Tag: Secret SAAS

Candle in the Tailwinds: Bath & Body is “Secret SaaS” in Plain Sight $BBWI

Reading Time: 7 minutes

L Brands officially spun off Victoria Secret and now Bath & Body Works (BBWI) is an independent company. This is great news to me as I think BBWI is a “Secret SaaS” business, a topic which I discussed before and will get into here.

Why do I like BBWI?

  • High margin category with growth tailwinds (beauty, fragrance)
  • Fragrance has difficulty translating to online without trust – Brands matter
  • BBWI has high customer loyalty – leaning into that loyalty even more; “Secret” razor, razor-blade model in fragrance
  • Like many other brick-and-mortar retail (B&M) businesses, discovered the power of omni-channel during COVID – I believe it will structurally benefit the business
    • Many focus on LTV / CAC as well as gross profit return on sales and marketing for SaaS and DTC businesses – the thinking being because it is a more variable cost business and you can tie the two
    • But strong B&M brands have high initial upfront investment (e.g. the stores), and then serves the customer and drives loyalty with more limited incremental spend. We shouldn’t forget this.
  • Business has been “trapped” inside L Brands
    • Not sure analysts gave BBWI its full consideration when it attached to VS – a brand that is facing significant competitive pressure and heavily dependent on malls.
  • Not as impacted by supply chain issues, but the “baby could get thrown out with the bathwater”
    • BBWI sources most products from their facility in Ohio, not China. 80% sourced from US. Broader sell-off in retail could create an opportunity

As an aside, the Victoria Secret spin may end up being like Joel Greenblatt spin-off: the market hates VS so much that it gets to an extremely attractive price as people sell the spin. Time will tell. Don’t get me wrong, I would probably be one of those dumping VS if I received it.

Business has been “trapped” inside L Brands

I’m going to start with the last point first because it is quick. If you listen to the latest BBWI call, it is clear to hear analysts are still a bit confused how to model BBWI – it hasn’t been standalone before. Things like normalized capex, SG&A, and others were frequently brought up. I had to do some digging to find long-term gross margins for BBWI. All this is to say – you have to do some work to learn the most you can about BBWI standalone.

Second, BBWI and VS fortunes have been the complete opposite. As such, if you just looked at L Brands as a whole, you might miss the success story within occurring at BBWI shown below:

High margin category with growth tailwinds (beauty, fragrance); Fragrance has difficulty translating to online without trust – Brands matter

BBWI has 28% operating income margins, which both shocked and didn’t shock me.

Granted, this is LTM, where they benefitted from more of a “DTC” model during COVID and less promotions, though their physical stores were closed for 90 days in 2020.

On one hand, the margins are top quartile. On the other, fragrance and beauty are notoriously high margin categories.

Why is fragrance a high margin category? The packaging and everything involved with fragrance related products are usually a small cost. What drives the sale is the actual smell – and that takes technical know-how that is hard to replicate.

It’s analogous to beauty – beauty products are high margin because it tends to be a tough category to replicate, it is tough to get good distribution, and there is a degree of customer trust and loyalty (“hey this worked for me, you should try it”) which is hard to break into. Oh – and obviously consumers will pay up for these products if they “work”.

BBWI is at the center of some of these trends. Clearly, you can see their growth in the numbers I posted previously as well.

BBWI has high customer loyalty – leaning into that loyalty even more; “Secret” razor, razor-blade model in fragrance

I like the simple “razor, razor-blade” model from BBWI. They have “wallflowers” which consumers plug into the wall and dispenses the fragrance. These plugins can be simple or decorative, like seasonal ones shown below.

They  aren’t too cheap, as a razor is for the blade, but the scents offered are consistently refreshed and tend to be “optically” cheap. For example, 5 refills for $24 tends to be a consistent sale.

Compare that to one Yankee candle which is more than that for just one candle (which will burn longer, but the optics to a customer aren’t the same. I could dwell on this point, but to me, I don’t think consumers do that math).

I hate anec-data, but my wife and mother are consistent buyers here (thank you Peter Lynch for recognizing this investment thesis!).

Management has several slides that show they are thinking about this the right way. Find ways to increase retention rates and drive value.

