Archive for November, 2015
We have been made aware of a massive short position taken in CVSL shares over the last few weeks, a position of over 2.4 million shares that includes a single institutional bet of 2.1 million shares + the reported CVSL retail short interest per WSJ (a CVSL record in itself) of 316,734 shares. We find this remarkable in many respects, but the most obvious would be that this position would take 33 trading days to cover if the average trading volume of 73,000 shares per day continues and 100% of the volume is short covering. If that 33 days started today, the buying necessary to cover that position would take until January 15, IF 100% OF THE VOLUME TRADED OVER THAT 33 DAYS WERE BUY TO COVER TRANSACTIONS . That is not possible and what is more likely is that the buying will now include not just value investors who recognize CVSL as mispriced, but traders who will see a short position that is such a huge percentage of the available public float for a company whose management controls over 65% of the shares outstanding. Given the time frame over which this short position has developed, we can not construct a scenario where the price at which the position could have been established would be higher than the $1.50 range. We continue to believe that CVSL trading below $2 is an aberration and we now understand why it actually traded lower after reporting a Q3 that should have pushed the shares much higher.
We view the emergence of this short position as a stunning development, as it would be impossible for this short position to be covered before Q4 is over if normal trading volumes persist. Recent management commentary, channel checks and anecdotal evidence from multiple sources suggest to us what we had already suspected based on the third quarter’s momentum and the general seasonality of CVSL’s businesses – that CVSL is having a great quarter, tracking to report record revenue that we expect to be up 25% or more SEQUENTIALLY over Q3 and possibly the first profitable quarter in its history for Q4. With only 22 full trading days plus two partial trading days until the end of the year, CVSL could conceivably report that record revenue quarter before this short position could be covered. We can not conceive of a more bullish scenario for CVSL shares.
A quick update on two of our focus stocks –
CVSL reported Q3 earnings last week with revenue that topped our expectations, but a bottom line loss that was a little on the light side. Revenue for the quarter was approximately $37.0 million, up from approximately $24.0 million in the third quarter last year, an increase of 54.0%. Gross profit margin increased from 54.4% to 59.8%, but the company still reported a bottom line that was less than expected with a loss of 23 cents per share.
The situation at Longaberger continued to improve and this plus consistent results from Kleeneeze allowed the Home Decor segment to fare well quarter over quarter and show very strong year over year revenue growth.
Health and Wellness
AGEL and the Health and Wellness segment struggled in Q3, with revenue coming in 4% below Q3 2014, but we note that AGEL launched two very promising products at the very end of Q3. The timing was such only the week or so of sales following the launch would be included with Q3 results and early indications suggest both Caspi and Bio will be much more significant contributors in Q4.
Gourmet Food Products
Your Inspiration at Home continued its impressive growth trajectory, clocking in with sequential growth of over 30% and gross profit growth of over 15%. If YIAH can continue to grow at this rate, it will be one of the largest companies in the CVSL portfolio within a year.
In summary, CVSL’s results continued to show sequential improvement, with Q3 essentially proving that Q2’s bounce from the very challenging Q1 was not an aberration. Management’s turnaround efforts are demonstrably working and we are encouraged by the progress made thus far.
Remark Media –
Remark Media filed a form NT 10-Q to indicate their inability to file quarterly financials by the deadline, but we are expecting to see a filing by early next week. Though there are obviously many potential catalysts that could drive MARK shares higher, we remain cautious due to the enormity of the changes that will be reflected on the company’s balance sheet and income statement starting this quarter. While we recognize that the Vegas.com acquisition/merger will transform Remark’s income statement and balance sheet, we note that Remark is essentially a different company following this merger and we need to get a level of comfort with the new operations, capital structure, etc. before we could be more bullish again.
Dear Rave Management and Board of Directors,
On the eve of the Rave Restaurant Group annual meeting we wanted to offer up a few ideas for your consideration –
1) If you love Pie Five like we do, set it free. IPO style.
Sell a small slice of Pie Five to investors who will be hungry for more. RAVE stock should never be sold for less than the price of a Pie Five Pizza ($6.99), plus we think it goes without saying that investors would be all over a shot at owning the first pure publicly traded pure play in the fast casual pizza space. So drop the ATM offering and lever up for a few months until you can get the S-1 filed. We suspect you are already thinking about parting with part of Pie Five, we just think investors should be given a clear time line for when you expect this process to start. Can you let us know what you are thinking? #FreePieFive
2) Please consider having an open conference call each quarter when you report earnings.
