Practically everyone is familiar with gift cards either conspicuously displayed in many popular retail stores, or purchased/received as gifts. The latest National Retail Federation (NRF) 2015 Holiday Consumer Spending Survey found that nearly six in 10 (58.8%) consumers celebrating the holidays say they would like to receive gift cards as a gift, making this the ninth year in a row that gift cards have topped the list of most requested gift items. Close behind is clothing or clothing accessories (52.2%) and books, CDs, DVDs and video games (40.5%) — though the latter is the lowest percentage seen since NRF started asking. Those struggling with finding the perfect gift this year should look no further than a retailer’s gift card section.
Since to date the NRF has provided no total gift card sales expected for the 2015 holiday season, using last year as a reference, the NRF 2014 survey expected holiday shoppers to spend more than $31 billion on gift cards.
A major player in gift cards is Blackhawk Network Holdings, Inc. (HAWK) that began in 2001 as a division of Safeway, Inc., the supermarket chain. It was incorporated in Delaware as Blackhawk Network, Inc. in 2006, and changed its name to Blackhawk Network Holdings, Inc. later that year.
In April 2013, Blackhawk Network Holdings (HAWK) completed its initial public offering for the sale of 11,500,000 shares of Class A common stock, all of which shares were sold by existing stockholders, primarily Safeway Inc. Prior to April 14, 2014, HAWK was a majority-owned subsidiary of Safeway, Inc. On April 14, 2014, Safeway distributed its remaining 37.8 million shares of HAWK Class B common stock to Safeway shareholders. As a result of this spin-off, HAWK became a stand-alone entity separate from Safeway. On May 21, 2015, following approval of its Board of Directors and stockholders, HAWK amended its Certificate of Incorporation to eliminate its dual-class common stock structure by converting all outstanding shares of its Class B common stock into shares of Class A common stock on a one-for-one basis and renaming Class A common stock as common stock. As a result of this conversion, HAWK has retrospectively presented Class A and Class B common stock as common stock in its condensed consolidated financial statements and related notes for all periods presenting, including within earnings per share.
Blackhawk Network has grown from 7 brands, 1 retailer and presence in 1 country in 2001 to 600 plus brands, over 198,000 retailers and presence in 24 countries in 2015.
BLACKHAWK BUSINESS OVERVIEW
The following is the Blackhawk Network business overview from the FY 2014 10-K filing with my inserted update notes in brackets:
"Blackhawk Network Holdings, Inc., together with its subsidiaries is a leading prepaid payment network utilizing proprietary technology to offer a broad range of prepaid gift, telecom and debit cards, in physical and digital forms, as well as related prepaid products and payment services in the United States and 21 [Update: 23] other countries. We believe our extensive network provides significant benefits to our key constituents: consumers who purchase or receive the products and services we offer; content providers who offer branded gift cards and other prepaid products that are redeemable for goods and services; distribution partners who sell those products; and business clients that distribute our products as incentives or rewards. For consumers, we provide convenience by offering a broad variety of quality brands and content through retail and online distribution locations or through loyalty, incentive and reward programs offered by our business clients. For our content providers, we drive incremental sales by providing access to millions of consumers and creating new customer relationships. For our retail distribution partners, we provide an important, growing and productive product category that drives incremental store traffic and customer loyalty. And for our business partners, we provide a wide array of services, software and prepaid products to enhance their customer loyalty, sales channel incentive and employee reward programs. Our technology platforms allow us to efficiently and seamlessly connect our network participants and offer new products and services as payment technologies evolve. We believe the breadth of our distribution network and product content, combined with our consumer reach and technology platforms, creates powerful network effects that enhance value for our constituents and drive growth in our business.
We are one of the largest third-party distributors of gift cards in the world based on the total value of funds loaded on the cards we distribute, which we refer to as transaction dollar value. Our retail network connects to more than 600 content providers and over 190,000 [Update: 198,000] active retail distribution locations, providing access to tens of millions consumer visits per week. In addition, we sell physical and electronic gift cards to consumers through leading online distributors and our websites GiftCardMall.com, GiftCardLab.com and Cardpool.com. Our retail channels accounted for over $12.7 billion in transaction dollar value during fiscal 2014.
