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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, September 15, 2015

$FTLF: Positive reflections on an initial (small sample) channel check

I have been looking at $FTLF as an investment idea and posted my initial thoughts here >> http://goo.gl/UnuzIs << but i've been struggling with an internal conflict b/t the investment thesis, which looks good to me on paper, and the product, which makes me feel uneasy.

So I recently visited two corporate GNC stores and three local franchise stores to check in and hear what they had to say about $FTLF and $IFIT products. This is an insanely irrelevant sample size. GNC has ~3,500 domestic corporate owned stores and ~1,100 domestic franchise stores and I've visited 0.10% of them.

Still, with the risk of spreading the contagion of availability bias, here's what I learned from visiting 0.10% of GNC stores in a small sample channel check.

Corporate stores (2): 
Both stores had a small section of iSatori bio-gro and hyper-gro on hand.

At one store, a bit run-down and poorly lit, the dipshit kid who helped me said they wouldn't recommend the iSatori product "... b/c nobody buys it".  uh ...

He couldn't tell me anything about it.

The other store was clean and well lighted and the dude working there was insanely nice, very knowledgeable and totally jazzed about the iSatori bio-gro. "I'm a biology major so i try to understand how these products work ... it's an IGF4 stimulator ... the only product like it on the market ... the only way to get the same effect is with a much more expensive growth hormone."

He says he was not trained or paid to say that.

My takeaway is that IFIT's bio-gro has a good product, but they pay way too much to market it through the "traditional" advertising channels of meathead spokespeople (ie CT Fletcher's "I COMMAND YOU TO GRO!").

IFIT pays $0.24 / dollar of revenue on sales & marketing and generates the same 2x sales / total assets as FTLF, which spends only spends $0.12 / dollar in revenue. No wonder FTLF has ~20% ROA. Now imagine for a minute the same product sold through FTLF's channels at 2x the margin.

It was a little disappointing that the MetisNutrition line hadn't yet reached the GNC corporate stores, but the product just launched.

Franchise stores 
I happened to arrive at a franchise store while the owner was there and he owns three of them in the area, so these comments refer to all three stores.

I was told that musclepharm, BSN, Optimum and Cellucor all pay for their wall space and are in corporate and franchise stores equally.

FitLife products (NDS, PMD and SirenLabs) were all in the middle aisle, facing the wall, a less prominent position. (I think they called it a camel shelf, or something?)

The manager at the store raved about the product. He loved it for a variety of reasons:

1. it sells well and there are "zero returns, none!" apparently returns are a huge hassle.
2. the brands are consistent and have longevity. they don't change around the ingredients and they don't continually introduce new brands that are confusing to the sales people.
3. the product works, he said.

a few other tidbits ...

1. he said the brands reminded him of cellucor from a few years ago when cellucor was called nutrabolt, started out as a small business, grew through product development and word of mouth, and now is a GNC anchor product. but today's cellucor is different than the past, with too many new brand intros and a lot of returns.
2. he of alluded to musclepharm being a joke
3. on the distribution transition, they used to order direct from FTLF maybe a pallet every quarter. Now that they order via corporate GNC every two weeks and since they don't have to stock up, the orders are about 5%-10% less volume. but its steadier.
4. the product is now more expensive to them since they buy from GNC with a markup.

this final point highlights a negative aspects of the change in distribution channel and also a risk for $FTLF

  • the product price to the franchise has increased and could cut into the franchise owner's margins. the owner I spoke said it is still a high margin product, but that's narrowed. FTLF mgmt says the higher prices are offset by a termination of shipping costs and credit card fees, so on their end the impact is a wash. 
  • the risk is that GNC can pretty much do whatever it wants. while i'd assume there is a contract b/t GNC and FTLF on frequency and size of price increases let's face it, GNC controls the distribution channel ... and therefore can do whatever it wants. 

5. post summer is the slowest seasonal period for the business. everyone met their summer goals. it picks up again in January.

... my takeaway, from the franchise stores is that FTLF is punching above its weight, outperforming other products in the sports nutrition business without wall access space or end caps or expensive advertising.

Again, small sample, but exciting for me to hear and its developing some trust in the product. I called it "snake oil" in the prior post and I think that was overly harsh. I will amend that. 

Finally, "Sudbury Capital Fund" recently filed a 13G on the stock, representing a 5% position (432k shares) >> http://goo.gl/G8osCL << The fund has another disclosed position in RLJ Entertainment, so I'd guess this fund is going after small value.

Not sure how they acquired so many shares without moving the stock so probably acquired from another large holder. The fund is run by Dayton Judd >> http://goo.gl/s6bW7n << I google mapped his office in Texas just to get a sense of where it is. It's located - the cliche of Texas - roughly equidistant from a gospel church, a gun store, a bbq pit and a DQ.

All this is to conclude that I'm getting over my fear of the product and there will be more store visits in the future.

-- END --


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