Tupperware: Moving Deeper Into Value Trap Territory

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About: Tupperware Brands Corporation (TUP)
by: D.M. Martins Research
Summary

Tupperware is planning on shaking off years of financial and stock price underperformance, but I remain skeptical.

I believe the company is swimming against the current, considering the success of the e-commerce and direct-to-consumer models.

With shares trading at a P/E of only 5.1x, I choose to keep a safe distance from what looks more like a falling knife than a value play.

It hasn't been an easy ride for Tupperware (TUP). Considered one of the select few companies to successfully and sustainably run a multi-level marketing business model for many decades, the company and its stock have been in free fall for well over a year. Shares, in fact, have lost three-fourths of their market value in the past five years, a period when the broad equities market (SPY) marched forward by a cumulative 47%.

Credit: Taste of Home

The chart below illustrates how Tupperware's revenue, gross margin, and free cash flow have been trending sharply down since 2017. It is true that, because the company operates heavily in emerging markets while 92% of sales occur outside the United States, this globally diversified company has suffered quite a bit from currency pressures.

However, I do not believe that FX trends tell the full story. Suffice to say that, in 2018, currency-adjusted revenues were still down in every major geographic segment, with only emerging European markets showing signs of resilience at times. Adjusted segment profits outside North America declined by at least 10% in each continent, while the picture did not improve much in the first quarter of 2019.

Chart Data by YCharts

But I would go a step further. While the management team claims to have a multi-pronged strategy to return Tupperware to its glory days (see chart below), I fear that the company might be swimming against the current.

Tupperware still relies heavily on a marketing model that is supported primarily by its sales force network - which I find unlikely to thrive in the long term, given the success of online shopping. The company may still be able to perform well in less developed global markets for now. But in the end, I bet on product demonstration parties eventually succumbing to the e-commerce and direct-to-consumer models.

Image result for multi level marketing how stuff works

Source: How Stuff Works

Last quarter's 8% drop in average active sales force size reflects the challenges that the company faces. Tupperware claims to be committed to "expanding ways to get products into the hands of consumers through continuing to work on growing the sales force size, expanding studios, leveraging B2B partnerships, and deploying technology". Whether it will be successful at doing so fast enough is a different conversation.

Source: company's earnings slide

On the stock

If one were to simply look at Tupperware's stock valuation of 5.1x on a current-year earnings basis and rich dividend yield of 5.2%, shares would seem priced to own at first glance. Better yet, adjusted op margin still looked healthy last year at 18% (but contracting), while cash continued to flow into the company's coffers (CFOA of $132 million, representing 6% of sales).

Chart Data by YCharts

The problem lies in Tupperware's ability to reverse revenue and earnings growth trends that have been discouraging. While fundamentals have not deteriorated to "a point of no return" quite yet, a path to top- and bottom-line recovery is still unclear. In the meantime, Tupperware had to slash its dividend by nearly two-thirds to finance its turnaround efforts, while net debt has climbed fast in 1Q19 to $824 million, representing well over half of the company's total assets.

Given the combination of rock-bottom valuation multiples, rapidly deteriorating fundamentals, business prospects that are shaky at best, and a stock price that can't seem to find a bottom, TUP appears to be moving deeper into value trap territory. Should more optimistic developments cause investor confidence to improve, I would not mind revisiting this name. But, for now, I choose to keep a very safe distance from what looks more like a falling knife than a value play.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.