FITLIFE BRANDS (FTLF)

A 10-bagger that might be just starting

Fitlife Brands is a leading provider of premium supplements and health products, boasting a track record of sustained value creation despite facing challenges in 2017. Under their umbrella are renowned brands such as NDS Nutrition, PMD, Siren Labs, Metis Nutrition, iSatori, Nutrology, Energize, BioGenetic Laboratories, Core Active, All Natural, Dr. Tobias, Maritime Naturals, and Muscle Pharm.

While historically reliant on GNC for product distribution through its franchises, recent strategic acquisitions by a seasoned management team have reshaped Fitlife Brands into a predominantly online retailer of well-established brands. This shift positions the company for substantial growth and improved profitability, challenging any lingering market perceptions anchored in previous valuation models.

A brief overview of the Company´s history:

FTLF first became a relevant player in the supplements market when it merged with iSatori in 2015. In 2017, 80% of their sales were through GNC. This level of exposure generated considerable risks for the Company. For example, between 2016 and 2017, GNC decided to lower inventory levels with a big hit to FTLF sales (-30%), ending FY2017 with a net loss of 9,8m. During that time, gross margins were 28,6% and growth paths were limited given the competitive environment in wholesale.

Dayton Judd entered the Board of the Company in June 2017. After seeing the inefficiencies and cost optimization opportunities, as well as the potential for growth via online channels, he stepped in as CEO in February 2018. He bought a 36% stake in the Company at the time through Sudbury Holdings (100% owned by him). He even financed the Company himself, first with a 525k loan in November 2018 and then with an 800k loan in December 2018 that substituted a factoring agreement for their receivables with GNC that they were incapable of renewing.

The strategy was clear from the beginning. High exposure to GNC implied a very high customer concentration risk and online sales were the way to diversify from it, while at the same time improving the avg 30% gross margins of wholesale to the more attractive 45%-50% gross margins of online channels (mostly Amazon).

It is important to keep in mind the challenging competitive environment of the industry. Most sellers have 100% outsourced production, including FTLF, and brand differentiation is key. Customers seem to have a high degree of loyalty to the brand they use due to familiarity/taste, but obviously marketing efforts are set to be permanent to maintain/grow sales.

Sales were flat during 2018, but Dayton managed to bring the Company back to profitability, increasing gross margins to 39,5%, mainly through increasing online sales. Still, the Company was doing most of its sales via GNC franchises.

During 2019 Dayton continued to increase its stake in the Company, ending the year with 52% control. The Company also started buying back shares aggressively and bought 16,3% during the year. 12% of the revenue came now from online sales and gross margins continued to go up (42,4%) representing the new mix in channel sales.

And 2020 came, and COVID-19 hit the retail world with full force. In March 2020, GNC was unavailable to refinance its heavy debt position and ended up filing for bankruptcy in June. It mainly impacted their corporate stores and franchisees were in better economic positions, but sales for FTLF were down 40% during the second quarter of the year. They were required to write off some receivables, and it took a while for franchisees to restock, yet overall, they weathered the situation in good condition.

Still, FTLF managed to finish the year with 11,7% growth in revenue, mainly thanks to a surge in online sales because of COVID. The Company made 21,3m in sales and continued to increase gross margins to 43,2%.

Online sales were now 20% of revenue and the Company had a good balance sheet, so it was time to start looking for new brands to acquire and increase the portfolio.

The first small acquisition came in early 2021 with Nutrology. The Company spent 500k in what was presumably a low single-digit multiple of earnings, starting to show the ability of Dayton to find outstanding investment opportunities.

During 2019 and 2020 FTLF also bought back 20% of the Company. Online sales continued to grow aggressively during 2021 and 2022, in part because of the efforts of the Company and in part because of the COVID tailwinds.

At the end of 2022 came the second, this time way bigger, acquisition; Mimi´s Rock Corp. Mimi´s is an online dietary supplement and wellness company which markets and sells its products under the Dr. Tobias, All Natural Advice and Maritime Naturals brand names.