If this is Secret SaaS, can we look at BBWI metrics with the lens of SaaS?

This isn’t perfectly accurate, but I think it is instructive. If you assume 15% of SG&A is for attracting incremental customers, then the company has a ~3 year payback. Again, that is just a fixed assumption and hard to get a direct feedback response for a legacy B&M player.

However, this is extremely difficult to determine for B&M retail. Especially one where we have limited stand-alone detail… But as noted before, the investment in SG&A comes upfront and to some degree, it is a “build it so they come” model.

But Warby Parker put it well in their S-1:

“While we have the ability to track where our customers transact, we’re channel agnostic to where the transaction takes place and find that many of our customers engage with us across both digital and physical channels; for example, many customers who check out online visit a store throughout their customer journey, while others choose to browse online before visiting one of our stores.”

To me, it is clearly the other way around for fragrance. Once you get comfortable that BBWI isn’t going to sell you something awful in their fragrance line up, you are likely to buy online from them (and perhaps, not from a brand you don’t trust). Or, you find several fragrances you really like and consistently re-order them.

I think they are just too interlinked to derive anything useful from this analysis. Instead, we can just focus on margins and FCF to get a sense of health.


On that B&M note, the company is 35% mall (says 99% are cash flow positive), 31% are off-mall (i.e. stand-alone stores, all cash flow positive) and 31% digital – super-enabled by COVID. They also have a small, international franchise business making up the balance.

I see a similar set-up longer term as Big Lots, which I wrote about how they can pivot their footprint. You can see in the table below that off-mall stores and Class A and B malls are clearly worth keeping. Class C and D? Less… And the Class D malls have the shortest lease terms remaining.

BBWI specifically called out closing stores in non-viable declining malls and remodeling others for an sales uplift.

BBWI Driving More Loyalty

While I’ve already stated why I think BBWI has a loyal customer base, BBWI is doing more. It makes sense – to create value from their existing customers, they need either more trips or for them to spend more in stores per trip.

Loyalty programs typically achieve this. For example, offering a 25% off coupon to loyal members typically gets them to either start an order they might not have done previously, or add one more thing… this incremental sale drives a lot of value for the retailer.

BBWI is testing that now: customers in the loyalty program spend 30% more than non-loyalty members.

A Quick Word on Value

BBWI is expected to generate $5.2BN in FCF between 2022-2025, or 30% of market cap. I even think that could be conservative. The company is returning significant amounts of cash to shareholders (continued the L Brands dividend, doing a $1.5BN share buyback) and I think the valuation is very reasonable at around 10x EBITDA.

However, they are earning high margins lapping a COVID bump. Essentially, the company saw a significant increase in sales, especially online, despite their stores being closed for 90 days during the pandemic. In the 2H of 2020, they were able to pull back on promotions which boosted margins.

I am not too concerned. This is a wide gap, but management targets $10BN in revenue (from $6.4BN in 2020) over the next 3-5 years. They assume some of this margin will be given back and EBIT margins will be in the low to mid-twenties. The stock is currently trading at 10x EV/EBIT on this forward number. Not too cheap, but not overly expensive given the business model either.

If I take the $6.4BN of revenue they did in 2020, apply a 22.5% margin to it I get $1.4BN of EBIT instead of $1.8BN. Based on their PF balance sheet for the spin, I calculate ~$910MM of tangible invested capital. This is true for most successful retailers thanks to leases (which can be a double edged sword), but that ROIC is fantastic.

Bottom line, I think BBWI deserves a premium multiple.


Secret Saas Business: Ituran $ITRN

Reading Time: 7 minutes

Last year, I laid out a handful of “secret SaaS” businesses. SaaS companies are getting massive valuations because they have highly recurring revenues (which provides earnings visibility), have low churn (highlighting how much customers like their product), and are also asset light. Many other, non-software businesses have this too, people!

I recently did a post of International Flavors & Fragrances, which seems like a secret SaaS business. IFF’s products are mainly food additives that impart taste or fragrance. Food is highly recurring and these products are mission critical. Good margins, low churn, highly recurring.

But today’s company, Ituran, won’t seem that secret. Ituran actually sells software. More importantly, I want to show that Ituran’s stock does not reflect its strong business characteristics. 

