Natuzzi Trades At A Fraction Of Fair Value

Summary

• The market is missing the continued acceleration in written orders that will show up in operating results in 2021. We are at just shy of $5/share in EBITDA for 2021.
• The private market value of this business, including the esteemed global Natuzzi brand, is in excess of $47/share. There are a number of reasons why this gap will close.
• The reasons for Natuzzi’s historical underperformance are fading.
• We are highly aligned with insiders who own over 56% of the company.

We previously highlighted the Natuzzi story here.

To summarize, Natuzzi has no research coverage and is off the radar. Natuzzi is one of the best-known quality furniture brands globally. Natuzzi is the premier Italian furniture brand with a six decade history. Natuzzi has pivoted away from private label and lower margin business to ~90% branded. What has plagued the company in years past is having excess manufacturing capacity and too many employees, most of whom have union representation. For years NTZ has been working with the government and unions to right size its labor force. Coming into 2020, NTZ remained overstaffed and quite bloated compared to competitors. But, given the large tailwinds in the furniture sector and a huge increase in backlog combined with an accelerating written order growth, NTZ’s over staffing and excess capacity issues are being fully absorbed as the company has recently stated they are operating at “near full capacity” (as supply chain issues are being resolved).

At the end of the fourth quarter, the company’s backlog was up triple digits from the year prior. NTZ recently stated that the order flow thus far in 2021 has increased significantly. Historically, ~46% of the company’s sales have come from Europe and the remainder from North America and APAC. Many European countries such as the UK and Italy have faced stricter lockdowns and the UK has had retail shops closed for nearly 90 days.

The UK stores open on Monday, April 7th. There is substantial pent-up demand and written orders are going to increase dramatically. UK furniture company DFS Furniture is projecting as much as ~50% order growth in 2021 upon reopening. DFS also noted “Prior experience in the first national lockdown showed order intake for the 13 weeks following resumption of trading of +64%.” UK sell side firm Peel Hunt wrote in a note yesterday that they anticipate the bounce back in customers may be “even more pronounced” than when restrictions were lifted previously and there remains pent-up demand in lots of categories, along with consumers that have cash to spend.

NTZ said the North American business is accelerating. Branded order flow is up 39% sequentially versus Q4 and retail volumes up 29% sequentially - this is huge acceleration. Q1 wholesale order flow was up 67% yoy and retail stores up 124%.

As the President of Natuzzi North America said, “when I look into our history for our retail group, in 2018 and 2019, our best 5 to 7 stores were averaging about $2.5 million. Today, as we sit here in Q1, if we annualize our Q1 volumes, our best stores are pacing at $4 million.”

This is a 60% increase in SSS versus 2019. In our estimates below, we conservatively project 13% consolidated revenue growth in 2021 versus 2019.

NTZ’s Italian plants are now “almost at full capacity” as supply chain issues and COVID safety measure headwinds fade.

Apparently, nobody is modelling the written order growth hitting the P&L.

With 13% growth in revenues from 2019 and 33.8% gross margins (2.4 points of expansion yoy) NTZ should do $4.88 in EBITDA per share.

NTZ will add €111M in revenues versus 2020 – a year in which gross margins were 31.4%. The gross margins on this incremental revenue are likely to be at least 41% as NTZ will leverage fixed costs. That means €45.5M in incremental gross profit contribution in 2021, or a 2.4 point increase in GMs yoy.

These assumptions are backed up by the huge backlog, written order growth acceleration, and the recent return to near full operating capacity. NTZ is also lapping China tariff expenses, and for its secondary brand - NTZ has outsourced more operations to (cheaper) Vietnam and Romania, providing further margin tailwinds.

NTZ will invest its cash flow into growing its Directly Owned Stores (DOS) in the US. NTZ North America is led by Jason Camp who recently guided to opening at least 150 stores over the next decade – with 6 or 7 opening this year.

NTZ also says they could add ~100 stores in China over the next few years.

