LUVE: Major Upside from Current Levels |
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LUVE is changing its name from Prince Mexico S.A., Inc. to LUVE Sports, Inc. to reflect a business model shift which includes the sale of other manufacturers’ products, in addition to its relationship with Prince Sports USA
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COMPANY OVERVIEW Linea Deportiva Prince Mexico S.A., which is 100% owned by LUVE Sports Inc., is the Mexican and Latin American counterpart to Prince Sports USA has historically owned owns exclusive distribution rights to sell all Prince Brands in Mexico and much of Latin America and is working on a renewal contract. Founded in 2008 and headquartered in Guadalajara, the Company has recently generated annual sales of $500,000 with a distribution chain in retail stores and pro shops in Mexico. It should be noted that this sales level was recorded with little marketing, inventory and limited historical penetration into some of the key retailers. These include the Company’s four primary retail outlets in Mexico: WalMart Mexico, Sears Mexico, Liverpool, a chain with approximately 200 outlets, and Marti. It is expected that as the Company procures significant inventory in which to further penetrate into these hungry for Prince product retail chains, meaningful sales growth and profitability will occur. As market penetration is achieved, and favorable financing is available, management plans to expand into the South American markets of Brazil, Columbia, Peru, Ecuador, and Venezuela. Plus, management has recently announced its intention to distribute sporting goods offerings of other manufacturers as well which offers significant revenue and profit potential. Prince Sports USA A major brand name in racquet sports, Prince Sports USA has been in existence for nearly 40 years with a strong global brand presence in tennis, racquetball (Ektelon), squash, with highly innovative products related to racquets and balls. The Company also manufactures golf equipment and owns the popular Viking (table paddles) athletics brand and is involved in footwear and other accessories. All told, since the introduction of the first tennis ball machine in the 1970’s, the Company offers hundreds of products. The key to the Company’s longevity lies in the fact that it has led its industry through innovation and sponsorship as the key growth differentiators. The Prince Tennis line has included revolutionary products like “Oversize”, “Longbody”, O3, and Speedsport. Sponsorship has always included some the sport's most elite athletes, including Maria Sharapova, Nikolay Davydenko, Jennifer Capriati, Patrick Rafter, Jimmy Connors, the Bryan Brothers, David Ferrer, John Isner, and Martina Navratilova. (Analyst’s note: My first tennis racquet in 1979 was a Prince manufactured racquet and I have been a big fan and consumer of the brand ever since. I was one of many who used the Prince-produced oversized racquet during the start of the huge growth of the products, which was led in large part by hometown Baltimore-based tennis Hall of famer Pam Shriver and others. ) INDUSTRY OVERVIEW Globally, the estimated size of the sports equipment is an astounding $65 billion per year in revenue. Interestingly, our due diligence has indicated that a good deal of the growth in recent years is due to increased sales to emerging markets such as Mexico and Latin America. (Source: Global Sports Equipment, MarketLine Industry Profile. February 2012.) “Ball” sports constitute $15.4 billion, or close to 24% of the estimated overall market, with racquet sport equipment making up 8.3%, or annual sales of $5.3 billion as of 2011. Figure 1 outlines the sizable estimated market opportunity for LUVE Sports Inc. in Mexico (largest importer of sporting goods in the region) and other key target Latin American markets, alone. Figure 1: 2011 Market Share for Existing and Target Markets – LUVE Sports
There are a number of large sports equipment providers generating substantial revenue. However, there are few major players worldwide that cross over into the racquet and ball space in which Prince and others occupy which has enabled the brand to thrive. Adidas AG and Nike (NYSE – NKE) are worldwide conglomerates with several brands and lines but competition with Prince offerings is primarily relegated to footwear and clothing. Finland-based Amer Sports Corporation is the largest sporting equipment manufacturer in the world and offers the Wilson brand, one of the chief competitors to Prince in the tennis, racquetball, and squash space. Here is a brief analysis of the direct competition. Figure 2: Prince Direct Competitor Analysis
