equity are attainable. Importantly, we believe shares remain inexpensive on an absolute basis and comparable basis, which should provide downside protection.

Happy investing,

Jeffrey Walkenhorst

Disclosure: Long BIDZ.

© 2010 Jeffrey Walkenhorst
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