Well I don't think it is any secret that KITS has been a bit of a darling of mine when I first reviewed them back in November of 2022. It was under $2.50 at the time. I made it one of my 2023 annual picks a short time later when it was at $2.57 and took a position myself. That's 150% in share price appreciation, not bad over 14 or 15 months.
I was really impressed with their Q3 as well and gave it an upgrade to 3.75 during my latest review. But with a much greater market cap and an upgrade come higher expectations for the next one. Can they get to the holy grail of Wolf reviews with a four star or better performance this time out? Let's see.
Before I get into that however, I also want to address the customer service concern I expressed during my last review. If you missed it, my last review can be found here.
A quick recap is one of the branded pair I purchased from KITS lost a screw, and after being less than impressed with customer services response, I just purchased a repair kit from Amazon and fixed them. Now to correct the record where I may have misled people, it was actually Mrs. Wolf who made them good as new again. She read my previous review and was dissatisfied with the amount of credit she so rightly deserved (insert eyeroll emoji here). Subsequent to that review, KITS customer service did reach out to me to apologize on how the initial request was handled and made a very generous offer to make it right. Maybe too generous. I didn't feel good about taking them up on it. I discussed it with fellow shareholders in our discord (who felt I should), but I ended up not taking them up on it. In fact I thought so long about it, I forgot to respond to KITS themselves. Kudos to them for researching who the customer must be, and reaching out to resolving the situation. I ultimately didn't want to take advantage, nor feel any influence for future reviews. Ultimately my Boss glasses are fine with the $11 Amazon purchase.
I digress. On to the financials.
Balance Sheet:
A good current ratio of 1.69, (with deferred revenue removed) which is slightly worse than where they were to end last year, but not significant enough to get excited over. They ended the year with $16M in cash, $1.8M in receivables and $15.4M worth of inventory against $20M in liabilities due within the next twelve months. Given the 31% revenue increase they achieved significantly better inventory turnover than a year ago, delivering that increase on 6% less inventory. Good stuff. They have $4.65M worth of debt, down substantially from the $8.16M they started the year with.
Cash Flow:
Hmmm. Operational cash flow took a hit with just $2.4M generated compared to $4.7M generated in all of 2023. That's almost half and most of that decline happened within their recent quarter. They did have a big swing in their A/P last year which made their OCF look probably better than it actually was, but to see operational cash burn of about $2.3M in Q4 is not what I wanted to see here after upgrading them last quarter. More encouragingly, they paid down over $4M in debt for the second consecutive year, but overall ended the year with $2.75M less in cash then they started the year with.
Share Capital:
Excellent float management here with just 31.4M shares outstanding, with under 300k worth of dilution over two years from RSU awards. Not much new here from my last review, so click the link to see what I said about it then. Lot's of reviews to do so no need to duplicate efforts.
Income Statement:
Very nice annual revenue numbers of $120.5M, up an impressive 31.5% over what they achieved in 2022. Q4 itself came in at $31.6M, up 20.7% from the comparable quarter. It's worth noting that their last two QoQ performances were 3.7% and the recent quarter was 1.6% better than Q3. Is this an indication that growth is starting to slow? I guess we'll see but the thought comes to mind when looking at those numbers knowing they'll be up against tougher targets in 2024. Gross margin was also up very nicely during the year to 33.85%, nearly 200 basis points better than what they achieved during 2022. Q4 alone came in at an even better 35.6%.
For me, please add a total expense line. Please. It will mean more to me than a free set of frames.
Total cash burning expenses (Fulfillment/Marketing/G&A) grew by 19% which is some decent conversion on 31% revenue growth with G&A actually decreasing by $70k year over year. Financing costs were cut by two thirds which all resulted in a $3M improvement to their net income before taxes, but still a loss of $2.4M. They did get hurt in 2023 from foreign exchange. With that removed, their bottom line would have improved by over $6M.
The operating income in Q4 alone was a loss of $915k with total cash expenses increasing by 15% over last year. Most notably here is marketing spend was up by 6% QoQ while only delivering a 1.6% QoQ revenue increase suggesting heavily that they are coming up against much tougher numbers. I'm encouraged though about the eyeglass growth segment as I've felt that was a big opportunity to capitalize on.
Overall:
Really solid numbers here. I will say that I probably expected a little bit more out of this quarter after last quarter's upgrade. I'm by no means concerned but their QoQ on the profitability line is something I'll be looking at very closely in Q1. Closer to downgrading than upgrading to be honest, but leaving at 3.75 stars with more stringent eyes to come next time (Note: Adjusted EBITDA numbers are something that will never impress me). They are no longer an $80M market cap company, they are at $200M. Kid gloves come off baby.
After a quick opening market pop to a 3 year high of $7 bucks, the share price has pulled back down 1% on the day so I think the market wants to see a little more next time out too.