Global Industrial Company (NYSE: GIC)
Can a distribution business be a compounder?
Global Industrial Company (NYSE: GIC), referred to simply as Global Industrial, is a distributor of industrial and maintenance, repair and operation (MRO) products. The business has changed considerably since the excellent writeup by u/JohnKimble on Value Investors Club in August of 2015. Please click the link here if you’d like to read more about the business up until that point in time. This writeup will focus on what the business has been doing since then. Global Industrial is headquartered in the mean streets of Port Washington, NY.
What Has Global Industrial Company Been Up To Since 2015?
Global Industrial Company looks totally different than it did almost seven years ago. The business now only distributes industrial and MRO products. I describe what industrial and MRO products are in the next section. The business used to have a technology division, a chain of retail stores and a rebate processing business which were all sold between 2015 and 2018. These other segments of the business are discussed in the Value Investor Club post that I linked above if you want to learn more about them. They were sold because they weren’t very, if at all, profitable and were operating in commoditized markets. The focus since then has solely been on the former “Industrial Products” group which now operates in the United States and Canada. While doing my research, I noticed three things that the business has done to differentiate itself. The first is a large private label offering. Taken from p. 8 of the 2021 10-K, “…because the industrial products market is highly fragmented and generally less brand oriented, we believe it is well suited to private brand and white label products.” Private/white labels now make up ~45% of their available product selection. Barry Litwin, the CEO, was asked about Global Industrial’s private label strategy during the Sidoti & Company Small Cap Virtual Conference linked here on 3/23/2022. His response was, “There’s two real factors that go into it. One is in terms of the velocity of an item, sales velocity of an item. So, as we start to see high velocity, high sell through on a particular item, we start to flag those items and ask ourselves the question, “Is this something that, you know, we can drive a higher margin?” Two, can we add more value to this product that’s currently in there? So, we have a pretty strong pipeline and we identify items based on those factors. When it comes to pricing, typically we’ve been 10% lower than the national brands. So, what we try to do is, you know, really drive a lot more value at a little bit less price. So, we comp the pricing from the related items in the market. We try to find a price point that works within the private brand assortment. We apply that and we generally get higher value at a slightly lower price and that creates a great formula for sell through and satisfaction with the customer.” A second thing that has differentiated Global Industrial has been their focus on small to medium sized businesses (SMBs). The screencap of Slide 11 from their Q4 2021 Investor Presentation describes their SMB market strategy. A third source of differentiation is listed in the next section.
Global Industrial has also rebranded itself. The business used to be called Systemax but changed its name and logo to Global Industrial in 2021. Quoting Richard Leeds, the Executive Chairman of Global Industrial Company, from a post on inddist.com, an industrial distribution market newsletter website, “This is an exciting day in the history of the company and one that unites the entire organization. In 1949, the company started as a small material handling business and it’s fitting that we embrace those roots. The corporate name change is the final piece in the repositioning of the company around the Global Industrial business and one that allows us to move forward under a unified brand.” (Systemax, 2021). Barry Litwin, Global Industrial’s CEO, also commented on the brand change stating, “Today’s announcement reflects the singular focus of our business and our position as a leading pure-play industrial distributor. The Global Industrial name unifies our corporate operations under the brand our customers know and trust and aligns with our long-term strategic vision for the company. With our multi-year ACE (Accelerating the Customer Experience) strategy and the dedication of our associates, I believe we are well-positioned for continued growth.”
The third difference from 2015 that I will discuss is the CEO. The CEO through the end of 2015 was Richard Leeds who served in that capacity since 1995. The CEO from 2016-2018 was Lawrence Reinhold. Mr. Leeds and Mr. Reinhold are both members of the current Board of Directors. Mr. Reinhold was replaced by Barry Litwin in 2019. Per Global Industrial’s investor relation website, “Barry was appointed CEO of the company in 2019 and has served as Director since 2017. Barry was previously the Chief Executive Officer of Adorama, Inc., a leading multi-channel retailer of professional camera, audio, and video equipment. He has also served in executive roles overseeing the e-commerce businesses and digital strategy for Sears Holdings, Inc., Office Depot, and Newark Electronics, Inc., in addition to serving as an advisor to several early stage technology companies. Barry graduated from Indiana University with a BS degree, and an MBA in Operations from Loyola University, Quinlan School of Business in 1992.” One thing I would like to add is that while the business has changed CEO’s, it is still controlled by the Leeds brothers who are referenced in the Value Investor’s Club post above. Richard, Robert and Bruce Leeds collectively own 67% of the of common stock and each collect a yearly salary of approximately $980,000.
