PFSweb (PFSW) – Large Capital Return/Company sale – Upside TBD

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Current price: $11.64

Target price: TBD

Upside: TBD

Expiration Date: TBD

This idea was shared by Alan.

 

A short note on a potentially interesting situation with an uncertain timeline. The upside is mostly dependent on a binary event of a successful sale of the remaining business.

PFSweb is a third-party logistics (fulfillment, order management, etc) services provider in the US. In July’21 PFSW has sold its e-commerce advisory business LiveArea and initiated a strategic review for the remaining 3PL (third party logistics) business. More than half of the current PFSW market cap is in net cash and management plans to return it to shareholders shortly. The stub now trades at 6.5x segment level EBITDA – materially below recent peer acquisitions at 12x multiples. If the strategic review results in the sale of the remaining operating business, investors are looking at substantial upside. The buyer would eliminate holding company overheads that reduce the consolidated profitability to breakeven levels.

LiveArea segment sale closed in Aug’21 and since then the company has faced major issues with its accounting/financial reporting trying to separate previously commingled businesses. Management expected to report both Q2 and Q3’21 back in Nov’21, but the date was adjourned. Finally, in Feb’21 the company filed Q2 results and released Q3 results a few days ago. The explanation provided for the delays (Q2 call):

The transaction resulted in the very complex financial reporting and accounting segmentation of these previously commingled business entities. Look, candidly, the timeline that we and our advisers anticipated just did not sufficiently contemplate the complexities of this process. The varying tax treatments resulting from the multinational structure of the business with operations in 4 countries, including Bulgaria, India, U.K. and the U.S. and the classification of LiveArea’s financial results as discontinued operations back through 2020 have been a very heavy lift for our team, especially our accounting department and our various advisers.

Management also shared a strategic update together with 2021 peformance estimates and 2022 guidance. The update revealed net cash position of $151m at the end of 2021. Of that management expects $15m to be paid out to various advisors/accountants, leaving $136m on the balance sheet vs the current market cap of $257m. Moreover, in the update/and recent Q3 results PR management has clearly said that it intends to return majority of this cash to shareholders:

As we stated when reporting Q2 2021 results, we believe that the PFS business’s strong performance throughout 2021 makes it a very attractive asset. We anticipate that we will have numerous compelling options available to us as we assess the best ways to create additional value and return our significant amount of capital to our shareholders.

That leaves the stub business (PFS – third party logistics and warehousing) trading at $121m. PFS operations involve:

  • order management (order to cash service) – order and payment processing platfrom, fraud management platform, etc.
  • fullfillment – shipment accuracy verification, unpacking, package audit, damage inspect, packaging, assembly, kitting, reverse logistics (returns). PFS has over 1.8m sq.ft of distribution facilities located all over US (Memphis, Dallas, Texas, etc), Canada, UK and a bit in Europe.
  • customer care – order entry, returns authorization, product inquiry and order tracking.

Historical performance of PFS segment can be seen below – 2021 and 2022 figures are based on management estimates in the Feb’22 update:

pfsw

* Note – PFSW reporting is a bit noisy as the company records certain costs, which later get reimbursed by clients as revenues (pass-through/product revenue). Service fee revenue (SFE) represents the actual revenues of PFSW. Also, the table above is based on the historical PFS segment info, whereas recently released pro-forma financials show somewhat higher revenues for 2019 and 2020 excluding LiveArea business.

2019 revenue drop was mostly due to 2 merchandise retailer client bankruptcies in Feb’19 and July’19. In 2020 the business experienced several changes – revenues increased substantially due to rise in e-commerce, however, margins declined due to higher mix of lower margin fulfillment business and labor rate increases. Management estimated $3.3m of labor cost impact in 2020. Pretty much the same trends were seen in 2021 and are expected to continue into 2022. The company guided for 5%-10% revenue growth in 2022 (expecting it closer to the upper range) and 8-10% adj. EBITDA margins. Using this guidance, PFS business segment now trades at around 6.5x forward EBITDA.

However, the holding company overheads have been pretty substantial at around $20m, eating the whole of PFS segment profitability. It is not clear how much of these were one-offs related to business reorganization/LiveArea sale/ongoing strategic review and it is also not clear how much of these costs could be optimized going forward. Nonetheless, my understanding is that all of these holding company overheads can be ignored/eliminated from the perspective of potential PFS buyers.

Most of the PFS peers for which data is available are significantly large companies and were sold at far higher multiples – Radial ($820m, 12x adj. EBITDA) and Visible SCM ($838m, 13x adj. EBITDA). Another peer (even larger – $8bn market cap, growing faster, but 8% adj. EBITDA margins), which was recently spun-off, GXO trades at 12.2x mid point 2022 adj. EBITDA guidance.

