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Kalkine IPO Report

Should You Subscribe for the IPO of Cariloha, Inc.?

Feb 09, 2022

 

The Offering

Company Overview

Cariloha, Inc. is an omnichannel brand that emphasizes soft and sustainable consumer products spanning across bath products, bedding and clothing. The products are primarily made of Bamboo, which is one of the most  sustainable and renewable resources on Earth. The company markets and sell its products through e-commerce and offline mode as showrooms and wholesale channel. Further, the company is having ties with major cruise lines and showrooms located in high traffic destinations and cruise ports of call, giving access to thousands of new customers to its stores.

Source: IPO prospectus

Key Highlights

Usage of proceeds:  The company divulged well in terms of the usage of the proceeds from the current offering wherein around $5.0 million will be used for the repayment of the outstanding borrowing under the Revolving Line of Credit. Further, the mix of other usages includes funding of its working capital, growth capital, and various alternative requirements depending upon the business climate. The company did not shy away from discussing the fund's deployment over short and medium-term interest-bearing instruments.  

Dividend policy: The much-awaited dividend distribution pattern to the shareholders, came as a surprise since the company sternly refused to follow any set dividend-paying policies at least anytime soon. At the same time, the company is focusing on the business development and expansion for now and any changes or updates related to foreseeable dividends will be completely dependent on the board of directors' discretion. 

Product offerings: The company diversified its product portfolio across four major segments: (For simplicity, the products were evaluated for Nine months ended on September 2021) 

Revenue share for the period ending nine months on September 30, 2021

Source: IPO Prospectus, Analysis by Kalkine Group 

Business Model & Strategy:

  • Scalable Model: Cariloha, Inc. has integrated various marketing and selling channels which makes its operations and consumer base, scalable. The community of sustainable products is a close-knit one that intimidates and inculcates brand loyalty, driving the biggest edge of the company over its competitors.
  • Fast-growing E-Commerce channel: Cariloha, Inc. grew its online sales via its website and third-party e-commerce vendors, summing the sole growth from its third-party vendors by 41.2% to $30.7 million in 2020.
  • Commitment to Sustainability & strategic allies: The company’s products are made of Bamboo, which is one of the most eco-friendly, saving soils, preserving oceans, and cleaning the atmosphere, helping to reduce the carbon footprint. The explosive marketing and strategic ties with various cruise lines are making the products mobile and reachable to customers across the globe.
  • Environmental, Social, and Governance (ESG): The biggest differentiating factor of this company is the ESG norms, deeply rooted across its products and culture. By using Bamboo as its raw material, the company is trying to mitigate the effects of chemicals used for production purposes. On the Social front, more than 25% of the employees are with the company past 10 years and they are empowered to grow and develop a steep learning curve. On the Governance metrics, the company takes the appointment of its board of members, diversity, and backgrounds including compensation on a very serious note, raising the bar across its peers.

Source: IPO prospectus

Business ‘Moat’: Cariloha, Inc. is catering its products to the businesses and end customers, that are retailers. Moat, the unfair advantage that the company has over others, is the key strategy to continuing its dominance in the segments it's dealing with. To better understand that, a crisp analysis of Porter’s Five forces is presented below:

Source: Analysis by Kalkine Group

Financial Highlights (Figures in US Dollar)

Source: IPO Prospectus

  • Revenue composition: For the three quarters ended September 30, 2021, the company reported a marginal increase in revenues in an absolute term of $0.4 million or 1.2% to $34.4 millions compared to the revenues of $34.06 million for the three quarters ended on September 2020. The impact of $1.8 million was delivered by the wholesale channel and the roadshows. Further, the rise in revenues was partially neutralized by the dip of $1.1 million, from the shift in e-commerce revenue stream and buying patterns.
  • Operational efficiency: An uptick in the operational front was witnessed in the numbers for the three quarters ended on September 30, 2021 vs September 30, 2020 ending quarters. The Cost of sales declined by $0.9 million or 6.6%, Gross profit increased by $1.3 million or 6.7% and gross margins increased to 61.7% from 58.5% in the previous corresponding period. This was primarily driven by the increase in sales via higher margins channels.

