The 26th Annual ROTH OC Conference included presentations and panels featuring more than 60 consumer companies, including publics and privates across the active lifestyle, brand management, consumer electronics, food & beverage, healthy living, infant & juvenile, and restaurant sectors. We came from this year’s four-day event feeling incrementally more positive on select names and believing that M&A will soon accelerate.
M&A Likely To Accelerate Given consumer companies strong equity currencies and generally clean balance sheets, we believe many consumer-focused companies are pursuing acquisitions in the absence of much end market growth. Along these lines, Bauer Performance Sports (BAU.TO, Buy) recently announced its intention to acquire Easton’s diamond sports business, while Crown Crafts (CRWS, Buy) is seeking deals to bolster its top line. Meanwhile, Black Diamond (BDE, Neutral) is exploring strategic alternatives for its Gregory Mountain Products business, which may command a premium valuation given relatively decent growth and a host of potential suitors. Most companies noted willingness to lever up temporarily beyond 2.0x-3.0x EBITDA given accommodative debt markets and potential for earnings accretion.
Growing Interest In Brand Licensor Business Model Consistent with this M&A theme, brand licensing appears to be gaining traction. Several companies, including Sequential Brands, (SQBG, Buy), Cherokee (CHKE, Not Covered), and Xcel Brands (XELB, Not Covered), as well as Authentic Brands and Bluestar Alliance are making a bigger push into licensing, with slight variations to the traditional Iconix (ICON, Not Covered) business model of focusing on brand management and marketing while licensing out manufacturing and distribution. This is pushing deal multiples higher and creating a need for larger acquisitions to move the needle. While this creates certain risks, we believe the model remains attractive, given high margins, limited working capital requirements, and annuity-like revenue streams.
Branding Still Imperative In Active Lifestyle We believe active lifestyle companies are well positioned for long-term growth given the proliferation of outdoor recreational activities and healthy living. While traditional apparel providers may struggle due to a focus on basics and a trend away from non-logo apparel, we believe active lifestyle equipment companies such as Bauer, Black Diamond, Johnson Outdoors (JOUT, Not Covered), and Escalade (ESCA, Not Covered) are somewhat more insulated given the importance of high-quality performance-oriented equipment and lesser competition from the likes of Nike (NKE, Not Covered).
Electronics Accessories Targeting International To Drive Growth The environment remains challenging at U.S. Retail, given Holiday weakness at Best Buy and Target, and RadioShack’s more recent announcement to shutter roughly 25% of its company-owned stores. As such, companies like Skullcandy (SKUL, Buy) and ZAGG (ZAGG, Neutral) are turning to international for growth, while reemphasizing brand through better product segmentation and/or new store fixtures, etc. Meanwhile, the gaming console replacement cycle appears to be more of a potential revenue driver for headsets in Holiday 2014 and 2015.
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