16 Comments

16 thoughts on “PFSweb (PFSW) – Large Capital Return/Company sale – Upside TBD”

  1. Are the distribution facilities owned? Those alone may be worth more than the current stub depending on their debt situation.

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  3. PFSW reported Q4 results:

    – PFS revenue increased 3% to $63.1m
    – adj. EBITDA was $5m vs $2.2m same quarter last year.
    – net cash was at $151m, apparently, that’s already after paying the LiveArea transaction-related costs.
    – 2022 guidance reiterated.
    – Strategic review is still ongoing, but no further color was provided on this from the management.

    Overheads continue to stay elevated at $9m in Q4’21. The company will burn a lot of cash if they can’t lower it down. So the whole thing really boils down to a successful strategic review and a company sale. Unfortunately, the management has been very silent so far.

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  4. In conf. call management reiterated that capital return is their top priority. Q1 is expected to get filed in mid-June.

    Analyst
    And final question for me. With respect to returning cash to shareholders, how should investors think about that? Is that a separate and completely independent process from the strategic review? Or is that hand-in-hand?

    CEO
    No, it’s hand in hand. In our view, I think we’ve said in the past is that the most efficient way to return capital to our shareholders would be through a subsequent transaction, which is obviously one of the things that is on the list, maybe at the top of the list of the valuation. There are other mechanisms to do that. We will be asking Raymond James to — as they look at the market and opportunities and work with us to help us understand both with regard to timing, certainty and also efficiency, what would be the best next step for us to take to do that.

    But as I mentioned, it is our top priority. So having accomplished the heavy lifting of accounting for the LiveArea transaction, remaining focused on getting our Q1 filed by mid-June, according to our time line. It does allow us to focus on that process and working with Raymond James to move to conclusion.

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  5. Q1’2022 results were released and the company is now fully compliant with Nasdaq and SEC reporting rules:
    – Total revenues grew 10% to $66.5m.
    – Consolidated adjusted EBITDA was a negative $0.4m as SFE gross margin declined to 20% versus 24.2% in Q4’21 due to rising labor costs.
    – 2022 guidance is unchanged – SFE revenue growth of 5% to 10% and EBITDA margins of 8% to 10%.
    – Overheads are still very high.
    – $154m in net cash, around 55% of the market cap.

    During the call, talks about the remaining business sale have returned again (I think that’s what they refer to as a “second transaction”):

    We continue to work with Raymond James on the review of a full range of strategic alternatives for PFS. As we previously communicated, we believe that completing a second transaction represents the most efficient way to return to significant capital we hold to our shareholders. While we do not have a specific completion timeline to disclose at this point, we believe our ongoing work to optimize and strengthen the PFS business has made it an attractive platform for potential strategic opportunities and completing this process remains our top priority.

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  6. PFSW reported Q2 results – nothing new so far. The business continues to burn cash as overheads remain elevated and inflationary pressures are subduing the margins. That said, going forward the company will implement contracted price arrangements to transfer some of the wage inflation impacts to customers.

    Management expects to provide more details on the strategic review later in the year and remains quite optimistic despite general macro headwinds:

    -James Maxwell Rush
    Craig-Hallum Capital Group LLC, Research Division
    Great. And then last for me, just on the strategic process, to the extent you can talk about it, I guess, can you just talk about the level of interest in M&A in the space in general? I mean there have been some decent sized transactions even with sort of public market valuations coming in and broader macro concerns. So just any incremental detail there would be helpful.

    -Michael C. Willoughby
    President, CEO & Director
    Yes. I don’t know that we can provide a ton of detail. I think some of the things that you mentioned around macroeconomic uncertainty, headwinds, things like that, certainly give us some pause as we think about conditions overall. But I think that we have a really good story to tell. I think we have a great platform that has a lot of differentiators associated with it. And so while we are bucking these headwinds that a lot of people are seeing, as we indicated in our commentary, we’re hopeful that, that differentiation is going to help us to really pop in a market where some people may be seeing some headwinds and some challenges.

    We’re looking forward to continue to take our story into that market and look to capitalize on our differentiators that we have. We do continue to have this as our top priority. Our hope and expectation is that we’ll be able to conclude the process and give you more information this year. That’s our current expectation. But it’s probably about as much as I can say at this point in time.