NTZ indicated they are close to a partnership deal on further expansion into the southeast Asia region.

NTZ also said their cash position is strong and will continue to build (€46M cash vs. ~€18M in debt – primarily mortgages on properties – and ~€27M outstanding on an AR securitization facility). They are opening 2-3 additional stores next quarter in Australia where the Natuzzi brand recognition is very high.

Importantly, these growth initiatives will help mute the overstaffing and excess capacity NTZ has historically had in its manufacturing operations.

We agree that NTZ’s US opportunity is an extremely attractive growth story for the following reasons:

• A proven successful operator is leading the charge. In 4Q19, NTZ hired Restoration Hardware's former CMO Jason Camp as president of Natuzzi North Americas.
• With NTZ being vertically integrated, the economics of these stores are good. NTZ captures good margins and generates positive cash flow a couple months after opening.
• The white space (150 store potential) is large and there is room for more than just RH to win, NTZ has one of the highest quality furniture brands providing an edge over its luxury peer group.
• The US housing and home renovation sectors have secular tailwinds.
• 150 stores doing $2.7M in revenue each, equates to $405M in revenue, four wall EBITDA margins are likely to be high teens, and using a conservative 13% EBITDA margins for the US DOS segment we believe NTZ can add over $50M in EBITDA. At a discounted 5x multiple, we believe the US growth opportunity adds $250M in value. Across 11M ADRs this is an INCREMENTAL $22.73 per share in value.

Furniture Comp set

NTZ Fair Value

• 1x 2021 sales for existing Natuzzi business = $47.7/share

• Annual Distributions from minority interest in KUKA China JV = ~$7M at a 10x multiple = $6.36/share
• US DOS additional growth opportunity, achieving additional $50M/yr in EBITDA, at a 5x multiple = $22.73

Fair Value for NTZ = $76.79/share

Precedent Transactions

Poltronesofà – Poltronesofà is an Italian furniture company that is very similar to Natuzzi. The main difference between the two is that years ago Poltronesofà opted to outsource its Italian manufacturing to various manufacturing companies in Italy, while Natuzzi opted to control the manufacturing. Poltronesofà made the wiser move and has reaped the benefits with double digit net income margins.

Natuzzi has historically suffered due to overstaffing in its manufacturing operations, as noted, this headwind is fading as these costs are being utilized.

Other than how the two companies handle Italian manufacturing, there is no structural reason NTZ cannot mirror Poltronesofà’s margins.

Pasquale has been unwilling to rip the band aid off and restructure NTZ’s manufacturing footprint. Although he made the following statement in this week’s earnings release,

With the recent sale of the Italy-based foam company to a third-party player we have taken a further step towards de-verticalization of our operations. We will continue to review our supply chain and manufacturing footprint to get a leaner structure of the Group.”

We believe Natuzzi will have a great year in 2021 and into 2022. Pasquale Natuzzi turns 82 years old next month, we believe there is a decent chance he will elect to sell the company, there are a few reasons: The NTZ business will be on track and therefor in position to achieve fair market value from a buyer, Pasquale is very old and has been breaking his back at NTZ for decades – he can finally sell the company for north of $500M, exit a winner, and spend his remaining years thoroughly enjoying life. I am quite sure Pasquale Jr. would like to have a couple hundred million in liquidity to play with as well. Pasquale is seen as a business Titan in southern Italy - he has been unwilling to take big, necessary steps to outsource manufacturing – by selling to a strategic or financial buyer he will finally get fair value for his company and not have to make the hard decisions.

We believe this is a highly coveted brand/asset that has significant potential.

Based on our due diligence, a buyer will likely have to pay €50-€60M in one-time restructuring costs. In order to rid Natuzzi of excess labor and restructure NTZ’s manufacturing footprint to an outsourced model using manufacturers around Italy. NTZ has stated they have €25M+ in non-core assets they could sell. This would help fund the operational restructuring.

We are convinced that NTZ can mirror Poltronesofà’s operating model and can reach consistent double digit net income margins under new ownership.

