Owner-Oriented Investment Research and Commentary - Have a private comment or question? Email us at commonstocksense@gmail.com

Tuesday, February 15, 2011

Bidz.com (BIDZ): Finally Catching a Bid as Shares Go Boom Boom Pow! Who On Earth Wants to Own Bidz.com?

On the heals of Blue Nile's (NILE) better-than-expected sales results last week, shares of Bidz.com (BIDZ) are finally catching a bid on significant volume. Here's the five day chart from Google Finance:

AND, the one year chart from Yahoo Finance (we captured over the weekend, before Monday's jump -- didn't finish our post):

In our Happy New Year post, we mentioned that our position in the online jewelry/fashion retailer had not worked out to-date, but said that we'd been adding to our position because we still saw value from several different angles.

Why on Earth would anyone want to purchase [more] shares in Bidz.com?

We can think of at least ten reasons, starting at the top and counting down:

10) Most key Bidz overhangs removed. A summary from a management deck last spring:

9) Per our original Bidz long thesis, jewelry can be a very good business over time and, fortunately, industry fundamentals stabilizing. Of course, following a period of margin compression, Bidz.com needs to demonstrate an ability to drive sustainable mid-single digit (or better) operating margins.

For a view on fundamentals, this December Bloomberg article is worth a read:
Two points from the article:
  • U.S. consumer confidence reached a six-month high, an economic report showed last week. Consumer spending may rise an average 2.6 percent in 2011, compared with a 1.7 percent increase this year, according to the median estimate of 56 economists in the latest Bloomberg monthly survey.
  • Almost 4,000 U.S. jewelry retailers and suppliers went out of business between the start of 2009 and the end of November, or more than 10 percent, according to the Jewelers Board of Trade in Warwick, Rhode Island.
8) Favorable long-term secular trends, also noted in our initial thesis. People like to shop, especially for jewelry and other accessories. From our original post in August 2009:
  • People like to shop – while the average American consumer is struggling, we submit that Americans will always be consumers, with some arguably addicted to purchasing products from TV channels such as QVC.com (LINTA) and HSN.com (HSNI), as well as Web sites like Bidz.com. A growing middle class elsewhere in the world also brings more consumers.
  • More commerce will gravitate online over time – although e-commerce growth is lagging amidst the recession, sales are holding up better than offline retail sales. comScore reported 1Q09 online sales flat Y/Y versus overall retail sales down 5% Y/Y.
7) International business is greater than 41% of total revenue and growing at 11% Y/Y (9M10). From latest Form 10-Q (click to enlarge):

6) Meaningful relative discount - from Yahoo Finance (before Monday's jump):
  • Bidz delivers higher gross margins than Blue Nile but currently operates at a loss. Still, Blue Nile's ten times price-to-sales (P/S) premium appears rich, in our view, and the gap should narrow at some point. If Bidz garnered the same P/S multiple, shares would be at $16.
  • Another potential "comp" (not pictured above) might be online retailer Bluefly (BFLY), which has struggled to generate profits since formation and carries an accumulated deficit (the opposite of retained earnings) of $152 million (9/30/10). Bluefly trades at 0.93 times sales versus Bidz.com's 0.26 (prior to Monday). If Bidz garnered the same valuation, the stock would trade north of $5 per share.
5) Bidz.com's established brand, supply chain relationships, E-commerce know-how and scale are difficult to replicate (e.g. we couldn't do it). Bidz invested significant money to build its brand and develop an E-commerce platform that operates at scale. A $100 million plus annual revenue business is non-trivial. Also, major face lift to Bidz.com's Web site is coming soon -- beta version available now:

4) Embedded call option on growing Modnique.com fashion business. No value at all is being awarded to this start-up business entirely self-funded by Bidz.com's core business. We briefly discussed this business and competitive landscape in our post last August.

3) Significant insider ownership - greater than 60%. From last year's proxy (click to enlarge):
  • We know that management wants to generate wealth for themselves and for ALL shareholders since they own more than 60% of the business.
2) Historic track record of profitability (pre-crash) and protecting shareholder value (e.g. see retained earnings, through downturn) with NO DEBT and ample cash generation to fund growth. Shareholders' Equity from Yahoo Finance over the past twelve months (most recent 3Q10 quarter on left side - click to enlarge):
  • No accumulated deficit and fairly stable net tangible assets through tough operating conditions.
AND our number one reason:

1) Who doesn't like free stuff? Like our Parlux Fragrances (PARL) and FLY Leasing (FLY) (click for prior posts) purchases, the entire Bidz.com business including Modnique.com was being given away for less than free.

Until Monday's big move, Bidz.com was offered below net tangible book value (e.g. liquidation value). Given reasons (2) through (10) above, we thought this made no sense whatsoever, particularly for a self-funding company with no debt that was no nowhere near bankruptcy. Bidz was/is not a "cigar butt" as discussed in our initial Parlux post last fall.

We tweeted the discount back on February 3rd:
Hence, the Market gave us an excellent opportunity to purchase Bidz.com at approximately 0.80 times net tangible book value. We took advantage of the apparent disconnect and significantly reduced our average cost basis in the company.

While certain questions remain, we are pleased to see renewed Market interest in Bidz.com. As we've noted previously, when Market sentiment turns, it can turn on a dime. Borrowing from The Black Eyed Peas, we could say that things sometimes go Boom Boom Pow:

Even with the recent uptick, we believe fair value remains meaningfully higher since the business is now only trading equal to net tangible book value. Reproduction cost is certainly not zero, nor is the value that would be assigned by an informed private market buyer. Further, if management can deliver renewed revenue growth with margin expansion, we could again consider EV/EBIT and P/E valuation metrics that might bring us back to our original mid- to high-single digit fair value estimates.

Like Bidz.com, we are also looking for our 1-800-Flowers.com (FLWS) to go Boom Boom Pow! We just don't know exactly when the shift might occur. Near-term timing is unpredictable.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long BIDZ, PARL, FLY, FLWS.
© 2011 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.