ATER: Righting the Aterian Ship
NASDAQ:ATER
Aterian (NASDAQ:ATER) has had a rocky few years as its e-commerce business first boomed and then was devastated by the inability to get its products from China during the pandemic without paying historically high shipping rates. This was combined with supply chain problems causing inventory gaps. It then had to sell through products bearing the very high cost of sales from these issues. After disappointing investors with poor performance and unmet goals, senior management was changed in mid-2023 and the company is more aggressively taking steps to increase contribution margins and keep costs in line with revenues. In the past two years, it wrote down goodwill and intangibles, and last year, it reduced its headcount by 30%. High-priced inventory has almost entirely sold through and margins should improve. The company is now in the process of streamlining operations by reducing seller accounts to one per brand and cutting unprofitable or low-profit SKUs. Plans are to cut the company's SKUs to 1,700, a reduction of 50% with completion expected by the end of Q1 2024. While it is still a show-me stock, Aterian management is moving closer to righting the ship.
Aterian, founded in New York City, is primarily an Amazon seller that has a diverse product line consisting of consumer brands for the home. The company is working to broaden its distribution to reduce its dependency on Amazon and reach more consumers. No product contributes more than 10% of sales on an annual basis but in certain quarters a product may go over 10%. The products it sells are perennial types that sell year after year with few updates needed. Its better-known brands are Squatty Potty, Mueller Living (kitchen appliances and accessories), and its hOmelabs (dehumidifiers, air conditioners, and other home appliances). It also sells liquid scents under its Healing Solutions brand, PurSteam steam appliances, and Photo Paper Direct branded photo paper and iron-on transfer paper for fabrics. It sources most of its products from China which arrives in the US on the West Coast. It was greatly affected by shipping rates during the pandemic. Supply chain disruptions and new China tariffs also added to profit woes. In the long run, management hopes to source new products in other geographies to minimize dependence on China. Moving into 2024, these disruptions are now in the rearview mirror and the company is working to regain profitability.
In 2023 analysts believe that the company generated approximately $140 million in revenues, and they forecast $110 million in revenue for 2024 as the company rationalizes its SKUs by eliminating money-losing and low-margin items. This effort should raise margins and decrease losses despite lower revenues. With fixed costs at approximately $20 million in 2024, management is hopeful it can move its contribution margin back to 15% resulting in an annual run rate loss of only $3.5 million--- a huge improvement from a non-GAAP loss of $43 million in 2023. With some organic growth and the potential for opportunistic acquisitions, management hopes to be in the black in 2025.
With a current market value of $39 million and an enterprise value of $26 million, Aterian is priced well below its e-commerce peers at 0.2 times EV to projected 2024 sales. There is currently only one analyst price target out and it is $1.00 based on 0.7 times EV to that analyst’s 2024 estimated sales.
Aterian’s Brands
Management has been working to optimize profits and reduce SKUs and going forward the company will have the six brands as described below. One current brand that is being phased out is Vremi, which sells many different home and kitchen items such as dehumidifiers, small refrigerators, and ice makers as well as lower-priced items like storage containers, measuring cups, colanders, and ice cube trays. That is expected to be done by the end of Q1. Aterian sometimes has multiple brands in the same product category to gain market share and drive additional profits. Aterian has used robust software to manage its business which results in high revenue per employee. The software automates labor-intensive tasks like competitive pricing surveys in real-time and examining buyer reviews to glean the pros and cons of various products.
Squatty Potty
While some brands account for more than 10% of sales, no single SKU accounts for more than 10% of total revenues. The most well-known and highest-margin brand Aterian sells is Squatty Potty, which it purchased in 2021. It has approximately 27 SKUs for sale on Amazon ranging in price from $13.23 wet wipes to a $89.99 Carrera marble Squatty Potty. Squatty Potty appeared on Shark Tank in 2013 and since then has sold over eight million units. Despite patents, the company has many competitors copying and selling the product at lower prices making profits lower than they should be.
Aterian announced in November that Walmart has relaunched the sale of Squatty Potty and now stocks the folding stool version ($24.99) in its physical stores. Eighteen other Squatty Potty stools are also available from Walmart.com. Squatty Potty products can also be bought from CVS and many other stores online including Wayfair, Target, and Ace Hardware.
Mueller Home
This brand represents a variety of small home appliances and kitchen gadgets including toasters, coffee machines, mixers, vegetable slicers, and spiralizers. Prices begin at $8 for a vegetable peeler. Here is shown the Mueller Ultra Glass Kettle for sale for $29.97.
hOmelabs
HOmelabs brand sells the biggest ticket items including window air conditioners. Anticipating a new tariff on beverage coolers starting on January 1st, 2024, the company bought inventory in Q3 2023 rather than later in 2024 closer when hotter weather arrives. hOmelabs also sells many of the same products as Vremi such as small refrigerators, ice makers, wine chillers, dehumidifiers, and air purifiers. Prices can reach over $600 for a commercial-grade dehumidifier. Its hOmeLabs Beverage Refrigerator and Cooler - 120 Can Mini Fridge with Glass Door for $299 is a Best Seller in Display Refrigerators on Amazon and it sells over 1,000 units a month.
PurSteam
PurSteam sells steam irons, garment steamers, floor steamers, and even a humidifier. Its product prices begin at a $20 handheld garment steamer.
Healing Solutions
This brand sells liquid essential oils. It has the largest number of SKUs due to various scents and sizes as well as delivery by dropper, spray, roll-on, or just in a bottle. This is the closest the company has to a product with recurring revenues and some of these products are offered with subscribe and save such as the Health Shield Blend and the Good Sleep Blend. In addition to the more pedestrian lavender, peppermint, and eucalyptus oils, this is the place to find out what frankincense and myrrh smell like. They are available separately as well as in a Biblical gift set (priced at $24.99.)
Photo Paper Direct
Photo Paper Direct sells photo paper, iron-on transfer paper for fabrics, vinyl self-adhesive sticker paper, printable greeting cards, matte brochure paper, printable magnetic sheets, and transparency film. It also has some products available for Subscribe and Save. Photo Paper Direct was also bought by Aterian in 2021.
What’s Next?
Aterian continues to hone its methods to maximize profits and improve margins. Investors will be watching carefully to see if it makes progress in this effort and how quickly. The company believes that it is fully funded to reach profitability. It ended the September quarter with $28 million in cash though management has stated that they used cash in the fourth quarter of 2023 to increase inventories to avoid a coming tariff. It is however expected to stay on the lookout for synergistic and opportunistic acquisitions. It believes there are several struggling overleveraged roll-up ecommerce companies that could be available at distressed prices. Near-term look for the company to improve contribution margin and cut SKUs. Also, keep an eye on shipping rates as recent pirate activity seems to have taken up prices recently as global traffic reroutes around them. With such a low valuation Aterian stock is worth taking a look at, but many are waiting to see the company begin to start beating forecasted expectations.
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