Moonpig (LON: MOON)

Moonpig Group (LON: MOON), referred to as Moonpig for the duration of the writeup, is a leading online greeting card and gifting business comprised of the Moonpig brand in the United Kingdom, Ireland, Australia and the United States and the Greetz brand in the Netherlands. Per its 2022 Annual Report (FY 2022), Moonpig generated just over £304 million in revenue and 39.8 million total orders which were two-year increases of 75.8% and 63.6%, respectively. Moonpig is headquartered in the mean streets of London, England.

History

Per p. 12 of the 2022 Annual Report, “The original vision for Moonpig was to combine digital printing and the internet to enable customers to make a better card than they would find on the high street.” It was founded by entrepreneur Nick Jenkins when he returned home to England after spending eight years as a commodity trader for Glencore in Moscow. Quoting Mr. Jenkins from an interview in Management Today on why he returned home to start a business, “It was definitely time to come home - I'd been there for eight years since I left university - but the added incentive to leave was that I had a death threat nailed to my door. It was from a client who had stolen quite a lot of our sugar and had then got annoyed when I pursued him.” He named the business Moonpig because that was his nickname in school.

Per the “History” section on p. 60 of Moonpig’s Prospectus, “Moonpig is a pioneer in the online card market with a longstanding history of revenue growth, having been founded in 2000.

Moonpig initially focused on personalised cards, and was the first online cards business in the UK. Over time, the Group expanded into card-attached gifting, adding categories including flowers, chocolates and other personalised and non-personalised gifts to its product range, becoming a destination for online gifting.

In recent years, the Group has evolved further towards becoming a ‘gifting companion’ for its customers, a term the Group uses to refer to its gifting proposition and ecosystem. The Group’s gifting companion ecosystem is built upon the Group’s reach (through its customer base and its strong brand recognition), its customers’ loyalty and its ability to access and leverage specific and relevant data on customers’ purchase intent around life events to drive repeat purchase and cross-sell its products and its platforms (including reminders and its app notifications).”

The business experienced rapid growth during the mid to late 2000’s and was acquired by Photobox in 2011 for £120 million. Mr. Jenkins cashed out at that point and has not been associated with the business since. Moonpig and Photobox were both acquired in 2016 by Exponent Private Equity. Greetz was acquired by Moonpig in 2018. The business went public in February of 2021 and acquired Buyagift in July of 2022.

CEO

The CEO of Moonpig is Nickyl Raithatha. Per p. 66 of the 2022 Annual Report, “Nickyl has significant e-commerce leadership experience, having founded Finery, an online British womenswear brand in 2014 and holding the role of Chief Executive Officer until 2017. Nickyl served as the Chief Executive Officer of the e-commerce business, Rocket Internet, a company that incubates and invests in internet and technology companies globally, from 2012 to 2014.

Nickyl spent the early part of his career in financial services, where he was Vice President at Goldman Sachs until 2010 and then worked at Arrowgrass Capital Partners until 2012, leading research and investments into global technology, media and telecoms companies.

Nickyl holds an MBA from Harvard Business School and a bachelor’s degree in Economics from Cambridge University.”

CEO Compensation

Mr. Raithatha’s total compensation is made up of a base salary, an annual cash bonus, a long-term incentive plan (LTIP) and a pension. I will only discuss the first three portions of his overall compensation as his pension is paid out at 5% of his yearly salary which isn’t material.

Mr. Raithatha’s base salary was £580,000 in FY 2022 and increased 3% to £597,400 for FY 2023.

Mr. Raithatha’s annual cash bonus payout measures and targets for FY 2022 are shown in the screencap below which was taken from p. 97 of the 2022 Annual Report.

The only measure that changed for his FY 2023 annual cash bonus was the last ESG initiative. Per p. 95 of the 2022 Annual Statement, it will be a “climate-related environmental target”. This seems vague and a bit concerning considering the sway that the Remuneration Committee has in coming up with an appropriate target, but at least it will be only 5% of his total compensation. I’m also a bit concerned with “adjusted EBITDA” being 50% of the overall bonus. Per p. 158 of the 2022 Annual Report, “adjusted EBITDA” is defined as “profit before tax, interest, depreciation, amortisation, IPO transaction costs, Legacy Incentive costs and charges or credits relating to the Greetz pension provision and associated indemnity asset.” His Annual Bonus for FY 2022 was £822,150.

