See, Glentel Part 2: The Problems Facing The Company Today, Here
The table below provides a high-level overview of Glentel's (OTC:GLNIF) four segments. The figures for the Canadian segment show store-level economics prior to the changed Canadian wireless laws and also prior to the opening of the 127 Target (NYSE:TGT) stores.
This table shows the basic financials for these segments. The final metric, EBITDA per store, is the most important:
I'll address the segments in order.
How the Canadian Business Works:
In Glentel's non-Target Canadian stores, the company is paid a commission by the carriers each time it sells a phone, data/voice plan, or upgrades a customer from a dumb phone to a smart phone. The commissions vary, with new smartphone sales being the most lucrative for Glentel. Glentel also sells accessories and other ancillaries, on which it earns a typical retail margin.
In addition, the company earns an unspecified, but ongoing revenue stream from the carriers for each phone customer who originally joined the carrier through a Glentel store and currently remains with that carrier as a customer.
Against these revenues, Glentel incurs costs for store-level salary, sales commissions, rent, and to a lesser extent, management. The sales compensation structure is highly variable, but the other costs are relatively fixed.
Here is how the annual per-store economics worked, roughly, for a Glentel Canadian store prior to the change in Canada's wireless laws, and prior to the opening of stores within Target Canada locations:
It is important to note that these figures are the average for Glentel's Canadian stores; the "in-line" mall stores are probably more productive than the example given above, but with a higher up-front capital cost, while the kiosks are likely less productive, but at a lower capital cost. Here is my guess at the respective economics:
Now here is EBITDA per store across all stores over time for Glentel's Canada segment:
For the five years prior to 2013 (when the Target stores opened and new Canadian wireless code of conduct went into effect), the average EBITDA per Canadian store was $167,000. For comparison, let's look at the EBITDA per store, in Canadian Dollars, earned by Carphone Warehouse (trades in London under the ticker CPW), the only comparable public company:
CPW's EBITDA per store is actually a bit higher than what the table shows, because CPW's reported EBITDA includes corporate overhead, while Glentel's segment EBITDA does not.
Either way, I think we have ample evidence to believe that ~$170,000 of EBITDA per store is a reasonable "base" profitability level for Glentel's non-Target Canadian stores.
That covers the non-Target Canadian stores. What about the Target stores? How much are they earning now, and how much might they be earning if they are ultimately successful?
Let's start with the first question: how much are the Target stores earning now?
To answer this question, I begin by offering up the following table:
The most important assumption in this table is in line E, which shows the run-rate revenue for the Canadian segment. The figure-$450 million-is an educated guess. I derived it by taking the Q1'14 Canadian segment revenue and dividing by 22.5%, which is how much annual revenue is usually generated in the first quarter. (The portion is not 25%-exactly one quarter-due to seasonality.)
If the math in the table above is correct, then the Target stores are generating $500-600K of revenue each. That is far below the $1M+ generated by the non-Target stores.
What about profitability? Glentel's Canadian segment earns a 39% gross profit margin on average. The vast majority of Glentel's COGS are variable, but not all of them are. Since the Target stores are seeing such slow sales, I assume there is some negative leverage at work, and give the Target stores a 35% gross margin.
I also assume $215,000 of operating expenses. Unfortunately I have no strong basis for this assumption. The old Canadian non-Target stores were operating at approximately $310,000 of cash operating expenses. The Target stores are smaller than the mall stores, and Target is sharing some (unknown) portion of the losses, so I think it is safe to assume that Target store OpEx is lower than non-Target store OpEx. We just don't know by much. $215,000 is my guess. This number jibes with reality insofar as Glentel has said that the Target stores are not currently profitable, and $215K of OpEx would make the stores unprofitable, but not hugely so:
The last important question regarding the Target stores is this: how much can they make if they are successful?
The answer: I don't know. In the U.S., part of Glentel's operates works under a franchisor model. This model trades some profitability for stability. These stores earn about $60K of EBITDA per location as a result. The franchisor model is similar to the Target Canada model insofar as Target is sharing in the profit and loss, which is somewhat akin to what a franchisee does.
So, in the absence any better guess, I $30K as a base case, to allow for the possibility that even if Target can turn things around, performance could still be substandard. I use $60K as a best case that assumes Target fully rights the ship. I assume a worst case contribution of zero EBITDA, which assumes Glentel ultimately severs the relationship.
You will notice that EPS contributions in the "total change" column are larger than the estimates I used ($0.05, $0.15, and $0.25 respectively) in the EPS build-up table at the end of the previous post. This is to account for the high level of guesswork involved in forecasting the Target stores.
How the U.S. Businesses Work:
Glentel has two U.S. businesses, both of which it came to own through acquisition. The first is Diamond Wireless, which operates ~350 company-owned Verizon (NYSE:VZ) stores, primarily in the Western half of the country.
The reason behind the lower profits is exclusivity. Since Diamond sells Verizon exclusively, it does not have another carrier customer (as Glentel does in Canada and Australia) to use as leverage against Verizon in order to extract higher commissions.
Anyway, as you can see, the EBITDA per store hovers around $90K. This is what I'll use in my models going forward. Glentel believes Diamond Wireless represents an attractive growth opportunity that will accommodate 25 or so new stores per year.
The main risk to this business is that Verizon decides to take the stores back and operate them itself. In my view this risk is strongly mitigated by the fact that Verizon thinks highly enough of Glentel's operational prowess that Verizon recently "gave" Glentel 154 Verizon kiosks within BJ's Wholesale Club, Inc.'s (NYSE:BJ) stores. Previously, Verizon had been operating those kiosks itself.
Glentel's other U.S. wireless business is Wireless Zone, which has 393 stores. Wireless Zone is also an exclusive Verizon dealer, but two things distinguish it from Diamond: it operates primarily on the East Coast, and it utilizes a franchisor model, which leads to lower profits (roughly $60K of EBITDA per store), but also reduces volatility and capital requirements.
We only have five quarters of Wireless Zone results. Every quarter so far, Wireless Zone has earned between $13k and $17K of EBITDA. I assume going forward Wireless Zone stores contribute 4 x $15K, or $60K, of EBITDA annually.
How the Australian Business Works:
As for Australia: In November of 2012 Glentel paid $68M for 83% of AMT/Allphones, which operated 208 independent multi-carrier mall stores. Prior to the acquisition AMT had generated trailing 12-month revenue and EBITDA of $162M and $18.5M, respectively. This equated to approximate per-store revenue and EBITDA of $780,000 and $90,000, respectively.
Today the business isn't profitable, as I've mentioned. I will discuss the prospects for this segment in more detail in one of the future posts.
How the Business Business Works:
Glentel also has a "business" segment specializes in designing commercial wireless networks for mining and oil & gas, among other industries. This segment is such a small contributor to consolidated EBITDA that I won't spend time discussing it in any depth here. In most years the business segment generates between $2 and $4 million of EBITDA; I estimate $3 million going forward.
How the Corporate Business Works:
This isn't a business segment, it just represents the corporate overhead. The company has been able to leverage this expense: it was 5% of revenue in 2004, and has steadily fallen to about 3.2% today. As revenues continue to grow I expect it to move toward or below 3% of revenues.
That covers the segments. Next up: the Canadian Wireless Code of Conduct.
Disclosure: The author is long GLNIF.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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