We believe there are buyers that would happily pay 1x sales for this premier brand and asset, which would equate to a sub 10x proforma P/E multiple, plus obtaining the ability to significantly grow DOS stores in the US and other attractive markets such as southeast Asia.

A precedent transaction related to Natuzzi would be comp Poltrona Frau. Poltrona is/was (2016) the #3 Italian furniture brand, NTZ #1. In 2014, privately held Haworth purchased 58% of Italian furniture maker Poltrona Frau for $190 million. This represented an EV/EBITDA multiple of about 9.5x and over 1.1x sales (company valuation multiples have expanded since). The company did about $35 million in EBITDA and $300 million in revenue. Poltrona Frau – “The commercial structure of the Group's companies covers the main geographical markets, reaching over 65 countries with a network of over 70 monobrand and multibrand stores (including 24 DOS) and over 1000 high-quality multibrand retailers. As at 31 December 2013, the Group had approximately 900 employees. The Group's manufacturing structure consists of two main facilities in Italy: one in the Marche region at the parent's site in Tolentino (MC) and one in the Brianza district at the historic site of Cassina in Meda (MB), plus one in Detroit (USA).”

A sale of NTZ at 1x 2021 sales ($47.7/sh) would represent a 38% discount to the fair value we calculated, but this leaves plenty of upside for buyers who could likely do even more with the premium brand. This is a 267% increase over the present stock price of NTZ.

Even if it is only a 40% chance Pasquale sell the company within the next 2-3 years, we still like that bet and ultimately think the shares get to fair value on their own as NTZ generates nearly $5/share in EBITDA this year.

Analyst’s Disclosure: I am/we are long NTZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Philaretos]

5.3M Euro in EBITDA in Q1 after lease expenses and not counting the asset sale gains, in USD this is $6.5M in EBITDA or .58 cents per share. With written order growth acceleration called out in April vrs the already strong Q1, Europe reopening and orders coming back, Europe orders getting filled, Rest of World backlog still very high and NTZ being in better position now to fill orders faster as supply chain and manufacturing headwinds eased as NTZ claimed two months ago that they had finally reached "near full capacity" – NTZ should comp up at least 13.5% vrs 2019, which would be $522.5M in sales, using 36% GM (which is conservative given mix shift away from low margin private label and higher reported sales/deliveries hitting the income statement in Q2-Q4, NTZ reported 36.2% GMs in Q1 - and there is going to be a step up in delivered orders in coming quarters so GMs should actually expand - I conservatively assume they come in at 36% for 2021), NTZ should generate a true EBITDA after lease expense of at least $42M, or nearly $4 per share.
And the changing of the guard at CEO should be a big catalyst to improve operating margins – of which there is a meaningful amount of opportunity.
“Mr. Achille will focus on all the actions required to foster the Natuzzi Group’s growth and to enhance its operating margin.”

Bears continue to pontificate on 1) lack of reported revenue growth, and 2) Pasquale's lackluster track record.
1 - Bears don't seem to understand that revenue is not recorded until product is delivered, and lead times have been stretched due to supply chain issues industry wide. If you look at La-Z-Boy, Ethan Allen, and HOFT - each reported lack of revenue growth in Q4 because of the bottlenecks. NTZ said a couple months ago that they have finally reached near full manufacturing capacity - NTZ will now be able to deliver on more of the backlog in Q2-Q4, and do it faster throughout the rest of the year - NTZ will be able to crank out at least110M+ euro in reported revenue for the next 3 quarters. Which for the full year 2021 would be a low teens comp versus 2019 - and if you run that through the model we are talking $42M+ in EBITDA after lease expenses.
2 - At times, investors' past perceptions of certain companies don't allow them to look at the present (and forward) reality. As we have laid out in the article NTZ has been stubbornly overstaffed for years but will now have the revenue in 2021 and beyond that more appropriately matches its cost structure and thus significantly alleviating the company's kryptonite. The US DOS story is significantly underestimated, this is being lead by a proven leader from RH. US DOS have a very attractive margin and ROIC profile and NTZ has said they are aiming for 200 US stores. And the changing of the guard at CEO, with Pasquale being replaced, should be a big catalyst to improve operating margins – of which there is a meaningful amount of opportunity.
“Mr. Achille will focus on all the actions required to foster the Natuzzi Group’s growth and to enhance its operating margin.”

