LOW TIDE INVESTMENTS MONTHLY ROUNDUP - August, 2020 Edition
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LOW TIDE INVESTMENTS
MONTHLY ROUNDUP
August, 2020 Edition 1
Disclaimer
The two authors of Low Tide Investments are long SBUX, CLWY, SVIN, KTB,
TTSH, CSCO, TLFA, AMNF, KTB and SMIT. All expressions in this publication and
on www.lowtideinvestments.com are not recommendations to buy, sell, or hold
any type of security. Nothing that we publish is intended to be investment advice.
This content represents the opinions of the authors and is for informational and
educational purposes only. The information posted is believed to be accurate to
the best of the author’s knowledge. Please do your own due diligence when
making investment decisions or consult an investment advisor.
2
Starbucks
Corporation
Ticker: SBUX
Category: Dividend Value
Price: $85.00 August, 2020: Part of us just wants to acknowledge that people will sit in a drive-thru pickup line for 30 minutes to get their favorite
Starbuck’s coffee during the pandemic and call it a day. Sales should come back as the fear of COVID subsides and people get back
to their regular lives. In fact, management expects U.S. sales to recover by the end of Q2 2021 with margins lagging by two quarters.
Market Cap: $99.3BN Q3 numbers were expected to really take the brunt of the COVID economic slowdown and, surely enough, they pretty much did. Lost
sales of about $3M led to a 38% decline in revenues and they flipped to an operating loss of about $700M. Comp sales were down
roughly 40% for both American and International segments driven by a sharp decline in transactions. However, this was partially
Enterprise Value: $112.2BN offset by a 23% increase in ticket size. In others words, those people sitting in those long car lines are ordering more items.
SBUX has plenty of liquidity to manage through the pandemic, with $4.4B in cash and equivalents in addition to a $2.0B credit
facility with only $1.3B in debt due through 2021.
Publication Date: 7/22/2018
1,554 new stores opened in the quarter (1,100+ in China) with 97% of Global Stores and 87% of Licensed stores (airports,
universities, etc.) currently open. There is still some limited seating and hours due to the pandemic.
Total Return: 74.2% 3 million people were added to the starbucks rewards program, a 17% increase from Q2.
With the demand for ready-to-drink coffee soaring, SBUX has also seen an increase in market share for packaged coffee. The
Price Target: $62.00 business segment grew by 5%, facilitated by the Nestle Global Coffee Alliance.
The recently announced dividend of $0.41 is in line with previous dividends and represents a 2.1% annual dividend yield.
Management stated that they have no plans to reduce the dividend.
Implied Return: -27.1%
The price of SBUX has already increased significantly since we first wrote about it and we have since trimmed the position to
reallocate capital. We still believe there may be long-term value here and hold shares. However, we are not currently buyers at this
level. Once the uncertainty of the pandemic subsides, we will be able to re-value with more clarity and will update the valuation in
the coming months. Right now we believe the stock is fairly valued, but are comfortable holding due to the high quality of the
business.
Calloway’s Nursery
Ticker: CLWY
Category: Other
Price: $9.00
Market Cap: $66.1mm
Enterprise Value: $49.2mm August, 2020: Calloway’s reported earnings on August 12th. The company has had an exceptional 6
months, as consumers are finding projects to do around the house given the lack of alternatives for
leisure during this pandemic. YTD sales grew 20.6% and sales per store grew ~15%. The company
Publication Date: 8/10/2018 generated $16.6mm in free cash flow due to low CAPEX and delayed payments to suppliers (TTM days
payable outstanding increased to 97 days, versus 79 days over the same period last year). Since the
price has been approaching our estimate of fair value, we have been trimming as the margin of safety
Total Return: 24.8% shrinks.
The company plans on opening up a new store in a new mixed-use development located at the former
Price Target: $10.00 Braniff Airways complex at Dallas’ Love Field called “The Braniff Centre”. This development resides just
outside of Highland Park, an ultra-affluent neighborhood in Dallas. After speaking with a Braniff Centre
representative, it seems that the new store set up/improvement is on pause right now due to COVID.
Implied Return: 11.1%
The company announced a $.75 dividend in late August, with the ex-date being September 8th. They
paid out a $.25 dividend in July, bringing the total dividend payout for this year to $1 on what was a
$5.50 stock just a month ago. We continue to be impressed by the capital allocation of this shareholder
friendly board of directors.
