[Past Post] My 1st due diligence post on $GOED, a potential multi-bagger.

Nearly a year ago, in Q1 2022, I made my initial post on Reddit about $GOED (now $POL). Since then, I have also provided updates in subsequent Reddit posts, which I plan to share here on Medium as well.

In any case, let’s travel back to a year ago and see what I said about GOED (note that this was before all of the audit debacles).

Goedecker (GOED) is an e-commerce business that sells appliances and furniture in the US. A reverse merger happened in Q2 2021 which caused massive share dilution and financial misrepresentation. The legacy Goedecker acquired Appliances Connections in a deal valued at 200 million (via share dilution). Legacy Goedecker was not a very well-managed business, making 56 million in revenue in 2018 and 55 million in 2019. Appliances Connections on the other hand is the real deal, making around 300 million in revenue for 2020, 540 million in revenue for 2021, and currently expected 640 million in revenue for 2022.

https://www.appliancesconnection.com

The management team from Appliances Connection moved to Goedecker (Basically, Goedecker is now Appliances Connection). They have made management changes and hired new talents. More can be viewed here (https://investor.goedekers.com/overview/default.aspx) and their presentation (https://s25.q4cdn.com/225826556/files/doc_presentations/2022/05/GOED-Q1-2022-Investor-Presentation.pdf).

Their CEO Albert Fouerti (https://thecorporatemagazine.com/building-a-brand-albert-fouerti-business-leader/) started Appliances Connection with his brother Elie in 1999 and is now a well-established, growing e-commerce furniture and appliances retailer.

First of all, let's begin by checking out their financials:

In my opinion, Goedecker is a company that is widely misunderstood. Despite having a market capitalization of 170 million, it is not on the radar of most people and funds, which has resulted in its current undervaluation. Furthermore, this undervaluation has been compounded by the general decline of the market.

Additionally, the reverse merger was completed in Q2 2021, meaning that the company’s combined revenue and earnings are only reflected for Q3 2021, Q4 2021, and Q1 2022. This means that the FY2021 revenue and earnings do not provide a clear representation of the business, as Q1 and Q2 are not easily visible on stock screeners.

https://www.sec.gov/edgar/browse/?CIK=1810140&owner=exclude

According to the 10K, FY2021 revenue is 362 million (this figure doesn’t include what Appliances Connection generated in 2021 Q1 and Q2), likewise, net income is at 7.6 million without taking the first half of the year in consideration.

The Pro Forma report provides a post-merger perspective on the company’s financial performance, allowing us to better understand its achievements. The unaudited pro forma results presented below (in thousands) reflect the impact of the AC and AG Acquisitions as if they had been completed on January 1, 2020. Adjustments have been made to reflect pro forma events directly related to the acquisitions.

Based on the earnings call transcripts and ER information, we can interpret the revenue and earnings as:

I have calculated the Q3 revenue by subtracting the six-month pro forma revenue from the nine-month pro forma revenue, among other calculations. However, the total revenue of Q1+Q2+Q3+Q4 amounts to 548.4 million, which is not consistent with the reported 541 million. Similarly, the total FY2021 net income derived from various 10Q pro forma accounts does not add up to the 27.9 million stated in the FY2021 10K.

This discrepancy may be caused by differences in accounting methods, specifically, that older pro forma reports may not have accounted for the loss incurred by Goedecker. Furthermore, it is possible that the high net income reported in Q1 and Q2 of 2021 was due to tax rebates resulting from the COVID-19 pandemic. However, the company’s 10-Q reports do not note this.

Therefore, it is important to view the chart above with a degree of caution.

Nonetheless, what is confirmed by the company is the following:

• 541 million revenue in FY2021
• 27.9 million net income in FY2021
• 370 million revenue in FY2020
• -11.2 million net loss in FY2020. (It is possible that this loss was used to offset the tax rebates received in Q1 and Q2 of FY2021, which could explain the high revenue figures reported in those quarters.)

In any case, it is important to consider the information above only as a reference, given the complexities of calculating pro forma and reverse merger results, which are often unaudited.

To gain a better understanding of some of the issues discussed above, it may be helpful to review the footnotes included in the FY2021 10-K.

Income tax benefit (expense). We had an income tax net benefit of $4.4 million for the year ended December 31, 2021, as compared to an income tax expense of $0.7 million for the year ended December 31, 2020. As a result of the Appliances Connection Acquisition, the Company is able utilize previously derived net operating losses, as it is more likely than not that the Company will be profitable.

Net Income (Loss). As a result of the cumulative effect of the factors described above, we had net income of $7.7 million for the year ended December 31, 2021, which included net income of $30.6 million from Appliances Connection for the period from June 2, 2021 to December 31, 2021, as compared to a net loss of $21.6 million for the year ended December 31, 2020, an increase of $29.2 million, or 135.6%. Excluding Appliances Connection, our net loss increased by $1.4 million, or 6.3% for the year ended December 31, 2021.

