At the close of today’s yesterday’s session, sales reps from each of CVSL’s companies helped to ring the closing bell at the NYSE.
We think this was very telling in that CVSL C-level executives were not ringing the as we would typically see when a company gets such an opportunity. Instead of taking the glory of such an opportunity for themselves, they sent sales leadership from the partner companies along with some of their top sales reps. This speaks volumes to the mindset of CVSL management and further illustrates this management team’s commitment to investing in the true drivers of value in this company – the sales force. This is just one more very high-profile example of how this management team “gets it” better than any other in the direct sales space and comes just two weeks after acknowledging on the earnings call that the board had already hired an expert to help develop more creative ways to get CVSL stock into the hands of its sales force. Bravo CVSL leadership.
We also think it is fitting that CVSL would be part of ringing the closing bell on one of the most bullish trading sessions (Dow up 600+) in the history of the NYSE. We believe this is a harbinger of things to come for CVSL and we feel that the strides management has made over the last 90 days justifies our making CVSL the Groove’s #1 Focus stock. We are making CVSL our #1 focus stock today as we believe that the rally in CVSL shares since we first introduced it in June at $1.09 has been the equivalent of a “dead cat bounce” and that the stock has not yet begun to reflect that the company’s difficulties in Q1 have been addressed, that the company’s largest divisions have turned a corner and that each significant line of business is now growing again. The stock continues to be overlooked by investors and currently trades in the $1.55 range (yesterday’s closing price) despite the remarkable improvement in all aspects of the company’s operations verses where we were back in January when the stock traded much higher.
In summary, CVSL is in a much stronger position from an operational and financial standpoint than they were when the stock was trading above $6 per share earlier this year, but the shares have continued to languish in the $1.50- $1.60 range. We see any opportunity to buy this stock below $2 per share as a steal and we fully expect many more investors to discover the CVSL story very soon and events like yesterday’s ringing of the NYSE bell just gives the CVSL story that much more exposure. We believe that Groove participants would do well to buy more shares at current prices. CVSL sales reps who have started to participate with the Groove community should also jump on this opportunity to buy CVSL shares at these prices and make sure that other sales people in your organization are aware of this opportunity. We think CVSL will be a great investment opportunity for many years to come if management continues to execute at this level, but we don’t think the opportunity to buy the shares below $2 will be with us for much longer.
Dear Longaberger, Agel, Kleeneze, YIAH, My Secret Kitchen, Tomboy Tools, Project Home, Uppercase Living and Paperly sales reps and employees:
As the heart and soul of CVSL and the key determinants of the success of CVSL going forward, we want to share some information that we think you should know. CVSL stock is trading at a level too low to be sustainable given what is going on with the company’s operations. We think it unlikely that CVSL will trade below $2 for much longer, thus we think a short-term gain of 25% from current levels (closed 8/18/15 at $1.60) is not only possible, but highly likely. But that is just the tip of the iceberg, because we feel that CVSL’s Q2 report addressed the previously unanswered questions about this company and management team, such that the stock should begin moving back towards the $3+ level where the traded before it cratered due to those concerns. In short, while we believe that CVSL management is working to get all CVSL sales reps and employees the opportunity to own shares of CVSL, we think all would do well to go ahead and buy CVSL shares while they are trading at such a ridiculously low price.
Warren Buffett once said of the stock market – “In the short-term, the market is a popularity contest. In the long-term, the market is a weighing machine.” CVSL was very unpopular with investors and traders over the last six months due to a confluence of factors amounting to a perfect storm that knocked the stock down to levels usually reserved for companies that are failing. This happened simply because some in the investment community believed CVSL was failing in the months just before and after CVSL’s first quarter report. The Q2 report discussed on Friday’s call shows a company that has recovered nicely from a very difficult period where the company had to deal with multiple issues in its largest divisions and one that is now showing significant momentum. But the “weighing machine” of the stock market has not yet begun to reflect what CVSL accomplished in Q2 yet. Due to the lack of Wall Street analyst coverage and the newness of the company’s listing on the NYSE Mkt (less than one year), we have the opportunity to buy shares before they move up to levels associated with a healthy growing company. We believe those who buy the stock before its price reflects what is happening in Q3 (likely only sales reps and the handful of investors who listened to Friday’s conference call are aware of how well Q3 is going) stand to earn an easy double-digit return over the next few months in addition to what will likely be exponential returns over the next few years. We would love to see as many members of CVSL’s sales force as possible get the benefit of owning shares at these low levels.
