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Loyalty Ventures Inc. ($LYLT) -- a ~$40M market cap company with trailing twelve months' EBITDA of $117M…
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None of this is financial advice. It is written purely for entertainment purposes.
I stumbled across this ticker on Stocktwits and started to look into it over the past few days. I haven't yet initiated a position, but I am likely to do so as the dust settles on FOMC madness.
If anyone is more familiar with this company I'd be curious to get your perspective!
What is Loyalty Ventures Inc.?
Loyalty Ventures Inc. (“Loyalty Ventures” or “LYLT”) is a loyalty solutions company that runs the most recognized coalition marketing program in Canada and campaign-based loyalty solutions for grocers and other high-frequency retailers. The company’s primary operations are in Canada and Europe and the business is headquartered in Dallas. LYLT was spun-off from Alliance Data Systems Corporation (ADS) on November 8, 2021. Loyalty Ventures is comprised of two operating segments:
Air Miles ($488M revenue, $143M Adj. EBITDA in 2020): Air Miles is a coalition loyalty program in Canada. The program provides all marketing, customer service, rewards and redemption management for clients who have opted into the program (sponsors). Sponsors are typically granted exclusivity in their market category (e.g., grocery, hardware, banking, etc.) enabling them to realize incremental sales and increase market share as a result of their participation in the program. Consumers (the company calls them collectors) earn reward miles as they spend money with the sponsors. These Air Miles (Air Miles is the name of both the loyalty program and the currency garnered from spending within the program) can be redeemed by collectors for travel, entertainment, experiences, merchandise, or other rewards. The value of the program resides in the extensive reach of the program (2/3rds of Canadian households participate), the brand recognition of the program to drive sales given how long it has been present in Canada, the amount and quality of the sponsors which contributes to the network effect, and the ability to gather data about consumer behavior to help sponsors better reach consumers. Air Miles’ primary competition is sponsors insourcing the loyalty program as well as PC Optimum, a relatively new program started by Loblaws.
BrandLoyalty ($275M revenue, $42M Adj. EBITDA in 2020): BrandLoyalty is a campaign-based loyalty solutions business. BrandLoyalty designs, implements, and conducts digitally-enhanced, bespoke loyalty campaigns for high-frequency retailers in Europe and Asia. An example of a program is a grocer who wants to incentivize increase spending levels during a promotional period. In concert with the customer, BrandLoyalty would design a program designed to increase shopping behavior from a segment of its customers (for example shopping frequency). During the promotion customers receive rewards if they hit the performance standards set by the company. The rewards are licensed products from companies such as Disney that have contracts with BrandLoyalty. The customer is guaranteed a certain baseline productivity from the program and BrandLoyalty earns revenue based on achievement above these levels. BrandLoyalty was purchased by ADS in 2013 at a 10x EBITDA multiple.
Why has their stock fallen 95% in less than a year?
Seems like a couple reasons.
- The business is highly levered -- When ADS (now Bread Financial) spun them out, they saddled the Spinco with a shitload of long term debt.
- The operations have declined -- Seems like they have faced a YoY decline in operational execution. This presentation shows revenue and EBITDA declining from 2019 - 2021. They also lost a large contract with Sobey's, a Canadian grocery chain, that investors reacted negatively to as Sobey's represented ~10% of EBITDA.
What does it mean?
When a company's valuation falls 95% in less than a year, that generally is an indication that the company is going out of business. If this company IPO'd around $800M, the fact that it is only worth $40M now seems extremely problematic.
The question is... is this company going out of business?
The argument for why $LYLT could go out of business
Simple -- if the company can't produce free cash flow such that it services its large amount of leverage, and it is unable to refinance its debt, then it would likely enter bankruptcy, and equity holders would be wiped out.
It seems to me that there are three scenarios under which this could happen:
- Companies flee to a competitor --If customers identified a market provider who had a superior offering (either doing the program in-house or going to another provider), they could leave $LYLT. This would threaten $LYLT's FCF generation.
- Companies opt out of loyalty programs -- In a market downturn companies could see loyalty as an unnecessary operating expense, and just opt out. This would threaten $LYLT's FCF generation.
- The company fails to control its costs and/or execute in sales + marketing (both new account addition and existing customer retention)
The argument for why $LYLT won't go out of business
- They have plenty of time to execute -- ~25% of term debt comes due in Nov 2026, with the remaining ~75% coming due in Nov 2027. This basically gives them 4-5 years to execute and de-leverage the company. Given that they are a cash flow positive company, this seems entirely feasible if they can maintain current performance, if not grow.
- They are the market leader in their domain -- You can see in the investor presentation, but their level of client penetration, brand recognition, value add to their customers, and wealth of 1st party data make them an excellent provider. For many companies it wouldn't make sense to insource this capability. Further, $LYLT continues to make strategic investments to shore up their ability to execute.
- The company has a concentration of equity holders who have a vested interest in seeing them succeed ADS still owns 19% of the company. Further, a ton of their small float (~24M shares outstanding) is actually held by mutual funds and institutional investors. According to Barron's...
-- Bread Financial (ADS) owns 4.7M shares -- Mutual Funds own ~3.9M shares -- Institutional investors (e.g. hedgies) own ~10.7M shares
Maybe there's others that fit in the above three categories that aren't documented by Barron's. But those alone represent like 80% of the total float at ~19.3M shares. So there's really only 5M shares max floating around out there for individuals to buy. Given how easily it would be to manipulate / swing this thing for the big dogs, it's hard to see why they've even let it crater this far. I truly don't get it.
Further, now that the market cap is like $40M, it's not hard to imagine either a strategic or even a private equity firm trying to swoop in and take this thing private. A company that still generates over $100M in EBITDA annually for only $40M seems like a steal!
Conclusion
As far as I can tell, it seems like this thing is massively oversold, beaten down, overlooked, and undervalued. It's not a GREAT business, but it is a decent business at a really cheap price. If they can maintain operations and deleverage the company... a $100M EBITDA company annually with no real competitors... even at 5x EBITDA multiple this company is worth $500M. That's an easy 12x from current share prices.
Certainly not a risk free play, but it seems like the upside relative to the risk presents a fine tradeoff. I personally am likely to initiate a meaningful position here soon.
Sources
https://www.loyaltyventures.com/static-files/9d86c6aa-fa14-46f9-b6ae-140bf6077251
https://www.barrons.com/market-data/stocks/lylt
https://www.gurufocus.com/news/1844201/loyalty-ventures-a-highrisk-highreward-opportunity
https://finance.yahoo.com/quote/LYLT?p=LYLT
https://www.nasdaq.com/market-activity/stocks/lylt/institutional-holdings
https://www.marketwatch.com/investing/stock/lylt
https://www.valueinvestorsclub.com/idea/LOYALTY_VENTURES_INC/8196583992
Top Comment:
I collect Air Miles (among other loyalty program points) and it's one of the lower value programs (for consumers), especially for travel, and it feels like it has lost so many places where you can collect from lately.
In the last 2 years Lowes/Rona, and Safeway/Sobeys have both left the program.