March 20, 2017 - 12:19pm EST by
2017 2018
Price: 7.00 EPS 0 0
Shares Out. (in M): 19 P/E 0 0
Market Cap (in $M): 133 P/FCF 0 0
Net Debt (in $M): 36 EBIT 0 0
TEV (in $M): 170 TEV/EBIT 0 0

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PFSweb (“PFSW” or “PFS” or “the Company”) (NASDAQ – PFSW) provides end-to-end eCommerce solutions for over 170 brands, including some very well-known brands like Lego, L’Oreal, Lindt, See’s Candies, and Yves Saint Laurent. The Company started as a logistic provider (i.e., order fulfillment, supply chain, customer care) and through acquisitions has built a comprehensive offering ranging from agency (digital marketing services including website strategy and creative design) and technology (e-commerce system integration and ongoing platform maintenance). More detail on the Company’s operations is included at the end of the write-up.

 As e-commerce continues to grow, more companies need to ensure the best possible, easy to navigate website with easy shopping features and great online marketing. For many businesses, it is not cost effective to design and maintain this in-house. This is where PFS gets involved and can either provide a full-service offering or a partial-service offering.

We like the business because of its recurring revenue (although degree of recurring revenue differs depending on the segment), its inherent organic growth and its profitability profile as the business scales beyond its current size and the Company focuses more on the bottom line. This focus on profitability has recently been reinforced during their last earnings call.

While the Company experiences different competition in each of its various segments, very few competitors can provide an end-to-end solution like PFS. PFS is also one of the few players that is truly global. The investor presentation has a slide describing the competition in the Agency, Technology and the Operation segments. One of the competitors, Radial, Inc. is the old GSI Commerce entity which has changed hands a number of times. It was originally sold to eBay Inc. (NASDAQ – EBAY) who then sold it to Permira as part of the separation from PayPal Holdings Inc. (NASDAQ – PYPL) in 2015. Permira has since merged the business with Innotrac Corp., an e-commerce fulfillment firm.

We believe the best way to measure the Company’s performance is through the service fee equivalent revenue “SFR” (see page 15 of the investor presentation for more on this) and EBITDA.  SFR has increased from $119 million in 2013 to $229 million in 2016 while EBITDA has grown from $10.7 million in 2013 to $18.2 million in 2016. Performance in 2016 was disappointing and well below the Company’s initial guidance of $23.0 to $25.0 million of EBITDA. More broadly EBITDA is actually down compared to 2015 when it reached $20.7 million despite significant organic and M&A growth. We believe the declining profitability during this period has been caused by the Company significantly investing for growth (sales people, infrastructure) as well as the loss of a retail customer (more on this later) in 2016.

We believe that the situation is ripe because the Company is now slowing revenue growth and focusing on maximizing profitability. 2017 guidance calls for SFR between $240 and $250 million and $23 to $26 million of EBITDA. During the last earnings call, both the CEO and CFO made a few comments indicating a higher focus on profitability including “we're moving into 2017 with a greater emphasis on optimizing financial and operational performance across our business and being more selective in taking on new fulfillment business.” and “As disclosed in the earnings release this morning, we will evaluate our omni-channel operations in 2007 and focus on driving higher margin -- sorry, 2017, and focus on driving higher-margin engagements. On a year-over-year basis, this will present a slight revenue headwind. However, we plan to utilize the related infrastructure capacity for more profitable engagements in the second half of the year.”

We wouldn’t be surprised if this is the first step towards a value maximization event sometime in 2018 after the Company meets expectation for a few quarters, regains investor confidence, and trades at a higher price (which would be a better basis to start a sale process). We would note the presence of two interesting shareholders. First, Privet Fund LP, an activist fund, has been on the board for a numbers of years, and is probably growing impatient given the poor stock performance. While they did sell some shares at a much higher valuation, we believe they are still very much involved. Privet has a history of selling companies in which they take a board seat and we suspect that PFS won’t be different. Secondly, Transcomos Inc., a large Japanese BPO company, has been an investor (with board representation) since 2013. We suspect that they will also like a liquidity event at some point.

At $7.50 per share, the market cap is around $140 million and the enterprise value (“EV”) is around $175 million (PFS has $24 million of cash and $60 million of debt). At the mid-point of the EBITDA guidance, PFSW trades at an undemanding forward multiple of approximately 7x.

We expect 2018 EBITDA to be somewhere between $27 and $30 million. Using our midpoint, this would imply $28.5 million of EBITDA in our base case. Based on the Company’s guidance, the Company expects to generate approximately $6 million of cash in 2017. 

At 7x 2018 EBITDA, the stock in one year would be worth $9.10, representing an upside of 22%. At 8x 2018 EBITDA, the stock in one year would be worth $10.60, representing an upside of 42%.  And at 9x EBITDA, the stock in one year would be worth $12.20 representing an upside of 62%.

Given the revenue growth, the operating leverage and the Company’s focus on profitability and margin improvement, we don’t believe these EBITDA targets are excessive. We also believe that 8-9x EBITDA would be attainable as a standalone given the long-term revenue growth potential. The stock did trade at an average NTM EBITDA multiple north of 10x between 2014 and 2016 when EBITDA was growing and investors had more confidence in management. We personally believe the higher-end range is more likely to come through a sale, which we believe is likely within a relatively short timeframe (2 years).

The Company just announced its 2016 results. 2016 was characterized by strong SFR growth, strong booking growth, and additional investments in sales and infrastructure. The Company also increased its capabilities (it’s the only provider able to advise companies on all key e-commerce platforms). The negative news from the announcement was the mutual decision between PFS and a retailer (a fulfillment client) to part ways. PFS had already announced in October that it had problems with a seasonal retailer and was losing money on that account (one reason it missed its initial EBITDA guidance for the year) and was trying to renegotiate the contract. The Company has now announced it is disengaging from that customer leading to a reduction of its 2017 revenue guidance (EBITDA guidance remained the same).

Potential buyers would include logistic companies, BPO companies, consulting companies or large competitors such as Bertelsmann SE & Co. (BER – BTG.BE) (they own Arvato) or Radial.

Risks include customer turnovers and operational missteps (like what just happened with that one customer in 2016). 

Here is a description of the Company from its website:

Headquartered in Allen, TX, PFSweb, Inc. (PFS) is a leading provider of eCommerce and multichannel outsourcing solutions for global consumer brands, online retailers, and brand manufacturers. We provide a broad range of services, including eCommerce technology, order management, customer care, global logistics and fulfillment services. We craft fully integrated solutions that are customized to each client’s unique set of requirements to create Commerce Without Compromise. Our solutions provide optimal customer experiences, high-performance operations, cost savings, easy seamless entry into international markets, and client freedom to concentrate on core competencies. We expertly serve both direct-to-consumer (D2C) and business-to-business (B2B) initiatives, providing services to more than 160 clients who operate in a range of national and international markets including apparel, luxury goods, home improvement, sporting goods, home décor, collectibles, food & beverage, health & beauty, and consumer electronics, among others.

The digital agency, our first line, works to capture shoppers’ attention and provide a site that is easy to use and fun to shop on. Once engaged, customers need a reliable technology platform to make transactions with, which translates into our robust back-end order management system, supported by our experienced IT professionals. The final drive home, our operations component works with our technology segment to accurately and quickly deliver packages, as well as provide customer care throughout the buying journey. These three key solutions are held together by our technology ecosystem and complimented by our strategic eCommerce consulting practice, which uses data-driven decision making to make actionable recommendations for your business.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


1. Company matching or exceeding its guidance

2. Restoring investor confidence

3. Sale of the Company

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