We were struck by CVSL’s earnings report and not just by the operations results that blew away even the most rosy of estimates, but how this management team truly “gets it” in terms of what will make this company great. A key quote by Mr. Rochon was “We realize that our true ‘product’ is economic opportunity for the men and women in our independent sales forces”. He also indicated on the conference call that he was working with the Board of directors to put programs in place that will make it easier for more sales reps and employees of CVSL to buy stock so they can own part of the company they are helping to build. We think its great if they can get stock at $3 that goes to $10, $15 or $20. But we would like it even better if the reps could get stock NOW while it is still trading below $2 per share. It is for this reason that we penned this letter – we want sales reps to get the opportunity to get in at these prices. If you are a sales rep or employee at Longaberger, Agel, Kleeneze, Your Inspiration at Home, Tomboy Tools, My Secret Kitchen, Project Home, Uppercase Living, Paperly, etc. we are glad that this letter found its way to you and we hope that you will take advantage of this opportunity and pass it along to others who may not have seen it yet.
We have pressed Mr. Rochon to get these programs in place as soon as possible because CVSL stock is trading way below where it should be trading based on its assets and operating results. We believe this stock will trade 50-100% higher over the next 12 months with the potential for much larger gains if the company continues to execute in future months like it has the last three. We believe there is tremendous value to the company and its shareholders if we can get as many of CVSL’s top producers to buy the stock while its uber cheap and get the benefit of the run from current levels up to the $3’s. And to be clear, we believe it will go much higher than $3 over the next few years, maybe a multiple of that. But that will be driven by operating results as the company’s model is proven to be increasingly successful again and again each quarter and it pushes the stock higher. The move up from the current $1.60 is what we would call easy money – the move up from current levels back to the $3+ range is just a “reversion” to the range that might usually be expected for a company in CVSL’s position. We believe that could happen in a fairly short time frame and we would like to see as many CVSL reps as possible get the benefit of that.
So the bottom line is this – there is a very real opportunity to build wealth through CVSL beyond the cash flow you can generate by selling CVSL company products and services. Consider buying shares of the company you are building through your sales efforts. We believe those who buy CVSL stock at its current levels will get a pretty quick taste of the long-term wealth building opportunity when they earn 50% or better returns on their money in a very short time frame (less than a year), to be followed by exponential returns for those who can be patient and hold the stock for a few years. We can’t guarantee you that you will make 10x your money by buying CVSL stock today, but we believe you will make at least some multiple of your money if you buy at today’s prices. If CVSL management and its sales force execute going forward like they have over the last 100 days, you could see that $1.60 invested today could turn into $5, $10 or more.
Another article by one of our own, includes additional commentary at the end for Groove participants –
Prior to the market opening today, Remark Media announced the acquisition of Vegas.com. The terms of the deal were not disclosed, but this is a huge acquisition for Remark Media and we believe the revenue impact will be quite significant. While Vegas.com was owned by a privately held company who does not report its revenue publicly, we believe it is fair to say that the hotel booking commissions and ticket/show commissions/markups earned by Vegas.com would combine to equal a multiple of the revenue Remark reported for the last 12 months. We did a little digging to try to find information on the amount of revenue that Vegas.com generates and found little to nothing, except one article from over a decade ago that quoted “industry insiders” as saying that Vegas.com did somewhere in the range of $60-$80 million range. If we take that figure and assume even the most conservative lodging commission at the base travel agent commission level of 10% (high-profile destination wholesalers often earn 15% or more), Vegas.com would have been producing $6-$8 million in revenue. If there is any significant correlation between traffic growth and revenue growth, we note that the 3.4 million monthly unique visitors mentioned in today’s release announcing the deal is more than 4x the monthly unique visitor figure (800,000) quoted in that article from 2004. Obviously we are getting well into the speculative realm in trying to come up with a revenue figure due to the lack of publicly available intel on Vegas.com, but we think its fair to say that Vegas.com likely catapults Remark Media from a company struggling to reach the $1 million per quarter revenue level in their seasonally best quarters into one that may consistently do 5x that much or more with Vegas.com in the fold.
