Colorado-based lifestyle company Gaiam (Nasdaq:GAIA) got its start in fitness and yoga. Today, it's an environmental media company. The problem is that investors aren't buying into the company's green pitch; in fact, they're shorting the stock in large numbers. Currently, 29% of its 18 million-share float is held by shorts. This is not very encouraging, but for those willing to keep an open mind, you may be surprised at what you find here. (To learn why short interest can be a company's death knell, read Short Interest: What It Tells Us.)
Company Background
Gaiam is the amalgamation of the Greek word for Mother Earth, "Gaia", and "I am." The company markets media content and other products using a multi-channel distribution system. Currently it's products are in 70,000 retail stores in the U.S. and they're distributed direct to 8 million customers, it's an authority in the health and sustainability market. The company is serious about making the world we live in a better and healthier place.
Is Living Healthy Too Expensive?
Market research firm Information Resources suggests 52% of shoppers who've bought organics in the past were cutting back due to higher gas prices, but somebody must be buying. In 2008 alone, the National Marketing Institute (NMI) says the sale of organic food products will increase by 17%. Further, the NMI predicts the health and wellness category will be a $170 billion market by 2012.
The NMI says that those people cutting back were never committed buyers of organics, just dabblers. The real growth will come from those who believe in a lifestyle of health and sustainability. Once you devote your life to these principles, it's hard to go back. Much like wine, once you've gotten used to the expensive stuff, it's hard to drink cheap swill.
Short Sheep
Investors are like sheep. Once they see a trend, they follow it. Approximately 29% of the float is short for 5.28 million shares. Everywhere you look, media and analysts are talking about people cutting back, not just here and there but to the bone. Those eating fillet mignon are now eating shoe leather, or so the pundits want you to believe. (To learn about the float and how it helps investors understand ratios, read The Basics Of Outstanding Shares And The Float.)
While many followers of sustainable living might cut back the amount they spend, they clearly do not intend to stop altogether. Gaiam understands this, producing products that will help its core demographic learn more about living sustainable lives. It is currently marketing Green Solutions, an instructional DVD series about going green. The packaging is 100% recyclable and biodegradable, using paperboard from 100% post-consumer waste and soy-based ink for the printing. Titles include "Green Remodeling 101" and "Growing Green Babies". This is information we all can use. (For related reading, check out Evaluating Green Equity Investments.)
Growth is Good
In 2003, sales were $102 million with an operating loss of $1.2 million. Four years later, Gaiam had sales of $263 million and an operating profit of $10.5 million. That's quite an improvement.
In the first quarter of 2008, revenue was up 11.5% to $65.2 million. The direct to consumer and business segments were up 13.8% and 8.2% respectively. The direct to consumer business generates 60% of total revenue. Its gross margin, when you remove the solar energy business spun off in May, increased by 270 basis points to 66.8% from 64.1% a year earlier. Even more impressive, operating income increased 64.1% to $2.7 million from $1.6 million the year before with margins increasing 130 basis points to 4.1% . The company expects 2008 revenue will be $300 million, up 14% from $262.9 million in 2007. Some of this growth will come from Target (NYSE:TGT) where the first quarter test of four additional feet of shelf space (bringing the total to 12) for permanent media in its sporting goods department, went exceptionally well. These aren't the signs of a deteriorating business.
Gone But Not Forgotten
Gaiam spun off its solar energy business, Real Goods Solar (Nasdaq:RSOL), in the spring. It was priced at $10 a share and on May 8, its first day of trading, the stock closed down 12% at $8.80. It currently hovers around the $6 mark.
Given that the IPO market has been terrible the past two years, you have to wonder why Gaiam made the decision to proceed with the offering. Management believed incorrectly, as it turns out, that the solar business would still be hot in 2008, allowing it to take advantage of this while removing its lower margin business from the financials. With solar plays like SunPower (Nasdaq:SPWR) and First Solar (Nasdaq:FSLR) down year-to-date, the benefits of this move are open for debate.
Bottom Line
No company is perfect. When investing, most of us just try to pick those stocks with the least warts. In the case of Gaiam, the high percentage of shorts leads me to believe that many investors don't think its growth is sustainable, that its margins are razor thin and its business is a house of cards, just waiting to crumble. I disagree.
Gaiam is ideally positioning itself as an authority in healthy and sustainable living. The trend continues to grow and Gaiam's financial statements between 2003 and 2007 bear this out.
Learn how to read and understanding financial statements in Advanced Financial Statement Analysis.
