I am usually not a fan of sub-penny stocks given the inherent risk they pose. In the case of today’s profiled stock, I was compelled to make an exception. After all, the Company was profitable and posted $3.6 million in sales last year (up from $2.3M in 2010) and has a much higher gross margin than any of its competitors, including the publicly traded industry leader. It doesn’t hurt that its extremely low valuation of .3x its 2013 sales means it has room to move higher and could get a boost from the execution of its own M&A down the road.
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Tracing its roots to 2002, the Company changed its name to Green Endeavors, Inc. in 2010. Through its wholly-owned subsidiaries, Green Endeavors, Inc. currently operates and manages two high-quality, upscale hair care salons that also feature Aveda™ products for retail sale. The Company’s combined operations generate well over $3 million in annual revenue. In fact, annual revenue has risen each year, from $2.3M in 2010 to $3.6M in 2013.
Green Endeavors has four classes of stock: common stock with 10,000,000,000 shares authorized; preferred shares with 3,000,000 shares authorized; a convertible preferred stock series with 2,000,000 shares authorized; and, convertible super-voting preferred stock with 10,000,000 shares authorized. It should be noted that Green Endeavors is a more than 50% controlled subsidiary of Nexia Holdings, Inc. (OTCPK – NXHD). Nexia is not currently a reporting company.
The flagship Landis Salons, Inc. (“Landis I”) operates its business within a 4,000 square foot space located in the Liberty Heights District of Salt Lake City, Utah as an Aveda Lifestyle Salon. Landis Salons II, Inc. (“Landis II”) operates within a 3,024 square foot space located in the Marmalade District of Salt Lake City, Utah under the Landis Lifestyle Salon brand as an Aveda Lifestyle Salon. Aveda Lifestyle Salons can be distinguished from Aveda Concept Salons in that Aveda Lifestyle Salons are required to carry all of Aveda’s products and must meet a higher threshold for product sales than Aveda Concept Salons. An Aveda Lifestyle Salon is the highest level within the Aveda hierarchy of salons which is classified by higher purchasing volume, location, array of products carried and size of retail space.
Green Endeavors also operates as an Aveda™ Experience Center in the newly developed City Creek Center located the central business district of Salt lake City, Utah. Aveda Experience Centers operate as retail outlets of Aveda™ branded products, including the full lines of hair care products, makeup, and skin care. The Experience Center also serves as a resource where potential clients can be referred to and make appointments for services at the two Landis Lifestyle Salons.
The Company’s salon operations consist of three major components: an Aveda™ retail store, an advanced hair salon, and a training academy, which educates and prepares future staff about the culture, services, and products provided by the salon. The upscale design of the salons is intended to look modern and feel comfortable, appealing to both genders, and all age groups. In addition to the Aveda relationship, a key differentiator is the fact that the Company’s upscale offering is in stark contrast to the typical low-cost salons under the industry leader Regis (NYSE – RGS) umbrella that generates over $2 billion in annual sales. These brands include such as such as Regis, Supercuts, among others. Similar non-Regis related chains that generate sizable revenue also include such as GreatClips and The Hair Cuttery.
The Company’s salons offer high quality hair care and other salon services such as makeup, skin care and nail care. The salons incorporate the use of the Aveda line of products in all of the services performed and exclusively offer Aveda retail products for sale. The Aveda brand, owned by Estee Lauder Companies, Inc., manufactures professional plant-based hair care, skin care, makeup, Pure-Fume™, and other lifestyle products. Some of the “green” product categories used during services and which are available for purchase, include:
It should be noted that the Company’s customer demographics are typical for upscale salons rather than the mass market competition listed above. Approximately 70% of the clients are female who visit the salon 6-8 times per year and spend an average of $66 on services and purchase about $16 of Aveda products per visit. All three facilities are located in a high income demographic region and the Landis Aveda Experience Center is in City Creek Center, the newest first class shopping mall located in downtown Salt Lake City.
As is the case with most upscale regional salons, the primary marketing efforts are executed via word of mouth, supplemented by targeted advertising campaigns and referrals from existing customers. On a secondary basis, management’s online marketing campaigns are heavily focused on organically ranking under certain keyword search terms and online sites such as Yelp (NASDAQ – YELP) and CitySearch, coupled with other social media sites.
GREEN ENDEAVORS EXECUTIVE LEADERSHIP
Richard D. Surber, President, Director
Mr. Surber graduated from the University of Utah with a Bachelor of Science degree in Finance and then with a Juris Doctorate with an emphasis in corporate law, including securities, taxation and bankruptcy. He has served as President and Director of Nexia Holdings, Inc. (OTCPK - NXHD) since May of 1999. He has been an officer and director of several public companies. He was appointed as President and to the board of directors of Green Endeavors, Inc. in September of 2007.
