We have written extensively about the Travelzoo (TZOO) saga and were bullish on the name a year ago when strategic moves could have enhanced shareholder value and catapulted the company to the next level. Our most recent article "Travelzoo: The Emperor Needs New Clothes" suggested that investors avoid the stock. On October 12, in a rare move showing TZOO's possible new direction to financial transparency, the company issued a press release outlining a miss on analysts' projected Q3 revenue and earnings. The stock dropped nearly 15% as a result.
Chris Loughlin, TZOO's current CEO, reiterated his belief in the company's strategy. This is hard for us to believe given his track record. We think that the controlling shareholder, Dr. Ralph Bartel, has done little to help minority shareholder value. One example of this is the separation of Travelzoo Asia Pacific from the public company TZOO through a "licensing" arrangement which is outlined in the following 8K filed with the SEC. There was no strategic need for this separation and it is now an expensive litigation distraction for the company. Another example of shareholder value destruction is stubborn TZOO litigation regarding its true capitalization stemming from its merger with its affiliate Travelzoo.com back in 2002. The following excerpt from another 8k filed with the SEC briefly highlights the event: "...the 2002 merger of Travelzoo.com Corporation, a Bahamas corporation, into the Company. In exchange for such release, the Company is making a one-time cash payment to the State of Delaware of $20 million."
Actions like those outlined above attract aggressive short-sellers who bet against the company. This has been an ongoing activity for the last decade and a half with TZOO making their stock extremely volatile. We respectfully ask Dr. Bartel to communicate with his fellow shareholders in a more constructive manner and describe what his intention is for the company he founded and actively controls.
An interesting TZOO metric we have followed closely for quite a while is the short interest as a percentage of the float. The last reported number by NASDAQ on 9/28/12 is 2,370,290 with a days to cover ratio of 20.21. The number of shares short has consistently dropped over the last year from 5,128,797 to its current level. The days to cover has done the reverse by nearly doubling from 12.9. This is a direct result of the waning volume in TZOO shares. Total number of shares outstanding in TZOO as of 8/1/12 was 15,961,553 of which Dr. Bartel owns 53.3%, or approximately 8.5 million. The shares short to the float ratio is 31.8% which is still relatively high but down significantly from its elevated levels earlier this year. We think a high short interest to float ratio is an asset for a company with a clean balance sheet and could be a key tool if used properly by TZOO.
We suggest the following immediate steps to stop the downward spiral and take advantage of the remaining strengths in this name:
1. Stop the share repurchase agreement and reallocate the capital to build a real mobile platform to embrace the "social travel space" which none of TZOO's peers have been able to capture as of yet according to Erik Rannala, co-founder of Muckerlab and former vice president of product management and strategy at TripAdvisor (TRIP) on a recent podcast of This Week In Startups.
2. Raise capital from a private equity shop to fund real growth and reduce Dr. Bartel's majority position. We know this is highly unlikely which leads us to number three.
3. Stop rumors in the media of hiring a M&A banker by hiring one and formally announcing a process to explore your strategic options. We stand ready to suggest a perfect "boutique investment bank" in New York city who would like the assignment.
The landscape is changing quickly. Priceline (PCLN) just launched mobile "Express Deals" for "hotel booking option is now available for travelers with iPhone, iPod touch and Android devices, and those who access the mobile version of priceline.com's website." TZOO also inserted this in the press release linked above: "Travelzoo discloses that the Company is in active negotiations to acquire a hotel booking website." We suggest that this may be "too little, too late" to stem the tide in dwindling revenues. We think more R&D spending to build better apps for your existing customer base and looking for a better strategic option will benefit all shareholders in the long run.
Additional disclosure: TZOO will continue to come under downward pressure until tangible insider actions are taken.