The final difference has been a focus on changing the customer experience. The business describes this in detail on p. 6 of the 2021 10-K, “The Company's multi-year business strategy is focused on Accelerating our Customers Experience (“ACE”). The ACE initiative, which guides our actions across the business, and specifically in our customer end-to-end purchase, service, and delivery experience, has at its core building of customer loyalty and trust by addressing unique customer needs through a responsive and tailored sales, product, and service experience. We build customer loyalty and trust through personalized and high touch customer interactions that often feature strong one to one relationships. The Company's digital and multi-channel sales model drives customer acquisition and with rigorous vetting we are able to identify opportunities for product category expansion, particularly private brand products. Category expansion with our customers drives repeat orders and increases their annual and average spend. We maximize customer satisfaction and loyalty by coupling close customer relationships with product expertise, efficient and competitive fulfillment and delivery and exceptional customer service.”
What Are Industrial and MRO Products?
Industrial and MRO products are those which help you run your business operations efficiently behind the scenes and are not involved in making a specific product. These products are the lifeblood for warehouse and operations managers. If you go to the link here you can see that Global Industrial Company segments their products in to Manufacturing, Distribution & Retail, Construction, Healthcare, Government & Education and Small Business. A list of some, but not all the available items in each segment are listed below:
Manufacturing – Pallet jacks, workbenches, floor scrubbers, garbage cans, paper towel dispensers, stretch wrap film, janitorial carts, etc.
Distribution & Retail – Pallet racks, security deposit bags, whiteboards, utility carts, money counters, breakroom tables, water fountains, etc.
Construction – Hand trucks, cantilever racks, gantry cranes, protective clothing, two-way radios, hard hats, etc.
Healthcare – Medical carts, thermometers, soap dispensers, medical chart racks, instrument stands, laboratory freezers, bio-hazard waste cans, etc.
Government & Education – Laptop charging stations, lockers, bookcases, fire extinguishers, outdoor structures/storage, guard booths, etc.
Small Business – Fans, fire-safe cabinets, wire shelving, reception tables and chairs, PPE equipment, boxes, tape, envelopes, etc.
From what I can tell, the availability of products doesn’t necessarily depend on which segment a customer falls in to. For example, they can be a Small Business customer, but still buy products that are sold under different the Manufacturing or Construction segments.
Global Industrial’s slogan is “We can supply that” and they do a good job of coming through on that promise. The business has over one million products available for purchase. Taken directly from p. 6 of the 2021 10-K, “Our broad product offering and focus on responsiveness to our customers is captured in our promise “We Can Supply That®”. We offer our customers a competitive assortment of leading products and services, a sales force with deep product knowledge and expertise, and timely and relative industry and product content via The Knowledge Center. Our go to market strategy also focuses on leveraging our deep product knowledge and experience by seeking to expand our higher margin private brand line of Global products by adding additional products and product categories. We have over one million brand name and private brand products available through our e-commerce sites and have access to over 1.7 million products in our database. We endeavor to expand and keep current the breadth of our product offerings to fulfill the increasingly wide range of product needs of our customers, and periodically remove certain products from our offering to improve efficiencies or to address vendor or market changes. Sourcing hard to find or non-standard product helps to differentiate our business from our competitors and we believe provides us with a competitive advantage.” This is the third source of differentiation that was referenced above.
Management Compensation
As stated in my previous writeup about Valvoline, I will focus mainly on the compensation of the CEO going forward unless I see something else that I think is interesting, peculiar or worth your time as the reader. Barry Litwin, the CEO, is compensated through a mix of a base salary, non-equity incentive compensation, equity-based incentives, a special bonus which is only paid under “special circumstances” and other benefits, perquisites, etc. Global Industrial Company uses EA Compensation Resources as their compensation consultant. The information provided below is from the 4/28/21 Proxy Statement. This will be referred to as the “2021 Proxy Statement” for the remainder of this writeup.
Base salary – Base salary is fairly straightforward. Mr. Litwin’s salary is based upon a peer group which is provided by EA Compensation Resources. The peer group is large and is shown in the screencap below.