Ituran started out in the 1990s as a provider of SVR tracking services (Stolen Vehicle Recovery). The company is based in Israel, where insurance companies mandate the use of SVR services as a prerequisite for providing insurance in medium to high end vehicles. They also grew in Brazil, where car theft is high. In fact, 70% of Brazil is uninsured due to high amounts of vehicle theft. Therefore, Ituran is a cheap solution.

As you can see, Israel and Brazil are the core markets. The company has grown subscribers organically very well and got a boost from the Road Track acquisition back in 2018, which also helped expand it into other countries like Mexico, Columbia, and Ecuador. Organically though, it’s grown subscribers at a 12% CAGR.

Subscriber Base Growth
Israel and Brazil are core markets, though new geographies gained with Road Track acquisition are easy white space

In its core countries, Ituran uses RF network technology to do this tracking, which has some advantages over GPS. For example, GPS services require clear view of the sky with line-of-sight to at least three satellites within the GPS constellation. The terrestrial network technology that Ituran uses does not require line-of-sight and signals are not easily interrupted. It’s also much harder to jam the signal. Lastly, the system can be connected to the anti-theft system in the car, so you don’t have to wait for the vehicle to be reported stolen first.

According to ITRN, the average recovery time is 20 minutes.

However, there are some drawbacks, such as the need to install physical infrastructure in the region it operates. These base stations communicate with each other and help keep a precise location of the car. That said, capex for the company is still really low and ITRN has said they will be using a GPS platform to expand into new regions.

Fleet Management

With its technology, the company also expanded into fleet management. Fleet management would be something like tracking the usage of a corporate fleet, or letting truckers no about “no go” locations on their routes (perhaps a low hanging bridge).

Ituran’s services have been used by corporations with large fleet vehicles. Ituran uses real-time information to track driver behavior and can alert a corporation if the driver is being reckless. This is a low-cost tool for managers of fleets to set benchmarks and hold drivers accountable and in the grand scheme, likely lowers costs for the customer.

Usage-based Insurance

Finally, they also use their technology for usage-based insurance (“UBI”). Insurance companies use Ituran’s plug-in to determine how much users drive and also how they drive for custom pricing.

For insurance companies, this helps them stay competitive by saying, “hey, you could lower your insurance if you are a better-than-average driver or just drive less.” And consumers think, “hey, I’m a better than average driver and don’t drive that much, so maybe I can get a better rate than something fixed.” Truth is, everyone thinks they are a better-than-average driver.

What’s interesting about this information is that Ituran also knows when the car gets in an accident. It can see the exact location of the scene and alert emergency services. Ituran can also provide hard evidence of what actually happened in the accident (down to the G-forces, driver action-reactions, etc). Insurance companies and customers also like this because it provides clear evidence of what happened and can also save lives by cutting response times.

Significant Upside on Conservative Estimates

I think Ituran’s stock looks very cheap. As you can see from the snapshot below, Ituran has grown at a strong clip over time, has really high gross margins and EBITDA margins and generates good FCF. The other thing I should mention is that management says churn is consistently around 3%, which helps stabilize results.

On my numbers, Ituran’s stock is trading at a 10% FCF yield, which is significant when you don’t really have much debt. I also don’t assume they see 2019 revenue again until 2023, despite India launch, despite Brazil bottoming out of a recession, and despite a recovery from COVID-19.

Ituran Model Snapshot
Ituran stock looks very cheap on conservative estimates

Note: there were some accounting changes that moved expenses around + the acquisition, which is why R&D for example looks so odd over time.

Areas for Growth. SaaS businesses also get high valuations because of their growth characteristics. Ituran has a lot of white space available for growth to boost the stock awareness:

  • India.
    • India has 250M+ registered cars. If the company achieved 0.5% penetration, that would be 1.25MM incremental users.
    • The challenge with India versus some of the other locations will be what you can charge, but even at $60 a year across 1.25MM users would be $75MM of incremental revenues (or a 30% increase to where they are today)
  • Mexico, Columbia, Ecuador.
    • Ituran is already big in South America through Brazil and Argentina, but could expand the playbook into these countries which it entered via its acquisition of Road Track

  • Acquisitions
    • Ituran generates strong FCF and currently has very little debt. In my model, I assume they continue to pay down debt to zero, but they also could continue to acquire players to enter into new geographies, like they did with Road Track (albeit, that was ill-timed, as discussed below).
  • Other Optionality.
    • I like companies that have shown they can pivot. Ituran pivoted from mainly a stolen vehicle recovery business to a fleet management business to an insurance company. What else can they do?
    • With a cash rich balance sheet (net debt zero right now), this gives them a lot of optionality

Why does this opportunity exist?  Ituran stock has to be beaten down for a reason.