    More details:
    – Total revenues were up 6% year-over-year to $64.6m. SFE revenues increased 13% to $45.3m.
    – Consolidated adjusted EBITDA remained unchanged sequentially at -$0.4m.
    – 2022 guidance has been reiterated.
    – Net cash stands at $148m or 60% of the market cap.

    https://ir.pfsweb.com/news-releases/news-release-details/pfsweb-reports-second-quarter-2022-results

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  7. On November 4, 2022, the Company’s Board of Directors declared a special cash dividend of $4.50 per share to holders of issued and
    outstanding shares of the Company’s Common Stock of record as of the close of business on December 1, 2022.

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    • Nov. 11, 2022 (GLOBE NEWSWIRE) — PFSweb, Inc. (NASDAQ: PFSW) (the “Company”) today announced that, in connection with the Company’s recently announced special cash dividend of $4.50 per share (the “Special Dividend”), Nasdaq has determined that the ex-dividend date for the Special Dividend will be December 16, 2022 (the “Ex-Dividend Date”) in lieu of the November 30, 2022 date previously announced by the Company.

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      • On the same press release that you linked it is stated that shares will continue to trade with dividend included till the 15th of Dec. Then the price should decline by the amount of dividend received on the 16th of Dec.

        “Since the payment of the Special Dividend represents more than 25% of the stock price on the declaration date of November 9, 2022, Nasdaq has determined that the Company’s shares will trade with “due bills” representing an assignment of the right to receive the Special Dividend or an obligation to deliver any shares acquired as a result of the Special Dividend from the record date of December 1, 2022 through the closing of the Nasdaq Capital Market on the payment date of December 15, 2022″

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  8. PFSW reported solid results in seasonally softer Q3. Business operations showed signs of improvement in SFE gross margin and adjusted EBITDA. Importantly, the company decided to return most of the cash, about half of the current market cap, to shareholders. On December 15, $111m or $4.5/share will be paid out as a one-time special dividend. The share price is up +16% after the announcement.

    However, the update on the strategic review was a bit of a mixed bag. The comany’s sale process is getting delayed by macro headwinds and much tougher M&A environment and ongoing corporate restructuring at PFSW. However, the restructuring is targeted to complete by the year-end and management expects to finalize the strategic review in 2023. The current CEO will be transitioning away from his position onto the board of directors to fully focus on the exploration of strategic alternatives.

    Q3 results:
    – Total revenues were up 7% YoY to $65.5m. SFE revenues increased by 4% to 43.7m
    – SFE gross margin improved to 23% from 21% last quarter – mainly driven by the cost transfers to customers.
    – Driven by the cost-savings/restructuring process consolidated adjusted EBITDA finally turned positive to $0.2m from -$0.4m last quarter and -$1.3m YoY.
    – 2022 guidance has been reiterated.
    – After the $110m special dividend company’s net cash position will stand at $20m.

    https://www.sec.gov/Archives/edgar/data/1095315/000109531522000094/ex991-2022q3pressrelease.htm

    From conf. call:

    Sure. So I think consistent with what we said in the last call, we have experienced these headwinds or points of friction, which I don’t think are unique to us. We’ve noticed that in the M&A markets, transactions are down pretty significantly year-over-year. The Wall Street Journal reported a 43% decrease in M&A transactions in the U.S. this year compared to last. So we certainly see a macro market condition that’s not overly friendly to getting deals done. I think we also experienced some specific points of friction that we pointed out in our prepared comments, in the press release, including the fact that it’s really a market where I think buyers are looking either for a bargain, which may be a turnaround story or something that’s got some significant complication to it or they’re looking for a pristine situation, and we’re neither a bargain nor were we pristine as we came to market.

    So the corporate restructuring activities that we have been doing all year, really, in my opinion, needs to be complete in order for us to provide a good, clean story. And so as we are completing those towards the end of this year, we’ll be in a better position to have that more pristine story to tell.
    I also believe that the excess cash that we had on our balance sheet is a point of friction that is a point of friction not only for current investors as they try to understand the intrinsic value of our company and you’ve got a significant amount of excess cash there. It also ends up being a complication for prospective buyers, especially financial sponsors that have to figure out how they’re going to buy that excess cash or require us to do the special dividend as part of the transaction. All of those things are just complicated conversations that you don’t want to have when you’re talking to prospects. So these things that we are doing, including the special dividend and completing our restructuring are aimed at eliminating the points of friction we have control over. And the question is, as we go into next year, what’s the market going to be like? None of us have the answer to that question. But I think even in a market that continues to be difficult, having a really good story to tell, that’s free of the complications I mentioned, positions us much better to have those conversations.

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  12. Too close to busy Q4 for them to drag it on. Want to close ASAP so it doesn’t drag into holiday. Don’t see bidding war here

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