We closed out FREE at a loss of 30%. Although its licorice business is as dominant as ever, we have lost conviction in management’s ability to roll up brands. One-time expenses continue to exist (it has been almost 18 months since the acquisitions of Swerve and Wholesome brands) under the label “supply chain reinvention” accounting for $8mm in 2021 with other miscellaneous expenses accounting for another $8mm. For a company generating around $40mm in EBIT, these are not small expenses. These expenses are likely an artifact of the legacy brands existing under Ron Perlman’s conglomerate in which cash flows were likely siphoned off, generating tech and manufacturing debt that is now coming due. Although FREE’s brands are recognized and well known, especially in the licorice segment where FREE has a dominant market share, (and is what piqued our interest in the company ) we will wait to see a reduction in expenses along with a more measured appetite for acquisitions before re-entering. Roll-ups are an investing predicament as they rely on strong execution by management. In Buffett parlance, investors are betting on the jockey rather than the horse. Some roll-ups are easier investments than others and this is a concept we will articulate further in our investment essays. We suspect that it is easier for roll-ups to be successful when FREE’s situation is reversed; that being a brand acquiring distribution rather than distribution acquiring a brand. This was the situation that Autozone and O’Reilly found with the auto-parts industry, leading to the consolidation of mom-and-pop retail stores nationwide. A roll-up of brands is significantly harder as when a brand is acquired, not only is it an uphill battle to preserve the brand but also there are significant financial costs; there are no marketing synergies as each brand that is acquired needs its own marketing.
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