CVSL Q2 Report Blows Away Estimates & Q3 Looking Strong
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.
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