The market cap of Remark had fallen to a level that some commentators had suggested equated to the value of its Sharecare stake only, leaving little if any value attributed to the current operations (IRS.com, Bikini.com, Roomlia, etc.). Given the cash burn situation, it follows that this was either a stock deal or management has significantly levered up Remark’s balance sheet and we would not be surprised to see that both (debt and equity) were used to pull off an acquisition of this magnitude. This leaves the big question for current shareholders – how much has our ownership stake been diluted and/or to what degree did we mortgage the farm to gain control of Vegas.com? Announcing the deal without disclosing the terms just two business days after filing the latest quarterly report means we might have to wait three months to find out exactly what we own. For this reason, we suggest that Groovers who had not done so previously should consider taking their original investment off the table now. Given our previous suggestions, it likely that most of you had already done this when the stock was trading at higher levels but we know some have bought back in when the stock traded near its 52 week lows. For those of you who did this or are still at the table with “house money”, we think you might do well to be cautious here and maybe even consider cashing in a few chips given the patience and faith that may be required here. While we are in no way negative on what we know of the deal (we have long believed that Remark would do well to buy more revenue producing online travel assets), we just don’t know enough about the deal and investors in the current market environment appear to be fleeing when they encounter this kind of uncertainty. Taking a little off the table with an eye towards buying back in if the market punishes the lack of transparency seems like a good tack here.
CVSL impressed in every way with its Q2 report late Thursday evening, with major upside surprises on the top and bottom lines and eye-popping margin improvements. CVSL management made a statement with this report, in a tacit response to short sellers, traders and other Wall Street naysayers who had pushed the shares down to levels that essentially rendered a judgement that the CVSL model could not work. Revenue for the quarter was $35.7 million, up from $24.6 million in the second quarter last year, an increase of 45.2% and significantly ahead of our expectations for $30 million. Operating loss was $2.5 million, compared to a loss of $4.1 million in last year’s second quarter, an improvement of 39.0%. Gross profit margins increased to 61.0% of total revenue, compared to 54.9% of total revenue in the same quarter a year ago. The increase in gross profit margins was primarily a result of less discounting at The Longaberger Company and the lack of discounting at Kleeneze that reduced program costs and discounts as a percentage of revenue.
Key takeaways from the reported results – the geo-political issues that negatively impacted Agel in Q1 were not a factor in Q2 and the revenue production rebounded with a 17.2% sequential gain in revenue. Despite the distractions of the Longaberger CEO’s departure during the early part of the quarter, in the back half of the quarter Longaberger’s results rallied significantly and led to the company’s first sequential revenue gain (4% over Q1) in many years. Additionally, the “Your Inspiration at Home” business has continued to grow like wildfire and has now grown 8 fold since it was acquired by CVSL two years ago. In each instance, the thing that is becoming much clearer is that the adjustments made by CVSL with each of these businesses are starting to have a very positive impact on each division’s performance.
The only thing more bullish than the reported numbers for CVSL was the discussion of the company’s performance since the end of Q2. During the Q&A session following management’s prepared remarks, Mr. Rochon was asked if Longaberger’s late Q2 momentum had continued into July to which he replied that the company seems to have regained its confidence and seemed to turn a corner in its revival. Additionally, he stated “…Last month the recruiting at Longaberger was the best in a decade….leading to a stunning revenue result for July”. Additionally, management discussed the excitement building around Agel’s new skin care line that will launch next month. While they were not willing to make any predictions as to sales or revenue impact on Q3, Mr. Rochon called the product “Stunning….takes the best of my work in the 40 years I have been in the industry”.
Thus, we are seeing significant momentum in two of CVSL’s largest divisions, momentum unlike anything seen in the company’s three years of existence. This is occurring at a time when the stock is still trading at an enormous discount to its slower growing peers in the direct sales space and still down about 90% from the levels it was trading at when many of the questions that were answered in this report began to surface. We believe CVSL at $1.63 is an aberration that will be corrected soon and that the days of CVSL trading below $2 per share are numbered.