The CEO’s LTIP awards were nil in FY 2022 because of the pre-IPO awards he received in FY 2021. A screencap of the total pre-IPO awards are shown in the screencap below which was taken from p. 80 of the 2021 Annual Report.

Reading about his LTIP for FY 2023 caused some confusion. The screencap below shows the performance measures and targets for the CEO and was taken from p. 95 of the 2022 Annual Report.

The confusing portion of the LTIP is highlighted above. I couldn’t figure out what “Adjusted Basic Pre-Tax EPS” was. There wasn’t a single definition of what does or does not constitute the metric. The term “adjusted basic” came up four times in the document. I found a section titled “Alternative Performance Measures” on pp. 51-52 of the 2022 Annual Report which provided the most information that I could find on the topic. There was a term called “adjusted PBT” which was defined as “profit before tax, before Legacy Incentive costs, M&A transaction costs, charges or credits relating to the Greetz pension provision and associated indemnity asset, IPO transaction costs and restructuring and other costs.” It seems like “Adjusted Basic Pre-Tax EPS” and “adjusted PBT” may be the same thing, but I was not sure. The fact that it was not easily found made me suspicious.

To finish off my thoughts on the compensation scheme, the 50% weight of “adjusted EBITDA” for the annual bonus and the previously mentioned issue with “Adjusted Basic Pre-Tax EPS” were both red flags 🚩🚩.

The summary compensation table for the last fiscal two years is shown in the screencap below. It was taken from p. 96 of the 2022 Annual Report.

Last, but not least, I tried finding out how many shares insiders held. The information was not listed in the annual report and I did not know where to look in the House Reports. I lucked out with TIKR and saw that the CEO owns 2,834,000 shares which can be viewed as both good and bad. It’s good because it shows that he has a meaningful position in the business, but the bad is that he owns <1% of shares outstanding.

What Does Moonpig Do?

As mentioned in the introduction, Moonpig is an online card and gift-giving business. It currently offers 43,000 types of card designs, 2,400 SKUs for gifts and 130 different types of flowers and plants. The cards cover every kind of occasion that you can think of and each one allows you to write something personal to the recipient. Types of cards available for purchase include photo-cards (which allow you to add your own pictures), magazine spoof cards, newspaper spoof cards, announcements, e-cards, branded cards from such media properties as Harry Potter and DC Comics and finally, my personal favorite, giant cards. The giant cards are sized at approximately 11.75” x 16.5”. The link here allows you to view all the different card options. All cards that I saw on its website were priced at <£10.

Gifts include everything from chocolates (linked here) to balloons (linked here), Lego sets (linked here) and alcohol (linked here) across a range of lower end price points. Of the 2,400 SKU’s that the business states that it has, 87+% cost ≤ £40. In case you want to poke around, a link to all gifts can be found here.

The flower and plant selection were dissatisfying quite frankly. The business has offered them since 2010 and only offering 130 different kinds just seems low. I feel like the business should have a wider range of options for sale. Another concern is that the reviews for its flowers and plants weren’t great. Of the reviews that were available on the website, only a handful had a rating of at least 4/5 stars. A link to Moonpig’s flower and plant selection can be found here. The typical price range for flowers and plants ranged from £20 - £40.

Last month, Moonpig closed on its acquisition of Buyagift. I will discuss the acquisition more in the Valuation and Risks sections of this writeup, but for now I’d like to focus on what it offers to Moonpig’s customers. Buyagift allows them to purchase all kinds of experiences in the United Kingdom and throughout Europe. Most of the experiences I came across on the site were for one to two days and the breadth of them was impressive. There’s something for everybody. There were 29 available places to do an overnight stay at a hotel while trying to piece together the clues of a murder mystery (link here). You can stay at this really cool castle outside of Liverpool for two nights for £299.99. There’s an experience available for you and a guest if you’d like to drive a tank. It will run you £735, but I must admit that it seems really cool. Buyagift offers 68 experiences for you and your dog if you want to take man’s best friend along with you on a trip. A link to the full site is here and I encourage you to check it out to see all the other kinds of experiences that are offered.

