Topic: Daily Advice

Spinoffs, Takeovers and Special Situations Hotline – Friday, April 12, 2019

GAMESTOP CORP., $9.32, symbol GME on New York, is a specialty retailer that sells new and used video games and video game consoles through its 5,800 GameStop, EB Games, and Micromania brick-and-mortar stores in 14 countries. As well, it sells games online through www.Gamestop.com.

In March 2019, activist investors Hestia Capital Partners and Permit Capital Enterprise, who together own 1.3% of GameStop stock, sought changes from the video game retailer, including the appointment of four of their own directors to GameStop’s board.

The activists are also demanding that the company take other steps to improve its performance after GameStop’s attempt to sell itself earlier this year failed. The search for a buyer was part of the company’s strategic review.

As a result of its assessment, GameStop reached a deal in November to sell its Spring Mobile business to Prime Communications LP. That sale of nearly 1,300 wireless phone outlets closed in January 2019, earning the company about $735 million in cash.

As the result of the pressure from Hestia Capital and Permit Capital, on April 1, 2019, GameStop announced that it would add two new independent directors to its 11-member board. That included one of the four proposed by the activist investor. In addition, the company will select another of their proposed directors to fill the other seat on the board.

GameStop has named a new CEO, too. George Sherman previously served as head of Victra, an authorized retailer of Verizon Wireless products and services.

In the three months ended February 2, 2019, GameStop’s overall revenue fell 8.3%, to $3.06 billion from $3.32 billion a year earlier. Sales were lower due to weaker sales of hardware and pre-owned video games. Sales for the year-earlier quarter also benefited from an extra week.

Excluding one-time items, the company earned $163.9 million, or $1.60 a share, in the latest quarter. That’s 20.0% lower than the 205.0 million, or $2.02 a share, it earned a year earlier.

GameStop’s long-term debt of $820.8 million is a high 82.2% of its market cap. However, it holds cash of $1.6 billion.

For the past several years, the company has struggled with declining sales for its core business. That’s because more and more gamers download new titles directly to their consoles, computers and mobile devices. In the process they bypass traditional retail stores. As well, the increasing popularity of playing videogames online has weighed on GameStop’s performance.

The company now needs to decide what to do with its high cash balance. This could include reducing debt, buying back stock or reinvesting in the business. GameStop may also opt to become more actively involved in esports and competitive videogame contests, or try to diversify revenue at its existing stores. Regardless, the company’s growth prospects are limited.

OUR RECOMMENDATION: We don’t recommend shares of GameStop Corp.

GameStop’s recent coverage

RESIDEO TECHNOLOGIES INC., $20.25, symbol REZI on New York, makes residential heating, ventilation and air-conditioning equipment. It also offers security products.

On October 29, 2018, Honeywell (symbol HON on New York) spun-off Resideo to its shareholders. They received one share of Resideo for every six HON shares they held.

On March 28, 2019, the spinoff company announced that it had acquired California-based Buoy Labs, maker of a Wi-Fi enabled solutions to track water use in a home and so identify potential water leaks before they happen. Homeowners subscribe to an app to access the data.

Resideo already has a presence in over 150 million homes, and Buoy Labs will let it add yet another “smart home” product to its existing offerings.

In the three months ended December 31, 2018, the company’s overall revenue rose 4.7%, to $1.3 billion from $1.2 billion a year earlier. Excluding one-time items, it made $38.0 million, or $0.31 a share, in the latest quarter. That was down 61.2% from $98.0 million, or $0.80 a share. However, the decline was due to one-time payments to Honeywell as part of the spinoff. Excluding those payments, earnings rose 4% in the latest quarter.

Resideo shares are down from their peak of $32.55 in October 2018. That’s in part due to the reduced profit in the most recent quarter. Still, the stock now trades at just 10.4 times the likely 2019 earnings of $1.95 a share.

OUR RECOMMENDATION: Resideo is a buy for aggressive investors.

Resideo Technologies’s recent coverage

ZUORA INC. $19.34, symbol ZUO on New York, is a software company that uses its cloud computing platform to manage online subscription services for corporate clients. Essentially, it’s a business set up to help other firms manage their online subscription models.

The California-based company first listed its shares in an IPO at $14 on April 11, 2018.

In 2007, Zuora CEO Tien Tzuo—then the Chief Strategy Officer of Salesforce.com Inc. (symbol CRM on New York)—started the company with two partners. The founders believed the “subscription economy” (they claim to have invented the term) would take hold and represent a big growth area.

Today, Zuora has more than 1,000 customers around the world, including Box, Komatsu, Rogers, Schneider Electric, Xplornet and Zendesk. The company’s growth strategy includes acquiring more customers, generating more revenue from existing customers, and entering new markets.

