rayfinkle Posted September 13, 2014 Share Posted September 13, 2014 Geeknet operates a niche online retailer--thinkgeek.com. It's core business is selling nerdy paraphernalia to folks who buy that type of stuff. Think a "Starship Enterprise" themed pizza slicer, etc. Products are generally developed through in-house R&D. My first diligence question for an investment is normally: "can Amazon kill this?" On this dimension GKNT isn't bulletproof, but the small market, niche, and "proprietary" (read: internally developed) nature of their product suggests the product is not a pure commodity. To be real--the IP here is light. The flat-ish (historically core) web retail business is rapidly being balanced by a higher margin, high growth, wholesale business. The company has demonstrated operating leverage (G&A hasn't grown proportionally with sales)--though recent changes in facebook advertising mechanisms have caused them to increase marketing spend (realizing no additional volumes). In recent quarter web conversion started to tick up. Continued growth in the wholesale channel, paired with the likely scenario where online retail "treads water" will have GKNT printing positive earnings. More, roughly 70% (6.70$ cash / $9.50 share price) is cash on the balance sheet. Zero debt means there's time to wait for a rebound. The business is highly seasonal. 4Q will make or break. Have spoken to CEO several times. GE management background, credible. Ken Langone (founder of home depot) is a large investor and has bought more recently. Finally, on a price to sales basis--the company is cheap. $67 Market cap less $45M net cash = $22M EV vs. $138M LTM sales (+16% Y/Y). Gross margin in 2013 was up ~29% Y/Y From an acquirer's perspective--much of G&A would be redundant. At 20% GM an acquirer would be paying <1x GM for this business at current market price. CEO mentioned they had strong interest last summer by acquirers at >= 1.0x sales. The stock has slid over the past year. First was the spinoff that created the company as it exists today (certain web assets were divested). Then the company was delisted from Russel index. Finally, sales costs came in over expectations for the 2013 holiday season. Since then there's been a steady stream of selling on results that are basically as expected (nothing happens till 4Q) driving the stock down down down! In summary, the company has characteristics of a good value... -Underfollowed small cap -Net cash on balance sheet -Post spinoff / delisting dynamics creates "forced selling" -Segment shift (retail to wholesale) not clear to screeners in financials -Insider buying -Clean balance sheet=time is a friend -Could be a compelling acquisition target at 1x sales (~~2x current market cap.) ...But has some hair -highly seasonal -not in amazon's crosshairs (too small), though not a great business (online retail) -retail portion of business is probably flat growth at best, with arguably increased maintenance advertising spend needed to tread water. -Management paid well for a company this size -Probably shouldn't be a public company (G&A contribution from "public company" expenses is arguably meaningful) Link to comment Share on other sites More sharing options...
LanceSanity Posted September 13, 2014 Share Posted September 13, 2014 What stopped them from becoming acquired? Have investors just been scared off by the cash burn? Overall, this seems like a good investment. Niche retailers are great businesses. I've heard of the website before but never checked it out. Now I'm really tempted to buy a Doctor Who product. Link to comment Share on other sites More sharing options...
Haasje Posted September 13, 2014 Share Posted September 13, 2014 The terms they offer to affiliates are competitive with Amazon I guess, though the commission for sales to existing customers is rather low. Overall EPC looks good and I think they probably perform well for affiliates with a very focused audience. Note they have a geekpoint system in place to lock customers in. Not sure how effective that is online. Not sure how prices of similar products compare with Amazon either. Link to comment Share on other sites More sharing options...
rayfinkle Posted September 13, 2014 Author Share Posted September 13, 2014 What stopped them from becoming acquired? Have investors just been scared off by the cash burn? Overall, this seems like a good investment. Niche retailers are great businesses. I've heard of the website before but never checked it out. Now I'm really tempted to buy a Doctor Who product. From what I understand they thought that they could grow sales (they have) and get a better price. Link to comment Share on other sites More sharing options...
rayfinkle Posted September 13, 2014 Author Share Posted September 13, 2014 The terms they offer to affiliates are competitive with Amazon I guess, though the commission for sales to existing customers is rather low. Overall EPC looks good and I think they probably perform well for affiliates with a very focused audience. Note they have a geekpoint system in place to lock customers in. Not sure how effective that is online. Not sure how prices of similar products compare with Amazon either. I think more than price (which of course is important), thinkgeek offers a one stop shop for this type of gear. Try finding a similar selection on amazon...it's more difficult. Thanks Link to comment Share on other sites More sharing options...
rayfinkle Posted September 17, 2014 Author Share Posted September 17, 2014 http://www.bloomberg.com/video/how-big-bang-show-leads-to-big-geek-sales-HJImyi_xQ3qGt7B2wAmFFw.html CEO getting word out. Stock even lower ($9.05) on no news. Link to comment Share on other sites More sharing options...
Moht Posted March 23, 2015 Share Posted March 23, 2015 Anyone following this? It's now a net-net after a miserable Q4 and 2014. Solid balance sheet, with $8.17 in net cash per share and a pile of NOLs. The company ripe for activist involvement. Hard to know if they'll win battling it out with Ken Langone, a large shareholder and chairman of the board. FWIW, they did a tender offer for shares between $12 and $14 in June 2013... Link to comment Share on other sites More sharing options...
rayfinkle Posted March 23, 2015 Author Share Posted March 23, 2015 Anyone following this? It's now a net-net after a miserable Q4 and 2014. Solid balance sheet, with $8.17 in net cash per share and a pile of NOLs. The company ripe for activist involvement. Hard to know if they'll win battling it out with Ken Langone, a large shareholder and chairman of the board. FWIW, they did a tender offer for shares between $12 and $14 in June 2013... Still like the price, even as company performance has disappointed. Agree that activist or buyout could help, but real catalyst is hitting positive earnings and/or CF! Link to comment Share on other sites More sharing options...
krazeenyc Posted May 26, 2015 Share Posted May 26, 2015 HOT TOPIC https://finance.yahoo.com/news/hot-topic-acquire-geeknet-inc-110000143.html Link to comment Share on other sites More sharing options...
rayfinkle Posted May 26, 2015 Author Share Posted May 26, 2015 well.... disappointing that company performance sucked, but nice outcome for folks who came in in the last 12-18 months... Link to comment Share on other sites More sharing options...
innerscorecard Posted May 26, 2015 Share Posted May 26, 2015 Congrats, looks like a classic case of a net-net working out. I need to do more deep digging into COBF investment ideas that never get a page 2. Link to comment Share on other sites More sharing options...
LanceSanity Posted May 27, 2015 Share Posted May 27, 2015 Thanks for sharing this idea, rayfinkle. This worked out very well for shareholders. Link to comment Share on other sites More sharing options...
jawn619 Posted May 27, 2015 Share Posted May 27, 2015 Nice....Trade Link to comment Share on other sites More sharing options...
krazeenyc Posted May 27, 2015 Share Posted May 27, 2015 http://finance.yahoo.com/news/geeknet-inc-confirms-receipt-company-173400073.html Link to comment Share on other sites More sharing options...
rmitz Posted May 27, 2015 Share Posted May 27, 2015 I've seen this play out badly before. I'll take the cash now and not be too greedy. Happy these are in IRAs. Link to comment Share on other sites More sharing options...
vpagano Posted June 2, 2015 Share Posted June 2, 2015 $20 offer ended up coming from GameStop, congrats to anyone long on this one: http://finance.yahoo.com/news/gamestop-corp-announces-agreement-acquire-132500003.html Link to comment Share on other sites More sharing options...
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