Future Growth:

On the Q1–2022 Earnings Call, the CEO reiterated their Q4 target:

We forecast high teens to low 20 sales growth for the year compared to 2021 pro forma sales and gross margins and adjusted EBITDA margins relatively flat to our 2021 full year pro forma results, which were 23.3% and 9% respectively.

Based on the reported revenue of 152.8 million in Q1 2022 and the company’s projection of a 16–22% growth rate in revenue from the 541 million reported in FY2021, we can estimate that the company’s revenue for the next fiscal year will fall within the range of 620 to 660 million.

Analysts on https://finance.yahoo.com/quote/GOED/analysis?p=GOED expects:

As stated in their Q4 and Q1 earnings calls, their quarterly fill rate is at 3.5%

The definition of fill rate is the percentage of customer orders you’re able to meet without running out of stock at any given time. A strong fill rate is at or near 100%, meaning you’re able to fulfill all of the wholesale sales you make without stockouts, backorders, or lost sales.

Albert Fouerti in Q1 2022 Earnings call:

Unfortunately, I mean, it’s almost holding steady to what it was in the past, I would say Q4 of 2021. We’re looking anywhere from about 63.5%, 63% of fill rate. We’re still struggling with the same struggles that we had in the past. Hopefully, we’re looking forward to the next Q2 or Q3 to get some type of relief in the supply chain.

Albert Fouerti on Q3 2021 Earnings call:

Our historical highs anywhere from eighty five percent to ninety percent and that’s really what we’re trying to get to in 2022

So… increasing the fill rate back to even 75% will increase their sales by at least 10% which is a bonus on top of their organic e-commerce appliances/furniture sales growth!!!!

Albert Fouerti in earnings call:

We continue to believe that we are well on the way to becoming a company with $1 billion in annual sales in the next few years

Now the juicy part… Valuation:

Currently trading at $1.6 (as of writing)

Outstanding shares = 106.4 million

Warrants (1:1) = 92.5 million (weighted-avg exercise price of $2.25 with contractual life of 4.42yrs)

• What warrants does is essentially give investors the right to purchase the share at the exercise price, the company will issue these share (dilution), however, the company receives the cash which adds to their enterprise value

Assumption 1 (Pessimistic basis):

$GOED is trading below the weighted avg $2.25 so warrant dilution is non-existent or at least minimal. We assume outstanding shares to remain at 106.4 million.

Let’s assume net income drops, and is lower than FY2021, from 27 million to 20 million

20/106.4 = 0.189 EPS

Assume expected revenue growth of 15% CAGR, PE of 12:

0.189*12 = $2.27 (42% upside)

Assumption 2 (bullish case):

As the supply chain crisis subsides, the fill rate will return to 85%, with revenue continuing to grow at 15–18%. Profit margins increases to 5–6% as freight cost and transport costs etc. are reduced, and the revenue hits the CEO’s expectation of $1 billion.

Net income = 1,000,000,000*5.5% = 55 million

With their current authorized 25m buyback program (blackout period ended 2 days ago), there is a possibility to reduce share dilution from warrants (perhaps only slightly), let’s assume from 200m to 180m shares outstanding

EPS = 55/180 = 0.3

Analysts also expect 0.3 to 0.38 EPS in 2023, now assuming 15 PE (continuous growth)

0.3*15 = $4.5 (181% upside)

Analysts have a price target of $5 (low) and $8 (high)

Now for some Catalysts:

• The next quarterly report will display the correct TTM info (21Q3, 21Q4, 22Q1, 22Q2) which will help stock screeners. Also, gain coverage.
• $25 million authorized buyback plan can be put into affect after the blackout period (which ended 2 days ago).
• Rebranding happening which according to the CEO will happen ‘in the next few weeks’.
• Introduction to the Russell 2000 (unlikely but may happen)
• General recovery of the market
• Continuous Rev/earnings Growth and more coverage.

Risks:

• Cost of living crisis, lower demand for appliances/furniture and reducing revenue and earnings
• Supply chain shock lasting (or worsening) far beyond 2023 which will hurt profit margins
• Recession, rising interest rate, general market downturn
• Proforma results are unaudited so it’s hard to say whether it’s correct or not, also since it was a private company, appliances connections doesn’t disclose any financial statements prior to 2019.
• Risk of warrant dilution (although cash received will go towards Enterprise Value)
• Catalysts not forming (e.g. not introduced to russel 2000), market doesn’t recover, rebrand not effective…

All in all, I believe it’s a good buy and remains one of my highest convictions based on its financials, decent future, and nice margin of safety.