PRINCE OF SPORTS: THE PRODUCTS  Source: Prince Sports USA The Company has a history of innovation including inventing the first "Natural Foot Shape" tennis shoe, the first "synthetic gut" string and the first electronic ball machine. Today, Prince markets leading technologies in racquets (EXO3), string (Recoil), footwear (Precision Tube Technology) and apparel (Aerotech). It has operations on three continents with distribution in over 100 countries. Prince is committed to continually delivering top-quality tennis products in all categories – outfitting players with the very best in footwear, apparel, strings, balls, accessories, and more. As mentioned previously, Prince enjoys a significant market share in racquet sports, particularly tennis, where it maintains a leadership position in innovation coupled with sponsorship of key athletes and events. For example, racquets are built with a larger sweet spot, innovative string technology, and an improved weight/power ratio compared to other leading racquet manufacturers. To illustrate the leading edge technology we look at the example of the best-seller EX03 Tour 100 tennis racquet. The features on this flagship product include capturing over 26% of wasted energy on impact, providing a stronger hit. There is a patented graphite energy bridge that cuts down on frame vibration by 20%, improves spin, and provides an 83% greater sweet-spot than other racquets. The partnership with top tour professionals allows the company to get feedback to continually innovate. A picture and specifications of the EX03 are shown below. Prince Sports is an established leader in the sport of squash since its inception in 1984. The success of Prince Squash includes a long history of successful grass roots promotions, game changing product innovations and top players giving the brand tremendous exposure on tour worldwide. Prince provides sponsorship support of squash events, organizations and players nationwide. Prince is a key sponsor/partner of the U.S. Squash Association with a regular presence at many of the national events across the country, Prince is also supported by some of the top players and coaches in the U.S. Prince Sports is an established leader in the sport of squash since its inception in 1984. The success of Prince Squash includes a long history of successful grass roots promotions, game changing product innovations and top players giving the brand tremendous exposure on tour worldwide. Prince provides sponsorship support of squash events, organizations and players nationwide. Prince is a key sponsor/partner of the U.S. Squash Association with a regular presence at many of the national events across the country, Prince is also supported by some of the top players and coaches in the U.S.
Image II. Prince Squash Products Ektelon is a division of Prince Sports, Inc. Ektelon has enjoyed the longest, most successful reign of dominance in the sport of racquetball. Ektelon's heritage includes some of the top players in the sport’s history including former No. 1 players Mike Yellen, Dave Peck, Ruben Gonzalez, Paola Longoria and current world No. 1’s Rhonda Rajsich. In addition, Ektelon has introduced more revolutionary technologies and programs to the sport of racquetball than any other company. Ektelon innovations include oversized racquetball racquets, the Racquet Taper System (RTS), Power Ring® racquets and Total Racquet Customization, VisionGrip and O3 among others.
Viking Athletics, Ltd. has been an equipment leader in the sport of platform tennis since the company was founded in 1995. Viking offers the most complete line of high performance and game improvement platform tennis paddles, balls, bags, apparel and accessories including the OZ™, the sport's best-selling paddle for twelve consecutive years. Viking is the Official Ball of all APTA National events and enjoys a significant ball market share position with a majority of all balls sold in the sport during 2007. Currently over 70% of the top men and 60% of the top women players in the world use Viking paddles. SALES AND DISTRIBUTION All of the racquet sports have a huge following in Mexico and Latin America, especially squash. To date, the Company has successfully surpassed Prince Sports Inc. (USA) sales requirements for 5 consecutive years aided in large part by sales to new tennis clubs and larger retail chains. With a strong track record behind it, management plans to procure significant inventory in order to execute a deep penetration into some of the largest chains in Mexico, which is hungry for the key Prince products, such as the EXO3 Tour 100, balls, and squash equipment. Once product is shipped to the centrally located facility in Gudalajara it will be quickly delivered to the Company’s key retail outlets. In addition to Walmart Mexico, the Company has already penetrated Sears Mexico, a wholly-owned subsidiary of Grupo Carso, controlled by the wealthiest man in the world, Carlos Slim Helu. Plus, products are already in Liverpool, a 195-strong department store chain, and Marti, a large sporting goods chain in Mexico with hundreds of outlets. As noted previously, Prince enjoys a significant market share in racquet sports, particularly tennis, where it maintains a leadership position in innovation coupled with sponsorship of key athletes and events. The Company has featured ‘Prince’ Tournaments as well as maintaining a key association and presence at tennis, racquetball, and other paddle events across Mexico. Prince Sports is