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1847 Goedeker (NYSE:GOED) owns the Appliances Connection brand, which is a large provider of home appliances for online sale. Unlike other categories, home appliances are in the process of moving to online sale with plenty of online migration remaining. There are reasons to believe GOED is well-positioned to win in the space.
Why Goedeker May Grow Share Over Time
Big box retailer such as Home Depot (HD) and Lowe’s (LOW) don’t have the breadth of selection. For example, on a recent search I performed Appliances Connection had 4x the built-in dishwashers SKUs that Home Depot offered. Mom and Pop stores will struggle with the scale of an online model. Vendors going direct will never be able to offer the breadth of selection some consumers want. And yes there are other online providers of appliances, including, of course, Amazon, but there’s no reason to think that Appliances Connection can’t compete with them, especially since not all home appliance brands, especially premium brands, will want to work with Amazon and the need for in-home service and installation make appliances a more involved fullfilment experience.
There are reasons to think the model is working, sales grew +46% in 2021 on a pro forma basis and are expected to increase “high teens to low 20s” in 2022. That growth and growth expectation suggests that Goedeker is taking share as appliance purchases move online.
Strategic Initiatives May Further Boost Growth
Goedeker acquired Appliances Connection last year (even though Appliances Connection was by far the larger company) and the CEO, who previously ran Appliances Connection has a number of initiatives that may boost growth including notably:
- Rounding out their distribution center footprint (currently they are only in St Louis, MO and Trenton, NJ with some showrooms elsewhere)
- A greater focus on serving contractors and designers in addition to end customers
- Private label offerings
Appliance Sales Are Less Cyclical
Historically US appliance sales have held up reasonably well in recessions. Across post war recessions appliance sales outcomes over past recessions have been (for annual sales) +2% in 1980, -2% in 1982, -1% in 1991, +5% in 2000, -6% in 2009 and +9% in 2020. So a recession would likely be a drag on sales, but not necessarily and probably not a disaster for the business that could even grow through a recession. It’s possible that the migration to online purchases offsets a softer appliance market, since GOED may continue to grow market share.
Valuation
Then the valuation of GOED is relatively compelling. 2021 pro forma income was $27.9M, putting the company on a price to earnings ratio of a little under 8x. That’s perhaps a reasonable multiple for retail in aggregate, but if GOED can deliver meaningful growth and perhaps margin expansion, then the company is likely undervalued.
To come at it another way, is notable that GOED acquired Appliances Connection in mid 2021 for $224.7M, before the acquisition, GOED had a market cap of around $40M roughly speaking. and now the whole company has a market cap of $215M. Thus investors in GOED today are arguably buying the whole company at a 5% discount to the standalone Appliances Connection purchase price and getting the legacy business (where there appear to be substantial cost savings given overlapping activities) for free. It’s not a screaming buy on that basis, but is interesting if you have faith in the assets, strategy and potential cost savings from combining Appliances Connection and Goedeker.
Potential Price Target
If things go well, it seems possible that the company could grow earnings 20% over the next two calendar years to get to post-tax earnings of around $40M for calendar year 2023. If the company has established a degree of category leadership by that point a multiple of 18x appears fair. The warrants would be exercised at $2.25/share at this hypothetical valuation, leading to a price of $4.69/share with the warrant exercise cash treated as cash on the balance sheet. So it’s perhaps reasonable to think the shares more than double from here if things go well.
Risks
One risk is that a lot of numbers from GOED, after the Appliances Connection are on a pro forma basis today given the acquisition closed in June 2021. This makes true year-on-year comparisons complex until later in 2022 when the acquisition has been in place a full year and growth and margin analysis will require fewer accounting assumptions. Often M&A fails to deliver expected results.
The current CEO and COO essentially cashed out with the Appliances Connection sale, which was primarily a cash deal. The CEO leases property to the company and the COO also owns a company that has a management contract with GOED. So incentives may not be fully aligned with senior management who have less skin the game than they once did.
The category may suffer post-covid. During covid a lot of consumers spent money on their homes generally, perhaps pulling forward demand for appliance products in particular. This could cause a lull in sales going forward. Still, I argue above that this category may not see the post covid lull that many expect. In Q4 2021, arguably a post-covid period, pro forma sales grew +32%. Guidance does imply softer sales in 2022, but sales are still expected grow double digits and there are reasons to think guidance may be conservative.
The company does have warrants in its capital structure which start to become dilutive at a price of over $2.25/share and expire in March 2025. This may reduce the upside in the stock if things go relatively well and especially if the potentially incoming cash is allocated poorly.
GOED operates a relatively asset light model today, to the extent they want to control more of the customer experience in terms of a broader set of fulfillment centers and perhaps associated delivery and investment that will require potentially material investment.
Conclusion
GOED appears an inexpensive online-focused retailer with a good opportunity to become a key player in the growing and potentially less cyclical market of online appliance sales and delivery/installation. Multiple strategic initiatives and management appointments may support that growth, and reduced reliance on pro forma reporting in mid 2022 may make for a cleaner story for investors. The stock appears inexpensive today at 8x pro forma earnings when growth may continue to come in at double digits and margins may expand with operational leverage.
What would contradict this thesis would be sales growing at closer to single digits over the coming quarters, material investment by GOED without compensating growth and/or the company showing a step down in growth or margins as it moves off pro forma comparisons later this calendar year.
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