Through our recent acquisitions of loyalty, incentive and reward providers that include InteliSpend Prepaid Solutions, LLC and its subsidiaries in 2013, and Incentec Solutions, Inc., CardLab, Inc. and its subsidiaries and Parago, Inc. and its subsidiaries in 2014, we provide customized engagement, incentive and rebate programs for consumers, employees and sales channels. In January 2015, we moved to a align these businesses and drive synergies by restructuring them into Blackhawk Engagement Solutions. Blackhawk Engagement Solutions provides software, services and prepaid products to approximately 2,250 business clients for their loyalty, incentive and reward programs. In 2014, Blackhawk Engagement Solutions processed over 12.4 million rebate, incentive and reward transactions with an aggregate value of $0.8 billion.
[Update: On June 30, 2015, Blackhawk Network acquired Achievers Corp. and its subsidiaries, a leading provider of employee recognition and rewards solutions designed to help companies increase employee engagement primarily in the U.S. and Canada, for purchase consideration of $103.5 million in cash through a merger. The acquisition has allowed Blackhawk to deliver expanded capabilities and products in the employee rewards market.]
Our retail distribution product offerings include gift cards; prepaid telecom products and prepaid financial services products (including general purpose reloadable, or GPR, cards and our reload network). We offer gift cards from leading consumer brands such as Amazon.com, Applebee’s, iTunes, Lowe’s, Macy’s and Starbucks (known as closed loop) and from leading network card associations such as American Express, MasterCard and Visa (known as open loop). We also distribute prepaid telecom products offered by leading prepaid wireless telecom brands. In addition, we distribute GPR cards provided by Green Dot and NetSpend, the industry leaders in this product category, as well as PayPower, our own GPR card. Reloadit, our proprietary reload network, allows consumers to reload funds onto certain of their previously purchased GPR cards. We also offer functionality and connectivity for digital wallet products within the rapidly growing digital payments space as well as an online gift card exchange called Cardpool.
We distribute our products across multiple high-traffic channels such as grocery, convenience, specialty and online retailers. Grocery is our largest channel and enjoys a high volume of frequent visits from all consumer demographics. Our distribution network includes nine of the top ten, and approximately 90% of the aggregate grocery store locations operated by the top 50, conventional grocery retailers in the United States and Canada as reported by Supermarket News in January 2015. These grocery retailers include Ahold, Kroger, Loblaws, Publix and Safeway. We also distribute our products in specialty retailers such as Bed Bath & Beyond, Lowe’s and Staples, in convenience stores such as QuikTrip and Wawa and in other retailers such as JCPenney and Kohl’s. In addition to the United States, we distribute our products in 21 [Update: 23] other countries, including Canada, the United Kingdom, Germany and Australia. We have recently expanded into South Korea and South Africa. Our international network includes leading retailers such as Albert Heijn, Carrefour, Loblaws, Morrisons, Tesco and Woolworths. Our international business accounted for approximately 24.0% of our total operating revenues in 2014.
Blackhawk Engagement Solutions provides rebate, incentive and reward processing and validation services. We also provide fulfillment of the incentives and rewards in the form of open loop single-use incentive cards, open loop reloadable incentive cards that allow multiple incentives and rewards to be loaded onto a recipient’s card, and restricted authorization network incentive cards that permit redemption at only selected merchants. Blackhawk Engagement Solutions also fulfills awards with checks and merchandise and sells customizable open loop incentive cards and closed loop incentive cards through our IncentiveCardLab.com web site."
Here is a comprehensive, easy to understand Investor Presentation about the business and financials - click 2/26/2015 Investor Presentation.
Click 3/3/15 March 2015 Raymond James Conference Presentation for a detail financial presentation.