Non-Equity Incentive Compensation – Non-Equity Incentive Compensation is a cash bonus as a percentage of Mr. Litwin’s salary. Per p. 27 of the 2021 Proxy Statement, Non-Equity Incentive Compensation is based on the following factors in the screencap below:
Global Industrial does not disclose what the specific Non-Equity Incentive performance figures are. Per p. 28 of the 2021 Proxy, “Pursuant to SEC rules, and except for disclosure of our actual performance relative to any actually achieved 2020 and future financial targets, Systemax is not disclosing the specific performance targets and actual performance measures for the financial goals used in our NEO Plans because they represent confidential financial information that Systemax does not disclose to the public, and Systemax believes that disclosure of this information would cause us competitive harm. In addition, we do not disclose the specific subjective non-financial goals, since they may directly relate to strategic initiatives, plans and tactics being undertaken by our business and may indicate where we intend to devote our resources. We believe that our competitors having detailed knowledge of where we are devoting our strategic resources and management emphasis could give our competitors an advantage and be harmful to our competitive position.” Based on the information above, there is, in my opinion, quite a bit of subjectivity in awarding Non-Equity Incentive Compensation.
Equity Based Incentives – Per p. 28 of the 2021 Proxy Statement, “Equity based compensation provides an incentive for executives to manage Systemax with a view to achieving results which would increase our stock price over the long-term and, therefore, the return to our stockholders. Historically equity grants included only time based vesting conditions, but in 2019, 2020 and 2021 certain executives and other members of management received equity grants that included both time based and performance based vesting conditions.”
Special Bonuses – Per p. 28 of the 2021 Proxy Statement, “From time to time, the Compensation Committee may make special awards to our executives, in order to reward special achievement in the year that was not covered by the NEO Plan for that year. These awards may take the form of cash bonuses or equity awards and were granted pursuant to the 2010 LTIP and predecessor plans, and 2021 grants would be awarded under the 2020 LTIP.” Nothing else was provided regarding Special Bonuses or what “special achievements” are in relation to Global Industrial’s performance.
Benefits, perquisites, etc. – These include a car allowance, medical/dental/life/disability insurance, severance payments and 401k contributions. I do not think these deserve further analysis.
2020 Long-Term Incentive Plan (2020 LTIP or simply LTIP) – I’m including the LTIP in this section because it is described in detail over several pages in the 2021 Proxy Statement. Global Industrial adopted a new long-term incentive plan in 2020. Per p. 31 of the 2021 Proxy Statement, future awards that may be granted under the 2020 LTIP include incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, cash performance awards which may be in the form of non-equity incentive compensation or special bonuses, and other stock-based awards. After reading the rest of the 2021 Proxy Statement, I was not able to find what “other stock-based awards” could be. The Compensation Committee considers both financial and non-financial goals when deciding to grant LTIP awards. Per p. 34 of the 2021 Proxy Statement, a greater emphasis is placed on financial goals as the business believes that they are “the most critical to enhancing stockholders value, maintaining long-term growth, and remaining competitive, and furthermore provide the funding for implanting the strategic accomplishments and corporate governance goals. Achievement and over-achievement of the financial goals results in incremental increases to the available incentive compensation pool in which the participating executive share.” The screencap below from p. 34 of the 2021 Proxy Statement shows the financial and non-financial goals that Global Industrial’s Compensation Committee considers when granting LTIP awards:
A financial and non-financial scorecard are also considered by the Compensation Committee when awarding long-term incentives. The screencap below from p. 37 of the 2021 Proxy Statement describes them in further detail.
The table shown in the screencap below from p. 38 of the 2021 Proxy Statement provides a full breakdown of how the scorecards are weighed for each NEO at Global Industrial.
Total compensation for each NEO at Global Industrial is shown in the screencap below which is taken from p. 41 of the 2021 Proxy Statement. The Leeds brothers are each listed as a Chairman, but I’m not sure what they do on a day to day basis at the business.
In closing, I’d like to see more transparency from the Compensation Committee about what specific metrics and hurdle rates they use for bonuses instead of what is provided in the Proxy Statements. In addition to the transparency, I wish they’d use returns on invested capital as their primary incentive metric. The Proxy Statements mention returns on invested capital as a consideration for awarding Non-Equity Incentive Compensation, but there is no data provided as to how much weight it holds in determining those bonuses. Overall, I think Global Industrial Company’s incentive system is alright, but not great. One other thing I’d like to see is Mr. Litwin own more stock in the business. As of the 2021 Proxy Statement, he owns 16,810 shares out of a total of ~37,500,000.
Valuation
On the surface, Global Industrial’s financial performance since it sold off its unprofitable units looks like a mixed bag. Revenues since the end of 2015 are down from 1.243 billion to $1.063 billion; a decrease of over $180 million. If you want to start from the end of 2016 then revenues have increased from $753.1 million to $1.063 billion which is a CAGR of 5.91%. Free cash flow (FCF) has been all over the place too as shown in the screen cap below.
