9.2.2020 Investment Journal: Vente-Unique update

Vente-Unique is a rusty growth company that has been one of my genius stock picks, currently clocking -50 %, give or take, from my purchase price. I was down even more during last year so I have been fighting with some negative reinforcement here for a while.

At the time of the original writeup, I got into growth stock fever and have subsequently paid dearly of it, and now admit that the purchase price at the time was at most fair as I wasn’t adjusting earnings for some potential deficiencies in the stock properly (see further “independence adjustment”).

But past actions do not matter whether I should buy or sell today, so how do I see the stock currently?

As a reminder, Vente-Unique is online-only furniture retailer in Europe. It doesn’t have a “platform” and it’s nothing like Amazon. It’s real simple operation; they have a website in multiple countries in Europe and a warehouse in France, and they sell cheap.

It looks like lean old-school merchandising operation; they use e-mail and online marketing, utilizes marketplaces to get site traffic, doesn’t give free shipping, and brag about being the only listed profitable and growing online-only furniture retailer in Europe (veiled greetings for the VC friends).

The strategy isn’t very elegant, but it seems to be working. In 2008 revenues were ~10 MEUR and in fiscal 2019 about 96,5 MEUR. This with unchanged strategy and being profitable every year.

Last year revenue growth was 11 %, eighth year in a row with double digit growth, with 5,4 % operating margin. First quarter revenue growth was again double digit and they just finished project that doubled warehouse capacity to absorb growth (in existing markets, in new markets and in new categories).

Current market cap is 43 MEUR and net cash 8 MEUR, so the enterprise goes for 35 MEUR or 6,7x trailing EBIT and 5,6x forward EBIT (assuming current EBIT margin and 10%ish growth). This looks cheap.

Moreover, the parent company, CAFOM, is in small financial trouble so I expect the big cash position distributed to shareholders in coming years, not mold in the Company’s coffers (company indicates strong dividend capacity).

One worry that I have is that Vente-Unique uses some shared resources with the parent company, so as fully independent operator the cost could be higher.

If we add 1 MEUR to the operating cost as “independence” adjustment, trailing EV/EBIT is 8,4x and forward EV/EBIT 6,9x. Not bad given the growth but not obviously cheap either, as I have some questions of the competitive strength of the simple business model.

The stock could still be considered cheap if the future dividend is strong and the growth continues (of which management seems to be optimistic as indicated by the doubled warehouse capacity), even with the independence adjustment included.

For say with the historical 10% CAGR to sub 150 MEUR revenue by 2024 with current EBITDA margins would command almost 85 MEUR valuation with 10x independence adjusted EBIT+modelled net cash. With the modelled dividends and the exit value, potential returns would be 20 %+ IRR.

That would be underestimation in case the indenpence adjustment is completely unnecessary, which is also possible (usually related party transactions should be done “arms-length”).

Then again, growth might not continue, and necessary independence adjustment might be even higher than the 1 MEUR I indicated. In this case the current stock price wouldn’t be that cheap but more on the fair side, or even expensive if the business starts to deteriorate.

So, with stock up about 50 % from the bottom, where it was obviously cheap, I’m little undecided what to do now. There are pros and cons, potential very good outcomes and potential for bad outcomes.

But with lack of super good new ideas currently, I prefer this over cash and say SP500, but the situation might change.

Disclosure: Long with 3% but slight bias toward selling

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