Scheid Vineyards
Ticker: SVIN
Category: Other
Price: $18.00
Market Cap: $15.9mm
August, 2020: The performance of SVIN has been a tough one to swallow. The company continues to trade for less than
liquidation value and has no doubt been impacted by COVID’s effect on the restaurant industry (July food services and
drinking places retail sales down~19%). However, some of this is offset by the increase in beer, wine, and liquor store retail
Enterprise Value: $128.4mm sales (~22% in July).
The annual grape harvest began in Monterey County on August 14th. Scheid expects an average harvest with above average
Publication Date: 1/21/2019 quality grapes due to spring rains and moderate/cool temperatures felt throughout the summer.
California has declared a state of emergency due to the wildfires that have emerged in Northern California. Scheid posted
Total Return: -76.8% on August 19th that the River and Carmel fires do not present any immediate threat to their personnel, vineyards, or
structures. However, some have not been so lucky, with winemakers wondering if they will be able to even harvest/transport
grapes this year. From what we have gathered, Scheid’s harvest has been largely unaffected by the fires.
Price Target: $82.50 We think the market is overlooking the liquidity they may be able to draw from three of their unencumbered parcels
(221-011-071-000, 221-011-070-000, 221-011-068-000) which are currently being developed into the “Las Vinas” residential
subdivision and “Pinnacles Plaza” project. Unfortunately, these projects have been in the works for quite some time due to
Implied Return: 358.3% hold ups from the town of Greenfield. They had $7.9mm in cash as of May 31st.
In order to try and capture the trend of healthier living amongst millennials, Scheid released a new brand called “Sunny With
a Chance of Flowers”, a low calorie, 9% low alcohol wine with zero residual sugar, in June. The bottles are finally available in
stores, including in New England. This brand could potentially give them the case sales needed to achieve break-even cash
flow.
Kontoor Brands
Ticker: KTB
Category: Dividend Value / Forced
Selling
Price: $22.95
Market Cap: $1.3BN
August, 2020: Kontoor Brands reported Q2 earnings (ending June 30th, 2020) on August 6th. Global revenue was
down 40%, better than we expected. They generated ~$49.8mm in cash flow from operations and continued to
Enterprise Value: $2.2BN invest in their digital platform. They also paid down $75mm of their revolver at their own discretion.
Their Lee brand will be distributed in ~2,000 Walmart stores starting in Q3, 2020 and their All Terrain Gear (ATG)
Publication Date: 10/17/2019 (Div brand, which has shown strong results thus far, will be distributed in over 400 Dressman stores (European retailer)
starting in H2 2020. One of their major customers, Kohls, started to reopen its doors in late April/early May. Due to
Value) & 5/29/2020 (Forced Selling) shipment timing shifts, Wrangler U.S. sales were down 27%. If the timing shift did not happen, Wrangler U.S. sales
would only be down 16%. Management expects sequential YoY improvement in revenue for H2 2020 and sees
inventory as a lever for cash flow generation. Additionally, Walmart Q2 (ending July 31st, 2020) comparable sales
Total Return: -12.8% (Div Value) & grew 9.3% YoY, with apparel being “particularly strong”, growing in the mid-single digits (Walmart is Kontoor’s largest
53.0% (Forced Selling) customer, making up 34% of sales in FY 2020). Target, another major customer, reported similarly strong results.
Management plans to do a soft-launch of the Wrangler brand in China this fall with a more robust launch in the
spring of 2021, when they expect the consumer environment to be better.
Price Target: $36.75
Kontoor Brands amended their credit facility in May so as to not trip debt covenants. In doing so, they were forced to
temporarily suspend their dividend. We believe that this was a prudent capital allocation decision. According to the
Implied Return: 60.1% amended credit agreement, the board may have the ability to reinstate the dividend as soon as Q4 of this year.
Tile Shop Holdings
Ticker: TTSH
Category: Forced Selling
Price: $2.49
Market Cap: $124.3mm
Enterprise Value: $137.6mm August, 2020: Tile Shop reported earnings on August 6th. As expected, sales took a big hit, with comparable store sales
down 24.7% in Q2 2020. Management reported a 50% decrease in foot traffic in the first few weeks of April. Several stores
were required to operate with limited hours or close entirely during this time. Similar U.K. based company, Topps Tiles,
reported an 80% decrease in sales in the month of April.
