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.

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