- FitLife is a nutrition company, growing at 30%, debt-free, and trading at very low multiples.
- Sell-off after Q3 2021 was most likely the result of the confusion over abnormal comps due to Covid re-opening in Q3 2020.
- Some investors likely dumped the stock without understanding the proper context of the results or FitLife's lumpy revenue cycle.
If I told you that I know a company which trades at normalized trailing P/E of about 8x, has almost 30% growth rate, debt-free, and has cash representing about 15% of its market cap, would you believe me? Well, I know such a company. It's called FitLife.
I and others have extensively covered the company so I will not focus on explaining its business again. I suggest you read the details in the presentation provided by the company itself.
Instead, I will focus on its financials and how they were affected by Covid, last year's bankruptcy of its largest client GNC, and peculiarities of GAAP treatment of its tax-free earnings.
I believe that the fair value of FTLF is in the range of about $80-120 per share, not lowly $48/share it is trading at now. Once it lists on NASDAQ, I think valuation should work its way up to that level.
Very short history of FitLife
The company has been around for over a decade. I started closely following it in 2014 when it was selling almost all its products to a single retailer, GNC's franchise stores. FitLife's business was solely dependent on GNC success. When GNC business started declining in 2016, FitLife was hit hard and narrowly escaped bankruptcy after defaulting on its loans. It was taken over by its largest investor Dayton Judd who is still its CEO today as well as its largest shareholder. If you bought FTLF back then, you would be sitting on almost 20x gain in 5 years. Yet, FitLife is still incredibly undervalued today despite its impressive run-up: it's more diversified, its main client GNC is thriving as a private company after emerging from bankruptcy last year, and its online sales represent 25% while its products are sold jot just in GNC but also in Walmart, CVS, and other prominent retailers. FitLife retail and online sales are growing at about 22% and 40% year-over-year.
What changed after GNC bankruptcy
Today, GNC still represents about 68% of FitLife's total sales. While this is significantly lower than 90% in 2017, GNC is still the dominant variable in FitLife's business. GNC filed for bankruptcy in May 2020 after Covid has shut down its stores. To be truthful, GNC has struggled for many years before Covid with unmanageable debt, the result of over-expansion and reckless stock buybacks. The number of both franchise and corporate stores has been shrinking by about 5% every year while the debt burden grew out of control. It took only a couple of months for GNC to re-emerge from bankruptcy attesting to the fact that its core business was still sound. It managed to shed both its debt and closed many unprofitable corporate stores.
Today, a smaller number of corporate stores is a real boon to GNC franchise stores whose business is growing again in less competitive environment. Unfortunately, as a private company, GNC no longer publishes its franchise store counts or its revenues, but we know from FTLF's last press release that its shipments to GNC have grown 22.5% in Q3 year-over-year. The good times at GNC are likely to continue for a while as many have become more health-conscious during the time of Covid.
Why revenue is down in Q3 sequentially and year-over-year
I can only speculate why investors sold off FTLF from high of $55 to the low of $48 after its announced solid Q3 results. My best guess is the confusion over abnormal comps in Q3 of 2020 is to blame. When Covid shut down retail stores in Q2 2020 and GNC filed for bankruptcy, FitLife's revenue has collapsed to $2.7 million, 41% lower than in Q2 2019. When the economy re-opened in Q3 and GNC re-emerged from bankruptcy next quarter, the revenue spiked to $6.9 million due to GNC restocking its depleted warehouse shelves. Not only Q3 revenue was more than 2.5 times the previous quarter, but it also exceeded Q3 revenue of 2019 by over 30%.
To make things even more confusing, FitLife had an unusually strong Q2 this year generating $8.1 million in revenue. Knowing the company business well, I realize that GNC places large orders to replenish its warehouse and the timing of these orders creates quarter to quarter revenue volatility. Therefore, there is little information we can gather from 6% revenue year-over-year or sequential decline.
To look at the proper context one needs to look at a full 9-month cycle year-over-year which is showing excellent top-line growth of 33% and even better bottom-line growth:
Unfortunately, the matters get even more confusing on the bottom line due to the intricacies of GAAP accounting. FitLife has a large net operating loss (NOL) of $17 million, which not only resulted in not paying any taxes for several years, but should also ensure no payments of taxes for the next 2-3 years. Today, GAAP forces the companies to recognize the saved taxes as a one-time “benefit” when it becomes more likely than not it would be able to generate profit and then expense this asset every subsequent quarter as if it were paying taxes. The companies are simply not paying taxes and these benefits and expenses are not only non-cash but have no economic meaning.
The distortion to FitLife's earnings is significant: in Q4 last year, it made “phantom” profit from “$4.4 million tax benefit resulting from the Company eliminating a substantial portion of the reserve against its deferred tax assets”. This year, FitLife already booked over $1 million in “phantom” tax expenses which it is not paying. Normalizing for this distortion, the 9-month net income would have been 25% higher: $5,358 or $4.45 per fully diluted share, almost a double it made last year!
Putting it all together
I expect 4th quarter to roughly match revenue of Q3. FitLife used to have a weak Q4 until last year due to GNC destocking as it tried to “dress up” its balance sheet when it was a public company. This seems to be no longer the case as Q4 last year was strong with almost $6 million in revenue. I also expect the operating expenses to come down by about $200K which were elevated due to payout to newly acquired Nutrology. The full year earnings should be in the range of $5.50-$6.00 on non-GAAP basis, giving it a normalized P/E of 8x. I do think the growth will slow down next year to probably 20% or so. On a positive side, the management doing its best to get the company listed on NASDAQ, the current stumbling block is meeting a 300 shareholders minimum. I expect FTLF will do a stock split soon to broaden its shareholder base.
So here you have it, an 8x P/E company growing 20-30% without debt and a ton of cash. Any takers?
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of FTLF either through stock ownership, options, or other derivatives. 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.
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