Further upside for Fitlife Brands in 2020

I started to build a position in Fitlife Brands during August 2018 based on initial signals of a succesful turnaround and significant insider buying by their new (at the time interim) CEO Dayton Judd. At the time shares were trading at c. $3-4 (stock split adjusted) per share.

I continued to purchase shares at prices up to $5 per share based on continued aggressive insider buying by the CEO during the remainder of 2018.

FTLF Investment Longlist_insider buying

Early 2019 I applied to microcapclub.com with this idea and in May 2019 I wrote an article on SeekingAlpha.

Today, the shares hit a fresh 52-week high of $14.00 per share. Despite the significant increase in share price, it is still one of my best ideas for 2020. I still hold all my shares and believe that the shares can easily reach prices above $20 (in the absence of an overall economic downturn).

The Company earned c. $1.90 per share in the last 9 months (vs. c. $0.60 per share in the first 9 months of FY18). Q4 is generally weak, but $2 per share in FY19 seems possible. On top of that the Company is likely to continue their growth. A PE of 7 for a growing asset light company is too cheap in my opinion.

I want to keep the post short, so will focus at why I believe that sales (and subsequently earnings) are likely to continue to growth during 2020.

The Company owns a portfolio of nutritional supplement brands which are sold via retailers (mostly GNC franchisees) and online (only started recently as part of turnaround). Below the growth drivers for both the offline and online channel.

Offline

  • First 9 month sales increased from $13.1m to $14.0m, despite a lower store count and same store sales at their largest customer (GNC franchisees, responsible for c. 77% of revenue) – Fitlife Brands increased in store market share
  • It is not clear what exactly led to this growth (the Company reduced marketing budgets), however it is likely that the rebranding of one of their product lines (PMD) had a positive impact
  • During the current quarter the Company rebranded another important product line (NDS) and another product line (Sirenlabs) will be rebranded during 2020.
  • These rebranding activities and continuation of other activities that resulted in sales growth during 2019 could result in further sales growth in 2020 or at least keep sales stable despite weakness at GNC
  • During the current quarter the Company launched a product at 3700 Walmart stores. If succesful this could increase sales significantly and open the door for other Fitlife Brands products.
  • I am not very bullish about the offline channel, but believe that Fitlife Brands is in a good position to at least match 2019 results

Online

  • The Company sells most of their products online via their own website and Amazon
  • Sales increased from $0.5m in the first 9 months of FY18 to $1.8m in the first 9 months of FY19
  • Most revenue is generated from the Energize and iSatori brands. These brands are not sold exclusively to GNC.
  • Other brands which are sold “exclusively” to GNC, are also sold via Amazon and the Company’s website, however Fitlife Brands does not have the freedom to price these below 100% retail prices (which makes it difficult to generate good volume, as these prices are much higher than online products of competitors)
  • In the first 9 months of FY19 the Company launched one new online exclusive product
  • In the current quarter the Company launched two more online exclusive products, with more to come in 2020
  • The three new products launched this year, all rank in the top 4 of Fitlife products on Amazon (1 iSatori product and 2 CoreActive products). As only one of these products was included in Q3-19, it is likely that online sales get a good boost from these new products.
  • FTLF Investment Longlist_new online products
  • In November 2019 the Company hired a E-Commerce manager to further growth this channel
  • In the Q3-’19 10-Q the following is stated: “Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management’s focus on higher margin online sales.”
  • The Company is increasing their online presence aggressively (only very recently) by growing a team of Fitlife athletes that market the products on Instagram, Facebook etc. and receive a commission on sales they generate.
  • Based on the above I believe that the Company will be able to increase higher margin online sales significantly during FY20.
  • This will not only increase earnings, but also lower the dependency on GNC.