If we are going to be in the “circle of crust”, we need to be able to communicate openly about things (like IPO timelines). #CanWeTalk
3) Please consider getting a Pie Five promotional deal with Stephen Curry.
It has occurred to us that it would be really cool if the best fast casual pizza chain in the world could pair up with the greatest basketball player in the world. #StephRules #SorryLJ
Thanks in advance for your consideration,
Rave Restaurant Group reported first quarter earnings that were surprisingly good given the market action in the days and weeks leading up to its release. Despite the kind of market action (down 40% in the few weeks prior to report) that typically presages a reporting disaster, Rave reported in line with our expectations (but one cent below the lone analyst covering RAVE) generating a loss of five cents per share on revenue of $14.5 million (in line with both projections). Highlights included top line growth of 28% over the prior year despite sluggish results from the 240+ store Pizza Inn chain, Pie Five revenue growth of 163% over the same quarter last year, a good same store sales gain at Pie Five despite a very difficult year over year comparison and a record 14 new Pie Five restaurants were opened during the quarter.
We were pleasantly surprised to see the Pie Five chain’s same store sales increase 1.5% over the prior year, which we viewed as very positive considering the high hurdle set for that metric this year due to the prior year’s 17% same store sales growth in Q1 and significant noise in this year’s number that many seem to be overlooking. Management’s commentary in the release mentioning “slightly negative” same store sales comps for the current quarter to date also seems to have caused investors to take a negative view of Pie Five’s performance and seemingly miss what is driving that lower figure, as the current quarter is also going up against a very tough prior year comparison (16.9% same store sales gain last year). More importantly, we think that most have missed the fact that the same store sales base for Pie Five includes only those restaurants that have been open for 18 months, which is less than 1/3 of the Pie Five stores that are currently in operation. The vast majority of Pie Fives that have been open for 18 months are located in the Dallas – Fort Worth metroplex where several new Pie Fives were opened during the quarter. These new restaurants are very helpful to the total system sales figures, but they likely pulled sales away from the older stores in the area, cannibalization that would directly impact the same store sales number in a negative way because the shiny new restaurant’s sales are not included in the same store sales measure. Thus, we believe that investors who are reading the same store sales figure for Pie Five in the reported and current quarter as being indicative of a lessening of consumer’s affinity for Pie Five are not realizing what a small portion of the Pie Five chain that number represents and also missing the fact that the numbers were materially lower because of the cannibalization caused by new store openings in that area.
Rave Restaurant Group’s loss from continuing operations was $520,000 for the quarter, but we note that this included $400,000 of pre-opening expenses (POE) due to the opening of 14 new Pie Five restaurants during the period. Ex-POE Rave would have had a loss of only $120k for the period, despite the fact that the company experienced the highest quarterly new restaurant unit growth in its history and despite the fact that the company has been spending heavily (General & Administrative expenses up 40%+) to build out the infrastructure to properly support the rapidly growing Pie Five chain. We are pleased with management’s ability to deliver what we believe to be good results at its existing restaurants while also executing on its aggressive growth plan. Additionally, management’s discipline in raising capital for this expansion has been impressive as they have judiciously sold only enough stock as necessary to fund this growth, as evidenced by their sale of only 58,300 shares in the reported quarter at an average price ($13.36 per share) more than double the current trading price. We note that management did not continue to sell shares when the stock started falling below $12 and they clearly noted that existing cash on hand would be sufficient for operating and capex needs for the next 12 months, so we believe the possibility of additional dilution at current levels is practically zero.
As we have noted previously, the short interest in RAVE shares has been increasing significantly over the last few months. We have reviewed the trading in the days leading up to and following this quarterly report and it has been characterized by trades that shrewdly and efficiently push the price lower. As of this writing, the seemingly coordinated effort to push the shares lower had succeeded in pushing RAVE shares to a new 52 week low below $6, which values the entire enterprise in the $65 million range. We believe this represents less than half of what Pie Five would command in a private equity transaction with its current 75 restaurants open and we note that the Pizza Inn chain of 240+ restaurants still has significant value as well. At this price, we believe that even the shorts who have targeted RAVE will soon start to turn and go long, as the easy money to be made in such trading will be to the upside. We strongly recommend that investors who do not not already have a position in RAVE should do so now, even if you have to sell other stocks to do so, as the opportunity to buy in to the only publicly traded fast casual pizza stock at these levels will not last long.
