Khrom Capital Management LLCwww.khromcapital.com
This causes the local shop to suffer from a negative feedback loop: as their sales shrink, there are lessrevenues to spread over their fixed expenses, which eventually leaves the shop with only red ink. Since2004, over one-third of commercial printers have gone out of business. The printing world willcontinue to exist; it will just be a smaller market with probably fewer competitors.Robert Keane wants to accelerate Vistaprint’s acquisition of market share. Many companies will try toinvest smoothly over time with no burden on currently reported income. Keane’s priorities, himself being a substantial owner of Vistaprint’s stock, are long-term. Vistaprint has decided to trade-off near-term earnings in favor of upfront investments that should increase customer retention, lowerproduction costs, improve product quality, create new products, and expand the business beyondNorth America and Europe. Should improvement in these metrics lead to the growth that Keaneexpects, Vistaprint will be worth multiples of what we paid.In the interim, the currently depressed earnings have created uncertainty for many investors, which ledto an attractive price for us to buy Vistaprint. We have no naïve misconceptions about growth; it ishighly challenging and hard to predict. It may not deliver in spades like Keane expects. But what wethink the market fails to realize is that at Vistaprint’s current stock price, we are not paying for thegrowth. Vistaprint already
14 million customers; it already
a profitable business with a competitiveadvantage. The recent contraction in earnings was not caused by a decline in customers, sales, or grossprofit margins. It was derived from a substantial increase in employees.
In the past year, Vistaprinthired almost 1,000 new employees–a 30% increase in just one year. We venture to assume thissubstantial increase in employees is not needed to service the revenues that Vistaprint already generates.Back out these incremental investments in headcount and adjust advertising to maintenance levels, and we purchased Vistaprint at a single-digit multiple of free cash flow. While the price we are paying does not give Vistaprint any credit for growth, we are taking on a risk related to the company’s growth strategy. Vistaprint’s new investments could mask our ability to detectany deterioration in the economics of the core business. In the short-term, an unplanned decline in acompany’s competitive position produces the same effect on an income statement as a plannedinvestment aimed at widening its moat. It requires careful forensic accounting and investigativescuttlebutt to distinguish between the two.Guiding the company through this landscape of risk and opportunity is a manager whose judgment wehave found ample reason to trust. Robert Keane has an impressive track record, having built Vistaprintinto a truly wonderful business, with a return on equity that has averaged over 21% for the past sevenyears. He is exceptional with collecting and interpreting data, a key skill given the centrality of data-driven marketing to Vistaprint’s business, and he personally owns a substantial amount of stock. Keanerecently raised the hurdle at which he can exercise his stock options to $75 a share (more than doubleour purchase price), and the company has redesigned its executive compensation structure to ensure
Excluding advertising, ~75% of Vistaprint’s expense increase was due to payroll.