also involved in the “Who’s Next” campaign which has the purpose of indoctrinating the up and coming juniors to Prince gear. Additionally, the Company’s representatives maintain a strong relationship with club instructors and coaches that have considerable influence, in order to build brand awareness and increase sales with its target audience. Management plans to use these tactics to expand its product lines in Mexico and Latin America. THE LUVE SPORTS LEADERSHIP In addition to senior management, LUVE Sports has 8 people responsible for sales, marketing, distribution, and logistics. Francis Duncan Forbes – Chairman, CEO Mr. Francis Duncan Forbes has over 30 years of experience actively involved in building and managing companies on an international scale. Mr. Forbes has established businesses in various sectors including real estate, health care, tourism and most recently lifestyle. He has built an impressive network of business and top level political contacts within Mexico and the Americas. Along with being a business and family man, Mr. Forbes has had over 3 decades of private and public company investing experience. Through his contacts, Mr. Forbes has recently secured exclusive distribution rights (in Mexico) for a clinically proven cancer treatment product that has sold billions of dollars worldwide. This product will be released to market in the last half of 2013. Prior to LUVE Sports, he founded Neptune Realtors, a real estate brokerage firm with multiple offices throughout Mexico. He remains a partner in the firm; however, in 2007 he positioned appropriate management to run the day-to-day operations and execute the growth strategy. In 2008, Mr. Forbes founded Linea Deportiva Prince Mexico Sports, S.A. de C.V. (now LUVE Sports, Inc.), a corporation set up to distribute top quality sporting goods to the Mexican markets and beyond. His past successes have allowed him to make the connections required to take LUVE Sports to the next level.RISK FACTORS In our view, LUVE Sports’ biggest risk factors are the typical issues facing distributors of consumer goods. These include the timing of the financing required to procure the inventory initially required to meet its objectives. Additional risks include delays in shipment or changes in brand loyalty or products due to cost, efficacy or affinity. However, at this stage, we do not believe that these issues appear to be serious threats to the Company. With an exclusive distribution opportunity, we believe that while competition from larger firms or even from newer entrants could slow the sales ramp or require additional marketing expenses, but these typical concerns are consistent with firms of LUVE Sports’s size and standing. CONCLUSION Leveraging the popularity of the 40-year leading brand in tennis, racquetball and squash, we believe that LUVE Sports S.A., Inc. is poised to generate as much as $7M in revenue and $1.5M in net income in the next 12 months and more than $20M in sales and $6.6M in net income by 2015. Due to the distributor model, the Company enjoys extremely high margins, as the only real expenses are sales and marketing associated with filling shelves of its customers and drawing broad demand. We should note that these figures include some sales into other markets in Latin America as well. Plus, with management’s plans to distribute sporting goods offerings of other manufacturers as well, the potential for further revenue and profit gains is dramatically increased. Bolstered by its business model shift and market penetration milestones this year, our short term target price is $3.15. We should note that since our coverage initiation, the stock was unjustly punished due to stock market miscommunication, earlier this year. With the issue behind it, and the huge new revenue potential ahead of it, we believe that the risk profile has been greatly reduced at current levels and major upside potential exists. We should also note that the timing of investment in LUVE is key, as investors should enjoy hockey stick type growth given the strong seasonality of business in the spring and summer months. Thus, we rate LUVE Speculative Buy. Senior Analyst: Robert Goldman 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. Analyst Certification I, Robert Goldman, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report. Disclaimer This Opportunity Research report was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research and Goldman Opportunity Research. The Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports. It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. While stocks in the Opportunity format may have a higher risk profile, they typically offer greater upside as well. Goldman Small Cap Research has been compensated by a third party in the amount of $3,000 for due diligence, editing, and production of this report. The Firm does not accept any equity compensation. All information contained in this report was provided by the Company. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations. 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