Hi Guys, i found the below in reddit which i thought is a pretty good analysis on RedBubble, original post here:
https://www.reddit.com/r/ASX_Bets/comments/n3rb5d/redbubble_in_the_postcovid_era_a_sanity_check/ . Althought the post was written 9 months ago, it stabs at the heart what the issue with RBL is.
To follow on from my post on Kogan I thought it only natural to cover either RedBubble or Temple Webster; I've chosen the former.
RedBubble (ASX:RBL) was founded in 2006 to connect artists with customers who can get niche designs printed on various media (tshirts, mugs and stickers). RBL holds no inventory, the orders are printed and fulfilled at placement - this is a very capital light operation.
Of the post-tax revenue for every item sold, 16% goes to the artist and 53% to the fulfillers (printing and shipping), leaving 31% for RBL. So my $25 Rick & Morty tee netted RBL something like $7.50 to cover marketing, opex and *checks notes* dividends!
So far this looks like a complicated tshirt retailer with questionable gross margins. The only two variables left to play with are marketing cost and opex. So are they doing anything special here?
Management would have us believe that over time the marketplace benefits from scale as it cements a foothold in the minds of both the artist and the consumer. Despite this, repeat purchases have been stuck at around 40% for years, with marketing steady at about 10% of revenue and even higher recently and in forecasts.
So, what’s going wrong? A few things.
Firstly, a lot of the ‘repeat customers’ aren’t really repeat at all. RBL has given us the example of a kid who buys some stickers in high school then years later in college might buy a Rick & Morty tshirt. Is that really repeat patronage? Do you think a repeat customer is someone who comes back every other year?
The best company statistic showing this is that the average customer makes 1.1 purchases per year and the vast majority do not make a purchase the next year. So really, customers needs to be ‘re acquired’ (this means more marketing spend) and the company has been open about this.
Secondly, customers have little reason to be loyal. I can get my R&M tee from countless options via Google. Simply dropping the words into Google search gives me a dozen price-matched options (the first one is Etsy!) in an easy-to-scroll smorgasbord of R&M shirts that don't come from RBL. Sadly/ironically, in all likelihood some of these vendors even share the same 3rd party printing and fulfilment partners!
RBL attempts to optimise their organic search results to reduce the marketing spend on Google search result positioning. Organic is ~40% of traffic, but Google is progressively monetising these organic search results while also making it harder to ‘game’ them through SEO. RBL has been open about the ‘Google problem’, and has even blamed previous earnings misses on it. They aren’t the only ones in this situation though as big US travel sites (such as Expedia for example) saw a 40% traffic reduction in November 2019 following Google algorithm changes.
Thirdly, artists are extremely promiscuous and have every reason to post their product on as many websites as possible. It's especially important for artists, as the vast majority make very low monthly sales. Redbubble has tried to mitigate this by buying competing platforms (Teepublic) but there are scores of them out there, as demonstrated by our R&M google search experiment. This also includes Merch by Amazon, who are somewhat formidable in this space.
So, with a few clicks artists are posting their content everywhere. And perversely RBL needs to buy ad words to compete with other websites that might be selling the same product by the same artist! Is there such thing as a negative moat?
Add to this a staff cost base that never lessens because they're constantly servicing a growing number of artists and curating an ever-increasing number of items, and we are left with a business that until recently has been incapable of turning a full year profit for disappointed shareholders.
Compounding everything is their extreme seasonality. RBL says they make more than 30% of their sales in the short period from Thanksgiving through Christmas! In fact, prior to COVID the December quarter was the only consistently profitable quarter.
This made things particularly bad when RBL provided a very weak trading update for their traditionally strongest quarter in December 2019. Core Redbubble growth stalled and unsurprisingly mgmt blamed it on competition, but I suspect the Google algorithm changes were also at play.
In response the share price nearly halved, violently readjusting down to $1.03! RBL ended up making $7m of EBITDA in the December 19 quarter, flat on the prior year and this despite the prior period not having a full period of Teepublic. Things were looking pretty grim.
But then the Great Reprieve happened.
