PRIME SERIES
·
The U.S. promotional
products market is valued at $18 billion in annual revenue as brand owners find
incentives effective building customer loyalty. Consumers remember brands from 90% of promotional
gifts, far better recall than print or digital ads.
·
Stran
& Company stands out among numerous competitors in the promotional products
arena with a technology-backed portfolio of services. Client contracts renew annually, averaging three
to five years duration as most competitors fail to match Stran’s breadth or
quality of service.
·
Company
leadership sees a unique opportunity grab market share through acquisitions as
many players in the highly fragmented promotional products and incentives arena
are struggling in the post-pandemic economy.
·
Two recent
deals adding as much as $15 million to Stran’s top line, boosting market footprint
through new client relationships, and adding fresh talent to the sales and creative
teams.
·
Recent
financial performance has been uneven, turning away investors who fail to delve
into Stran’s growth story. As a consequence,
STRN appears undervalued against other business service providers, providing diligent
investors with an attractive entry point for long positions.
It Begins with a Box
The parcel arrived as promised, holding a small and soon-to-be cherished reward
-
a medallion commemorating completion of the 2021 Virtual Marathon sponsored
by the New York Roadrunners (NYRR) club.
Policies to stop the spread of COVID-19 had shut down the usual round of
footraces in New York City, including the iconic 2020 New York City Marathon,
all orchestrated by the NYRR. The NYRR
turned to ‘virtual events.’ Even more important than the accomplishment
of running 26.2 miles, this particular trophy bestowed proof of a return to normalcy
after a punishing year and half of lockdowns and social distancing - a
calendar with more footraces and fewer Zoom calls.
Little did this analyst know, there was a sophisticated apparatus behind her
package and the treasures it held. It
was the efforts of Stran & Company (STRN),
a specialist in promotional products and branded merchandise, that ensured the
medallion was promptly delivered to the right person at the right address. Stran also made certain the prize was accompanied
by a proper ‘race bib’ with the correct entry number.
Much was at stake for the NYRR. The Virtual Marathon was intended to attract as many runners as possible back to the NYRR sphere of influence - especially those who could not qualify or did not feel safe enough to rejoin their fellows in the resumed-live, but scaled-down marathon in early November 2021. Thus, Stran delivered more than medallions for NYRR. It delivered motivation to renew NYRR membership and pay fees for additional races - virtual and in-person - cash flows critical to NYRR’s future.
The Art of Branded Incentives
The case is strong for using branded products to promote consumer loyalty. The Promotional
Productions Association International (PPIA) found in a 2017 survey that 90%
of consumers later recall the brand of a promotional item. This compares to 67% brand recall for print
ads and 44% recall for digital ads, according to neuromarketing firm True Impact. What is even more impressive is that 70% of
consumers remember the call to action that came with the promotional item. Such effective results give brand owners good
reason to make incentives and gifts a consistent part of their marketing program.
Industry research firm IBISWorld
estimates the addressable market for promotional products in the U.S. alone is
near $17.8 billion in 2022. The COVID-19 pandemic negatively impacted the
industry beginning in 2020, but it has returned to pre-pandemic levels as regular
activities resumed in late 2021. IBISWorld
analysts have forecast an annualized industry growth near 1.9%.
Distinguish by Custom Services
Stran offers businesses and organizations a unique mix of promotional
solutions for the achievement of their marketing and programmatic goals. Central to Stran’s service menu is sourcing
and distribution of promotion and rewards products on behalf of brand owners. Stran takes care of the nitty-gritty,
including art work creation, print-on-demand, kitting, inventory management, warehousing,
point-of-sale displays, and delivery to the door, among other essential activities
for successful loyalty and incentive programs.
The Company also offers sophisticated e-commerce services such as designing
and hosting online retail shops and online business-to-business platforms. To make things even easier for a client with an
online shop, Stran can take care of product sourcing, inventory management and fulfillment.
Stran personnel work closely with a client’s marketing department or
consultants to design and promote the right merchandise to win the widest brand
recognition and loyalty. The Company’s
creative team can design gamification tools, integrate social media exposure or
set up incentive plans to reward employees or customers.