Publication Date: 12/18/2019
The company took various measures to generate and preserve cash during Q2, including deferring $4.9mm of rent.
Management expects that the majority of repayments to occur between Q3 2020 and Q3 2021, signaling some type of
Total Return: 44.8% normalization within that time period. Due to rent deferral and inventory liquidation, the company paid down $15.5mm of
debt in the quarter, ending at a .4x leverage ratio. This is in full compliance with their 3.5x leverage ratio covenant.
Price Target: $4.50 The company settled with plaintiffs on June 30th regarding the delisting and deregistration lawsuit. The $12mm settlement
fund and $2.5mm expected attorney fees awarded to plaintiffs will be funded by the company’s insurers ($14.5mm in other
current assets and other current liabilities).
Implied Return: 80.7% At 4.9x EV/TTM EBITDA, we believe shares are materially mispriced on an absolute and relative basis. Topps Tiles current
trades at a 9.7x multiple. With the initial catalyst (lawsuit outcome) officially in the past, the next catalyst we see is a sale of
the company. As the public court documents show (page 3), the two Peters had a plan to turn the company around before
COVID and then sell it within two or three years. The current discount to our estimate of fair value and Kamin’s average price
of ~$3.75 leads us to believe that the company will be sold within two to three years at a price closer to our estimate of fair
value (~$4.50).
Cisco Systems
Ticker: CSCO
Category: Dividend Value
Price: $42.20
August, 2020: The balance sheet remains healthy with about $29B in liquidity and a debt/EBITDA ratio of under 1.5x. The stock
Market Cap: $178.2BN continues to significantly underperform the information technology sector YTD and recently just sold off about 10% after
management provided weak forward guidance. We believe fundamentals are being overshadowed by the negative sentiment as
CSCO does not have the same headline appeal as other tech names that have outperformed during the pandemic.
Enterprise Value: $164.8BN Kelly Kramer (CFO) has decided to retire but will stay on to help with the transition.
For the quarter (Q4 2020), total revenue was down (-9%). This was again led by Infrastructure (-16%) as companies continue to pare
back capex during this time. However, WebEx was +10%, Security +10% and Services remained flat. Management guidance is for
Publication Date: 2/2/2020 approx. a 10% decline next quarter as order rates haven’t really picked up yet.
The full year picture looks a little brighter. In their 2017 Analyst Conference, management laid out their transformation metrics for
Total Return: -7.50% the growth of the Software and Services revenue with a target of reaching 50% of total revenue. In FY 2020, CSCO hit that target and
has produced 51% of revenue from software and services, with 29% coming from software alone. Albeit this being helped by
declines in infrastructure, we are happy about this execution and it is good sign for the stability of FCF moving forward. For the full
year, revenue was down only 5%, gross margins actually improved to 66%, as did operating margin to 34%. Operating cash flow
Price Target: $56.00 remained flat at ~$15B and EPS increased by 4%.
We continue to like the dividend story here. CSCO generates steady FCF and only pays out ~40% of earnings with a dividend yield of
Implied Return: 32.7% over 3%. In April, they raised the dividend by 5%. The market is seemingly offering a low multiple (TTM EV/EBITDA of ~9.5x) for a
cash-flow rich business with high ROIC (25%). CSCO’s multiple is much closer to that of the Telecom Equipment and Telecom
Services. Normalized EV/EBITDA multiples for the sector range from approx. 8x-13x. Meanwhile the Software sector constituents
trade at higher multiples of about 20x. Knowing that roughly 50% of CSCO’s revenues are now derived from Software and Services,
we believe CSCO’s multiple should be somewhere in the middle. Shares seem cheap enough to reach for some stable yield.
