Stock Sonar #12 - 6/21/2023

Whole Earth Brands (NAS:FREE) — mrkt cap $99mm; Price $3.00; trailing P/E NA

EXITED. We wrote about FREE in a previous Stock Sonar when we initiated a small weighting. It has run up about 30% since then and we are closing out the position. The thesis was predicated around gross margins expansion and sku rationalization, however retailers are pushing back on FREE’s price hikes due to its lack of leverage and size. This was one of the reasons why FREE was intent on acquiring brands early on in an effort to grow. FREE is now turning to private label even though this is in direct competition with their brand portfolio (and has lower gross margins). FREE lacks a coherent strategy that will enable gross margin expansion and subsequently cash flow generation and as such we have closed the position.

Liquidity Services (NAS:LQDT) — mrkt cap $500mm; Price $16.31; trailing P/E 16.27

PASS. LQDT aspires to be the market leader reverse supply chain solutions. Which means they own several market places and distribution capabilities to connect sellers to buyers. Sellers/buyers include commercial and government institutions that are looking to sell/buy excess inventory, idle equipment or real estate. For example, the company is helping Delta to become the first carbon neutral airline by helping offload its CO2-producing ground support equipment. Management appears well aligned with significant insider ownership (~28%). There are several promising trends that can provide nice tailwinds for LQDT. We have reached out to management and look forward to ascertaining a more nuanced segmentation of their revenue.

Hibbett Inc (NAS:HIBB) — mrkt cap $474mm; Price $37.24; trailing P/E NA

PASS. HIBB is a specialty retailer of branded sports apparel with Nike making up a majority of sales (~60%). This company is a good example of one that is run on a good strategy but has poor competitive advantages. Their strategy is to locate stores in underserved communities, primarily in the southeast. Labor and rents are cheaper so the company can compete on costs. The recent surge in labor expenses (over 20% since 2019) has put pressure on what is already a low margin business (normalized at ~5%). As previously mentioned, the competitive advantages are hard to determine as they do not sell differentiated apparel. Their survival will depend on operational efficiency and although their track record is solid in this category, it is not enough to warrant continued interest.