Just recently on 10/14/2015, Blackhawk Network Holdings, Inc. and Stockpile, Inc., the company that pioneered eGift Cards for stock, announced that Stockpile’s “Gift Cards for Stock” are available at select U.S. retailers. This prepaid gift card can be redeemed online to open and fund an account with stock. Consumers may buy the prepaid card as a gift for others or buy it for themselves.
Stockpile’s gift card comes in fixed denominations of $25, $50 and $100. It may be redeemed for a variety of popular stocks or exchange traded funds (ETFs) such as the NASDAQ or S&P 500. When you redeem a Stockpile gift card and open a brokerage account, you get fractional shares of real stock that you choose.
Stockpile’s Gift Card for Stock is distributed by Blackhawk Network at the following first stores to have the gift cards available: Kmart; Buehler’s Fresh Foods (all locations in Ohio); Giant Eagle and Market District (all locations in Maryland, Ohio, Pennsylvania, West Virginia, and Indiana); Safeway (18 locations in Seattle, Wash.); Wegmans Food Markets (all locations in Maryland, Massachusetts, New Jersey, New York, Pennsylvania and Virginia).
BLACKHAWK CORPORATE FINANCIALS
Here’s a 11/13/15 snapshot of financial fundamentals for Blackhawk Network Holdings, Inc. (HAWK) compared with some of its competitors, i.e., Euronet Worldwide, Inc. (EEFT), Green Dot Corp. (GDOT) and Moneygram International Inc. (MGI)
11/13/15 HAWK EEFT GDOT MGI Market Cap 2.40 B 4.07 B 841.02 M 462.39 M 52-wk high 46.97 82.49 22.63 11.00 10/13/15 Price 44.53 77.07 16.15 8.69 52-wk low 32.98 44.96 13.87 7.55 Revenue (ttm) 1.70 B 1,76 B 699.29 M 1.41 B Net Income (ttm) 46.48 M 95.41 M 43.16 M -69.00 M EPS (ttm) 0.26 1.77 0.84 -1.10 P/E (ttm) 53.65 43.54 19.14 NA FWD P/E 17.00 20.02 11.87 9.05 P/B (mrq) 3.58 5.20 1.24 NA P/S (ttm) 1.43 2.35 1.18 0.35 EV/EBITDA (ttm) 17.06 15.11 2.24 7.54 MARGINS (ttm) Gross 91.7% 38.7% 100.0% 54.2% Operating 5.4% 11.3% 10.3% -0.0% Net 2.7% 5.4% 6.3% -4.9% ROIC 10.8% 19.5% 0.0% 22.6% WACC 2.6% 13.6% 11.0% 6.3% EVA 8.2% 6.0% -11.0% 16.2% Cash (mrq) 214.72 M 528.83 M 8687.54 M 151.60 M Total Debt (mrq) 475.66 M 467.53 M 134.10 M 956.10 M Debt/Equity (mrq) 69.3% 58.6% 20.2% NA Current ratio (mrq) 0.85 1.28 1.13 12.56 Employees 1,860 4,600 857 2,727
Based on my due diligence on the other 3 companies, I also favor EEFT that I hope to cover in a follow up post whenever I have free time.
HAWK reported the following in its FY 2014 10-K filing:
“Due to the breadth of our product offerings and distribution channels, we face a number of competitors across different business sectors domestically and internationally in our Retail Products business, including some competitors whose products we distribute in select locations. Many of our existing competitors with respect to our closed loop and open loop business are larger than we are and have greater resources, larger and more diversified customer bases and greater name recognition than we do. Our competitors include Visa, Western Union, MoneyGram, Green Dot, NetSpend, Euronet and Incomm. New companies, or alliances among existing companies, may be formed that rapidly achieve a significant market position. Our Blackhawk Engagement Solutions division competes with others who provide rebate and incentive processing services such as Young America, ACB and other providers of traditional travel and merchandise incentives and awards such as Maritz and Amia. Our incentives and rewards business also competes with other prepaid products companies for fulfillment of awards including Citibank Prepaid Solutions, InComm, and multiple other prepaid card providers for the incentives business. We also face competition from companies who are developing new prepaid access technologies and from businesses outside of the prepaid industry, including traditional providers of financial services such as banks and money services providers, and card issuers that offer credit cards, private label retail cards and gift cards. Some of these competitors offer digital solutions that do not require plastic cards for redemption by the consumer and allow for the sale of prepaid cards through new or existing online and mobile channels.”