[sarahPVmex]

@Philaretos Thanks for your continued updates on this. The story you laid out is beginning to become evident. Do you know what drove the negative 9.8m in operating cash flows as shown in the press release?

[stanley goodspeed]

Herman Miller / Knoll Deal Today

1.5x sales & 14x EBITDA. Boom! Implies $NTZ worth $60 today.

[Timothy Stabosz]

Nice try. Pie in the sky embarrassment here. The company almost went bankrupt last year. The brand has value, but that will only have a chance of being realized, when Pasquale Natuzzi passes on to his final reward. In the mean time, they will very likely continue to be a net cash burner. (The current time period is only a respite.)

[Gio Danisi]

@Timothy Stabosz
The point was not bankruptcy, never been. CFO in last cc talked about an estimation of need of liquidity for more than E50M at February, I don't know from where they came out with this number, in 2019 they were free cash flow negative (leases adjusted) for E5-6M. Moreover, when they made this "forecast", just China was closed and in China the costs were split in 2 with Kuka, with the Chines plant already in "desizing mode". However, they never needed a single euro in 2020, even the E2.5M they borrowed from Natuzzi's personal funds, were not needed.
I guess the family just realised that they had a very proficuous way to inject some cash in the company in exchange for the rest of the outstanding shares at 2-3% of their fair value.
They probably also pointed to the de-list of the company, which would have occured if NYSE didn't decide to extend the terms of the procedure for the pandemic.

[GuyRien1]

@Timothy Stabosz That's what I thought when I sold at $2.10 after buying in at $0.70. It just shows you perception means a lot in stocks. I think people have piled in after missing out on overstock and wayfair

[stanley goodspeed]

@Timothy Stabosz you should short it — I’ll lend you my shares. The cash pile will only get larger. Don’t pick up nickels in front of a steam roller Timothy, you’ll get run over.

[granularcloud]

KBAL is another I'd look at...

[Gio Danisi]

This euphoria is not justified: operating profit is still negative, FCF is negative even in the fourth quarter once adjusted for leases. Moreover, you have a company owned by a family who can screw the minor shareholders in any moment, as it did last year with the E15M safe line payable issuing shares at an unknown price in the future.
They said they would have sold the leather fabric for E35, they sold for E6 few weeks ago.
Natuzzi sells products which are designed to last: consumers just anticipated their furniture expenses in the last quarters, the trend could reverse very soon. What happened is that NTZ became another MEME stock, just not so famous as GME. The point is that u couldn't rationally keep it over $5 even if u were super optimistic, like for GME over $20.
What happened after the second quarter was impossible to predict, even for Natuzzi's family.

[stanley goodspeed]

@Gio Danisi sounds like you’re bitter you sold too early or want the stock to go down so you can acquire more shares cheaply. Literally everything you wrote is a lie/incorrect. How did you go from uber bull to bear? I hope you’re short, you’re going to be forced to cover at $30.

[Timothy Stabosz]

@stanley goodspeed
Because he’s a VALUE investor...and it’s not a value any more. Where were the ignoramuses when the stock was $1-4??

[Philaretos]

@Gio Danisi
The biggest mispricings exist in illiquid and orphaned stocks which Natuzzi was, you are anchoring to a false and misleading value, especially given the circumstances today.

We understand that past financials are not pretty, as explained this is due to a historical stubbornly overstaffed manufacturing footprint plus some private label mix that was uneconomical but is now very small, as NTZ just told us they are now near full capacity after facing supply chain issues which has been an industry wide phenomenon, NTZ generated .30/share in EBITDA last quarter on reported sales that were flat, sales were flat due to orders not being able to be fully completed in the quarter due to bottlenecks - if you look at La-z-boy reported sales were down last quarter and Ethan Allen was +2%.

