Goedeker’s (GOED)

Summary

  • GOED is the underdog ready to ‘punch up’ with the acquisition of Appliance Connection

  • Trends greatly favor the venture: white goods expected to grow significantly over the next 5-10 years.

  • Albert Fouerti from Appliance Connection on the board is a game changer

  • Company is ready to walk the walk, we will see if they do.

1. Intro

1847 Goedeker Inc. (GOED) “is a one-stop e-commerce destination for home furnishings, including appliances, furniture, home goods and related products.” (10-k) They specialize in appliances. It sounds boring, but the big play for this one is the misunderstanding (mispricing) surrounding Goedeker’s recent purchase of their larger and superior competititor: appliance connection (AC).

Note: AC is superior to GOED in that AC is profitable while GOED is not.

GOED bought out their main competitor through a dilutive financing deal, hurting their shareholders at the time. Their main competitor was 6 times their size, so the acquisition is very interesting here. The acquisition makes GOED the largest publicly traded pure-play ecommerce retailer. The combined entity is now profitable. The main thing here was that leadership hurt shareholders in order to stay afloat. GOED was losing money, circling the drain, and crapped on their current shareholders in order to stay alive. The only saving grace here is that the AC CEO is now on the board.

One of the main questions I’ve received here is “how did GOED successfully buy AC while circling the drain?” GOED held a public offering of common stock, thus diluting current shareholders at the time. From the M&A (Mergers and Acquisition) conference call with GOED: (bold, italics, and words in parentheses are mine)

Michael Samuels

My question is, as a long-term shareholder, I feel like I’ve really been given the shaft on this offering that came out because, first, we telegraphed that we were going to do it when the stock was at $9. The shorters came in. Shorters were all the way down to like $6. Then the stock the day before the offering gets up to $18, closes at $6, and we get an offering where there’s like 6 million shares outstanding, where we do 91 million units, which include 91 million warrants.

So now we have — we went from 6 million shares to almost 200 million shares. And I just feel as a long-term shareholder, I’ve just been really giving a — why didn’t I get rights? Why didn’t I get anything? As a shareholder, why did we have to give away the forum (I think he meant farm), and I knew we were under a time constraint. Did we give away the forum (farm) to do this offering?

Douglas Moore

First of all, thank you for being a shareholder. And I hope long term means longer than a year, which we have not even been in a year yet since the IPO in July of 2020. No, you did not get the shaft. What you have in front of you is now a combined entity that will do the kinds of things we talked about earlier on the call, which is expand our position in the marketplace and go forward with revenue and profits that have not been seen in this category by pure-play retailer in appliances before. So I appreciate the frustration but recognize long term is more than 10 months.

And this entity combined, which was not anticipated at the IPO of last year, is in a remarkable position going forward. I can’t advise you on what to do with your investments. I cannot tell you why things went the way they did in the marketplace. But we are a stronger, better company. And I hope others on the call recognize the combined market cap of what we’re doing. Although diluted over more shares, we’ll continue to produce an enterprise value, we think, over time that is consistent with the marketplace position that we have now and that we’ll have in the future.

That’s a lot of emphasis on future events that may or may not happen right after painfully hurting current shareholders. However, another point: “The oxygen of microcap is capital … even if it’s dilutive.” -Anonymous. I can understand the thinking behind this, how it’s normal to ‘do whatever it takes to survive’ but a quality company wouldn’t do this. Diluting equates to stealing equity due to poor management. That’s trike 1 through 3 for me. Wha’’s normal and what’s quality are two very different things here.

It’s also worth noting that GOED is relying on the story of becoming a heavy hitter in the industry when they have little to back it up while at the same time we are in a market where almost everything falls under the spell of greed and hope. (More on this later.) This is how they bought AC, their main competitor at 6 times their size while circling the drain.

GOED has a lot of insider buying, which is a bullish signal for me. I know it might not mean a lot to many people but insider buying is a pure signal for skin-in-the-game (SITG) that I am such a fan of.

GOED was a junk company circling the drain until they bought AC and started to get some heavy hitters on their board. This, combined with a few other moves, puts GOED at the top of my list for companies to pay attention to. Here’s why:

2. Investment Thesis

1. You could drive a truck between the price and the value.

When you think on solely numbers, the numbers look great. GOED is cheap when combined with AC.