Revenues has grown from $92.2 million in fiscal 2016 to $235.2 million for 2019 (years end January 31).

Excluding one-time items, in the three months ended January 31, 2019, Zuora lost $11.5 million, or $0.11 a share. That’s worse than the loss of $10.3 million, or $0.34 a share, a year earlier, and reflects higher expenses.

Still, revenue jumped 28.7%, to $64.l million from $49.8 million a year earlier. The company’s subscription services revenue increased 35% during the quarter to $46.7 million. Just by itself, that segment is now contributing almost the same amount as Zuora’s total revenue for the year-earlier quarter.

OUR RECOMMENDATION: Zuora is okay to hold, but only for highly aggressive investors.

Zuora Inc.’s recent coverage

EVINE LIVE INC., $0.47, symbol EVLV on Nasdaq, sells exclusive and name-brand merchandise 24 hours a day to more than 87 million Americans through its 24-hour TV shopping channel.

In March 2019, the company announced that it hired Guggenheim Securities to advise it on all possible strategic alternatives, including a sale of the company.

Early last year, Amazon.com (symbol AMZN on Nasdaq) was reportedly interested in buying Evine. That’s because despite its huge success in e-commerce and streaming media, Amazon thinks Evine can further the company’s growth beyond the Internet by connecting it to shoppers in more traditional ways.

Evine is a distant third in the world of home shopping channels after QVC and the Home Shopping Network. Yet it still has a potentially broad reach: its channel is available in 87 million homes across the U.S., in addition to its website and apps. Its business is also based on selling a range of merchandise, sometimes in partnership with celebrities.

Over the last year, the company has continued to enter into new partnerships and add brands and product lines. These are varied: Serious Skincare, a long-standing beauty brand co-founded by Jennifer Flavin-Stallone; new brands and product lines such as Nutritionary; shoe designer Ron White; and established fashion names like Karl Lagerfeld and Nygard. Evine is also now collaborating with Jane Fonda to develop an exclusive and comprehensive lifestyle brand.

The company also plans to launch a third-party logistics business to maximize the value of its fulfillment centres and provide a new revenue stream.

In the three months ended February 2, 2019, overall revenue fell 18.2%, to $157.6 million from $192.7 million a year earlier. On a comparable 13-week basis, sales were down 11.9%. The decline reflects a 21% drop in merchandise shipped during the quarter—2.4 million orders down from 3.1 million.

The company lost $10.0 million, or $0.15 a share, compared to a profit of $6.4 million, or $0.10 a share a year earlier.

How soon Evine can return to profitability is uncertain. However, it holds appeal to a potential acquirer looking to leverage the broadcaster’s multitude of local pay-TV markets and its existing audience of TV shoppers.

OUR RECOMMENDATION: Evine if okay to hold for highly aggressive investors.

BRICKTOWN BREWERY has filed paperwork with U.S. regulators for an initial public offering (IPO) of common shares. The shares will trade on Nasdaq under the symbol BEER. The company aims to raise $17.3 million.

Oklahoma-based Bricktown is a brewpub and restaurant chain that operate under the Bricktown Brewery and Bricktown Tap House & Kitchen banners.

The original Bricktown Brewery restaurant opened in Oklahoma City in 1992. Offering artisanal pizza, crafted burgers, and beer brewed in-house, it now operates 14 restaurants in Oklahoma, Texas, Arkansas, Kansas, and Missouri.

The company is looking to expand its Bricktown Brewery chain in Oklahoma, Texas, Kansas and Arkansas, as well as other parts of the Southwest, Midwest, Southeast and Mid-South regions of the U.S. As well, it aims to acquire complementary restaurant brands.

Missouri is off that list. Its exclusion points to a significant risk factor for Bricktown and restaurant chains, in general: rising labour costs. On November 6, 2018, Missouri voters approved Proposition B, the $12 Minimum Wage Initiative, which, starting in January 2019, increases the state’s minimum wage by $0.85 per hour each year until it reaches $12. Starting at this year’s $7.85 minimum wage, that hourly rate should reach $12 by 2023.

Regardless of increased labour costs, Bricktown believes that its exclusive beers and hand-crafted food focused on quality give it a unique competitive advantage.

However, the restaurant industry, including the casual dining segment is highly competitive. Many of the restaurants with which Bricktown competes are owned and operated by regional and national chains, many of which have greater resources. They include Chili’s, Applebee’s, TGIF and Buffalo Wild Wings.

OUR RECOMMENDATION: We don’t recommend participating in the Bricktown Brewery IPO.

Our next Hotline will go out on Thursday, April 18, 2019.

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