The beauty and cosmetics industry is one that is often overlooked by men in the capital markets. Investors tend to look at what they know, and generally men don’t usually know a whole lot about the beauty space.
Not to be overlooked are the deals in the space. In the last few weeks we have seen some mega deals close. Kylie Cosmetics by Kylie Jenner sold 51% of the brand to Coty, owned by the European investment firm JAB Ltd., for USD $600 million, valuing the brand at USD $1.2 billion. Kylie Cosmetics is reported to have USD $350 million in annual sales. Another deal this month was skin care and makeup brand Drunk Elephant which was acquired by Shiseido for a whopping USD $845 million. The Drunk Elephant deal was on the table for about a year before it finally closed.
On the public side of things ULTA Beauty (NASDAQ: ULTA), Estee Lauder (NYSE: EL), e.l.f Beauty (NYSE: ELF), Revlon (NYSE: REV) and many others have been pushing all-time highs or offered great trading opportunities with some fantastic volatility and ranges.
In the Canadian landscape, there are fewer names to play but some opportunities nonetheless. A name that we have been watching closely and believe may present an opportunity is MAV Beauty (TSX: MAV). Most people reading this won’t know what MAV Beauty is or who Marc Anthony is but I guarantee you that readers would recognize the brands on the shelf of their local pharmacy or in their bathrooms.
Based on our research of public and private companies in the space including NASDAQ: ULTA, NYSE:COTY, NYSE: EL, NYSE: REV and NYSE: ELF the average valuation is roughly 2x sales with variance to either side of that number based on a variety of micro and macro factors. Given that a lot of the major players are privately held and information are not widely available, we believe that the Price to Sales ratio is the best way to compare these players.
MAV Beauty (TSX: MAV) conducted a successful IPO in July 2018 with an estimated CAD $127 million in sales, an offering price of $14 and a Price to Sales ratio of ~4.06x. The IPO offered liquidity to shareholders as no shares were sold from Treasury. From the July 10, 2018 news release (source):
The Offering included a treasury offering by MAV Beauty Brands and a secondary offering of common shares of MAV Beauty Brands by entities owned, controlled or managed by TA Associates Management, L.P., Marc Anthony Venere, and the Redmond Family (collectively, the "Selling Shareholders"). MAV Beauty Brands sold 9,000,000 common shares under the Offering at a price of $14.00 per share, for total gross proceeds to the Company of $126,000,000. Pursuant to the underwriting agreement, the Selling Shareholders sold an aggregate of 8,267,000 common shares at a price of $14.00 per share, for total gross proceeds to the Selling Shareholders of $115,738,000. The Company did not receive any proceeds from the secondary offering.
At the time of the IPO, the (TSX: MAV) market cap was $515,000,000. Based on the industry peer group, it’s no big surprise that over the course of the next 15 months (TSX: MAV) got sold off heavily to then fall in line with pricing more in line with the peer group.
However, we believe that today at a market cap of ~ $135 million, (TSX: MAV) may have overshot to the downside. Currently trading at ~$3.50 and a Price to Sales ratio of ~1.02x, it seems relatively inexpensive and could present an interesting opportunity.
MAV Beauty is not a fly by night operation. With products sold in over 25 countries around the world, in over 100 major retailers and through over 60,000 doors, it is clear that they have a large established business. We believe that, although somewhat slow growth, financial targets being missed and an extremely apologetic management team during the Q3 2019 conference call, (TSX: MAV) could be a good turnaround story for 2020 as they digest some growing pains from their first year of being public.
Now, is (TSX: MAV) going to trade up from the ~1x valuation to ~2x in 2020 and the share price go from ~$3.50 to $7? Based on the tone and outlook from management we do not think so yet, but there is definitely some value to be had here and even a larger gain than 100% for patient investors who buy in to the story and believe that management will be able to execute in the next few years.
Once notable investor that saw value was CEO Marc Anthony. Having sold a sizeable amount of stock during the IPO, On November 20, 2019 Marc Anthony bought back ~2.4 million share at $2.40 for ~$5.7 milion. For the moment, that is an amazing trade that has marked the bottom for (TSX: MAV).
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