Low ROE business in an increasingly inflationary environment...

Low ROE business in an increasingly inflationary environment with limited ability to pass on price rises.

PTL purchased what I would consider to be a highly cyclical business at the top of the generational cycle for that business and is now faced with a consumer base affected by increasing inflation who I would posit won't be as interested in frivolous spending on things like hampers. They also diluted the equity for this acquisition so while the market cap has risen the price per share has stalled and slightly slid - remember it traded up around $0.47 on the day the acquisition was announced. Great sale by the previous owners of HwB though. Can you imagine a perfect storm of everyone being locked inside with low inflation and high/forced savings ever again? Even when the business cycle returns to normal and times are good again in the future whenever that will be probably years from now the likelihood of such a perfect confluence of factors for a hampers business is approximately 0. And at least MBH have a core brand to sustain them but HwB have no-name pretzels and other generic bar snacks along with generic wines, generic scents, generic bath robes. WTF?

The way I look at this business is that I think White King is worth around $50m so any price I could buy in at a large discount to $50m would be worth the risk and I ascribe $0 to the rest. Sounds crazy I know but over the years every other brand they hold has taken large write-downs/write-offs but I haven't seen anyone point to any other figure that could represent some sort of guidepost as to where you can attain a margin of safety in this business if you're able to buy at a large discount to it and so White King which has been #1 in its category for decades and has stayed there while under PTL's ownership is that guidepost for me.

Who is going to be buying hampers like they were during the pandemic now that people want to go outside again and inflation is riding roughshod over peoples' spending habits? Who is buying a $150 hamper full of off brand chocolate and trinkets now that food and fuel is in the front of their minds and their mortgage payments are rising? I get it, it's not going to completely collapse but will it keep exponentially growing up and to the right? I doubt it.

Yield seems high but that is on a period that has been good for earnings, now we'll see cost inflation and I would argue that PTL will struggle to pass on costs quickly. In late 2020 I tried asking them why they didn't raise the price of 2.5L White King from $4.25 to $5.00 - no response. Now about 2 years later they managed to bump it up to $4.65 but is that really enough given all the inflation we're seeing? I would argue no and that they don't have much control over pricing WK in the major supermarkets.

Management haven't really bought a lot of stock over the years - I know the major holders are ex-management but normally if things were going great you'd see the new management wanting to get a larger piece of the action as well.

I think HwB was one of the stupidest decisions I could imagine PTL making, especially given that they bought it right at the peak for what I think was to try and recover from the fallout of losing the majority of the Duracell partnership which made a lot more sense than this strange pivot that they tried to sell as being higher ROE but as I have said many times above those figures are based on an environment so perfect for maximising earnings for a hampers business I doubt we'd ever see an environment like it again in our lifetimes.