Strong client links appear to be a key driver of revenue for Stran. Indeed, the Company reports revenue in
segments according to the nature of its relationships. Clients that have contracted for ongoing
services are classified as Program Clients.
Such services are often related to inventory management, warehousing, creative
services, or an online retail platform.
The rest are considered Transactional Clients who engage Stran for a particular
event or task, leaving Stran with no ongoing responsibilities…or revenue. For example, in 2019, Stran was hired by a third-party
to provide support to the U.S. Census Bureau for the 2020 Census, an event that
will not come around again for a decade.
(More on the census project below.)
Less than 350 of the Company’s 2,000 active customer relationships are
considered Program Clients, but their contracts provide as much as three
quarters of Stran’s revenue. Based on revenue
reported in 2021, it is estimated that on average each Program Client contributes
about $85,000 to sales each year. This
compares to $5,800 average revenue per year from Transactional Clients. It is clear
why Stran sales personnel try to upsell customers to service contracts involving
value-added services such as creative work, an online store or inventory
management.
Strengths Against a Well Populated Competitive Field
Stran generates value for its clients by transparently facilitating the
special moments when prize boxes are opened and that coveted logo appears. The Company differs from most other players on
the field by having a ‘triple threat’ of talents under one roof: promotional product sourcing, warehousing and
fulfillment, and branded online retail platforms. As a consequence, Stran competes with quite
number of different companies in one arena or another, ranging from advertising
agencies to on-line retailers to small, localized promotional products
suppliers to larger branded merchandise vendors.
Stran management counts as many as 40,000 participants in just the
promotional products segment alone. The
trade organization Advertising
Specialty Institute (ASI) lists HALO Branded
Solutions as the largest player in this segment followed by Staples Promotional Products in second
place. ASI estimates the top forty players account
for only one third of promotional products sales.
There is quite a bit of risk when there are many contenders about. For example, most of the promotional items that
are favored by clients, such as T-shirts or cups, can be procured from multiple
sources and sometimes at discounted pricing.
Price undercutting is a typical competitive tactic in the promotional
products arena.
To meet competitive threats head-on, Stran holds out as a quality service
provider with unique platforms that give clients convenience and rich benefits. For example, the Company has invested in well-established
enterprise software platforms for its online retail offering, making it possible
to offer sophisticated e-commerce solutions to Program Clients. The online shops are customizable and
scalable. Even Transactional Clients get
the benefit of efficient order processing through the Stran platform.
From Stran’s perspective its software investments have made it possible
to approach a wide range of prospects, large and small. The Company has also proven its platforms can
be used across multiple industries, including sports, healthcare, food production,
beverages, and clothing, among others.
Clients find it difficult to get the same optionality and service level from
competitors, giving Stran the benefit of ‘stickier’ customer relationships. Management reports its client contracts
average three to five years in duration.
Financial Performance: rocking and
rolling with a growth operation
Stran has created efficiencies in its promotional products marketing
process that can deliver earnings to shareholders. However, investors need to look very closely
at recent financial reports to find the evidence. Indeed, at just a cursory glance it looks like
Stran is struggling.
The Company reported in its annual filing with the U.S. SEC, $39.7 million
in total sales in 2021, representing 5.2% year-over-year growth at the
topline. However, even as the previous
two fiscal years had been profitable, the Company reported an operating loss of
$437,879.
Up until the fourth quarter 2021 revenue had trailed the prior year. The unfavorable comparison at the top-line was
largely due to the completion of work related to the U.S. Census in 2020, which
was by definition a one-time event and did not continue into 2021. In 2020, the U.S. Census work represented
27.1% of total sales. The Company also
benefitted in 2020, from business related to personal protective equipment, but
experienced a decline in volume as the coronavirus finally slowed in 2021. It was not until late 2021 that revenue contributions
from acquired operations helped boost the topline to a 5.17% increase over
2020. Excluding the revenue related to
the U.S. Census contract in 2020, year-over-year organic and acquired growth is
estimated near 44% in 2021.
The operating loss in 2021, stemmed in large part from exceptional costs related
to shipping of promotional products from low-cost manufacturing sites in Asia. According to the Freightos FBX Index, the cost of transoceanic
shipping for a 40-foot container reached a high of $11,000 per container in mid-2021. This compares to $1,300 as recently as late
2019. Freight charges only abated about
15% in the final months of 2021. As a
consequence, freight costs for Stran increased 85.5% in 2021, far faster than
sales, cutting deeply into profits.
