neke Profile picture
3 May, 26 tweets, 4 min read
My Kogan thread was far more popular than I anticipated and one of the most common themes in the replies was could I do similar for RBL or TPW. I've chosen $RBL, another complicated COVID beneficiary (albeit with clearer reporting).

RedBubble was founded in 2006 to connect artists with customers who can get niche designs printed on various media (tshirts, mugs and stickers). RBL holds no inventory, the orders are printed and fulfilled at placement - this is very capital light.
Of the post-tax revenue for every item sold, 16% goes to the artist and 53% to the fulfillers (printing and shipping), leaving 31% for RBL. So my $25 Rick & Morty tee netted RBL something like $7.50 to cover marketing, opex and *checks notes* dividends!
So far this looks like a complicated tshirt retailer with questionable gross margins. The only two variables left to play with are marketing cost and opex. So are they doing anything special here?
Management would have us believe that over time the marketplace benefits from scale as it cements a foothold in the minds of both the artist and the consumer. Despite this, repeat purchases have been stuck at around 40% for years, with marketing steady at about 10% of revenue.
So, what’s going wrong? A few things. Firstly, a lot of the ‘repeat customers’ aren’t really repeat at all. RBL has given us the example of a kid who buys some stickers in high school, then years later in college might buy a Rick & Morty t-shirt. Is that really repeat patronage?
The best company stat showing this is that the average customer makes 1.1 purchases per year and the vast majority do not make a purchase the next year. So really, customers needs to be ‘re acquired’ (more marketing spend) and the company has been open about this.
Secondly, customers have little reason to be loyal. I can get my R&M tee from countless options via Google. Simply dropping the words into search gives me a dozen price-matched options (the first is Etsy) in an easy-to-scroll smorgasbord of R&M shirts that don't come from RBL.
In all likelihood some of these vendors even share the same 3rd party printing and fulfilment partners!
RBL attempts to optimise their organic search results to reduce the marketing spend on Google search result positioning. Organic is ~40% of traffic, but Google is progressively monetising these organic search results while also making it harder to ‘game’ them through SEO.
RBL has been open about the ‘Google problem’, and has blamed previous earnings misses on it. They aren’t the only ones in this situation though. Big US travel sites for example saw a 40% traffic reduction in November 2019 following Google algorithm changes.
Thirdly, artists are extremely promiscuous and have every reason to post their product on as many websites as possible. It's especially important for artists as the vast majority make very low monthly sales.
Redbubble has tried to mitigate this by buying competing platforms (Teepublic) but there are scores of them out there, as demonstrated by our R&M google search. This also includes Merch by Amazon, who are somewhat formidable in this space.
So, with a few clicks artists are posting their content everywhere. And perversely RBL needs to buy ad words to compete with other websites that might be selling the same product by the same artist! Is there such thing as a negative moat?
Add to this a staff cost base that never lessens (servicing a growing number of artists and curating an ever-increasing number of items) and we are left with a business that until recently has been incapable of turning a full year profit for disappointed shareholders.
Compounding everything is their extereme seasonality. RBL says they make more than 30% of their sales in the short period from Thanksgiving through Xmas! In fact, prior to COVID the December quarter was the only consistently profitable quarter.
This made things particularly bad when RBL provided a very weak trading update for their traditionally strongest quarter in December 2019. Core Redbubble growth stalled and unsurprisingly mgmt blamed it on competition, but I suspect the Google algorithm changes were also at play.
The share price nearly halved, violently readjusting down to $1.03! RBL ended up making $7m of EBITDA in the December 19 quarter, flat on the prior year. Despite the prior period not having a full period of Teepublic. Things were looking pretty grim.
But then the Great Reprieve happened.
All of a sudden I was locked down with nothing better to do than spend my holiday budget on custom made R&M merch off the internet. RBL, like many others, printed a historically large EBITDA of $7M in the usually quiet June 2020 quarter (the first full quarter of lockdown).
Boosting their sales further, RBL started selling high-margin facemasks in late April 2020 to people scrambling to get masks anywhere they could find them. Quarterly profit almost QUADRUPLED from the June quarter into the usually quiet September quarter!
Internationally, businesses like Etsy were also killing it and also doing really well on mask sales. Everyone that wasn't pumping a vaccine angle was doing either hand sanitizer or masks.
So it came as no surprise that the seasonally strong December quarter would deliver. And it did, but there were red flags. Compared to the September quarter, sales GROWTH was slower, and profit was LOWER! Gross margin normalised. Marketing spend relative to revenue INCREASED.
Was the initial lockdown frenzy waning? Were masks becoming easier to find? Maybe competitors were stepping up marketing activity to take advantage of favourable conditions? The market didn’t seem to care as long as profit was strong. The tiny red flags were packed away.
Analysts had all adjusted their forecasts wildly higher, in the region of $60-70m of EBITDA per year and growing (?!) over the next several years. They expected not just a continuation of strong December quarters, but also tens of millions of dollars of profit across the rest.

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More from @neke86_

3 May

Every quarter strong, every year, in perpetuity. No seasonal weakness forever and forever, a hundred years of strength, a hundred days forever a hundred times [belch]. Forever. What could go wrong?
Quite a bit it would seem. Enter the March 21 qtr. Despite not yet lapping COVID, sales slowed markedly. Gross margins fully normalised and marketing spend was way too high relative to sales (similar to Xmas 2020). What did this mean? Profit plummeted down to a measly $2m!
Sales are down, gross margins have completely normalised, and the marketing spend is back up to December 2020 ratios. What does that mean? Only $2m profit and a plunging share price. Trading around $4 today compared to $7 at its peaks.
Read 14 tweets
28 Apr
Thought I'd try my first thread and make it something topical, $KGN. Most of you won't know, but I actually worked at $JBH for several years a long time ago, so the journey of Ruslan Kogan has been something of an amusement for me for a long time.
Ruslan founded Kogan in the mid-2000s, buying smart phones on the cheap in Asia then reselling them in Australia. He later branched out into TVs & other electronics. Products were dropshipped (no inventory held), meaning low capital requirements and low margins.
For years, profit was relatively low and inconsistent. 2nd largest shareholder David Shafer, a school friend of Ruslan, joined the business before its 2016 IPO. They realised that increasing their product range & holding inventory (private label) were key to growth and profit.
Read 18 tweets

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