Blackhawk Network’s business is significantly affected by seasonal consumer spending habits, which are most pronounced in December of each year as a result of the holiday selling season. A significant portion of gift card sales occurs in late December of each year during the holiday gifting season. As a result, Blackhawk earns a significant portion of its revenues, net income and cash flows during the fourth quarter of each year. Blackhawk also experiences an increase in revenues, net income and cash flows during the second quarter of each year, which we primarily attribute to the Mother’s Day, Father’s Day and graduation gifting season and the Easter holiday. Depending on when the Easter holiday occurs, the associated increase could occur in either the first or second quarter.
Here’s the impact of seasonal variations on financial reporting, according to Blackhawk:
A significant portion of gift card sales occurs in late December of each year during the holiday selling season. As a result, we earn a significant portion of revenues, net income and cash inflows during the fourth fiscal quarter of each year and remit the majority of the cash, less commissions, to our content providers in January of the following year. The timing of our fiscal year-end, December holiday sales and the related January cash settlement with content providers significantly increases our Cash and cash equivalents, Settlement receivables and Settlement payables balances at the end of each fiscal year relative to normal daily balances. The cash settlement with our content providers in January accounts for the majority of the use of cash from operating activities in our condensed consolidated statements of cash flows during our first three fiscal quarters. Additionally, our operating income may fluctuate significantly during our first three fiscal quarters due to lower revenues and timing of certain expenses during such fiscal periods. As a result, quarterly financial results are not necessarily reflective of the results to be expected for the year, any other interim period or other future year.
GAAP and non-GAAP Financials
Since its IPO in April 2013, Blackhawk Network reports both GAAP and non-GAAP results in its press releases and quarterly and annual SEC filings that provide identification and reconciliation of differences between the two results. Look here for answers and explanations.
As shown in the following tables, there is a significant difference between GAAP revenue and adjusted/non-GAAP revenue in terms of of dollars and year-over-year (YoY) growth. Blackhawk realized strong growth in annual revenue over the past five fiscal years, i.e., 30%, 28%, 19%, and 27% for FY 2011, 2012, 2013 and 2015 GAAP revenue, respectively, and 18% and 31% for FY 2013 and 2014 non-GAAP revenue, respectively.
REVENUE $M FY 2010 2011 2012 2013 2014 TTM GAAP 577.7 751.8 959.1 1,138.1 1,445.0 1,703.5 YoY growth 30.1% 27.6% 18.7% 27.0% 0.0% NON-GAAP 440.0 519.6 682.7 865.0 YoY growth 18.1% 31.4%
Over the recent last 8 quarters from December 2013 to September 2015, Blackhawk realized strong YoY gains in GAAP revenue, i.e., 15%, 26%, 26%, 31%, 26%, 37%, 31% and 31%. Looking at non-GAAP revenue, HAWK reported phenomenal YoY gains of 40%, 48% 45% and 54% for quarters Dec 14, Mar 15, Jun 15 and Sep 15, respectively. As previously mentioned, Q4 ending in December historically experiences the highest revenue, net income and earnings due to the holiday season.
REVENUE Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 ($ M) GAAP 521.2 233.1 283.9 269.0 658.9 319.7 372.2 352.7 YoY growth 15.1% 26.0% 25.7% 30.6% 26.4% 37.2% 31.1% 31.1% NON-GAAP 222.2 110.8 134.7 125.4 311.9 164.4 195.3 193.4 YoY growth 40.4% 48.4% 45.0% 54.3%
The following tables show substantial differences between GAAP vs. non-GAAP annual and quarterly net income and GAAP vs. non-GAAP YoY annual and quarterly growth.