We’ve learned that Moonpig sells cards, gifts, flowers and experiences, but what makes it stand out from the competition? The most unique feature is its data-driven customer retention flywheel shown in the screencap below which was taken from pp. 14 – 15 of the 2022 Annual Report. Per p. 16 of the 2022 Annual Report, “We leverage our extensive and proprietary data on customers’ gifting intent and our self-learning algorithms to make it as effortless as possible to find the perfect card and the perfect gift.”

Great. The business says it has a flywheel business model, but what does that really mean? It’s all about its competitive advantages listed at the bottom of p. 14. They are what make the flywheel. First up is Moonpig’s brand power. The business dominates its markets in the UK and the Netherlands. Per p. 18 of the 2022 Annual Report, “The Group is the clear online market leader in single greeting cards and has increased its share over the last three years. The Group’s market share relative to its nearest competitor is now approximately 4.4x in the UK and approximately 3.2x in the Netherlands.” Its market share is shown in screencap below and was also taken from p. 18 of the 2022 Annual Report.

Next, we have rich data pools. The business claims its algorithms are “optimized across more than 70,000,000 reminders and across 230,000,000 transactions as of April 30, 2022.” What does this look like in action though? One example was provided on p. 17 of the 2022 Annual Report, “Our gifting business is primarily driven by the recommendations on our cross-sell pages. This is the point in the online journey where we are able to leverage all the data that we have about the gifting moment to inspire the customer to add a gift.

These recommendations continue to evolve and during the year we added several new datasets to the algorithm, such that every day we now serve over 50,000 unique cross-sell pages to our customers.

This will only increase over time as we increase the personalisation of Moonpig’s gifting recommendations.”

Another example was provided on the same page regarding Mother’s Day gifts. “For our algorithms to recommend the perfect gift for every relationship and occasion, we need to ensure we have the right range of curated gifts.

Ahead of Mother’s Day 2022, we developed an exclusive range of flowers in partnership with the Cath Kidston brand. This was executed as part of a wider expansion of Moonpig’s floristry offering.

Our data shows that brand partnerships such as these have resonance with our customers and enable us to create products that are unique to Moonpig.”

Third on the list is the scale of the business which has a lot of crossover with its brand power. Its brand awareness allows it to collect four times as much data as the nearest competitor. Its huge lead in data gathering is the base of the flywheel.

Finally, we have the Moonpig technology platform. I thought that a reasonable test to verify the technology platform claims was to look at what was said about it versus its reviews online. Unsurprisingly, the CEO was quite bullish on the overall technology platform. He discussed it in detail during his review of Moonpig’s performance in the 2022 Annual Report. Per p. 7 of the report, “Ongoing investment in technology and data is key to our growth plans. Alongside work on the Greetz platform migration, we have rolled out a range of new functionality to the Moonpig brand:

·       Progress towards delivering a hyper-personalised customer journey:

• Personalised landing pages for customers who click on a reminder.

• Upcoming occasions and reminders on the web home page.

• Personalised hero messaging on landing pages.

• Ordering of product search results based on personalised click rank algorithms.

·       A personalised promotions engine to drive customer behaviours associated with higher retention and frequency:

• Targeted offers to incentivise first-time use of the Moonpig app and first-time gift attachment.

• Personalised offers on the cross-sell page to drive gift attachment for specific purchase missions.”

He goes on to discuss how the business uses data to drive incremental gift giving. Quoting him from p. 7 of the 2022 Annual Report again, “During the year we rolled out the capability to present personalised promotional discounts to Moonpig customers. Our algorithms now assess each customer’s historical propensity to attach a gift for different combinations of recipient and occasion. Subsequently, discounts are displayed during the online journey that are personalised not only to the customer, but also to their specific purchase mission.

This, for instance, enables us to target customers who have not previously bought gifts from us, or to target particular missions for which propensity to attach a gift is lower.”