NTZ's backlog is at very high levels and they just told us North American written orders are ACCELERATING, the rest of the world is very strong, and Europe is/will open (UK big market opened up yesterday and analysts are calling for significant growth) to what will be significant FURTHER written order growth on top of an already huge backlog.

We are modeling a conservative 13% revenue growth vrs 2019 as NTZ is in finally in position for very high utilization of its manufacturing capacity to meet this huge backlog which will hit the P&L in 2021. This will lead to nearly $5/share in EBITDA.

You also have a very attractive US growth story - which also would ensure NTZ has more orders to utilize its manufacturing for years to come - thus minimizing the historical main problem causing the company's underperformance.

We can debate the loan Pasquale provided to the company but it was backed by a rights offering, and the company now has a strong and getting stronger balance sheet.

NTZ did not say what you claimed re leather fabric, NTZ said they were looking at 35M Euros in non core asset sales including the foam business and real estate - they own nearly a dozen properties - including a valuable building in North Carolina.

The path to victory for Pasquale is getting the business on track so that he can sell it and finally realize fair value - we believe he won't wish to keep busting his butt when he's 85, if/when he sells the company the buyer can make the hard necessary decisions Pasquale hasn't been willing to make regarding outsourcing the manufacturing.

Natuzzi trades at a fraction of fair value.

[stanley goodspeed]

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [57]

So far, (China) we have, in total, approximately 250 stores, something like that, okay? Between Natuzzi Gallery and Natuzzi Edition. We are planning to open, certainly in the next 3, 4 years, another 100 stores. It's possible to forecast something like that.

David Lawrence Kanen, Kanen Wealth Management LLC - President, Chief Compliance Officer & Portfolio Manager [58]

Okay. And then if I could ask a question for Mr. Camp. Specifically about the wholesale business in the U.S. Could you give us some color there if that business is coming back?

Jason Camp [59]

I would say 100%, Dave. I think there's generally tailwinds in the furniture business at every price level. We are definitely seeing it come back. Hopefully, my earlier comments resonated, but we have been for the fourth quarter, the branded wholesale business grew by almost 40%. And in Q1, again, although not fairly comparable grew by approximately 70%. So we've definitely seen that business come back. I mean, today, the profile of the region I lead is still predominantly wholesale. And I am as passionate about building the branded wholesale side as I am about building retail.

[stanley goodspeed]

North American sales could easily do $50 million in the fourth quarter. With additional store openings and e-commerce, not inconceivable NA does $250 million topline in 2022. $600 million in company-wide sales in 2022 would not be out of the question, which at 1x sales is a $50+ stock. This is very much $RH redux with the same guy leading the charge in Jason Camp who turned around RH. They are generating tons of cash as they take 50% deposits on orders, and using that cash to fund growth. It’s a virtuous cycle and the de-urbanization trend + work from home will only continue to drive sales for years. This is a super cycle and given Natuzzi’s unique operating leverage they will see profits explode and have industry high contribution margins. Also could be added to the Russell 2K index soon as the market cap goes higher. This stock is relatively tightly held and it won’t take much to move the needle. Another couple good quarters and will be tremendous technical demand for the stock with limited supply, setting up for a rocket ship. Not saying $NTZ will $GME, but $RH redux is in the cards. Jason Camp is going to take us home.

[Joseph investing]

Impressive analysis. Thanks.