Source: IPO Prospectus 

  • Dissecting Cash flows: The company experienced an increase in cash flows from operating activities to $0.14 million for the nine months ended on September 30, 2021 as compared to the negative cash outflows from operations of $1.49 million for the similar period in 2020 as per the ‘unaudited’ statements. The pivotal point was the re-opening up of stores and relaxation in the lockdown norms in 2021. Cash consumed in the investing activity for the similar period ended on September 30, 2021 was $0.5 million, an increase of $0.3 million from the similar period in 2020, for the purchase of property and equipment on account of the opening of new showrooms.

Source: IPO prospectus 

  • Balance sheet highlights. The ‘unaudited’ statements mention as of September 30, 2021, cash stood at $1.05 million with total assets amounting to $33.27 million. The total liabilities as of September 30, 2021, stood at $25.50 million, respectively.

Key Management Highlights

Source: IPO prospectus

Associated Risk (Moderate to High)

A few of the key risks associated with business/sector for the investment in the IPO of "ALOHA" are:

  • Lockdown restrictions: The biggest threat that persists to the retail industry is the lockdown and restrictions from the spread of COVID 19 and other variants, reducing the customer footfalls and shutting down of the stores at various instances. The online presence of the products is one of the alternative mediums, but the real purpose of providing a palpable experience to its customers at its showrooms could demise in the advent of any fresh lockdown, hampering the sales and profits.
  • The decline in spending power: The rising inflation and probable outcomes in the form of a rise in interest rates will lower the customer's purchasing power and bring a dent in the spending spree, on such products which are nonessential or at discretion.
  • Competition: The sudden shift of paradigm to protect the environment is attracting the interest of the deep pocket names and the sudden exodus from the traditional products to the eco-friendly ones, will reduce the pricing power and profitability of the company.
  • The rising cost of raw materials and supply chain bottlenecks: The rising cost of raw materials and the supply chain issues in terms of transportation and shipping will dampen the financials of the company in the near to medium term.

Conclusion

Cariloha, Inc. (ALOHA), is a well-diversified, eco-friendly, and sustainable business model providing consumer discretionary goods through the online and offline medium. The biggest differentiating factor is the nature of its raw material, which hits the bull's eyes as the world is moving towards environmentally friendly products. Though a serious threat persists from the competition from the big brands, deep-pocket players, and the COVID-19 restrictions, the company still managed to remain afloat and showed improvement as restrictions eases. It's worth noting that the company did not opt for external equity financing earlier, giving a strong sense of the organic source of income from its earnings.

From the investor's perspective, the following of the ESG norms gives the company a boost, which ranks it higher on such parameters. Same time, the earnings retention policy, leaves the risk-averse investors awe-struck, sitting without dividends.  Since it’s a capital intensive business and the beta increases as the interest rates rise, impacting the cost of funds to the company, and considering the above-mentioned concerns, we analyze the IPO of Cariloha, Inc. (ALOHA) to be “Attractive” only for investors with a moderate to high-risk appetite.

 

*Please note that an IPO can be postponed or put on Hold at the discretion of the company or regulatory authority.


Disclaimer-

Kalkine Equities LLC provides general information about companies and their securities. The information contained in the reports, including any recommendations regarding the value of or transactions in any securities, does not take into account any of your investment objectives, financial situation or needs. Kalkine Equities LLC is not registered as an investment adviser in the U.S. with either the federal or state government. Before you make a decision about whether to invest in any securities, you should take into account your own objectives, financial situation and needs and seek independent financial advice. All information in our reports represents our views as at the date of publication and may change without notice.

Kalkine Media LLC, an affiliate of Kalkine Equities LLC, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.