Coral Springs, FL, Sept. 30, 2019 (GLOBE NEWSWIRE) -- The following letter is issued by Kanen Wealth Management LLC.
Dear RTW Board of Directors and Executive Management,
We applaud the recent stellar growth in the e-commerce segment and the hiring of new President and CMO Traci Inglis, who helped build a billion-dollar business as head of Global Fashion Brands at TechStyle.
We believe significant value can be created through RTW’s intense focus on the e-commerce segment of the business while optimizing its store footprint and reducing fixed costs (both opex & SG&A) associated with a 413-store footprint.
We are writing today in order to highlight the board and senior leadership’s lack of a sense of urgency to create value. Insiders have purchased less than 40,000 shares of common stock in the open market since mid-2015, our CEO has made $21,728,002 in total compensation since his tenure began, yet only owns 186,340 shares of unrestricted common stock. This is less than $233,000 worth, amounting to 1.07% of gross compensation. Over the same time period, the board of directors has collectively made over $32,000,000 in compensation. Meanwhile since the start of 2010, shares are down 70% and not a dime has been distributed to shareholders!
We believe shareholders should receive a $0.10/share annual dividend vs. our $1.27/share in net cash on the balance sheet. This will give shareholders that invest today the prospect of earning an 8.3% annual yield on the current price while they wait for RTW management to execute on its strategy. This will have little effect on RTW’s over capitalized balance sheet, while displaying to shareholders that the board does care about the owners of the company.
We believe that a modestly successful execution over the next 2 years, centered around an aggressive e-commerce focus, will lead to RTW being worth multiples of its current price. RTW e-commerce will likely generate at least $290m in revenue in 2019. RTW is capable of generating ~$383m e-comm sales run rate in late 2021:
- With just 5% organic e-comm growth in 2020/2021 (on the back of an increased digital/e-comm focus by new CMO + potential new celebrity collaborations).
- Combined with rationalizing unprofitable/breakeven stores and recapturing 25-30% of closed store sales (to e-comm and neighboring B&M stores).
RTW e-comm, with a low fixed cost base, should generate at least an 8% EBITDA margin in this segment, which will require $2-3m in capex needs and generate $28.5m in FCF. If we assume RTW’s brick and mortar stores make no money, then by the end of 2021 RTW would be generating $0.44/sh in FCF and due to the asset light nature of this cash flow it should trade at a 10x multiple, plus net cash of $1.60 ,would equate to a $6/share stock price (RTW briefly traded over $5/sh in 2018).
By way of example, in 2016 Bebe Stores, inc. pivoted their strategy by exiting all stores to become solely an online retailer. BEBE entered into a ~50/50 JV with Bluestar, a digital brand management company. Bluestar paid $35m to BEBE for a slightly less than 50% stake in the JV which includes Bebe trademarks & IP, Bluestar manages the website and the JV pays Bebe ~$10m+ per year in distributions. Bebe is effectively a NOL shell with no expenses and pays out those JV distribution payments to shareholders through dividends. We estimate that the Bebe JV is making at least ~$16-20m a year in distributable cash flow as a 100% e-comm business. Compared to Bebe, RTW has multiple advantages:
- RTW is much bigger than Bebe and has a larger repeat customer base, > 46% of sales are from RTW private label credit card users. Strong brand ambassadors/proprietary clothing lines - Gabrielle Union, Eva Mendes, & Kate Hudson. RTW does not need to partner with a digital brand management company due to its already strong online presence and CMO Traci Inglis.
- Bebe gets 500-800k website views per month, RTW gets over 5.5m per month.
- BEBE had ~$420m sales in 2016/2015 before closing B&M, BEBE is now 100% online – best guess is BEBE JV does $100-125M sales. ~16-20% cash flow margins.
- RTW e-comm already has over $290m rev (2019E) with a path to $380m+ in online sales in 2 years.
Another comparable to RTW’s e-comm segment is Revolve Group, Inc. which operates a platform that provides women’s apparel, footwear, accessories, and beauty styles under a range of established and emerging brands, as well as owned brands.
Revolve trades at over 22x the market cap of RTW, fetching a $1.75B valuation on $550m/$47.8m in TTM sales/EBITDA, respectively. Revolve is awarded a high multiple because the e-comm business requires very little capital to run. Revolve was bootstrapped with just $50m in Private Equity investment and no other outside capital (up until its June 2019 IPO). Revolve incurs just $2m in capex per year. They have built the business on highly effective digital marketing and very little capital and asset needs.
If ownership cares about generating sustainable cash flow they must follow in the footsteps of the two aforementioned RTW comps that have a strategy built around e-commerce.
Current and prior leadership has admirably built RTW into a $900m revenue business, with 13M customers in its database, 4M+ active 12-month shoppers, and over 1.2M Runway Rewards Credit Loyalty Cardholders (46% of sales are loyalty). RTW has made nearly $400m in potential run rate online sales very reachable in 2021, RTW has commendable proprietary clothing lines and formidable celebrity collaborations. But if we are not willing to monetize the above and generate sustainable free cash flow, then RTW shareholders will continue to lose. Does RTW leadership care? Or is their only priority to continue to make a comfortable pay package while shareholders watch the stock continue to decline?
RTW’s margins have significantly and consistently trailed those of its peer group, we believe RTW should explore hiring an advisor to help the company make the e-commerce segment more profitable.
RTW Board and Executive Management, if you do not intend to purchase stock and become owner - operators while the market values your enterprise at below zero, and you don’t intend to ever pay a dividend… Then we challenge your current leadership, why are you leading this company if you don’t intend to generate value? Or if you don’t believe that you can generate value?
Sincerely,
David Kanen, President KWM LLC
Contact:
Richard P. Cuneo
Kanen Wealth Management, LLC
5850 Coral Ridge Dr.
Suite 309
Coral Springs, FL 33076
P: (631) 863-3100 F: (631) 863-3103