[stanley goodspeed]

Great article. Agree NTZ will re-rate now that it’s profitable on an operating basis, showing a massive backlog and written order growth, and a meaningful pipeline of new branded stores — as opposed to lower margin wholesale business. The US market growth will be staggering; they only have 13 directly operated stores in the US currently (orders up over 100% in Q1). The store count will increase by 50% this year alone, and will likely grow by another 50% in 2022. This is extremely important now just from a sale growth perspective, but for margins as well, as this will drive more volume through Natuzzi Italia’s factories in Italy, which are not yet even at full capacity. Leveraging those fixed costs, company-wide margins should go up dramatically. Natuzzi is also introducing e-commerce in the back half of this year, which will further drive high-margin volume. There is tremendous white space to grow in the US, with likely store openings in key markets such as Dallas, the Bay Area, Pacific Northwest, and the hit sunbelt. Natuzzi Editions is lower priced, non-custom brand that is also extremely well received and has growth potential in both of the branded wholesale channel (Raymour & Flanigan, etc)., as well as company owned stores. Natuzzi can continue to open stores in an asset light fashion by doing JV’s, partnerships, and franchise agreements, limiting the cash outlays, while continuing to drive volume through the factories and capturing wholesale margin and some retail margin. If this seems like a stretch, pretty easy to google the history of Jason Camp, president of Natuzzi America, who was a senior guy at RH and both helped to write the growth playbook as well as execute it. This guy knows exactly what to do, and is doing it. Interestingly, Mr. Camp spoke on the recent conference call for the first time since joining the company in late 2019 and confidently laid out the company’s growth strategy. Of note, he said the wholesale channel is “100%” coming back, which is still a majority of sales in the US.

Written orders in US - Q1
Retail was up 124%+ (13 stores)
Wholesale was up 67%+ (~80% of total US sales)
30% QoQ growth — sequential — is accelerating, and will continue to accelerate this year!

Given it takes 4-6 months to penetrate the pnl given that revenue is recognized upon delivery and not orders, revenue will skyrocket this year.

Interestingly, even with a relatively flat Q4, Natuzzi was profitable. What does that tell you about profitability when sales ramp, given the huge fixed costs of running your own factories in Italy, where you basically have to pay hundreds of workers per day, regardless of volume. The fixed cost leverage cuts both ways, and Natuzzi is about to be on the other side of that leverage.

Natuzzi is a world class brand that is about to be very profitable and its fast growth is among the highest in the industry in terms of store and revenue growth. Yet it’s valued at a ridiculously cheap 0.25 sales which won’t last as the market starts to connect the dots and see what’s really going on here.

[GuyRien1]

@stanley goodspeed So I'm the king of the idiots who bought it at $0.7 and sold it at $2.1. Now I did so because I looked at their 2019 stock price and fundamentals and I didn't see them changing much in 2021.

As for being a world class brand. It's a well known brand, they make good and average stuff like most brands now.

[stanley goodspeed]

@GuyRien1 it’s still very early imo. NTZ could easily print $600 million on sales in 2022 given market pull and new growth initiatives — US, SE Asia, and Europe coming back. North America alone should do $250 million in sales in 2022, which geography is 1/3 of company-wide sales currently. At 1x sales, that’s a $55 stock. Pretty straightforward assuming the housing market doesn’t collapse.

[GuyRien1]

@stanley goodspeed It could easily double but it could easily half as well. You have to believe in Pascale and he very nearly took the company private so I'm not sure his interests and the stock holders align.

[reasonableperson1]

I'm the biggest idiot of all. I never owned the company.

[GuyRien1]

@reasonableperson1 So better to be an idiot and lost than never to be an idiot at all?

[GuyRien1]

See who can top me for king of the idiots.

I bought 10,000 NTZ when it was $0.70 I sold at $2.10 thinking I was a genius for tripling my money ...

[granularcloud]

@GuyRien1 I sold GME at $40 if it makes you feel any better. Bought at like $15 but still.

[GuyRien1]

@granularcloud I still top you as a bigger idiot. I lost out on 600% upside and you only 400% as NTZ trades at 7 x my sell price and GME 5 x your sell price.

[Downtown10]

@GuyRien1 I bought TSLA at $33 ($6.60 in post split $) and a few months later sold it at $55 ($11) because I thought it was getting a bit pricey for a car company. Crown me.