Even with the business being relatively asset light, FCF is up and down and up and down. This is mainly due to the selling of their other business segments and the inclusion of income/losses from discontinued operations over the last several years. This writeup would’ve been a hell of a lot easier if Global Industrial didn’t have all of that going on. One thing Global Industrial has going for it are high returns on invested capital. I went ahead and calculated Earnings From Continuing Operations ROIC in addition to the usual NOPAT ROIC and Net Income ROIC. Net Income ROIC includes income and losses from both continuing and discontinued operations. The difference between Earnings From Continuing Operations ROIC and Net Income ROIC shows how much income/losses from discontinued operations has affected the business and its financial performance over the last several years. I also included “Earnings From Continuing Operations ROIC” because I wasn’t sure that only including Net Income ROIC would give the most realistic ROIC viewpoint. Luckily, there was only a large variation in 2018 due to $175 million in earnings from discontinued operations.
I went ahead and did the usual returns on incremental invested capital (ROIIC) calculations. I also included Earnings From Continuing Operations in the calculations in addition to NOPAT and Net Income. I used numbers from 2016-2021 instead of 2015-2021 because the amount of invested capital in the business in 2021 was lower than it was in 2015. This produced negative outputs in my calculations which implies infinite returns on capital which doesn’t make sense. For full transparency, I use TIKR which has been a big help to me in my analysis. 2016 was the first year that revenues were normalized on TIKR since the business sold off their other operating segments, so it made ROIIC a lot easier to calculate. The results are shown in the two screencaps below.
By my calculations, Global Industrial Company has been compounding business value by 20-30% per year since 2016. I’d like to see a higher reinvestment rate since their incremental returns on capital are so high. A lot of this value has been paid out in dividends which I’m okay with. I’d also like to see more stock buybacks, but what can you do? Per TIKR, its stock price in January of 2016 was $7.94. The stock price closed on 4/4/2022 at $31.78. The CAGR in stock price between January 2016 and today is ~26% which is right in line with my calculations. It seems like the market is fairly valuing this business.
Outlook
I’m going to start off this section by listing my concerns with Global Industrial. It’s always easier for me to start off with the bad and end with the good. There are three things that I’m concerned about with this business going forward. My first concern is with the revenue growth and the low levels of reinvestment. As I stated above, revenues have CAGR’d at under 6% since 2016 and the reinvestment rate has been somewhere between 4-6%. That tells me that Global Industrial will have to either figure out some kind of revolutionary new sales/growth strategy or they’re going to have to rely on making acquisitions which brings up my second concern. Management, specifically the CEO, needs to have discipline when making acquisitions. I can only hope that they’re a fan of Warren Buffett’s “Price is what you pay, value is what you get” quote and look for acquisitions that will provide shareholders with high returns on invested capital. My third concern is related to the previous concern about acquisitions. Global Industrial has stated in their annual reports and 10-Ks for years that the industrial and MRO market is consolidating. Taken directly from p. 12-13 of the most recent 10-K, “The MRO and industrial equipment industry are consolidating as customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. This consolidation has and will continue to cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost business models are able to operate with lower prices.” This all but ensures that the business and their competitors will have to increasingly cut costs and make acquisitions going forward. I’d like to think that their competitors will act rationally and judge their decisions on profits and not market share or empire building, but my gut tells me that most likely won’t be the case. Now on to the good stuff.
The outlook for Global Industrial is solid. The screencap of a slide from their Q4 2021 Investor Presentation shows that there is still a lot of room for them to grow in the SMB MRO market.
Global Industrial has also experienced solid growth in Canada. Sales north of the border have CAGR’d at a clip of 17.06% from $26.9 million in 2016 to $69.2 million in 2021. Sales in Canada make up less than 1/10th of overall sales so there is still a ways to go before they start to really affect the results of Global Industrial, but the signs are encouraging.
Slides 18-20 of the Q4 2021 Investor Presentation show the business’ overall outlook on capital allocation over the next several years. The screencaps of slides 18-20 are shown below.
Other encouraging signs are the focus on SMB’s, sourcing bulky/hard to find items, white label product sales and their “Accelerating our Customer Experience” program as discussed in the first section of this writeup. All the previously mentioned good stuff combined with their impressive ROIC and ROIIC is a winning combination more often than not in my mind.
Conclusion
Do I think Global Industrial Company is a compounder? I think it could be, but currently is not especially with it being fairly valued as judged by my ROIIC calculations versus the current stock price. I think management did the right thing by selling their unprofitable divisions over the last several years, focusing on their industrial product and MRO segment and doing the “good stuff” described in the “Outlook” section. While the ROIC and ROIIC are certainly impressive, the reinvestment rates and growth in revenues aren’t as high as I would like. I’m going to pass on Global Industrial Company for now, but certainly keep my eye on it.