Bang & Olufsen BO DC S
July 23, 2014 - 7:05pm EST by
perspicar744
2014 2015
Price: 70.50 EPS $0.00 $0.00
Shares Out. (in M): 43 P/E 0.0x 0.0x
Market Cap (in $M): 550 P/FCF 0.0x 0.0x
Net Debt (in $M): 56 EBIT 0 0
TEV ($): 605 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Electronics
  • Denmark
  • Manufacturer
  • Consumer Electronics
  • Hardware
 

Description

Top 10 reasons to be short Bang & Olufsen, the consumer electronics company offering snazzy-designs and sticker-shock prices.  Trades in Danish Kroner (DKK/USD fx rate is 5.539) at ~45x '16 Est EPS which they won't hit.  US$550m market cap, EV US$605m.  43.2m shares out.  Sales are US$500m.

 

  1. Ridiculously high cost structure that they can’t change. 
    The company is the pride of Denmark, but makes it all there and runs a cost structure that is stratospheric.  They charge accordingly and price themselves out of the market.
  2. Franchised dealer network has retail leases and contractual territory rights preventing a strategy change or alternative distribution.  The dealers are slowly closing stores because they aren’t profitable so the points of presence for distribution are shrinking.
  3. EBITDA margin:                 positive 5.1%
    Operating Margin:           negative 6.7%
    Estimated eventual return to break even EBIT has the stock up
  4. Burning the furniture to heat the house.
    A series of asset sales and sale/lease back transactions have helped fill the hole on some of the losses.  Recent transaction was sale leaseback of their Czech Republic land & facilities which brought in approx. US $14.2m (DKK 79m).
  5. Can’t sell-through their high end products, and now even their “B&O Play” more modestly priced products (thought still relatively expensive… ie headphones for $199-$599) are facing revenue set-backs.  Co blames it on focused AV activity relative to audio (even though AV price points are vastly higher), and low level of new product introductions.  
  6. Revenue is shrinking.
    Is among a small group of companies who have shrunk in the past 5 years to below their 2009 sales low. 
    In USD:  fiscal yr ending May-2009: $518m    TTM through Feb-2014:  $501m

    But stock was ~40 then, now 70.  North America is down double digits due to “store relocations” (aka closures), and they are even shrinking in the faster growing BRIC market down 36%!
  7. Only bright spot is the Auto biz at 20% of sales and growing ~10%.  Announced new sound systems for the Audi TT and Aston Martin Vantage.  Don’t see too many of those on the roads though.
  8. Dilution.
    In June did a secondary of 3.927m shares at DKK 66 bringing in ~US$45m.  6 month share lock-up expires the day before xmas.
  9. Will have a very tough time meeting estimates which I believe were hockey sticked a bit to get the recent offering done.  Aiming to hit EPS of negative 0.92 DKK for the fiscal year ending May.  This is up from negative 4.30 DKK last year.  To hit the number they’ll need to do +0.66 DKK in this fiscal Q4.  They pre-announced sales up 8.2% for the quarter.
  10. The consumer electronics companies doing it right, such as Samsung, LG, et al, have extremely strong product lines with unnoticeable performance difference to BO products. And the price advantage is extreme with BO retailing at multiples of the comparable retail products.  That’s a lot to pay for snazzy design.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Further store closures
- Revenue setbacks if new product intros fizzle
- Hard to hit recently raised estimates
- Will this brand still exist the next time you're in the market for uber-high end electronics?
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    Description

    Top 10 reasons to be short Bang & Olufsen, the consumer electronics company offering snazzy-designs and sticker-shock prices.  Trades in Danish Kroner (DKK/USD fx rate is 5.539) at ~45x '16 Est EPS which they won't hit.  US$550m market cap, EV US$605m.  43.2m shares out.  Sales are US$500m.

