Fitlife Brands: building a powerhouse in nutritional products

History

Fitlife Brands started as a (sports) nutritional supplement company who over the years created and bought a couple of brands. In 2007 they went public on the OTC market and in the years after that they continued to acquire other brands. After 2013 sales stopped growing and some setbacks combined with some bad management decisions and high debt got the company in trouble by 2017. A new ceo (Dayton Judd, more on him below) then stepped in, turned the company around and has been growing the company organically and through a couple of smart acquisitions in the past years. In 2023 the company also uplisted to Nasdaq.

What do they do?

Today Fitlife Brands sells about 13 brands of « nutritional and fitness enhancement products », think of things like pills, powders and drinks to lose weight, build muscle and/or improve your health. Originally the products were mostly sold through franchisees of GNC, a specialized American nutritional company with over 2,000 stores in the US. When Judd became ceo he decided to make the company less dependent of GNC and started to develop the e-commerce channel, and Amazon gradually became an important sales channel.

In 2023 Fitlife did two big acquisitions with Mimi’s Rock and MusclePharm, which significantly increased the size of the company.

Financials & Valuation

All numbers are in US dollars

Nasdaq: FTLF

Share price: $ 31.70

Number of shares: 4.6 M

Options: 0.5 M

Number of shares fully diluted: 5.1 M

Market cap: $ 146 M

Cash: $ 4.7 M

Debt: $ 14.3 M

Enterprise value: $ 156 M

Here we must talk about ceo Dayton Judd, because he really turned the company around. Judd got an MBA from Harvard Business School and worked for a number of years at McKinsey, before becoming a portfolio manager at a hedge fund. A couple of years later he started his own investment fund, Sudbury Capital, which first invested in Fitlife in 2012. Through that investment he could follow the company closely and witness what went wrong. He had an idea of what had to change and bought more shares so he became the majority shareholder and eventually stepped in and became ceo at the beginning of 2018. Today he and his fund own 56% of the shares.

He streamlined the product offering, cut costs, improved efficiency and put more focus on the online sale channel, which has higher margins. This way he turned around the company, got sales increasing again and significantly improved margins. He also saw that the industry was fragmented, with a lot of small players, that often had good products, but not enough scale to become profitable. He saw that there was an opportunity for Fitlife to consolidate the sector and buy some of those smaller players, so when the balance sheet was fixed and Fitlife started to produce meaningful cash flows, he started screening the sector looking for acquisition candidates. This led to one small acquisition in 2021 and two bigger ones in 2023, all at relatively low prices, paid for with cash and debt. The first result seem to indicate that they’ve also managed to turn those acquired businesses around and improve their profitability. The last acquisition, MusclePharm, was a big one, so I think they’ll be focusing on fixing that one for a couple more quarters before doing new acquisitions, but I do expect more acquisitions to come in the coming years.

Through all these actions revenues have significantly increased in the past couple of years: revenue has gone from $ 17 M in 2018 to probably around $ 65 M in 2024 . More importantly margins have also significantly improved: gross margins went from 39.5% to 43.8% and adjusted EBITDA-margins went from negative to now 22%.

Organic growth has been modest in the past years on the legacy brands, but the acquisitions gave an extra boost to growth and increase margins. Since I expect more acquisitions in the future (and some further positive impact from the 2023 acquisitions in the short term) I think revenue growth combined with further margin expansion in the coming years is realistic. The growth will be lumpy and depend on the timing and size of acquisitions, but I think on average double digit growth of earnings per share should be achievable. The end game here probably is Judd selling the company in a couple of years, because he’s been invested in the company since 2012 and because of the very high return he has already had on his investment, Fitlife is now a very large part of his fund Sudbury Capital, and he’ll probably want to reduce that concentration risk at some point.

I expect Fitlife to make close to $ 2 of earnings per share in 2024, and more than $ 2 in 2025. At the current share price they then would now be trading at about 15-16 times this year’s earnings, which seems like a reasonable valuation considering the growth potential for the coming years.

Risks

There is of course key man risk here, if anything were to happen to Judd, then that would be bad for Fitlife.

Their wholesale sales are declining, mostly because of lower foot traffic and store closures, if this trend accelerates and is not compensated by more online sales, then they could have trouble increasing sales in the future.

Moving sales more online and through Amazon makes the company more dependent on Amazon, and there’s always a risk that they will abuse their power in the future and squeeze their margins.

It’s a fragmented but crowded market and new companies pop up all the time, which could decrease the popularity of Fitlife’s brands in the future and make sales go down.

Future acquisitions could fail or they could overpay.

Conclusion

Fitlife Brands is an interesting company that was turned around by an intelligent fanatic with skin in the game. Now he is working on the second phase and growing the company through acquisitions, and I think he still has a long runway for further growth. Since I think the current valuation is reasonable (but not cheap) I think it is worth following this company to see what Judd can make of it in the coming years.

Disclosures / Disclaimers: I own shares of Fitlife Brands . This is not a solicitation to buy, sell, or otherwise transact any stock. Nor should it be seen as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice. I am not a financial advisor. Please do your own due diligence.