Brick and mortar retail is in turmoil, and 12 ReTech Corporation (RETC) is positioned to benefit through a roll up of revenue-generating "micro-brands"; imminent acquisitions could put company on path to $3.0 mln or more in adjusted EBITDA, which may justify 300 to 900% of appreciation for RETC rapidly if these deals close.
This small company's unique roll-up strategy may pay dividends for shareholders with the right execution. Since going public last year, 12 ReTech Corporation (RETC) has spent the better part of 6 months attracting and courting "micro-brands", with a goal of capitalizing on the current turmoil in retail by acquiring undervalued, revenue-generating companies that they can then streamline for profitability both in-store and online. As a result, the company has signed numerous letters of intent in the last 3 months to acquire ownership stakes in companies doing a combined $47 million in annual sales and $3 million million in reported EBITDA, according to the company.
None of these deals have closed, as of yet, but management appear confident, and the use of equity is a simple, smart way to make potentially accretive acquisitions that can grow quickly. With these deals to be complete in the coming weeks or months, RTEC is set up as a unique roll-up player with significant upside if these businesses continue to execute and grow. Compared to average industry EV/EBITDA multiples, RTEC could TRIPLE to fair value based on these reported numbers, and not including any future growth. Closing these deals definitively could send RETC ripping.
Retail In Trouble, 12 ReTech Looking to Capitalize
12 Retech Corporation is taking advantage of a tumultuous time in brick-and-mortar retail. Community stalwarts and high-profile businesses like JC Penney Company Inc (NYSE: JCP)and Sears (SHLD) have struggled to adapt in a shifting world of ecommerce, where customers increasingly go online to do their shopping.
12 ReTech's approach to the sector is twofold: use equity to acquire successful "micro-brands" with meaningful revenue and some profitability, and both grow and streamline these businesses to improve the bottom line using a patented, proprietary technology that can help blend the retail and online experience. It's not unlike prominent private equity firms Bain Capital or 3G Capital, which are known for their ability to streamline and enhance their acquisitions.
12 ReTech's special sauce in the retail apparel industry is their 12 Technology Suite, which offers a spectrum of in-store smart devices--like mirrors, display screens and kiosks--that can help the brand reach new customers and increase visiblity, translating in-store "browsing" to online purchases. The technology suite helps companies and brands optimize inventory and improve liquidation, connect and nurture customers and continue marketing to them even outside of the store.
Since going public in June of 2017, 12 ReTech has signed LOIs with three wholesale and direct retail companies and is in the midst of negotiations to close the deals. Active Fashion Group, founded in 1998, sells athletic clothing wear through boutiques and other retailers. The company does $20 million in revenue and $1.2 million in adjusted EBITDA, according to 12 ReTech's SEC filings. The J. Peterman Company, founded in 1987, is a boutique clothing company that also does nearly $20 million in revenue, with $250,000 in adjusted EBITDA. Krazy Larry, Inc. wholesales clothing to 1,800 boutiques, primarily in resorts, and does $7.4 million in revenue and $1.6 million in EBITDA. None of these are household names, nonetheless all are making signficant revenue with significant EBIT numbers, as reported by the company, and 12 ReTech has signed LOIs with all three.
12 ReTech will be targeting $47.4 million in (purported) revenue and $3.0 million in (purported) EBITDA. If these numbers prove accurate after the company completes diligence, 12 ReTech may be on track to report almost $3 million, or more, of EBITDA in 2018.
A cursory understanding of public company EV/EBITDA multiples demonstrates why RETC could be due for a 300% move or more. According to data from NYU Stern, publicly traded apparel companies carry EV/EBITDA multiples of 10.97, on average; online retailers average 32.47; shoe companies trade at 16.79 times their EBITDA.
At a current enterprise value of about $12 million according to Yahoo Finance, categorizing 12 ReTech as one or the other of these subindustries is a quibble when the implications suggest 3x to 9x of upside depending on the correct industry - apparel or online. 11x the company's possible $3M in adjusted EBITDA this year would be about $33 million in market value, or almost 3X today's prices! 33 times this potential $3 million in EBITDA, like some online stores, could make the company worth almost $100 million on the public markets, or 800% of upside!
Adding in the company's planned growth projections and things get even more interesting, as 12 ReTech believe they can take Active Fashion Group from $350K to $6 million in projected online revenue alone according to a recent investor slide deck. And, these figures do not take into account improvements from the omnichannel opportunities with the 12 ReTech Technology Suite. The company has two pilot projects to deploy pieces of their 12 Technology Suite with the Hudson Group from the US, and Manor AG from Switzerland, to begin this quarter in their unique boutiques. That could lead to greater revenue from this side of their business.
Management Incentivized To Execute
12 ReTech's management team has a solid track record in wholesale and retail business lines, with a combined 150 years of experience in the C-suite. CEO Ponzetta owned over 50% of the company at mid-year, thus this team is clearly incentivized to go places.
The biggest risk to a position in RETC is the failure to close the current LOIs with Active Fashion Group, J. Peterman, or Krazy Larry, or that the financials don't look as good as initially reported. 12 ReTech has credit lines in place but may need to sell common stock in order to further finance the business. As a micro-cap, the odds are inherently stacked against the company in the public markets, and RETC could be worth next to nothing in the end, if they can't execute.
All in all, this unique "acquire and improve" strategy could be smart for 12 ReTech, especially using their own equity to make these purchases. While some apparel companies, like Michael Kors Holdings Ltd (NYSE: KORS) appear to be weathering the changing tide in retail, not all will make it, and the landscape of aquirable micro-brands is huge for 12 ReTech. As these first deals close and the financials become public, the appropriate valuation could materialize rapidly as investors understand the story. RETC could be due for a 100-200% move higher rapidly.
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