Stran management has also cited rising merchandize costs in 2021, largely
resulting from pandemic-related inefficiencies in the world supply chain. However, the Company appears to be meeting
the challenge, reporting that product costs fell to 60.4% as a percentage of
sales in 2021. This compares to 64.0% in
the previous year. Some of the improvement
in gross margin on product purchases was accomplished in the first half of
2021, but the Company made significant improvement in the second half, when the
cost of products was 58.1% of sales in the September quarter and 59.7% in the
December quarter.
Gross profits appear solidly near 30% of sales even with high freight and
product costs. Some of the efficiency may
accrue from Stran’s affiliation with Facilisgroup,
a software-as-a-service for the
promotional products supply chain. The
Company also found efficiency at the operating level. Operating expenses were held to 30.9% of
total sales for in the full year 2021.
Despite improvements in operating profitability in 2021, Stran reported the
use of $5.8 million in cash resources to support operations. Investment in working capital is largely Stran’s
reason for dipping into its bank account.
·
First,
the Company invested $2.7 million in inventory on behalf of its clients, 79% of
which is branded products. Notably, the
majority of inventory is subject to guarantees that require clients to purchase
unsold inventory, thereby providing Stran an element of protection against slow
sell-through.
·
Second, at
the end of December 2021, the Company was awaiting payment on an incremental $3.3
million in accounts receivable. Days’
sales outstanding increased to 83 days at the end of December 2021. While management’s discussion of its 2021
financial results is silent on the matter, the ending balance on accounts receivable
could be a matter of timing and unpaid invoices could return to historic levels
near 60 days. Importantly, doubtful
accounts represent 3.4% of total accounts receivable outstanding.
Acquisition Strategy
Simply converting existing Transactional Clients to higher-value Programmatic
Clients provides Stran with a strong internal growth driver. As reliable as pumping existing customer
relationships might be, leadership is not content to stop with that growth source
alone. They have set their sights on scooping
up market share by acquiring some of the numerous other players among their
well populated competition. New services capacities and fresh talent could be
icing on the cake.
Many industries are highly fragmented, but not all are friendly to a
roll-up strategy. The current dynamics
in the promotional products and incentives marketing arena make the industry
uniquely receptive to ‘acquire and consolidate’ tactics.
·
First, the
lack of a dominant leader makes it possible to close deals and complete
intelligent integration objectives without getting clobbered by a harsh competitive
response. Indeed, following an extended
period of COVID-19 related business shutdown, travel restrictions and social
distancing that lasted in various forms for over a year and a half, many promotions
products companies are in tatters. Customer
relationships may still be intact, but eroded working capital makes it difficult
for some to bid on new business. With its
strong balance sheet and access to public capital markets, Stran looks more
like an appealing ally than a threatening acquiror.
·
Second,
Stran has established a proven formula that can be applied to acquired operations
to create value. Knowledge that a suitor
has a ‘secret sauce’ helps attract sellers who are understandably focused on their
own reputations. The Company has got it right
in its first two of deals, winning praise from sellers for fair treatment. Stran negotiators can parlay such accolades into
references for future deals.
·
Third, a
consolidator needs a deal track record to demonstrate its ability to identify
good acquisition targets and then successfully integrate them into the parent. Willingness to adopt best practices from acquired
operations speaks loudly to Stran’s thoroughness in understanding its targets
and capacity to recognize opportunity.
Deals Add Value
So far Stran has done well by shareholders with its early acquisitions. In September 2020, the Company acquired the promotional
products customer accounts from Wildman Business Group, a uniform supplier located
in Indiana. In January 2022, Stran
acquired G.A.P. Promotions, a full-service promotions agency specializing in
the beverage industry.
With the Wildman deal Stran gained over 1,400 new customer relationships,
of which as many as 120 are strong candidates for upselling to program contracts. Certain account managers were also tatted
over to Stran’s employee base, helping to ensure customer retention and bringing
new talent to Stran’s sales and customer relationship teams.
