TUPPERWARE BRANDS CORP TUP
November 11, 2018 - 6:23pm EST by
Mostly_Ugly
2018 2019
Price: 37.03 EPS 4.32 4.60
Shares Out. (in M): 49 P/E 8.6 8.1
Market Cap (in $M): 1,799 P/FCF 8.4 7.2
Net Debt (in $M): 848 EBIT 339 360
TEV ($): 2,647 TEV/EBIT 7.8 7.4

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Description

If you bought Tupperware 5 years ago and just held, you'd have seen the stock price decline by 60%.  Even with a generous dividend, your total return CAGR would have been a little worse than -13% (and you would have had the pleasure of paying taxes on the privilege besides!)  Tupperware revenue peaked in 2013, and has been declining more than 4% per year since. The bear arguments are powerful: women have more attractive revenue generating opportunities now than in the past so no one wants to sell Tupperware anymore, Amazon is making the MLM distribution of food storage containers irrelevant, and declining multilevel business can get really ugly fast.

 

TUP now trades at 8x forward earnings and with a 7% dividend yield, which makes sense given the fact patterns.  A secular decliner at 2.2x leverage, which will have to cut dividend if trends continue for a couple more years, maybe deserves to trade even lower than 8x.

 

This is an argument to be long TUP.  Street consensus is for revenue to inflect positive (+2%) in 2020.  I think they will do better than that projection, growing sooner and faster.  I think revenue can grow at 4% or slightly above, translating to ~$5.75 in EPS by 2020.  At 14x (conservative for that level of growth/cash flow), I think the stock could hit $80 within a couple years, and you can collect the dividends while you wait.

 

The largest piece of misunderstanding about the company is that the core business is in secular decline.  There is a significant amount of noise in the TUP numbers, and segment disclosure is not as clear as you might wish it were.  However, there are non-operational drivers of the revenue decline over the last five years: their beauty business (which was proven to be a mistake almost from the beginning) has been a disaster, FX has moved significantly against them, and several geographies have had macro challenges or regulatory changes that materially harmed the business.

 

TUP will do ~$2.1 billion in revenue this year.  They report segments by continent and split into emerging/developed economies, but neither of those is how they really run their business.  The economic drivers of the business take place at a country-wide level.

 

To gain insight into countries, you have to dig into the quarterly 8K slide presentations and build out the time series.  Cross referencing with a table in the 10K showing each year which countries surpass US $100mm, $200mm, or $300mm, adjusting for currency, and triangulating shows you that 5 countries account for ~60% of revenue. The below table shows the countries ordered by current size (at current FX rates; Mexico is split into their core and beauty business), their 5 year local currency revenue CAGR, local currency growth in the TTM period, and my base case forward growth:

 

Country

Approx % of rev

5 yr CAGR

TTM

Base case forward

Brazil

13%

20%

-2%

10%

China

12%

24%

19%

15%

US/Canada (Core)

10%

5%

1%

2%

Mexico (Core)

9%

8%

9%

8%

Mexico (Beauty)

8%

-3%

2%

0%

Germany

7%

-4%

-3%

0%

 

A few notes on translating the above to growth going forward:

  • Brazil in TTM period had economic problems, and a major trucking strike which was handled poorly by TUP and significantly disrupted business. I don't have a strong view on whether Bolsonaro's conversion to free market economics is real or not, but certainly the stock market views the leadership change as a positive.

  • China should decelerate, as the scale naturally slows the growth rate and the economic prospects have question marks

  • The US business is for core Tupperware product only, as the beauty business (called Beauticontrol in the US) has been discontinued

  • Mexico beauty (called Fuller) shows some recent signs of stabilizing, but I think needs to be underwritten to ongoing negative growth

  • Germany has felt the effects of a restructuring which saved costs but significantly disrupted operations in all of Europe.  Germany reported +29% in the most recent quarter, which likely contains a lot of noise, but the two year stack is still +10% this quarter which should mean at least a clue that the business has a hope of stabilizing and potentially showing growth from this base.

 

You can (and should) run your own projections for these countries.  I include my base case estimates as a reference point, and they show 59% of the total business growing at 6.8% (assuming constant FX from here).

