Global Industrial Company provides industrial products and solutions, focusing on eCommerce and large enterprise accounts. The company has made significant strides in reducing selling, distribution, and administrative expenses, and it continues to improve its cost structure to enhance its overall conversion rates and customer experience.
However, sales to small to mid-sized customer groups have been sluggish, and short-term SG&A costs are expected to spike. Despite these challenges, the company remains reasonably valued compared to its peers.
Current Strategies: Balancing Margin
Market Strategy
GIC has been implementing strategies to fine-tune its promotional and ocean freight cost structure, which has remained elevated despite recent declines. The company has also reduced its selling, distribution, and administrative spending by 50 basis points year-over-year, reflecting Indoff’s lower cost structure.
However, SG&A costs are anticipated to rise due to several sales and marketing growth initiatives, SOX implementation costs, and IT control remediation.
The company built inventory before the spring and summer seasons, anticipating higher demand for private brand products in Q2 and Q3. GIC aims to maintain a balance by investing in sales and marketing initiatives that offer higher returns. This selective investing approach helps maintain a healthy margin while exploring future growth opportunities.
E-commerce Through e-Channels
E-channels, including EDI or e-procurement, cover more than 60% of GIC’s total e-transactions. The company’s eCommerce improvements have enhanced overall conversion rates and customer experience over the past two years.
In May, GIC introduced several new products, including a commercial air scrubber and negative air machine with HEPA filtration. The company sees growth opportunities in large enterprise accounts in the global industrial market over the next two years.
Challenges and Industry Outlook
SMB Market Performance
GIC’s small to mid-sized customer market has faced challenges recently. End-use markets such as manufacturing, retail, transportation, and warehousing have adversely impacted the company’s fixed asset purchases and capital expenditures.
Smaller customers have been more affected than larger enterprise national customers, who have better managed the lean period. Moving forward, the company plans to focus more on larger customers to mitigate industry challenges.
Industry Indicators
The ISM Services PMI increased to 53.8 in May 2024 from below 50 in April, driven by rapid new order growth, higher business activity, and slower supplier deliveries. However, employment deteriorated in May.
Over the past year, the average PPI for total manufacturing has remained nearly unchanged. The US manufacturing index is expected to remain steady without significant upside in 2024.
Q1 Results and Margin Outlook
Revenue and Margin Analysis
GIC’s organic revenues increased by 4.2% year-over-year in Q1 2024, benefiting from volume improvement but partially offset by continued pricing depression. The adjusted gross margin contracted by 160 basis points, marking a consecutive fall for the past two quarters.
The share of lower margin from Indoff primarily contributed to the lower gross margin profile.
In Q1, eCommerce became a leading growth driver for GIC, with strong growth in the enterprise business due to new account generation and healthy retention rates. The gross margin was 34.3%, a 50 basis point improvement over the previous quarter. However, the adjusted EBITDA margin shrank by 160 basis points.
The negative impact of pricing trends is expected to improve in the near term, as evidenced by better sales figures in April.
Cash Flows and Debt Level
In Q1 2024, GIC’s cash flow from operations fell sharply by 77% compared to a year ago despite higher revenues, due to increased inventory balances and accounts receivable. The company built up inventory in anticipation of a large sales period for its private brand products. Free cash flow, excluding acquisitions, also fell sharply.
GIC’s liquidity totaled $146 million as of March 31, 2024, with no debt, giving it an advantage over some of its peers. This equates to a 3.3% forward dividend yield, higher than its peer FAST (2.5% dividend yield).
Relative Valuation and Target Price
GIC’s forward EV/EBITDA multiple contraction versus the current EV/EBITDA is less steep than its peers, resulting in a lower EV/EBITDA multiple. The company’s EV/EBITDA multiple (11.6x) is slightly lower than its peers’ average. It is trading at a discount to its past five-year average.
GIC’s average EV/EBITDA multiple for the past five years was 13.2x. If the stock trades at the past average, it can increase by 21% from the current level. The average EV/EBITDA multiple for GIC’s peers is 15.1x. If the stock trades at this average, the stock price can increase by 36% from the current level.
Considering the company’s cost management efforts and expected adjusted EBITDA growth of 5%-10% in the next four quarters, the stock should trade between $32.5 and $34, implying a ~11% upside.
Risk and Conclusion
GIC is fine-tuning its cost structure and reducing its selling, distribution, and administrative spending. It is investing in e-transactions and eCommerce while focusing on large enterprise accounts.
However, SG&A costs may increase due to current marketing and compliance initiatives, and cash flows deteriorated significantly in Q1 2024.
Given the reasonable relative valuation, returns from the stock can improve marginally in the near term. The stock’s performance has been underwhelming compared to the broader market, and despite some positive developments, it may continue to face challenges.
As such, maintaining a cautious approach towards the stock is advisable.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
