The sales figure for the period amounted to EUR 13 million, marking a y/y decrease of 42%. This outcome fell short of our projected figure of EUR 15 million, and can be attributed to a range of factors, including the impact of the US dollar, macroeconomic conditions, and inflation, all of which weakened consumer spending. Additionally, the limited availability of antigen Covid-19 tests across Strax's European distribution network led to reduced demand overall.

The gross profit was EUR 0.3 million, reflecting a gross margin of 1.4% (down from 29% in the previous quarter). Although we had projected a margin of 15%, a EUR 4 million inventory write-down had a negative impact on the gross margin.

Meanwhile, the EBIT was EUR -5.9 million (compared to EUR 0.3 million in the previous quarter), translating to a negative EBIT margin (compared to a 1.3% margin in the previous quarter). This outcome fell short of our anticipated EUR 1 million.

Sales within Distribution were weaker than our expectations, totalling EUR 13 million, with a negative EBIT margin. The subdued sales can be attributed, in part, to a slower distribution of antigen tests, as previously mentioned.

The Own Brands segment outperformed our expectations, generating sales of EUR 8.3 million, albeit with a negative EBIT margin due to the inventory write-down. The strong sales performance was primarily driven by the successful turnaround of Urbanista and Clckr. Strax reported that Urbanista achieved a single-digit profit for 2022 and posted a positive EBITDA margin after two years of losses.

Clckr also continued to perform well during the quarter, with a growth rate of 130% in 2022 as the number of stores carrying the brand increased.

In contrast, Strax's fourth brand, Richmond&Finch, experienced a more challenging year, with one of the biggest reasons being the lockdown in China. However, the third brand, Planet Buddies, posted positive growth numbers for 2022.

Clckr will enter a cooperation with G-form technology (specializes in designing and manufacturing protective gear for athletes and outdoor enthusiasts) and will release a new product category, ahead of the iPhone 15 release, September 2023.

Going down the same path as with Gear4. Clckr now enters a much larger market audience than only in attachable spehere. G-form is a very large US brand with clear North American focus. G-form was bought back in April 2021 by Eldridge. Eldridge is a diversified investment firm based in the United States. The company was founded in 2015 and is headquartered in Greenwich, Connecticut. Eldridge invests in a variety of industries, including media and entertainment, sports, real estate, insurance, and technology.

Its portfolio includes a number of well-known brands and companies, such as The Hollywood Reporter, Billboard, and Dick Clark Productions in the media and entertainment space, as a well as Los Angeles Dodgers and the Security Benefit insurance company. The company is led and owned by founder and CEO Todd Boehly, a former executive at investment firm Guggenheim Partners. Todd Bohely owns, among other things, one of the owner of DraftKings and bough the English football club Chelsea for $5.2bn in May 2022.

We have previously reported on Strax's ongoing restructuring efforts, and it appears that significant progress is being made as the company continues to execute its action plan. The pressure to implement changes has intensified due to rising global interest rates, which have contributed to unsustainable financial costs for Strax. In response, the company has taken steps throughout the year to reduce costs, including a reduction in global headcount.

Urbanista cut from 27 FTE to 13 (reduced by 50%)

Richmond&Finch from 8 FTE to 4.5

Brandvault from 13 FTE to 5

Strax global service from 39 FTE to 27

These cuts stands for 11% of total cost savings or 15% of OPEX.

The action list now consists of following 5 main points;

Divest Telecom lifestyle Fashion                             Ongoing                                         Q1’23

Divest Health&Wellness                                           Ongoing                                         Q2’23

Sale of 50.1% of European Distribution                   Evaluation                                      Q2’23

Europe Distribution refinancing                               Evaluation                                      Q2’23

Sale of 25-33.3% of Clckr                                         Evaluation                                      Q3’23

The goal and key objectives are to reduce EUR30m in debt, reduce inventory and EUR15m debt (this debt is tied to Health&Wellness) and improve liquidity.

Strax had previously planned to list its Distribution business separately, but the company has now reversed this decision and will become a minority owner after the sale. Management has confirmed that they have had interested buyers over the years but did not feel the timing was right because the Own Brands segment was not stable enough to stand alone. The company is now looking to sell 50.1% of the Distribution business.  

The management team will collect the latest sales figures for Clckr before approaching potential buyers for Clickr, and a decision will be made in about six weeks if the metrics are met. The team running Clckr is the same as the one that successfully managed Gear4 in 2016-2018, which had a sale of USD24m and grew sales to USD70m in 3.5 years under new ownership. As Strax has valuable own brands and a fully developed Health & Wellness business, the company does not need to announce a capital increase at these low distressed levels. Instead, the company collaborate closely with its debt holders and divest its assets to turn around the business.

The selling of the Distribution business and Clckr, is expected to cover EUR30m of debt.

Strax breached the covenant on one of its loan agreements with Proventus Capital Partners (PCP) due to the inventory write down and lower margins. However, Strax received a "waiver" from PCP and has a good working relationship with them. It's worth noting that Strax has been in breach since Q3 of 2022. Although Strax has negative own capital of EUR6.5 due to the consolidation of different daughter companies, management believes that this is more of a technical issue and will not require a controlled balance sheet process. Moreover, Strax has guaranteed liquidity for the next 12 months.

Strax's goal is to streamline the company and to make it easier for stakeholders to understand, forecast, and follow. The company plans to become leaner and more transparent with lower debt, making it more resilient. Additionally, Strax aims to become a fast-growing company with more consistent margins and less fluctuation.

Strax is now to focus on their four core brands after the divestestments of grell, Dóttir completed and and Telecom Lifestyle fashion, its licensing business including adidas, Y-3, Diesel, WeSc, Superdry in the process of beeing sold or divested.

