Vente-Unique.Com: Rusty Growth Stock?

Vente-Unique is a French pure-play e-commerce furniture retailer, and seemingly a busted IPO after having been listed last spring:

The company has good long-term growth and profitability track record, ~8x revenues in last 9 years:

(Note: The data refers to the control shareholder CAFOM’s e-commerce segment, which is mostly, but not all, Vente-Unique. I think it’s a good proxy for Vente-Uniques long-term growth record.)

Subsequent to the drop in stock price, the valuation seems pretty interesting for a growth stock in “hot” e-commerce industry:

(Source: 4-traders 8.9.2018)

Just for comparison, Verkkokauppa.com, a Finnish electronics retailer focused mainly on e-commerce, has similar long-term growth rates but much higher multiples, despite it too hitting some problems recently (and which doesn’t look too expensive either):

On the surface, last Q3 press release shows that the Vente-Unique’s revenue grew 15 % in first nine month of this fiscal year, making me wonder the reason behind the stock price reaction:

The reason might be revealed if one clip and glues from recent filings what the growth has been quarter by quarter:

There is some worrying sings of slowing growth, especially in France and in “Europe du Nord et de l’Est” i.e. Germany, Austria, Belgium, Luxembourg, Netherlands and Switzerland.

Management seems to think that the slow growth at least in France is in their control, per Q1’18 comments (and repeated in little bit different form in Q2 and Q3 reports):

“In France, one of the most mature markets, growth stands at + 6%, in line with the objectives of the Group before the scheduled enrichment of the decorations offer and the extension of the warehouse” (Source: Q1’18 press release with Google translate, underlining mine)

Firstly, the managements’ sentence indicates that, given the lack of extended warehouse capacity and the lack of presence in the decoration product category, they think that the growth has been OK.

Secondly, the sentence also indicates that the logistical and product category problems are being solved (by the extension of warehouse and by expanding to the new product category).

Thirdly, the sentence indicates that management expects faster growth once the problems have been solved.

More worrying sign, actually, than the one quarter slow down, is two-fold:

1) Growth in France has been lackluster for last three years (4-5 %)

2) Per country revenue in the Europe du Nord et de l’Est segment is about 4 MEUR vs. the 52 MEUR in France, despite being most of the market for many years.

Why is Vente-Unique not growing faster in France and the other “mature” markets are still so small? Bad product, logistical problems or lack of presence in the mentioned decoration category?

Slow growth in growing market is always worrying but from valuation point of view, how much weight should be given to it given that there are new markets being opened constantly, thus making the headline figures grow impressively?

For the growth in the new markets will bring revenues and earnings just like growth in the existing market would, euros from both are equally valuable for shareholders. The point is are there euros coming in, not so much from what part of the map are they coming in.

Vente-Unique has recently opened in Portugal and Italy and will open in Poland by end of this year. They will open new logistics center somewhere in Eastern Europe next year, which will allow shorter and faster access to more new markets. From simple map analysis Czechs, Slovakia, Slovenia, Hungary etc. would make sense:

Remember, once the logistics have been figured out, new markets for Vente-Unique seem to mean translating the website and outsourcing call center for local customer service. The business model scales.

They might not become the market leader in any market with the strategy but they might capture some share in every market, which is enough for the revenue and profits to grow. At least history indicates so.

More over, if the management’s comment are to be believed, the new logistics centers will allow broader product offering and better and faster service to some of the existing market, which might ease up the worries regarding the sluggish growth in France and other “mature” markets.

Summary

1. Vente-Unique Operates in a “hot” e-commerce sector

2. It has low valuation multiple (some 6xEBITDA19E per 4-traders)

3. It has high headline growth numbers (15% for first nine months of current fiscal year).

4. It has growth problems in markets where it has been present longer

5. It’s opening new logistics centers and expanding to decoration category to improve service and boost growth in the existing markets and to open new markets

6. It has scalable asset light business model (read: website and leased warehouses) so it’s possible to grow profitably by winning small market share in many markets without being dominant in any of the markets

7. Vente-Unique has good long-term growth track record and the market is still providing nice tailwind to that to continue

8. The current valuation doesn’t imply that it would have to grow at the historical 25 % CAGR to lead to satisfactory result. It might have to able to do 10-15 %, which is what the latest trends indicate.

9. Basically the bet would be that they haven’t hit the wall just yet and thus that the 6xEBITDA19E valuation is wrong.

10. I don’t have any “real” growth stocks in my portfolio so Vente-Unique is playing that role in my portfolio. It’s a bit rusty growth stock but still a growth stock.

Disclosure: Currently long Vente-Unique with 3% “starter” position and thinking what to do, make a deep dive to determine cause for the sluggish growth in mature markets or simply demand higher margin of safety before committing more

ps. There is potential problem lurking in the cost side.

Vente-Unique is majority owned by CAFOM (one of my core holdings), with whom Vente-Unique has shared logistics, purchasing and financial administration functions based on contracts between the companies.

The listing prospectus highlights that if the contracts would for some reason end (for example CAFOM loses the majority position or chooses to do so) there is a risk that they couldn’t be replaced with same cost as they are currently.

Meaning, that the contracts might not have been negotiated on “arm’s-length” basis and thus that the historical and current good profitability is not necessarily indicative of what it would have been and would be with “market level” cost basis.

Thus, Vente-Unique might could be subsidided by CAFOM, which might or might not continue indefinitely.

That’s just me speculating but potential risk anyways (as per highlighted in the prospectus), but somehow I tend to think that the risk is small.

ps2. I wrote the article based on 4-traders estimates. I have also stress tested them with my own model and get to same EBITDA in 2020 as the 4-traders in 2019 (sourced from Thomson-Reuters) and I think the conclusions doesn’t change materially, the multiples look cheap if the growth continues.

Note also that France corporate tax rates will drop from 33 % to 25 % in coming years so P/EBT multiple is the more comparable and relevant multiple here.