Logan C. Fast, Vice President, Director
Mr. Fast was appointed to these offices as of August 28, 2008. He is currently working as a grand salon stylist and as an instructor at the Landis Salon locations. Mr. Fast is an Aveda color and cutting "purefessional" with in the Aveda network and frequently instructs stylist around the world on Aveda cutting and color techniques. Mr. Fast does not hold any position as officer or director of any other publicly held company.
Scott C. Coffman, Chief Financial Officer, Director
Mr. Coffman graduated from the University of Utah with a Bachelor of Science degree in Finance and then with a Masters of Business Administration and later returned to the University of Utah for additional Master’s level accounting coursework. He was appointed as CFO on July 2, 2013 and to the Board of Directors of Green Endeavors, Inc. on June 27, 2013.
FINANCIALS AND ROLLUP STRATEGY
Since 2010, Green Endeavors’ revenue has jumped from $2.3M to $3.6M in 2013. Gross profit margins for the company of over 40% are significantly higher than competing brands such as Regis, which records gross profit margins just over 32%. In addition to generating much greater revenue per salon service visit, fully 28% of the Company’s revenue is generated via the sale of Aveda products which carry high margins. The greater the mix of products sales to service revenue, the greater the gross and operating profit. In the past four years, the Company has recorded small operating profits or losses which indicate that as the business scales, and the product sales mix increases, consistent operating profits are in the cards. Sales could turn slightly lower this year due to a change in personnel in order to solidify the model but we believe that sales in the $4.0+ million range is achievable next year, especially as traffic increases in the product sales-only Experience retail location. At that level, investors can also expect a return to modest operating profitability.
Meanwhile, GRNE has been working to improve its working capital position and stockholders' equity through the reduction of debt and convertible debt instruments into equity in the Company during the first half of 2014. These significant reductions of convertible debt instruments increased stockholders' equity by approximately $860,000. Plus, the working capital position of the Company has improved by approximately $205,000. Overall, the debt reduction reduced total liabilities by an estimated $860,000. This follows the report of net income of roughly $51,000 for the year ended December 31, 2013.
Depending upon the availability of capital, we deem it likely that the Company will engage in a future rollup of salons in the Salt Lake City area and beyond which would enhance the value of the Green Endeavors brand and stock. The industry is highly fragmented with lower profit margins than Green Endeavors with each owner typically operating 3-4 salons and we believe that the Company could generate greater profits per store given its current model. At this time, we estimate that the exploration and commencement of this strategy will begin sometime in 2015, with a targeted 2016 closing.
There are two types of risks associated with these shares: business risk and capital markets risk. The most critical business risk relates to potential sales impairment from the mass market chains, along with the loss of key stylist personnel that attract clients. Also, if Aveda products were to fall out of favor or the relationship become impaired, it would have a deleterious effect on the Company. A lack of access to capital on favorable terms could also delay or hamper management’s expansion plans. Still, we believe that these risks are typical of companies in Green Endeavors industry and of its size. Moreover, we believe that its sales success history insulates the Company from some of these risks, to some0 degree.
Investor or capital markets risks include the small capitalization of Green Endeavors, and its current sub-penny share price, which could be viewed as a deterrent in engaging in broad investor awareness. Separately, the ownership and capital share structure may be a roadblock in attracting investors. Due to the ownership of super-voting preferred stock by Nexia Holdings, common shareholders cannot attain a majority of votes or possibly exert material influence on management for changes in strategy or key items related to the operation of the business. While these factors may be unattractive to long term investors, those investors who wish to invest in these shares merely for potential trading gains likely do not view this ownership structure as a material risk or issue. After all, historically, the Company’s President has personally guaranteed loans and other expenses required to grow the firm, and thus appear to be fully committed to its success.
The health and beauty salon services and products market is a multi-billion dollar industry. Yet, the upstart Green Endeavors, Inc. business model has proven success in generating enviable sales growth and higher than industry average gross profit margins. Unlike mass market chains such as the $2 billion in sales leader Regis (NYSE – RGS), Green Endeavors operates successful upscale salons and retail chains that generated a gross profit margin of well over 40% on 2013 sales of $3.6M. This profit margin is nearly one-third higher than that of Regis.
Green Endeavors’ customer demographics and revenue per customer are typical for upscale salons. Approximately 70% of the clients are female who visit the salon 6-8 times per year and spend an average of $66 on services and purchase about $16 of Aveda products per visit. With more traffic at key locations, and an even more favorable sales mix, revenue could reach north of $4M in 2015. Looking ahead, management plans to leverage its organic sales growth and business model success by engaging in a series of acquisitions, beginning in 2016, which could enhance sales and operating profitability.
In our view, the relatively unknown Green Endeavors is an inexpensive way to play the salon market as the stock trades around .3x 2013 sales. With high gross profit margins, the Aveda relationship, a rollup strategy, and other business model advantages, the stock could trade at much higher levels in the next 6-12 months. Therefore, we rate these shares Speculative Buy.
Recent Trading History For GRNE
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Rob Goldman founded Goldman Small Cap Research in 2009 and has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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