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Cash-Rich Market Ignores Restructuring Opportunity in CafePress

- By shadowstock

CafePress Inc. (PRSS) sells customized t-shirts, clothing, bags, drinkware, stationary, cases, home accessories, hobby and related items. Competition exists in this fragmented industry. More direct competitors are privately held Zazzle, Society6 and online Australian retailer Redbubble.


Curious about the business of CafePress? Watch this interesting video.

CafePress is an illiquid tiny company and may not be suitable for many investors. Further, operations are still a work in progress. Its two-and-a-half year turnaround plan, however, became obvious during fiscal 2016. Particularly in fourth-quarter 2016, the business stabilized, generating free cash flow. But the market continues to ignore tangible turnaround wins, although it has not gone unnoticed by guru micro-cap value investor Lloyd Miller. He recently added to his 18% stake on April 13 along with his heavy insider buying during 2016.The company's two founders, who are now CEO and chief markeing officer, recognized improvements by adding to their existing large insider ownership during 2016.

In August 2014, co-founder and former CEO Fred Durham returned as CEO along with Maheesh Jain (co-founder and prior executive) as chief marketing officer. Durham promised transparency throughout the turnaround process. This included an assurance to reduce expenses with a laser focus on the increase of shareholder value. With significant skin in the game, Durham and Jain are two of the biggest shareholders and have a strong incentive to align with investors. They now own 15% and 12%, respectively, with multiple insider purchases during 2016.

Part one of the three-part turnaround plan requires the heaviest lifting before maximizing parts two and three. Part one is business stabilization. This means doing more with less by eliminating unnecessary complexity that has over time diluted and then destroyed the company's value. The prior CEO's drive for growth is the most troubling ingredient that destroyed the stock price. The business focus became diluted and the customer experience suffered. Over time, they discovered managing a large group of brands had become counterproductive, so they set a goal to streamline operations, enhance the balance sheet and unlock value by selling the non-core strategic assets. The long-term growth strategy is the more efficient and profitable realization of a higher portion of repeatable sales.

These are some of the tangible results achieved over their tenure to stabilize and improve the business.

  • Closed the experimental Louisville, Kentucky retail store.
  • Sold its stationery business (InvitationBox.com).
  • Arts and Groups properties sold for $40 million in cash.



An important valuation comment is the 2015 Art and Group sale. It represents 20% of total CafePress revenue sold during 2015. The most encouraging fact of the sale is it sold for an EV/Sales ratio of around 1.50 versus the current EV/Sales ratio of 0.05. I calculated the Arts and Group valuation based on the final $40 million cash sale stated by management and financial data in the press release.

"The Art business represented approximately 20% of CafePress's total revenues in 2014." The company's total sales for 2014 was $132.10 million, hence 20% of sales equals $26.42 million for the Art Group. Management stated the sale settled for around $40 million in cash, so the EV/Sales valuation for the Art Group was 40 million divided by 26.42 million to equal 1.51 EV/Sales valuation or near this figure. Again, the current market value for CafePress' EV/Sales ratio is 0.05 versus Art's sale valuation of ~1.51.

The above mentioned asset sales are a key for stabilizing and moving the business forward.

Furthermore, a reduced number of production facilities enables engineers to focus on CafePress to improve quality and efficiency. Fewer websites means developers can focus on enhancing the customer experience and conversion on CafePress. Fewer marketing systems concentrates the focus on improving marketing efficiency and customer transactions.

An external consulting firm was used to do an extensive audit of margins, customer satisfaction, site conversion and volume. The discovered results now guide improvements in efficiency, merchandising, pricing and customer experience. Additionally, a review of over 600 products by starting at the bottom 10% in terms of sales, margin and quality were removed and discontinued on their site.

After the asset divestiture, engineering efforts can focus on improving mobile and social technology. The company is constantly looking to leverage technology progress that can cut friction and conversion. These technology improvement efforts will improve the customers' experience. Overall, meaningful opportunities exist to drive an improved CafePress as its mobile channel matures and gains scale.

Lets continue reviewing the turnaround plan. Durham commented an improved customer experience is an important personal area of focus. He promised to drive the team on the consumer side of quality and encourage a world-class customer experience. Customer service now reports directly to Durham.

The tables below show quarterly and annual financial results. This underscores CafePress' deep asset value discount to its current market price, coupled with stabilizing and improving 2016 financial results.

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Only insider buying from 2015 to April 13:

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Valuation

The company has a market cap of $48.10 million, an enterprise value of $4.66 million, a price-book (P/B) ratio of 1.08 and an EV/Sales ratio of 0.05. Year over year quarterly revenue growth is 6.06%, total cash equals $43.79 million and cash per share is $2.63. The 52-week high is $3.82 and the 52-week low is $2.78. It has 16.64 million shares outstanding, of which 7.94 million is float. Of it shares, 46.33% is held by insiders and 22.10% is held by institutions.

Opportunities

It is trading at a deep discount to its historical and relative valuation. To repeat the above comment, Arts and Groups properties sold during February 2015 had an EV/Sales valuation sale price of around 1.50. This compares favorably to CafePress' current EV/Sale value of 0.05.

The stock is too cheap to ignore. Its April 13 closing price of $2.85 and an enterprise value per share of 33 cents versus cash per share of $2.62, no debt, trailing 12-month gross profit per share of $2.51 and net cash per share of $1.52.

Large federal and state operating loss carries forward to reduce future taxable income: $25.2 million of federal and $19.0 million for the state.

The original founders came back to turn the company around with skin in the game.Their combined ownership is over 25%. They have continued insider buying since their 2014 rearrival.

Successful small-cap activist Lloyd Miller cannot get enough shares. He holds 18% of total oustanding shares with additional buys reported on April 13.

With major turnaround activities completed, fiscal 2016 showed tangible signs of improvement. Revenue growth improved each quarter, from -23% in the first quarter to 7.5% in the fourth quarter. The company reported positive cash flow from operating activities during the third and fouth quarters of 2016 and positive free cash flow in the fourth quarter.

Mean reverting price attributes with 52-week market price change of -23%, a -64% drop in the enterprise value from 2014 value of $15.37 million to $5.54 million on April 13.

An aggressive share buyback program ended 2013 with 17.17 million shares outstanding versus the most recent quarter reduced balance of 16.66 million shares.

The company has three new industry-proven board members. Ken McBride, the CEO of Stamps.com, "played a crucial role in the company's turnaround and has since lead it through steady improvements to impressive success." Nick Swinmurn, the founder of Zappos, is "a pioneer in consumer e-commerce and brings valuable consumer centric experience and creativity to the company." Tony Allen is the CFO of Sypris Solutions and brings extensive financial experience and expertise to the board.

Further opportunities lie in PRSS being acquired, going private or a special cash dividend based on the $2.62 per share in cash. Activist investor Miller has a history of forcing special dividends. These are all highly probabilistic, but ignored by the market.

Risk

Lacks a strong moat.

Illiquid nano-cap deters institutional ownership and lacks strong Wall Street coverage.

Closely held with 46% held by insiders.

May be unable to generate sustainable consistent profits and could be adversely impacted by competition.

Disclosure: Long CafePress

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This article first appeared on GuruFocus.