All of a sudden I was locked down with nothing better to do than spend my holiday budget on custom made R&M merch off the internet. RBL, like many others, printed a historically large EBITDA of $7M in the usually quiet June 2020 quarter (the first full quarter of lockdown).
Boosting their sales further, RBL started selling high-margin facemasks in late April 2020 to people scrambling to get masks anywhere they could find them. Quarterly profit almost QUADRUPLED from the June quarter into the usually quiet September quarter!
Internationally, businesses like Etsy were also killing it and doing really well on mask sales. Everyone that wasn't pumping a vaccine angle was doing either hand sanitizer or masks.
So it came as no surprise that the seasonally strong December quarter would deliver. And it did, but there were red flags. Compared to the September quarter, sales GROWTH was slower, and profit was LOWER! Gross margin normalised. Marketing spend relative to revenue INCREASED (?wtf).
Was the initial lockdown frenzy waning? Were masks becoming easier to find? Maybe competitors were stepping up marketing activity to take advantage of favourable conditions? The market didn’t seem to care as long as profit was strong. The tiny red flags were packed away.
Analysts had all adjusted their forecasts wildly higher, in the region of $60-70m of EBITDA per year and growing (?!) over the next several years. They expected not just a continuation of strong December quarters, but also tens of millions of dollars of profit across the non-Christmas quarters.
Every quarter strong, every year, in perpetuity. No seasonal weakness forever and forever, a hundred years of strength, a hundred days forever a hundred times [belch]. Forever.
What could go wrong?
Quite a bit it would seem. Enter the March 2021 quarter. Despite not yet lapping COVID, sales slowed markedly. Gross margins fully normalised and marketing spend was way too high relative to the sales being generated (similar to Christmas 2020).
Sales are down, gross margins have completely normalised, and the marketing spend is back up to December 2020 ratios. What does that mean? Profit plummeted down to a measly $2m, and a plunging share price. Trading around $4 today compared to $7 at its peaks.
Some people are buying the dip here but if you can't half tell, I think there is way more pain to come.
The market cap today is still $1.1 BILLION and some analysts still expect close enough to $50M in EBITDA in FY22 and $70M in FY23.
I think the March 2021 results are a portent of things to come. With the weak non-Christmas quarters normalising again I don't expect big EBITDA from them going forward. September 2021 will be a very different story from the blow out quarter last year.
Any remaining optimism then, must hinge on the seasonally strong December 2021 quarter carrying the day. But with the March and September quarters being historically similar, a COVID-boosted March 2021 quarter SHOULD have been similar to a COVID-boosted September 2021 quarter.
But in reality the March 2021 quarter was HALF that of the September 2020 quarter gross profit after marketing (GPAPA). And after operating costs, March 2021 EBITDA was less than 1/10th of September 2020 EBITDA!
I think this gives an indication of how much things have slowed down and we should apply similar logic to the December 2021 quarter BUT without over-correcting too much.
Take the December 19 quarter, grow it at the rate we saw in September 20, then normalise at the rate seen in March 21. Still with me? This gets you to $31M of GPAPA in December 21, less $21M of opex. Just $10m of EBITDA.
So, lower than December 20 but still a solid result compared to pre-COVID right? The issue is that if you add $10m of Dec-21 EBITDA to a few million here and there in the seasonally weaker quarters, we'll barely make $20m EBITDA. Barely a third of the analyst targets.
At this price, RBL is a $1bn business that looks to me to be on track to make $20m EBITDA while fast running out of COVID tailwinds as people begin redirecting their printed mug and t-shirt money back into holidays and dining.
With this in mind it's little surprise that management have put out ‘long term targets’ to keep us on the hook. But why do we think that they can execute on these targets now when for years before COVID they were unable to do so?
RBL barely managed a decent March quarter with full COVID tailwinds and management’s made-up targets assume no improvement in marketing ratios, so what happened to those repeat customers??
RBL's revolving door of mgmt continually struggles with guidance and has done little to inspire confidence beyond latching on to COVID tailwinds. But in a ruthlessly competitive business with no moats and beholden to Google, I suspect there may be some larger red flags ahead.
Thanks for reading 
(20min delay)
