Positive numbers coming from EMERGE Commerce, says Raymond James

Raymond James analyst Steven Li is sticking by his positive position on direct-to-consumer brand roll-up EMERGE Commerce (EMERGE Commerce Stock Quote, Charts, News, Analysts, Financials TSXV:ECOM) after a recent corporate update. On Monday, Li reiterated his “Outperform 2” rating for Emerge, saying investors should expect more M&A from Emerge up ahead.

Toronto-based EMERGE owns a portfolio of niche brands in the subscription and marketplace e-commerce spaces, including golf companies UnderPar.com and JustGolfStuff.ca, premium meat and grocery name CarnivoreClub.co, survival and outdoor gear business BattlBox as well as WagJag.com and BeRightBack.ca. 

The company provided on Monday an update based on preliminary results for the month of October, saying it hit record Gross Merchandise Sales (GMS) of $5.1 million, which would represent a 190 per cent increase over the previous October. Management expects the full Q4 to generate the largest quarterly GMS in the company’s history to date. (All figures in Canadian dollars except where noted otherwise.)

“We had a terrific start to the Q4 holiday shopping season with record GMS in October. We are pleased to report that BattlBox had an excellent first month under EMERGE, and bookings from across the portfolio indicate that this will be our strongest quarter ever,” said Ghassan Halazon, EMERGE Founder and CEO, in a press release.

“Over the last year, we have really transformed the profile of the portfolio towards a larger portion of recurring members, with favourable Customer Lifetime Value (CLTV) to Customer Acquisition Cost (CAC) ratios. While we are agnostic between subscription and marketplace e-commerce models, we remain intent on acquiring sticky e-commerce businesses with a track record of organic growth and profitability,” he said.

EMERGE reported October subscription-based GMS as 83 per cent of revenue compared to zero a year earlier, with BattlBox, the company’s largest acquisition to date, hitting $2 million in GMS and JustGolfStuff on track to double its GMS in 2021.

Commenting on the update, Li said BattlBox looks to be doing great, while on JustGolfStuff he said, “Management has successfully been re-directing its audience attention to leading golf product brands as golf experiences supply remain limited (due to the pandemic).”

“ECOM currently has a $25 million debt facility in place, including $17 million undrawn. We expect ECOM to continue its acquisition strategy of sticky e-commerce businesses with a track record of organic growth and profitability. In total, ECOM currently owns and operates 7 brands across 4 verticals in North America,” Li wrote.

Li said he is expecting an in-line third quarter, due on November 29, with revenue expected to be $6.3 million and adjusted EBITDA at negative $0.2 million.

“The preliminary updates for the month of October bode well for F4Q21,” he said.

Looking longer down the road, Li is calling for 2021 and 2022 revenue of $35 million and $60 million, respectively, and for 2021 and 2022 EBITDA of $2 million and $5 million, respectively. On EPS, he is forecasting negative $0.05 per share for 2021 and $0.00 per share in 2022. As for an EV/Revenue multiple, Li is estimating ECOM to go from 9.7x in 2020 to 2.5x in 2021 to 1.5x in 2022.

EMERGE completed on Tuesday its most recent acquisition in Richmond, Virginia-headquartered WholesalePet.com, a tech-enabled B2B marketplace that connects over 400 independent pet vendors to over 8,000 independent stores with over one million SKUs on tap. The purchase price was put at up to US$25 million, comprised of US$12 million in cash, US$2 million in EMERGE shares, $2 million in deferred consideration payable over two years and an earn-out of up to US$9 million over two years.

EMERGE said WholesalePet has facilitated over US$250 million in GMS over its 20 years existence as a company, with an average customer tenure of ten years. For the 12 months ended September 30, 2021, the company generated GMS of about US$40 million, revenue of US$3.7 million and adjusted EBITDA of US$2.8 million, with the value of the acquisition pegged at about 5.71x adjusted EBITDA.

“With the acquisition of WholesalePet.com, we have procured a profitable market leader in the lucrative B2B pet e-commerce space. With an impressive 20-year track record of steady organic revenue growth, profitability, and cash flows, WholesalePet.com will fit perfectly in the EMERGE ecosystem. The business has impeccable net revenue retention and requires minimal marketing spend, with a merchant network that is now 8,000+ strong,” said Halazon in a press release. 

“This acquisition marks our first foray into both the sticky B2B e-commerce space, as well as the pets vertical, one of the fastest-growing segments in the e-commerce sector. We are thrilled to welcome Chris, Bo and the veteran WholesalePet.com team to the EMERGE family,” he said.

Disclosure: EMERGE Commerce is an annual sponsor of Cantech Letter.