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Tupperware Brands Corporation single-handedly revolutionized the at-home food storage market with its airtight plastic containers. Launched in 1946 by inventor Earl Tupper, these products replaced the then-common heavy and fragile glass containers. Tupperware or similar products can now be found in kitchens around the world.
The company now sells a wide range of premium, innovative kitchen and beauty/personal care products. Its direct marketing approach, through which its goods are sold person-to-person by an independent non-employee sales force of 3.2 million consultants in over 100 countries, has been effective in producing over $2.2 billion in annual revenues without the burdens of traditional retail stores.
While Tupperware has an iconic role in America’s and the world’s kitchens, the weak share price (NYSE: TUP) and depressed valuation are forecasting that it will have a diminished role in the future.
At first glance, the shares have decent appeal as a turnaround investment
With its share price down 55% from the $96 record high set in 2014, and down 31% year-to-date, Tupperware is clearly out of favor. The valuation is cheap at 6.3x consensus 2018 earnings before interest, taxes, depreciation and amortization, or EBITDA. On a price/earnings basis, the 9.4x multiple of consensus 2018 earnings is similarly unchallenging at little more than half the S&P 500’s multiple of 16.4x. Adding to the appeal is the 6.3% dividend yield.
Revenues have remained steady at about $2.2 billion for the past two years, indicating some stability after a 12% drop in 2015. Reported segment profits, or profits at the regional level that exclude corporate overhead, have increased 7% from 2015, while corporate overhead has declined by nearly 12%. Adjusted EBITDA (using a more conventional method than what the company provides) shows similar improvement, increasing by 8% in the past two years. The Adjusted EBITDA margin has risen nearly 2 percentage points to 19.2%. By these measures, Tupperware’s profitability looks strong and steady.
Tupperware’s balance sheet looks healthy as well, with only $738 million in debt (a modest 1.6x Adjusted EBITDA), which is partly offset by $144 million in cash.
Combined with the recently announced CEO change and a potentially huge growth opportunity in the emerging markets, these numbers portray an underpriced yet stable company with real potential for an upward revaluation of its shares.
Looking deeper – not so strong and stable
Beneath the surface, however, Tupperware isn’t so strong and stable. First, its cash flows look tight. After the hefty $140 million in annual dividends, Tupperware has generated little surplus cash flow (or, free cash flow after dividends) over the past three years. Proceeds from selling extra land around its headquarters, along with cash expense savings from its stock-based compensation program, have produced nearly all of its surplus cash.
Even if 2018 produces the results as originally guided by management, for a 2-4% increase in sales and $170-180 million in pre-dividend cash flow1, the company will still rely on a boost in working capital, favorable currency translations and its cash savings from stock options to produce its surplus cash. This thin wedge of surplus cash needs to fund its planned development of the extra land plus cover one-off costs of up to $25 million that seem to crop up every year. The $50 million to $60 million in expected asset sales over the next few years will help, but this is hardly a source of long-term stability.
Adding more cash flow pressure: the optimistic outlook assumed in the initial 2018 guidance is looking a bit uncertain. On April 9th, the company meaningfully reduced its first quarter sales and earnings guidance and suggested that the second quarter would also be weaker. Management said these shortfalls would not be offset by third and fourth quarter operating improvements, but that the cash flow shortfall would be more than offset by an acceleration of asset sales. This discouraging start to the year doesn’t inspire confidence.
Key driver is weakening
“The key driver of our business is the size of our sales force,” according to departing chairman and chief executive Rick Goings on the most recent quarterly earnings conference call. While their total sales force has indeed grown nearly 4% in the past two years, the active sales force – the number of consultants who have placed orders in the most recent quarter – is noticeably shrinking, down 18% during the same time period.
Established markets, the source of 31% of Tupperware’s revenues and where the relevance of relationship selling would likely wane first, has experienced a 35% decline in active sellers since 2015. Further, only 20% of total sellers in Established markets are active sellers, down from nearly 26% just two years ago. While sales per active seller have increased an impressive 39% to $10,400, it is unclear what is driving this higher productivity nor how much further it can increase. The company has been largely silent on this point.
Increased reliance on China
China produced over $200 million in revenues in 2017 and is growing fast (+28% growth in the fourth quarter). The opportunity sounds impressive, with millions of people moving into the targeted demographic every year, and with Tupperware China’s demonstration studio approach apparently working exceptionally well. Management stated their target number of studios is 20,000, more than triple the current 6,100.
As vast as this opportunity appears, for investors it represents an increasingly large wager on a single country. China is now at least 9% of total company sales. If full-year China revenues grew at a likely conservative 20% rate, they would have contributed about $33 million in new sales, nearly all of the company’s total growth.
Further, while it doesn’t break out profit margins by country, Tupperware acknowledged that China has “very good profitability.” It is likely a major contributor to the Asia Pacific region’s company-leading margins. The Asia Pacific region now produces over half of Tupperware’s operating profits and almost 60% of its pre-tax profits. Things must go right in China for Tupperware to prosper or even remain stable.
Although the opportunity appears vast, the risks aren’t small. Setting aside the risks from its overleveraged economy, the Chinese government is taking a more active role in nearly all aspects of Chinese life and it is unclear what effect this could have on Tupperware’s business. Will, for example, its increased surveillance of its citizens boost, or reduce, people’s willingness to get together at Tupperware parties? With a $1,000 water filtration system as its core product, what effect will competitive products have on Tupperware China’s revenue growth? Will Tupperware’s acknowledged problems transferring cash out of China further constrain its already tight cash flow?
Will the underlying demographic trends continue, or thwart, the favorable sales trends?
Other nagging issues
Other nagging issues weigh on the Tupperware story. Can they continue to differentiate their products from competitors’ and maintain their 2-3% annual price increases? When will their reported results show new strength without the lengthy and ever-changing list of quarterly adjustments and explanations? Will the direct sales model survive with an increasingly sophisticated and busy consumer, especially in Established markets?
New CEO is unlikely to be a catalyst for change
We see a clear positive in that, for the first time in its history, a woman is at Tupperware’s helm – a surprising fact when the company’s fortunes are based on its legions of primarily woman-driven sales force and customer base. New CEO Tricia Stitzel brings considerable company knowledge and business-model expertise, with over 20 years at Tupperware, rising from Vice President for North America to Group President of the Americas to Chief Operating Officer. This CEO transition will likely be a smooth one.
However, the smooth transition is unlikely to produce meaningful change, even if it is needed. Her likely close involvement in crafting and executing the company’s strategy and day-to-day management makes her an unlikely candidate to offer a completely new perspective nor the willingness to terminate legacy problems or sacred cows like an outsider.
Despite the “first glance appeal”, this stock is not attractive
We recognize the immense opportunity that Tupperware could capture in China, India, Mexico, Brazil and Africa. With their rising middle class, entrepreneurial mindset and weak retail infrastructure, these markets may be very well-suited for the company’s structure of demonstrating and selling a product among relatives and trusted friends. And Tupperware’s re-engineering program shows promise for improving its profits and relevance. If everything works well, Tupperware shares will produce amazingly strong returns.
Yet, with thin surplus cash flow, a shrinking number of active consultants, its increasing reliance on a single country, and a CEO unlikely to make major changes, combined with several nagging issues, Tupperware’s outlook is too unpredictable. These prevent the stock from qualifying as an attractive turnaround investment in our view.