CVSL filed for an extension that allows an extra five days to file for Q2, This was not a big surprise given the company’s upgrade to national audit firm BDO in the middle of the second quarter. We are expected to see slight contraction from Q1 levels ex-Kleeneze ops due to distractions related to the Longaberger CEO departure and what would have had to be a really difficult April for that business. Additionally, the second largest division (AGEL) has the double whammy of dealing with significant political and economic upheaval in many of its markets and the potential for some slowdown in sales as reps anticipate new incentives with the rollout of the new skin care line in September, which could some sales that might otherwise have been made in Q2 get pushed forward to September (Q3). With Kleeneze, we would not be surprised to see some disruption as new policies and procedures following a merger often causes some distraction that can result in lower revenues. While difficult to quantify, out internal expectations targeted low double-digit percentage decline.
Overall, we are expecting CVSL to report revenues in the $30m range, reflecting a sequential revenue decline in the single digit range. While this might usually be expected to cause a decline in the stock price, we believe that investors who are closely watching the CVSL story unfold will recognize the unique issues that came to a head in Q2 and will expect a challenging top and bottom line picture for the Q. We think the more important thing to watch for in this report is management commentary on Q3 to date and expectations for the remainder of CY2015. While there are obviously going to be some unknowns with a turnaround situation like Longaberger, a new product line with Agel and the many unknowns with the recently acquired Kleeneze ops, anecdotal evidence suggests that we may see some fairly positive commentary that will allow us to adjust our top and bottom line expectations to reflect a turn in CVSL’s fortunes going forward. Regardless, CVSL stock is still significantly undervalued vs. where we expect the stock to trade over the remainder of the year.
An open letter to CVSL’s John Rochon was published yesterday (click here to read it) after the market opened and it will be interesting to see how the company responds. We believe that CVSL management should take advantage of how low the stock has fallen and it is hard to conceive of a way to create better long-term value than by offering a program for their sales reps to become owners (shareholders) of CVSL. Though the Dutch Auction Tender Offer approach mentioned would give us the quickest boost to the $2 range (likely price range given the current trading price), we believe that investing in the sales force through a non-dilutive program to help as many reps as possible become “owners” of the company through stock ownership would be a better long-term investment. We hope that Longaberger, Agel, Kleeneze, Project at Home, Tomboy Tools and other company sales people will join with us in pushing for some kind of stock purchase program that would be available to all sales reps. The sooner this happens, the better because we believe the stock is going to move significantly higher over the remainder of this year when investors see the larger divisions (Longaberger and Agel) start to turn a corner and the opportunity to buy CVSL shares in the $1.50 range may not be around very long.
Speaking of Longaberger, all reports from the home front suggest that the Longaberger convention was a hit with sales reps, old and new. Longaberger CEO John Rochon Jr. indicated when pressed that Longaberger sales are trending better than expected and more importantly, he indicated that the number of new sales reps has grown “exponentially” over the last 60 days. This is a very big deal (particularly coming on the heels of such a long fall in those numbers) because big revenue gains usually come soon after we start to see growth in the number of new sales reps. This is the strongest indicator we have received yet that tells us the Longaberger business has turned a corner and we will begin to see material growth in Q3. We strongly encourage participants in the Groove community to buy as many shares as possible while the stock is still down this low.
For Longaberger, Agel, Kleeneze etc. sales reps, the time is now to let your management team know that you want to own a stake in the company and given that it will take a little time to get one set up, you may want to open an Etrade, Ameritrade, Fidelity, etc. brokerage account and just eat the $8 commission to go ahead and buy CVSL shares. If it takes a few months to get an employee stock purchase program in place, CVSL could be trading at a much higher level by then.
Rave Restaurant Group’s stock continues to swoon in line with the other small cap restaurant stocks in its peer group. Across the board we have seen these stocks fall 20-25 percent from their recent highs, despite posting strong results and all indicators pointing to very strong growth in new stores and good year over year comps at existing locations. Yesterday Rave’s Pie Five division announced another significant development deal for new locations in Branson and Springfield Missouri, Tucson, Arizona and Albuquerque, New Mexico. Here is a link to the full press release (click here).
We continue to believe that fast casual pizza is going to be a big deal and eventually have a footprint very similar to the fast casual Tex-mex chains, which means there are many years of growth ahead for the players that execute well. We also think that there is room for at least two or three chains to stake out a claim in this space and early indications are that Pie Five is going to be one of the big winners. Short sellers have been targeting RAVE for a few months now and they appear to be having their way with the stock as the broader market forces have been working to their advantage. While this broader market and sector weakness may allow for some near term downside, we believe that patient investors who can buy shares when the shorts are pushing it lower (like this week) will benefit tremendously when the market storms pass.