1847 Goedeker Inc. (NYSE American: GOED.WT)

Written on June 2nd, 2021

Price of warrants at time of writing: $0.77

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Disclaimer: This report is not financial advice - please do your own due diligence. 

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Situation Overview

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On May 27th, 2021, Goedeker’s Inc, a primarily online retailer of high-end appliances and furniture, announced a share offering that sent the stock tumbling down 70% in a single day. Often times these violent moves cause extreme mispricings, so I decided to take a closer look in case I found anything promising.

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Not surprisingly, the offering was extremely dilutive to previous shareholders. Goedeker raised $205 million by selling 91,111,111 units priced at $2.25 each. Each unit consisted of one common share (Ticker: GOED) and one warrant (Ticker: GOED WS) that is exercisable at $2.25 at any time between now and five years from now. Consider the offering price with the fact that Goedeker IPO’d in August 2020 at $9 and was sitting at $5.7 on the day prior to the offering announcement. After the offering was announced, the stock reached a low of $1.77.

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The share offering was aggressively priced for two reasons: 1) Goedeker was likely going to file for bankruptcy if they did not receive a much-needed cash infusion, and 2) Goedeker needed the cash to close its acquisition of Appliances Connection, a much larger and more profitable retailer of high-end appliances. The purchase price of Appliances Connection was $212 million, consisting of $180 million in cash and $42 million worth of Goedeker shares.

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Along with the share offering, the company also raised $70 million worth of debt in the form of a $60 million senior secured credit facility and a $10 million term loan.

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Needless to say, this is an extremely messy special situation. The board and management clearly lacked capital markets IQ by issuing such a dilutive deal for previous shareholders, but after taking a closer look, I believe that the recently issued warrants represent an extremely asymmetric risk/reward opportunity with massive upside opportunity and limited downside. As I lay out in more detail below, I believe that the fair value of GOED’s common share is somewhere in the $5 range, which puts a 10x multiple on $75 million of EBITDA for 2021. This value for the common share would imply a $2.75 value for the warrants even without including their time value. At the warrant’s current price of $0.77, this represents an attractive margin of safety that could potentially deliver multiples on invested capital.

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Business Description

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As mentioned above, both Goedeker’s and Appliances Connection are premium appliances and furniture retailers. While both companies maintain showrooms, over 95% of the companies’ sales are online.  The companies primarily use “bottom-of-the-funnel” marketing, where they focus their marketing spend on customers towards the end of their shopping experience who already know the exact appliance model that they want to purchase. The practical application of this is that if you search for “appliances” on Google, you won’t see Goedeker’s name show up. If you search “KITCHENAID KRSF705HPS”, however, you will likely see Goedeker’s site show up on the first page.

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Goedeker’s and Appliances Connection maintain little-to-no inventory in their warehouses. When a customer places an order, they place an order with a supplier, who then ships the product to their warehouse. An item is only booked as revenue once it ships the product from its warehouse to the customer, which causes the average time between a customer placing an order and its ship date to typically range around 20-25 days for Goedeker’s and 10-15 days for Appliances Connection.  The majority of the differential in shipping dates between the two businesses is accounted for by the fact that Appliances Connection shares a warehouse with the largest appliances buying group in the Northeast. Other retailers, like Goedeker’s, have to rely on long shipping distances and buying events from OEMs to get inventory at competitive costs. This not only accounts for a fill rate (total revenues divided by total orders) differential but also a gross margin differential between the two companies. The additional shipping costs add over 300-500bps of gross profit margin to Appliances Connection’s bottom line.

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While the fill rate for the combined companies has historically been around 80%, it has fallen to around 60% since COVID, which has significantly reduced revenues in 2021. Industry-wide inventory shortages, as well as constrained supply chains, have limited how much inventory the companies can secure relative to their written order book. In their acquisition announcement deck, and in their most recent conference call, however, management sees a clear path to fill rates normalizing to 80-85% as the company opens new distribution centers in Texas, Florida, and California in 2021.

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Legacy Goedeker’s can also begin to assuage their cash leakage by switching their charging model. As soon as a customer places an order, Goedeker’s charges their credit card. This is not a terribly efficient model, given that if an order is cancelled, Goedeker has to pay credit card chargeback fees. Appliances Connection instead uses a credit card authorization model, where the customer’s card does not get charged until the product is actually shipped to the destination. Not surprisingly, CEO Doug Moore announced that Goedeker’s was moving to the authorization model once the acquisition closed.

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Industry Description

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The appliance market can be broken down into core and premium markets. The big box stores (think Lowe’s and Home Depot) focus almost exclusively on core, while Goedeker’s and Appliances Connection focus on the luxury spectrum of high-end appliances. After this merger is completed, the combined company will become the largest specialty retailer of high-end appliances with forecasted annual revenue north of $500 million. This merger would make them the largest player in North America’s $23 billion appliance market which is expected to grow at 13.7% through 2025. Its closest competitor in the premium space, AJ Madison, generated just $75-$100M in revenue in 2020.

 

The natural follow-up question is why did Appliances Connection choose to be acquired by Goedeker’s?

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The intuitive way to look at this acquisition is that this was a simple way for Appliances Connection to go public via the Goedeker’s shell. Similar to a SPAC, Appliances Connection can use the cash-infusion provided by the Goedeker’s offering to raise capital from the public markets. My point of view is that the Fuerti brothers (the owners of Appliances Connection) used Goedeker’s poorly managed situation as an opportunity to effectively “IPO” their stake. The brothers will join the Goedeker’s board and continue to run Appliances Connection, and hopefully bring their expertise in the ecommerce space to improve the situation at Goedeker’s.

Ultimately, the acquisition will decrease shipping times and increase fill rates for the combined company given Appliances Connection warehouse in Hamilton, NJ which geographically complements Goedeker’s more centrally located St. Louis warehouse.

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Economics Post-Merger

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After the offering, the combined companies are in solid financial standing, having $48 million of net cash. However, the company will also bring in an additional $210 million once the outstanding warrants are exercised.