Fossil Group (NAS:FOSL) — mrkt cap $57mm; Price $1.08; EV/EBITDA NA
PASS. We were quite close to initiating a speculative position on this one. Fossil Group designs and sells watches, jewelry, and fashion accessories worldwide. The company has undertaken a large operational overhaul to stem losses, finally discontinuing their smartwatch segment, closing non-performing stores, and taking out costs from supply chain optimization. Although their stock price has cratered, the company has ample liquidity ($100mm+) and there are signs that restructuring efforts are improving, with gross margin increasing 300 bps and opex declining 20% YoY. Their operating loss narrowed from $19mm to $6 million. Usually, cost-cutting this severe is associated with steep declines in revenue, but there are signs that ~50% of their revenue base—proprietary brands—is stabilizing. Ultimately, what gives us pause is the rest of the business—licensed fashion brands like Armani, Kors, etc.—which appears to be in free fall. We fear it may have something to do with potential non-renewals, as most came/come due late last year or this year. Because of this uncertainty, we are passing. We even evaluated some of the debt before passing ($FOSLL—it is common for “baby bonds” to trade on exchanges. YTW is ~40%, so clearly the bond market is not optimistic about a refi or recovery).
Natural Gas Service Group (NYSE:NGS) — mrkt cap $240mm; Price $19.19; EV/EBITDA 9
PASS. NGS sells and leases natural gas compressors to oil producers primarily in the Permian Basin. Compressors are used to inject high pressure natural gas into wells to boost production. Rental contracts last anywhere from six to sixty months with high renewal rates. NGS is levered more towards production cycle of a well as opposed to the exploration which gives it more stability against volatile commodity prices. Although the unit economics are favorable, its balance sheet has significant debt with little cash buffer and it’s likely a capital raise will occur soon through issuing debt/equity. A new CEO with turnaround/private equity experience has recently been bought to streamline operations and free up working capital. We will wait to see evidence of operational efficiency before initiating a position.
FTC Solar (NAS:FTCI) — mrkt cap $47mm; Price $.38; EV/EBITDA NA
PASS. FTCI manufactures servo motors for solar panels to track the sun, this way solar panels can receive the maximum energy input throughout the day. Their solutions cater towards utility rather than residential. FTCI suffers from anemic gross margins, burning cash to the tun of 50mm per year, and has declined about 95% since its IPO in 2021. With about two quarters of cash burn left, the future does not look great. However things might turn around. The CEO and COO have been replaced, Chinese solar tariffs have been implemented, and with energy demand increasing, utility solar is seeing significant demand. FTCI has seen backlogs increase significantly yoy, and if they can drive gross margins up, they could see significant price appreciation.