An article was published last week entitled “Rave Restaurant Group: Deep Analysis Of Supply Chain Reveals A Rotten Apple”, a title which would lead us to believe that there are some kind of Valeant Pharmaceuticals (NYSE: VRX) type shenanigans going on with Rave’s (Nasdaq: RAVE) supply chain or some other aspect of the company’s operations. Rave’s stock has fallen close to 15% in the trading sessions since the article was published, adding to what had already been a very severe selloff in the shares that had fallen nearly 40% over the last two months ($11.15 on Sept. 9 to as low as $6.85 on November 9). However, the article itself revealed no such rotten apple and the author’s faulty due diligence process apparently failed to “uncover” Pie Five’s expansion from 54 stores open to 74 over the last few months.
The entire gist of the article is that the author can not comprehend why the company’s cost of sales is as high as it has reported. In the article, he includes the statements from Rave’s most recent 10K that directly explains the specific components of cost of sales. He still has trouble understanding why the cost of sales would increase so much over prior periods despite admitting that Rave repeatedly gives us “… the fact that it added so many stores this year.” It seems the author believes there may be some other reason, perhaps something nefarious – the “rotten apple” indicated in the title of the article, but there is no mention of anything like a rotten apple in the body of the article or anything negative at all except that the author simply cannot fathom why cost of sales for RAVE would have increased so much.
The simple reason that the cost of sales increased much more than the author would expect given his review of the company’s financials is that his expectations were apparently not impacted by a due diligence process that included considerations of the new restaurants that would be opening in the days weeks and months after the end of the last reported quarter and/or he fails to comprehend that store openings require considerable expenditures in the months, weeks and days before a new restaurant opens and begins generating revenue. We presume this to be true because the author gives the number of open Pie Five restaurants to be 54 and he appears to be completely unaware that the number of operating Pie Five restaurants was actually 74 when his article was published. This glaring error explains much and it appears that RAVE stock has been selling off due to an article that drew negative conclusions simply because of a failure in the due diligence process of the author.
Pre-opening expenses for a new Pie Five restaurant include licensing, permitting, design, construction, marketing, staff training, etc. that are incurred BEFORE the restaurant actually opens and begins generating revenue. Most of these costs are one time expenses associated with entering new markets as RAVE did in the months that made up the quarterly filing the author pulled financial data from, a period that included expanding from three markets with corporate owned restaurants to seven as the company entered Arizona, Atlanta, Chicago, and Minnesota. Investors should realize that Pie Five’s open restaurant count has increased by close to 50% over the number the author lists as the open store count and that there are many more to open in the days and weeks ahead. The company appears to be accelerating its growth due to the success of the restaurants it has already opened (with 10 new company owned restaurants in Chicago, Minnesota and Atlanta) and while these additional expenses may have increased RAVE’s last reported quarterly cost of sales, that will result in a significant increase in revenue in future reported quarters and eventually this pushes the company closer to the scale needed for profitability. This is a very positive thing for long-term shareholders and while it may have depressed the June quarter’s earnings for RAVE, we believe the new corporate markets will benefit tremendously from the synergy of having multiple stores in each of these larger markets and this will cause the top and bottom lines to be impacted very big positive way starting with the current quarter.
The bottom line for investors is this – RAVE’s stock has been taken down by an article that drew negative conclusions about the direction of the company due to faulty due diligence. The stock has now fallen over 40% over a short period that has also seen the number of shares sold short increase to near record levels and that short interest is up over 10% in the last two weeks alone. Just under half a million shares are now sold short and at yesterday’s trading volume (25,517 shares traded), it would take 19 days where 100% of the trades represent short covering for the entire position to be covered. This is a very big deal for such a thinly traded stock and it means that any downside is limited by that pent-up buying interest and any positive company or industry news could spark short covering that would push the stock up very quickly in a very short period of time. Many commentators believe that RAVE has been targeted by short sellers because it’s thinly traded stock allows speculators to push the price down rather easily, but that also works going back in the other direction as well and we would not be surprised to start seeing short term traders taking a hard look at Rave on the long side. Regardless whether that transpires, we believe the current situation represents a tremendous opportunity for investors, as we believe that RAVE shares are dramatically oversold (RSI below 30 last four trading days) and ripe for a strong double-digit percentage move to the upside in the near term with the possibility of 100%+ gains over the next 12 months with significantly more if either Pie Five or Blaze Pizza files an S-1 in preparation for an IPO.