2. Punching Up

We all remember Sears and what happened to them: they didn’t pivot to serve their customers. Amazon stepped in to deal the final blow to Sears and so many others large companies like them. This same ‘passing of the torch’ happens often. The larger an organization gets, the less adaptive it gets. Amazon is not immune here. Amazon is large, GOED is small. Sometimes it’s that simple. The thing is, GOED must execute on a world-class level to compete with Amazon.

The amazon trucks physically cannot handle the business even if they wanted to. They are now backed into a corner, ripe for dethroning when it comes to white goods.

3. Brown Goods Setting The Example (BAIN RESEARCH)

https://www.bain.com/insights/covid-19-catapults-white-goods-makers-into-the-digital-future/

White goods are refrigerators, washing machines, and things that generally are white in color. Brown goods are TV sets, stereo equipment, and other tech. We got used to ordering brown goods online, and now white goods are following suit. With COVID ramping up the rate of change, white goods are on pace to be an online staple.

From Bain and Company:

Online sales of appliances grew at a 10.5% annual pace between 2015 and 2019 compared with less than 1% growth at retail outlets.

Bain & Company research shows one-quarter of global consumers are more willing to buy appliances online than prior to Covid-19.

More than 45% of consumers are willing to pay a premium price for an appliance if it includes additional services such as same-day repair.

Here’s some fun graphics from their writeup:

Web capture_27-7-2021_11513_www.bain.com.jpeg

Main point here is that the US has a lot of room to grow into white goods in Ecommerce. China, of course, ahead of us with adopting the shift utilizing technology.

Web capture_27-7-2021_115237_www.bain.com.jpeg

Millennials and younger are becoming more of the core demographic for online purchasing of white goods, at least in the US.

Web capture_27-7-2021_115731_www.bain.com.jpeg

Consumers are getting more savvy with their research befor ebuying these important items. Another area for GOED to focus on: the beginning of the customer experience. Web presence.

4. New Web, New Brand

GOED is tasking Capsule, “a boutique firm that has served clients as a faithful editor for over 20 years, assisting with branding, company identity, messaging, and overall marketing strategy to produce tangible outcomes” with a creating a unifying brand between GOED and AC. This is a must for a few obvious reasons, but most importantly to leave the spirit of GOED in the dust. The sum is greater than the parts. This is also a major opportunity to improve the entire customer experience.

One of my favorite snapshots of Capsule:

We will see if GOED takes a more playful identity going forward, which I think will serve them well.

We will see if GOED takes a more playful identity going forward, which I think will serve them well.

When I think about appliances I think about homes. There’s so much more.

3. Valuation

A smaller company buying a larger company and then the larger company taking mostly cash and little stock is a pretty big sign of ill-faith. I am new to Mergers and Acquisitions (M&A) but when a company dilutes current shareholders to buy a larger profitable company smells of poor leadership: Why would leadership, who ran GOED into the ground, do better with AC? I understand that synergies are real with some M&A deals, but this is a pretty far fetch. This is either a shady slip, or a great underdog story.

However you look at it, something is working. After the acquisition of AC:

June 2021 monthly orders increased 19.2% from the prior year period to $73.2 million while June 2021 monthly revenues totaled $55.7 million, representing a 47.8% increase over the June 2020 results.

4. Opportunities

Web Scale meets Distribution Woes – Opportunity for Customer Experience

Looking up reviews for AC and GOED reveal one thing: misery. GOED has terrible reviews, and AC are a little better but still terrible.

Here is the Better Business Bureau results for AC:

Untitled (1).png

Business isn’t complicated, but it can be hard. Make your customers happy by solving one problem really well. Right now GOED and AC solve that problem pretty well.

Apple has the sleek box for Iphones. GOED needs their own ‘sleek box’ and it’s a pleasurable installation process free of defects, blemishes, or wait times.

A great customer experience can encourage loyalty and turn customers into brand advocates. Bad experiences encourage the opposite. That’s why customer experience matters. In today’s digitally-empowered society (armed with smartphones, search engines at their fingertips and the like), it’s all about a great digital customer experience. Let’s talk about its importance in more depth:

✅Customers are in control
✅Customers who receive great experiences are more likely to become loyal…
✅…and spread good word about your brand
✅Satisfied customers are likely to spend more
✅You’ll build a lasting relationship with your customers
✅Great experiences can help you stand out from the competition

Why It’s So Hard

GOED and AC rely on vendors to supply, deliver, and install final product.