The Company was acquired for a total amount of 20m and at approximately 5x EBITDA. It was financed with cash on hand and a loan of 12,5m (<1x EBITDA). This was a turning point for FTLF as GNC went from 60%-65% of sales to 30%-35%. FTLF was now a mostly online seller, with the consequent positive impact on gross margins.

Mimi´s was already a digital-based brand, selling most of its products through Amazon with 75k customers under the “subscribe and save” modality, which generates a higher recurrence of revenue.

In September of 2023, they uplisted to the NASDAQ.

And then came the third acquisition in October 2023. FTLF acquired the assets of Muscle Pharm, a mismanaged but once big Company that hit 166m in sales in 2015 (although generating losses) and ended up filing for bankruptcy. The Company was founded in 2009 by Brad Pyatt (ex-NFL) and grew quickly with partners (they even had collabs with Schwarzenegger and Tyger Woods) and aggressive product branding.

After a total mess created by management (SEC charged them for weak accounting control, failure to properly categorize perks for the CEO, and inflating quarterly revenues) the Company went down.

The interesting part and what Dayton saw as a potential good investment is the remaining customer following and brand awareness that the Company has (557k followers on Instagram).

They paid 18,5m in an asset purchase agreement with available cash and a loan of 10m (SOFR+2,75%). They were still doing 1,2m-1,5m of revenue pre-acquisition so in the range of 14,5m-18m annual sales. They had depressed margins because they were selling online through resellers, obtaining gross margins of only 25%-30% vs a 45%-50% achievable.

The integration will require some time as they are letting their resellers run out of inventory to sell online directly themselves. Also, they are working on re-gaining back past customers (they already regained one, iHerb.com), and in general trying to bring back the earnings power of the brand.

Even without an increase in sales, 18m of annual sales can generate 4m-5m of EBITDA once margins are increased, so the acquisition was done at a very good price, probably between 3x-5x EBITDA (once margins are optimized).

The situation now is extremely attractive for FTLF:

• They have a clear path towards online growth developing their existent portfolio of brands.

• They have a healthier sales mix with around 70% of sales online, implying higher margins.

• They have low indebtedness and the ability to continue to implement their strategy of acquiring brands with complementary products to their existing portfolio.

• They can increase sales of the acquired companies with their e-commerce knowledge, with the consequent positive impact on margins.

Back of the envelop valuation:

They have a 113m Market Cap, 116m EV (11m debt and 8m cash).

Fitlife legacy brands and Mimi´s Rock: Both brands can generate about 10m-15m of EBITDA with their current product.

Annualizing the first 9 months of adj.EBITDA gives us already 10,4m although Q4 is the weakest for FTLF. Mimi´s is non-cyclical and the acquisition was not consummated until the end of February 2023.

The online part of the business (70% of FTLF and 100% of Mimi´s) will continue to drive growth. Online revenue growth for Legacy Fitlife was 15% for the first 9 months and overall growth for the Company was 68% thanks to the acquisition of Mimi´s.

Muscle Pharm: It is still necessary to see how much value management can add to the brand (re-signing with past clients, selling directly online with no re-sellers, and overall marketing efforts to bring back the brand). Considering existing sales before the acquisition, they should be able to generate around 4m-5m of EBITDA in the low end (if they continue to win back accounts and distribute to new clients, this estimation will prove very low).

Overall, I think the Company might be trading at a maximum of around 7x normalized EBITDA while growing constantly its online sales and a huge upside if it manages to give a new life to the Muscle Pharm brands.

With the upside optionality it provides, FLTF looks very cheap given the quality of management and their track record to date. Dayton Judd has proven himself and I believe we will continue to see further opportunistic acquisitions, optimization of margins, and online growth on their existing portfolio.

The content of this webpage is not investment advice. It is for general purposes only and does not take into account your individual needs, investment objectives, and specific financial circumstances. Investment involves risk.