     

    1. Ridiculously high cost structure that they can’t change. 
      The company is the pride of Denmark, but makes it all there and runs a cost structure that is stratospheric.  They charge accordingly and price themselves out of the market.
    2. Franchised dealer network has retail leases and contractual territory rights preventing a strategy change or alternative distribution.  The dealers are slowly closing stores because they aren’t profitable so the points of presence for distribution are shrinking.
    3. EBITDA margin:                 positive 5.1%
      Operating Margin:           negative 6.7%
      Estimated eventual return to break even EBIT has the stock up
    4. Burning the furniture to heat the house.
      A series of asset sales and sale/lease back transactions have helped fill the hole on some of the losses.  Recent transaction was sale leaseback of their Czech Republic land & facilities which brought in approx. US $14.2m (DKK 79m).
    5. Can’t sell-through their high end products, and now even their “B&O Play” more modestly priced products (thought still relatively expensive… ie headphones for $199-$599) are facing revenue set-backs.  Co blames it on focused AV activity relative to audio (even though AV price points are vastly higher), and low level of new product introductions.  
    6. Revenue is shrinking.
      Is among a small group of companies who have shrunk in the past 5 years to below their 2009 sales low. 
      In USD:  fiscal yr ending May-2009: $518m    TTM through Feb-2014:  $501m

      But stock was ~40 then, now 70.  North America is down double digits due to “store relocations” (aka closures), and they are even shrinking in the faster growing BRIC market down 36%!
    7. Only bright spot is the Auto biz at 20% of sales and growing ~10%.  Announced new sound systems for the Audi TT and Aston Martin Vantage.  Don’t see too many of those on the roads though.
    8. Dilution.
      In June did a secondary of 3.927m shares at DKK 66 bringing in ~US$45m.  6 month share lock-up expires the day before xmas.
    9. Will have a very tough time meeting estimates which I believe were hockey sticked a bit to get the recent offering done.  Aiming to hit EPS of negative 0.92 DKK for the fiscal year ending May.  This is up from negative 4.30 DKK last year.  To hit the number they’ll need to do +0.66 DKK in this fiscal Q4.  They pre-announced sales up 8.2% for the quarter.
    10. The consumer electronics companies doing it right, such as Samsung, LG, et al, have extremely strong product lines with unnoticeable performance difference to BO products. And the price advantage is extreme with BO retailing at multiples of the comparable retail products.  That’s a lot to pay for snazzy design.
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    - Further store closures
    - Revenue setbacks if new product intros fizzle
    - Hard to hit recently raised estimates
    - Will this brand still exist the next time you're in the market for uber-high end electronics?

    Messages


    SubjectNever anyone in the 58th st store
    Entry07/23/2014 07:06 PM
    Memberbaileyb906
    This was timely bc I walked by there today around 1:30 and no one was there and I thought to myself: "is there ever anyone in this store?"  (I walk by there a fair amount)

    SubjectAgree. Short this too
    Entry07/25/2014 08:39 AM
    MemberSiren81

    It might be even worse than you’ve laid out… Even if I make some “unrealisticly-aggressive” assumptions, the stock does not look cheap. For this exercise I’ve assumed:

    -          Sales per unit at B1 stores rise over 40% and go back to their 2007 all-time highs

    -          Non-B&O Play consumer gross margins rise 300bps and go back to their 2007 all-time highs

    -          Automotive sales increase 40% and 3rd party sales of B&O play double

    -          No corresponding increase in operating expenses

    Given the company has no credible turn-around plan and model appears intrinsically flawed, I believe these assumptions are entirely unrealistic. However, even in this case shares still trade at >13x P/E!


    Subjectanyone able to short this on IB?
    Entry07/25/2014 08:23 PM
    MemberWeighingMachine
    seems like I can't trade Denmark which seems odd to me.  Nice idea btw!

    SubjectRE: RE: turnaround
    Entry07/29/2014 04:37 PM
    Memberperspicar744
    Good question and comments greenshoes and Siren.
     
    I'm with Siren on this...  The pain they would have to go through to get rid of the dealer network and really change the bizmodel would be so extreme that they'd likely have to visit bankruptcy court en route. 
     
    Granted the strong brand name would sell well at lower price points, and though gross margins would be lower they might eek out a decent net margin, say mid-teens... similar to Samsung, if they produced the goods in lower cost countries... but they can't just do that, and the identity of this company is very tied to being Danish so there is no current plan to escape their cost structure and distribution arrangements.
     
     

    SubjectTime to cover
    Entry10/30/2014 10:21 AM
    Memberperspicar744
    With the outlook still bleak, it may be early to cover but I'm closing this out for the following reasons:
    - stock down from 70 to 44
    - Currency also moved favorably ~+6.5% to DKK 5.9
    - modest insider buys
     
    Will look to revisit higher if they pull off a decent Xmas season.
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