Wildman made a material addition to Stan’s business at a time a significant
project for the U.S. Census Bureau was winding down. Nonetheless, it appears Wildman’s pace of business
may have slipped a bit since the deal closed in late September 2020. Wildman accounts contributed $2.2 million to
the topline in the final quarter of 2020, and then generated $8.3 million in
total sales in the full year 2021. This
compares to $10.0 million in total sales Wildman recorded in 2019.
G.A.P. Promotions gives Stran a significant presence in the beverage
industry. Stran management found GAP was experiencing significant
demand from its beverage brand owners but could not pursue it for lack of adequate
working capital. The Company will invest
in GAP and make available Stran’s well-established supply chain connections
with factories, decorators, printers, and warehouse. GAP reported $7.2 million in total sales in
2020. Stran management maintains it will
be accretive to earnings in the first year in Stran’s fold. At least one of the GAP sellers has come along
with the operation and is well incentivized to make good since parts of the
deal consideration are contingent on future performance.
Stretching Capital Resources
The Company’s most recent acquisition of G.A.P. Promotions in February 2022, may be
exemplary of Stran’s strategy to conserve its cash resources and avoid equity dilution. Stran paid $500,000 in cash and $100,000 in
restricted stock at the time of closing, with two additional cash installments
totaling $480,000 promised in the next two years. Stran will also make two ‘earnout’ payments
contingent upon subsequent operating performance. The structure helps ensure that Stran is not
overpaying for acquired operations.
Nonetheless, acquisitions require capital for deal consideration as well
as subsequent investment. At the end of
December 2021, the Company reported $32.2 million in cash resources, fortified
by $37.7 million in new capital raised through the sale of common stock in an
initial public offering in November 2021, and a private round in December 2021. In total, the Company issued 9.4 shares of
common stock at an average $4.56 per share and 9.4 million warrants with exercise
price of $4.81 per share.
The Company also has access to a revolving line of credit up to $7.0
million. At the end of December 2021, the
line had not been used, leaving Stran with only $1.6 million in payment
commitments for acquisitions as long-term obligations.
Sum Up: Stock Price Discount for Uneven
‘Growth Stage’ Results
Stran’s addresses a large and growing market for promotional products and
incentive marketing. It is distinguished
in its competitive position with a sophisticated, technology-backed offering of
quality services that keep clients in long-term contracts.
The Company also wins good marks for its strategy to grow through acquisition,
both in terms of timing and tactics. It
is well capitalized with ample cash resources and low debt to make good on deals.
Rather than a struggling operation, recent financial reports tell the
story of growing pains in rapidly building company Investors need to know what to pay for a stock
supported by plenty of promises….and red numbers at its bottom line.
Unfortunately, valuing STRN shares is a challenge. The Company does not fit neatly into an
established sector with numerous public companies, frustrating an effort to peg
STRN against comparable stocks. Instead of looking at a specific sector, it is
possible to compare STRN to a broader group of business services companies. Even with a comparable group at hand, Stran’s
trailing earnings are negative and there are no published estimates of forward
earnings. Thus, a multiple of sales or
assets will have to stand in for an earnings comparison.
A group of 160 companies in the business and consumer service sector
currently trade at a multiple of 2.28 times sales. Given trailing 12-month sales of $39.7 million
and 21.0 million in fully diluted shares outstanding, this implies that STRN
intrinsic value is near $4.31 per share.
Using a multiple of enterprise value times sales takes capitalization
differences into account. Notably, this
approach suggests an even higher intrinsic market value of $6.46 per share for
STRN (based on $1.6 million in debt and $32.2 million in cash).
With the shares trading for less than a branded promo mug, STRN looks
deeply undervalued. Uncertainty over
uneven financial results may have turned some investors away, especially since
the stock is not yet well seasoned only six months after its debut. Indeed, Stran leadership thinks the stock is so
cheap, they have authorized a share repurchase program up to $10 million. If executed, the Company can use these cheap
shares as currency in future acquisitions.
Neither the author of the Small Cap
Strategist web log, Crystal Equity Research nor its affiliates have a
beneficial interest in the companies mentioned herein.
Underwriters of the Prime series may
have a beneficial interest in, serve as agents of, or act as advisors to the
companies mentioned herein.
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