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Monday, August 9, 2010

Bidz.com: Something for Nothing; Plus, Top Ten Questions for Management

Our recommendation of Bidz.com (BIDZ) last summer has not worked out to-date. As it turns out, we would have been better off purchasing shares of well established brick and mortar player, Signet Jewelers (SIG), which we mentioned in our original post and have loosely followed through the years. OR, we could have used this capital to follow our instinct and purchase shares of Starbucks (SBUX). Fortunately, our exposure to the jewelry (and, in this case, diamond mining) segment via Harry Winston Diamond Corporation (HWD) has more than offset our languishing Bidz.com position. Of course, despite daily, concerted efforts of so many on Wall Street trying to game (trade around) positive and negative catalysts (hence, annual portfolio turnover greater than 100%, 200%, 300%, etc.) stock performance in the short-term is near-impossible to predict.


What's gone wrong with BIDZ? We addressed some of the risks/issues in a March post and highlighted a key question in a subsequent post where we mentioned QVC (LINTA) and HSN (HSNI). In a nutshell: weaker-than-expected revenue performance and margin contraction, primarily resulting from the still depressed consumer discretionary environment. Competition may also be playing a role as all kinds of retailers discount virtually all types of merchandise, online and offline, and consumers are purchasing with a more discriminant eye. The question remains: is Bidz.com a durable franchise with real earnings power over the long haul?

The flip side? Trading near net tangible book value, the company is now essentially offered for free, assuming all inventory could be liquidated for cash at carried value and, along with existing cash, distributed to equity holders. After all, the company has consistently shown an ability to convert inventory to cash. That said, in a true, distressed liquidation, a discount would need to be applied to all balance sheet assets aside from cash in the bank. YET, this is not a distressed situation.

Company-specific fundamentals are marginally better and most overhangs are removed. The company remains a $100 million plus revenue business on an annualized basis and, behind BlueNile.com (NILE), is the second largest online jewelry retailer (aside: BlueNile's valuation is coming back down the earth - see prior post about things that don't make sense). Further, Bidz has no debt and continues to use excess cash to repurchase shares, shrinking the float and increasing equity owners' individual stakes in the company.

Unfortunately, the majority of repurchases were at higher prices ($3.71 average to date), although we were pleased to see the consummation of a "2.2 million share stock buyback for $2.3 million in a privately negotiated transaction" with Marina Zinberg, CEO David Zinberg's sister and employee of the company. While some investors may cringe at the insider dealing, the fact is that Bidz repurchased a large block of shares at $1.05 per share (an approximate 50% discount to then market value). The Bidz's press release noted:
  • "The 2.2 million shares bought by the Company will be retired, thereby reducing the Company's outstanding share count to 19.8 million. Both the Board of Directors and Management believe the buyback will serve to further enhance its future earnings per share and make its stock more attractive to own for both current and prospective investors."

The obvious question is -- in evaluating the repurchases -- what is the intrinsic value of Bidz? We provided estimates in our "detailed long thesis" of August of last year, which we hope to revisit in a future post. If we believe (1) there's more than meets the eye in establishing/ operating a leading e-commerce business, and (2) the company is capable of returning to moderate revenue growth with total revenue in the mid-$100 million range and achieving mid to high single digit operating margins (below the 11-12% achieved in 2007-2008), repurchases will likely look very smart.

Point one may be subject to debate as at least several private sale, invite-only fashion Web sites such as Gilt.com, Net-a-Porter.com, HauteLook.com, and RueLaLa.com entered the market and met fairly rapid success (at least in terms of revenue, margins uncertain). In fact, well regarded Compagnie Financière Richemont S.A. scooped up higher-end Net-a-Porter.com and GSI Commerce (GSIC) acquired RueLaLa.com. Then again, perhaps the deals support the view that first-mover, well-positioned e-commerce platforms are difficult to replicate.

For what it's worth, the purchase prices were many multiples of Bidz's current valuation (e.g. Richemont Net-a-Porter purchase - implied price to sales multiple of 3.4 times, or eleven times Bidz's current 0.30x P/S ratio). Bidz entered this market segment as a fast follower with the launch of Modnique.com in February, planning to leverage the company's e-commerce know-now, infrastructure, customer base. We are somewhat concerned over the visibility into the margin profile from this potential revenue stream. While RueLaLa and others may generate large revenue, we think margins may be slim.

Web traffic as measured by Alexa.com shows Bidz.com's traffic (excluding Modnique.com) as relatively stagnant versus the fast growth of the upstarts:



Gilt.com, not included in the above graph, is almost off the charts.... There is much more we could discuss here -- including reasons to NOT invest in consumer discretionary companies -- but we'll save commentary for future posts. For now, we end with our top ten questions for Bidz:
  1. Where will the overall business be in one year, three years, five years? Margins? Earnings power?
  2. Key risks/threats other than weak consumer environment?
  3. Outlook and ability to reignite growth in the core Bidz jewelry business? Level of confidence? Key levers?
  4. Traffic trends, conversion, repeat business?
  5. Competitive landscape? Worried about me-too players?
  6. International trends? Growth? Expansion plans? Repeat business? Margin profile versus domestic business?
  7. Current investment initiatives to grow or otherwise transform the business? What is Bidz doing that the competition isn't?
  8. Update on Modnique and how Modnique differentiates itself from RueLaLa, et al.? During the June quarter, RueLaLa doubled sales versus last year (uncertain of marketing spend or margin profile).
  9. Barriers to entry for Bidz.com and Modnique.com (related to #1 and #6)?
  10. No more insider selling?
We've gone through many of these with Bidz management in the past and some are addressed in the company's current management presentation. Nonetheless, we welcome an update with today's earnings report.

Happy investing,

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: long BIDZ, HWD.

© 2010 Jeffrey Walkenhorst
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1 comment:

  1. I appreciate your post, thanks for sharing the post, i would like to hear more about this in future

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