  • Ill-timed Road Track acquisition
    • The company acquired Road Track in 2018, which was going to provide them with several benefits. For one, it would expand their relationships with OEMs, whereas Ituran mainly played in the aftermarket space
    • Unfortunately, Brazil was ravaged by the COVID induced recession. At one point, Brazil car registrations were down 99.9% during COVID

Brazilian Car Registrations

    • The second impact was that OEMs wanted to save money. Typically OEMs provide a six-month free trial of the Ituran product, which led to pretty good conversion rate. Then the OEM cut the free trial to three months and then one month, which hurt subscriber conversion.
    • All things considered, the amount of OEM contracts lost is pretty encouraging. The losses look to be leveling out as well. This is probably boosted by the low churn rate (3% mentioned previously) in normal times.
    • Hopefully this recovers, but another good signal is that aftermarket subscribers, which is higher margin business, continues to grow
    • Road Track wasn’t all bad. They do still have better access to other Latin American countries mentioned previously and from the latest calls, it seems like the company will be leaning into those areas to grow.
Breakdown of Ituran's Subscribers
While OEM has faced pressure, it hasn’t been that bad in the context of the decline of OEM registrations
  • FX Headwinds Cloud Earnings Strength:
    • Most of the company’s earnings are in currencies that have fluctuated a lot
    • This includes the Israeli shekel, Brazilian real and to a degree, the argentine peso.
    • When you look at results, particularly 2015/2016 time frame when the Latin American currencies depreciated a lot, the results can seem more lumpy than reality

Common Questions

  • Doesn’t GM’s Onstar do this?
    • They do, but also much more expensive paid subscription at $350/year (around 3.5x the cost).
    • It uses GPS, which Ituran also uses in its growth areas, but again the core for Ituran is RF network
    • Ituran is actually the provider to GM in Brazil, which they originally signed in 2012.
  • Are there any comps to help us understand the value in Ituran stock ?
    • Lojack is actually public via a subsidiary of CalAmp (ticker: CAMP). They’re also a small cap, expected to do about $340MM of revenue in FY2020 and just $30MM of EBITDA (i.e. Ituron is much more profitable). They trade at ~18x ’20 EBITDA and 11.5x FY2022 EBITDA. They also have more debt.
    • Pointer was an Israel-based company that was also small, but was public and was acquired by a company called I.D. Systems for ~10x EBITDA in 2018
    • TomTom isn’t a great comp, has been shrinking and will be just slightly EBITDA positive in 2020 (though COVID had an impact). It has about 2x Ituran’s sales, but trades at 1.8x 2020 sales and 1.6x 2021 sales. This is where Ituran trades, but Ituran is expected to grow, is profitable, and generates good FCF.
  • Is Management aligned with Shareholders?
    • I follow another Israel-based company and I will say they tend to be very conservative.
      • For example, I think Ituran should probably carry a bit more debt, but perhaps the culture there frowns upon that. And Ituran’s management seems proud to be back in a “net cash position.”
      • Fortunately, for the Road Track acquisition, they did not issue Ituran stock to fund the deal
    • Management owns ~23.5% of Ituran stock via a holding company “Moked Ituran Ltd”. Moked literally means “focus” in Hebrew, so hopefully that’s a good sign

Bottom line: I think expectations for Ituran stock are pretty low. I also think it’s a cash cow with a highly recurring business model. I’ll admit, my biggest concerns are about technology disruption, but that’s true for a lot of businesses I own as well. That also probably stems from their brand not being known well in the US, where I am located.

I think Ituran’s results will improve over the year, which may mean it gets more attention and Ituran stock can re-rate. They also have enough cash to cause a re-rating themselves (i.e. buybacks) which is always positive.