Understood, the declining phone shipments could have a negative impact on Strax's mobile accessories business, as they are often used as complementary products to smartphones. However, Strax's focus on promoting its own proprietary brands could potentially mitigate this impact, as it can leverage its strong presence in North America to reach a wider customer base. Additionally, the company may also look into expanding its product offerings beyond mobile accessories to diversify its revenue streams.

In January, Strax's product, Urbanista Phoenix, received two awards at the CES 2023 event in Las Vegas, adding to the three awards it had already won at the IFA 2022 event in September. The positive response to Urbanista Phoenix, combined with a lack of new offerings from competitors, has made it a unique and highly sought-after product in the market.

Urbanista's collaboration with Exeger's Powerfoyle on Los Angeles and Phoenix has helped to increase brand awareness and capitalize on the emerging sustainability trend, while competition in the market remains limited. The true wireless technology used in Urbanista Phoenix also offers excellent profit margins, although it may not significantly impact volume sales.

Strax is invested in operational sales team in North America that will provide access to over 50 000 point of sales (POS). In total 20 salespeople on the ground plus external sales agencies that conducts training and visits stores in order to make sure exposure of the products is good. This is a fundamental way forward in order to reach growth in North America.

Although the upcoming massive restructuring of Strax will make financial estimates more challenging, we have revised our projections to reflect the divestment of the Health & Wellness segment. According to our conversation with the management, the divestment will most likely bring in positive cash inflow to boost Strax's liquidity and working capital. Consequently, we have adjusted our estimates for the next few years, adjusting sales from the Health & Wellness segment, which leads to lower projections than our previous estimates.

In 2022, Health & Wellness sales stood for EUR14.2m in the distribution business. Sales in Own Brands was EUR15.2 During 2023e we are cutting sales down in Health & Wellness by 70% in Distribution and 35% for Own Brands as demand for Covid-19 tests are falling and protective gear sales should drop.

We have revised our growth estimates for Own Brands (Accessories & Audio) upward by 47% due to the successful implementation of new initiatives and the new upcoming product launch for Clickr. Urbanista and Clickr are expected to be the main growth drivers for this segment.

Due to the update of the Redeye rating in combination with a higher risk-free rate, the WACC increase from 12.2% to 13.5%. With the new estimations we derive a valuation range of SEK0.6 (0.9) to SEK6.0 (6.1), with a base case of SEK2.8 (2.9).

We performed a sum-of-the-parts (SOTP) valuation to assess the value of the two segments. Although the valuation entails some assumptions due to the uncertainties related to the balance sheet, it complements our DCF valuation.

In our SOTP valuation, we have assumed that Strax will divest its Health & Wellness segment. We have not taken into account any substantial cash injection resulting from this divestment. Nonetheless, if Strax is able to generate a profit from the divestment, it may act as a positive catalyst for the stock.

Currently, Strax has net debt of EUR 50m, with about EUR 15-20m of it tied to the inventory of the Health & Wellness segment and thus subtracted from the calculation. We assume that 33% of the net debt is linked to "Own Brands," while 67% is associated with "Distribution," based on the sales ratio.

Management at Strax is placing significant focus on the improvement and expansion of its logistics operations, with a particular focus on direct-to-consumer logistics. To this end, the company is developing a 6000 sqm logistics center in Germany, which will be primarily dedicated to shipping. Additionally, to further expand its direct-to-consumer logistics business, Strax is investigating the use of automated logistics systems featuring robots, also known as RASS, or "robot as a service". The use of these robots, which can be rented on a monthly basis, would allow the company to easily scale its operations in response to increased demand without the need to hire additional staff. These robots can move across the warehouse floor and can be integrated into the existing layout of the logistics facility and shelves. Currently, Strax Distribution employs approximately 100 full-time staff.

As Distribution generates a positive EBIT (except last quarter) result, we have valued Distribution using a peer EV/EBIT multiple.

The EBIT margins of Peers fall within the range of 2% to 10%, with a median of 5%. Strax Distribution, on the other hand, recorded an average EBIT margin of 10.4% from 2020 to 2022. In our SOTP valuation, we have used an EBIT margin of 8%.

We have thus valued the Distribution part of the business at SEK3.0 per share.

As Own Brands does not generate a profit, we have used EV/Sales as a valuation multiple, also based on peers.

The valuation of Strax Own Brands, based on EV/Sales, comes to SEK1.88  per share.

Adding together the two business segments, we have derived a valuation of SEK4.9 per share. The SOTP valuation is within our valuation range supporting our DCF valuation.

Based on our 2023e estimations, Strax is trading at an EV/Sales multiple of 2. Strax Distribution's business accounts for 63% of total revenue, while Own Brands accounts for 37%. By using the EV/Sales of peers and weighting the multiple, we arrive at a peers EV/Sales of 0.7. The primary reason for Strax trading at a premium is its high debt level.

Sales CAGR 2023e–2026e: 3.8%

Sales CAGR 2027e–2032e: 3.6%

Avg. EBIT margin 2023e–2026e: 1.8%

Terminal growth: 2%

Terminal EBIT margin: 2%

WACC: 13.5%

Sales CAGR 2023e–2026e: 7%

Sales CAGR 2027e–2032e: 5%

Avg. EBIT margin 2023e–2026e: 3%

Terminal growth: 2%

Terminal EBIT margin: 5%

WACC: 13.5%

Sales CAGR 2023e–2026e: 10%

Sales CAGR 2027e–2029e: 8%

Avg. EBIT margin 2023e–2026e: 6%

Terminal growth: 2%

Terminal EBIT margin: 6%

WACC: 13.5%