The delivery experience and overall customer service that we offer our shoppers are central to our business. We primarily purchase inventory only after a sale has been, which allows us to tightly manage our inventory and warehouse space while still providing customers quick delivery times and control over the entire process. However, we do also make some strategic inventory buys to take advantage of lower costs and to satisfy consumer demand more quickly. Recently, however, because of changes in policies of our manufacturer vendors, we have increased inventory on hand. Despite the recent increase, our inventory levels are relatively low in relation to our sales. About 64% of appliances flow through our warehouse while almost all furniture is drop shipped to the customer. All inventory is managed with a barcode system and is automatically tracked through our Microsoft Dynamics GP ERP system.

If GOED is going to go long, they need to own the customer experience all the way through including removal and repurchase of replacement appliances.

Legacy Leadership

Douglas T. Moore has a history with Sears and Circuit City. He was with CC from 1990 – 2007. He may be an outstanding executive, but coming from those organizations is a tough act to follow.

I tend to be harsh on leadership, looking at the companies that leaders come from. How did Sears and Circuit City do while Mr. Moore was there? I am not sure how to look into this, but would love to know. It’s over-simplistic, but the fact that Mr. Moore’s previous engagements were both squashed by Amazon may seem poor form at first, but I think it’s having an inside view into what didn’t work.

It’s important to note here that GOED is the underdog here, while Amazon was the underdog that dethroned Sears and Circuit City before. Douglas Moore brings an extremely valuable experience set when taking on todays giants.

The cherry on top here is that AC leadership is staying with GOED:

On June 2, 2021, the Board of Directors of the Company (the “Board”), upon recommendation by the Nominating and Corporate Governance Committee of the Board, increased the size of the Board from seven (7) to nine (9) members and appointed Albert Fouerti, the President of Appliances Connection, and Alan P. Shor to the Board. The Board determined that Mr. Shor is independent within the meaning of the rules of NYSE American. Albert Fouerti, age 41, has served as the Chief Executive Officer of 1 Stop since 1999. Upon closing of the Acquisition, he also became the President of ACI. With over 20 years of experience in retail, he has made Appliances Connection into a household name for kitchen appliances. With 1 Stop starting out as a small camera and computer shop in Great Neck, NY, Mr. Fouerti was a pioneer for online shopping. Driven by technology, he entered the appliance business in 2008, and has contributed in taking the appliance industry into to the digital age. Along with his brother, Elie Fouerti, they developed a process of delivering bulky items across the United States. The Board believes that Mr. Fouerti is qualified to serve as a member of the Board because of his extensive experience building and leading the Appliances Connection business from its founding and his insight into the Company’s industry and business as Appliances Connection’s co-founder and Chief Executive Officer.

Mr. Fouerti’s presence on the board increases the legitimacy of this entire organization immensely.

Subscription White Goods

Revenue is good, but recurring revenues are great. With GOED aiming to be the largest pure-play white goods ecommerce retailer, they have an amazing opportunity to eventually expand into a subscription model for appliances. This includes a repurchase program.

Odd Markets

When we think of white goods and appliances we think of home owners looking for a washer and dryer. What about prisons, hopsitals, military facilities, etc?

5. Conclusion

The Horse vs The Jockey

When we boil it all down we see an amazing opportunity with underdog operators. No doubt that ecommerce will absorb white goods and appliances, but is GOED the company to lead the charge? Even at this price I think not. I could be wrong, and very well might be, but I am not willing to risk my money on such a bet. The entire premise is predicated on the mispricing between a failing company obsorbing a profitable company that does the same thing. A cheap trick. I doubt it’ll play out.

Walking The Walk

Everything with GOED is predicated on the fact that they got themselves in hot water and are now promising to turn things around. Buying a profitable competitor is one thing, but the leadership that got them in hot water remains.

6. Portfolio Update

I am not buying GOED at this time. This doesn’t mean they will do poorly. I have no idea what the future holds. What this does mean is that when I look at my own emotions and a little bit of data, I see a large serving of hope in GOED. Hope that they will do what they said, and hope that they will not do what they did in the past: drive a company into the ground and hurt shareholders with a dilutive deal.

(Don’t know what a dilutive deal is? Learn more by clicking here)


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