Ultimately, we believe multiples will increase with margin improvement due to the growth of the more profitable business lines and
excess FCF. In the meantime, the current FCF supports continued dividend growth.Tandy Leather
Factory
Ticker: TLFA
Category: Forced Selling
Price: $2.90
Market Cap: $25.9mm
Enterprise Value (est.): $15.9mm August, 2020: On August 10th, Tandy filed a press release announcing YTD sales figures and also provided shareholders
with an update on their financial restatement process. The company failed to file their outstanding periodic reports in order
to regain compliance with Nasdaq and was subsequently delisted on August 13th (new ticker is TLFA). As we wrote in our
initial deep-dive, we expected to see some selling pressure in the days following a delisting announcement. The stock price
Publication Date: 2/2/2020 hit a low of $2.60 in the days after the announcement, down 20% from their pre-announcement price.
YTD sales declined 27% from the same period in 2019 due to COVID’s impact on store closures during March. On a more
Total Return: -37.2% positive note, they reported a 5% decline in total sales for July. Given that only 97 out of 106 stores were opened in July of
2020 versus 115 stores in July of 2019, sales per store actually increased in July. They ended the quarter with $11.5mm
cash on hand, close to their year end estimate of $10mm.
Price Target: $4.85
The company intends to reapply for Nasdaq listing once it has made the required filings. The company also announced a
$5mm share buyback program (~19.3% of their current market cap) between now and July 31, 2022. The company will be
able to repurchase shares following their completion of the financial restatements and after they make all of the required
Implied Return: 67.2% periodic filings with the SEC. We believe this is a short-term catalyst.
During the annual meeting in June, they estimated the value of their unencumbered property to be $10-12mm. We have
updated our valuation using this new information to arrive at a going concern value of $4.85 and a liquidation value of
$4.00. While not our highest conviction idea, we believe shares are too cheap. 9Armanino Foods of
Distinction
Ticker: AMNF
Category: Dividend Value
Price: $2.17
August, 2020: On July 17th AMNF released their Q2 2020 results. As expected they have been hit
hard by COVID due to their exposure to the food services industry (restaurants). Net sales were
Market Cap: $69.6mm down 55% and they posted a net loss of $894k, a decrease of 132%. Note that this was against the
highest Q2 ever reported (2019). On a positive note, the company was still profitable through the
first half of 2020 and the new CEO said, “The negative impact of COVID-19 and corresponding
Enterprise Value: $60.6mm governmental protection programs were less than expected.” They also experienced an increase in
sales & margins since the low point of the pandemic. We believe that the low point is behind them.
Publication Date: 3/24/2020
In August their financial statements were posted. They finished the quarter with $10M of cash.
This was higher than expected and was helped by inventory liquidation of about $1M. There is
Total Return: 5.5% about $1.5mm of interest bearing debt on the balance sheet. They paid down about $600k in debt
which included paying the equipment financing agreement in full. This was done using the savings
from the 36% dividend cut. We expect the company to announce information surrounding their next
Price Target: $3.00 dividend in mid-september. If positive, this would likely be a catalyst for some price appreciation.
The company seems too cheap relative to its normalized state of growth, FCF generation, and
dividend payments.
Implied Return: 38.3%
AMNF issued another 120,000 shares of phantom stock at an exercise price of $2.38, currently
below today’s price.Schmitt Industries
Ticker: SMIT
Category: Other
Price: $4.61
August, 2020: On August 12th, Ample Hills posted that they were opening up a new scoop shop in
Market Cap: $17.4mm Long Beach, California. Opening scoop shops in markets with year round warm weather allows for
steady year round revenue, as opposed to the seasonality that comes with operating in the North
East. This shop was supposed to open in late 2019, but it seems like their past financial issues
Enterprise Value: $7.9mm prevented the former owners from doing so.
Here is a podcast that the founders of Ample Hills started recently. This will give investors more
Publication Date: 7/14/2020 insight into how the founders started, how they built their brand, and where they went wrong.
Total Return: 26.3% As a smaller reporting company, Schmitt is currently delinquent in filing their annual report. Given
COVID, the Ample Hills acquisition, and this report being their first without the balancer segment,
this is not surprising. We expect to hear from the company this week regarding the status of this
Price Target: $7.00 filing.
Consolidation continues in the propane market, as Superior Propane recently purchased Rymes
Implied Return: 51.8% Propane and Oil - a retail propane and oil distribution company with 49 locations. As a reminder,
Brookfield injected $260mm of capital into Superior Propane for the purpose of making strategic
acquisitions. Superior Propane is one of Xact’s largest customers.You can also read