NET INCOME $M FY 2010 2011 2012 2013 2014 TTM GAAP 19.9 36.5 48.2 54.1 45.5 46.7 Y0Y growth 83.5% 32.0% 12.3% -15.8% NON-GAAP 50.6 59.1 96.5 123.9 YoY growth 16.8% 63.3%
NET INCOME Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 ($ M) GAAP 49.3 -2.8 5.1 0.6 42.7 4.7 2.9 -3.6 Y0Y growth 35.6% NA 140.1% -76.2% -13.3% NA -43.2% NA NON-GAAP 44.4 5.2 14.8 12.4 64.1 18.9 21.1 19.8 YoY growth 44.4% 266.0% 42.4% 59.1%
Looking at GAAP annual earnings in the following table, diluted EPS has gone up and then down. On the other hand, non-GAAP earnings show EPS increasing annually, i.e., $0.98, 1.11 and 1.77 and for FY 2012, 2013 and 2014, respectively, and YoY gains of 13% and 59% for FY 2013 and 2014.
EPS diluted $ FY 2010 2011 2012 2013 2014 TTM GAAP 0.37 0.70 0.93 1.02 0.83 0.83 Y0Y growth 89.2% 32.9% 9.7% -18.6% NON-GAAP 0.98 1.11 1.77 2.23 YoY growth 13.3% 59.5%
Looking at non-GAAP quarterly earnings in the following table, the recent last 4 quarters from December 2014 to September 2015 have realized phenomenal YoY gains 40%, 240%, 36% and 52%, respectively.
EPS Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 diluted $ GAAP 0.92 -0.06 0.09 0.01 0.77 0.08 0.05 -0.07 YoY growth 31.4% NA 125.0% -75.0% -16.3% NA -44.4% NA NON-GAAP 0.83 0.10 0.28 0.23 1.16 0.34 0.38 0.35 YoY growth 39.8% 240.0% 35.7% 52.2%
Margins, ROIC, EVA & Cash Flows
MARGINS: FY 2010 2011 2012 2013 2014 TTM Gross 97.9% 97.0% 93.1% 92.4% 92.3% 91.7% Operating 6.4% 8.0% 8.0% 7.3% 5.5% 5.4% Profit/Net 3.3% 4.9% 5.0% 4.8% 3.2% 2.7%
At present, Blackhawk Network is creating positive value for shareholders with a ROIC of 10.8% and a WACC of 2.6% that create 8.2 cents of pure economic value (EVA) for every dollar invested.
FY 2010 2011 2012 2013 2014 11/13/15 ROIC 0.0% 41.9% 64.3% 38.0% 7.5% 10.8% WACC 2.6% EVA 8.2% ROE 43.06% 65.39% 38.14% 18.14% 10.16%
FY 2010 2011 2012 2013 2014 TTM CF op activ $M 18 225 20 28 286 124 Capex $M 20 30 24 30 40 51 FCF $M -2 195 -4 -2 247 73
Share buyback program and dividends
Currently, HAWK has no share buyback program and no plan for a dividend payout.
Blackhawk Network Holdings, Inc. is a growth-oriented company, showing very strong YoY gains in non-GAAP revenue, net income and earnings. Currently, a positive ROIC-WACC spread of 8.2% creates good value for shareholders.
Regarding P/E, using HAWK’s 11/13/15 closing price at $44.53 and GAAP earnings of $0.83 yields a high P/E of 53.65. However, using non-GAAP earnings of $2.23 yields a more reasonable/acceptable P/E of 19.97.
Several areas of concern that I watch are (a) the debt/equity ratio of 69.3% which I prefer less than 40% and (b) the current ratio of 0.85 which should be at least 1.0 and preferably higher.
As always, conduct your own due diligence and decision-making.