 

Beyond the top 5 countries, the business is a mix.  Indonesia and India have both been disasters, with MLM regulatory changes the key driver.  South Africa revenue is somewhere in the middle of those two (not yet $100mm as of 2017), but is a bright spot at 20%+ growth the past few years.  (The business was USD$50mm+ in 2010, but we don't have a full time series of growth since; data points were left out in certain quarters such as 4Q 2014.  There isn't a recognizable formula they use for which countries to include, it looks like they use some measure of which countries were significant but there is some fuzziness.) .  Given the rand being 50% weaker now than in 2010, if the interrupted data points look similar to what we know, the South Africa business should cross the USD$100mm threshold either in 2018 or 2019.)  The rest of Europe has been weak, southeast Asia has been strong.

 

If you assume 0% growth outside of the top 5 countries, you get consolidated growth of 4%.  If outside the top 5 it's -2.5%, consolidated growth is 3%.

 

In short, I can underwrite this investment to top line growth in local currency from here, while I think the stock price implies ongoing LSD declines.  That creates a good setup.

 

Additional thoughts and risks:

 

TUP is a very clean structure for an MLM.  They pay 45-50% of retail in total commission dollars (revenue recognition has some variance by country depending on whether or not they use stocking distributors), broadly in line with other MLMs.  The payout level of commission for the actual sale (~25% of retail) is significantly higher than other public MLMs, with another 4-7% of retail in commissions on sale to the direct manager. In most places the payouts can go 3 levels deep but not further.  Unlike say HLF, there are not multiple levels of price points, so there is no volume based incentive for people to fill up their closet with food storage containers. In China, as with other MLMs, the model is different and uses paid employees for the sales force.  The nature of the sales in China (food storage containers and other household products such as water/air purifiers) seem unlikely to create the kind of cult like following that say NUS had a problem with several years ago. The Chinese regulators pay attention to whether something is "good for the social order", and NUS had some issues with overpromising on their "anti-aging" products.

 

The concern about online sales is of course something to worry about.  If you look up various products online, you can easily find substitutes.  But they don't map exactly. Tupperware is a high price point brand, and in general has very satisfied users.  I classify this as a risk going forward, but somewhat mitigated by the history of local currency growth in their most significant markets.

 

If you're wrong on the revenue line, there is some help from the fact that the cost structure is highly variable.  COGs are in the low 30's % range, and commissions paid to the sales force are in the low 40's % range, leaving fixed costs somewhere around 10%.  If sales are low in local currency, certain bonus incentives aren't paid (free trips and etc), meaning that there is actually even less operating leverage on the way down.

 

Management has changed, though there is continuity.  Long time CEO Rick Goings (72) moved to Exec Chairman in May, and a planned transition to Patricia Stitzel, a 20 year company veteran.  Stitzel so far has seemed relatively vague in her communication with investors: talking about great opportunities across the board but demurring on specific areas of strength and weakness.  She likely will be at least incented rationally, as Tupperware has biased heavily toward long term incentives which trigger based on stretch EPS and rTSR targets. The fact that she is the first female CEO of an organization that has always presented itself as serving women perhaps is a positive; however, since so much of the sales force is global and in different languages, it doesn't seem likely that she will have a large impact on rallying the sales force.  If you're hoping for an activist to come in given the price drop, that also seems unlikely in the near term.

 

The dividend is a large risk, as if they cut now (particularly if it was in conjunction with a bad quarter or guidance cut), the stock would drop probably >20%.  They won't be forced to cut it due to cash flow, even if the topline was LSD for a few years. But insider ownership is quite low, so there may not be a lot of pressure to keep the payout up.  One analyst on the last call was arguing that since the market clearly doesn't give them credit for the payout, they should just cut it. The answer they gave was non-committal (the board will review on their traditional schedule).  Mitigants: Stitzel will still presumably be comped on rTSR. I think the company believes they will grow topline from here, and cutting would be an implicit signal that they don't think it's going to happen.

 

Overall, there are significant risks here to the base case, and as they can't be completely mitigated, I would size appropriately.  But given a base case that returns 100%+, I still see the risk reward as skewed to the positive.

 

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.

Catalyst

Dividend at 7% likely won't last at that level; top line growth over next 4 quarters should show safety of dividend and cause a re-rate.  

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