The quotes above painted a rosy picture of Moonpig’s technology platform. Let’s look at the other side and see how it has been received by its customers. It has been reviewed over 158,000 times on Trustpilot with an “Excellent” rating of 4.3/5 stars. Its app has been downloaded more than a 1,000,000 times and reviewed over 58,000 times with a 4.7/5 star rating on the Google Play store. Its app has also been downloaded over 1,000,000 times on the Apple App Store with over 500,000 reviews, an overall ratings of 4.8/5 stars and the distinction of being a Top 100 Shopping App. I think the business did a good job of passing my basic, qualitative test with flying colors.

My hope is that I’ve explained the competitive advantages well enough for you to see how they help create the flywheel. It all starts with data. Moonpig has a lot more of it than the competition due to its brand power. The data is fed to its algorithms which use it to create a better, more personalized shopping experience for Moonpig’s customers and also drive cross selling opportunities which drive both incremental revenues and profits at very low incremental costs. The better experience and easy to use technology platform leads to a greater number of purchases and a virality effect where recipients of Moonpig products become customers.

In addition to its flywheel business model, Moonpig is inventory and asset light. Both factors are described in detail on pp. 95-96 of the Prospectus. The business is inventory light because its raw material costs for cards are cheap, certain gift items are procured through third-parties which are drop-shipped to the end customer, it keeps a tightly curated selection of “off-the-shelf” gifts at third-party fulfillment sites and can order other items as needed and finally, when it sells experience vouchers or gift cards on its website, it acts as an agent and collects a commission meaning that there is no inventory for the vouchers or gift cards.

The business is asset light in part to its operational leverage for in-house card production, in-house gift fulfillment at Greetz and for the business’ primary UK gift fulfillment provider. There is a fixed cost element to this, but the incremental costs of producing more and more products in house go down as sales and order volumes increase. Regarding other supply agreements on p. 96, “the Group historically paid a fixed unit cost per item to its production and fulfilment network third party partners. Exceptions to this are: (1) for the third-party suppliers where the Group supplies the card printing equipment, raw materials and consumables, the Group is charged for direct labour only; and (2) with the Group’s third party flower supplier in the UK, the Group paid a peak surcharge per item to cover the additional cost of peak warehouses required to meet the Group’s demand during peak periods (which in a typical year lasts from Valentine’s Day through to Mother Day in the UK). Taking from p. 55 of the Prospectus, being both asset and inventory light along with having long-term relationships with third party suppliers allows the business to “… economically flex and scale its operations up to three times its normal dispatch volumes during peak periods.”

Long lasting customer relationships is the final differentiating feature that deserves mentioning. Quoting p. 63 of the Prospectus, “The Group has established an active and loyal customer base, fostered by the Group’s gifting companion ecosystem. Whereas many online businesses operate a traffic acquisition model (focusing primarily on website traffic, conversion rate and revenue per visitor), the Group seeks to achieve lifetime customer relationships, and these efforts have proved successful, with the Group’s customers exhibiting particular loyalty.”

Quoting p. 63 again, “The Group has sought to design a gifting companion ecosystem with a number of platform features specifically designed to facilitate long-term customer relationships. For example, both Moonpig and Greetz enable customers to set reminders for special dates and events, which the Directors believe is a significant source of competitive advantage compared to offline retailers and other online retailers who do not offer reminders, as these customers have a high purchase intent (i.e. customers’ purchases serve a specific purpose and that purpose tends to be a day that recurs on an annual basis, as opposed to being an inspiration-based purchase).”

Valuation

Revenue

In this section I used 2018 as the base year which the business has grown from because that was as far back as the data went in the Prospectus. I was able to find an income statement and a balance sheet going back further in time in the UK Companies House reports, but a cash flow statement was not available because Moonpig was a subsidiary of Exponent Private Equity at the time and did not have to file one.

Revenues grew from £87.6 million in FY 2018 to £304.33 million in FY 2022 which was a CAGR of 28.21%. A segment analysis of Moonpig’s revenue by product type, business segment and geography are shown in the screencap below.

Highlights from the segment analysis are “Attached gifting’s” rise as a portion of overall income, the rapid increase in the Moonpig brand sales and the lack of revenue from the “Rest of the World”. I discuss the lack of sales from outside of Europe later in the Risks section.

Capital Structure

Moonpig’s balance sheet is shown in screencap below which was taken from p. 119 of the 2022 Annual Report.

The major concern here is its debt load. Quoting p. 124 of the 2021 Annual Report, “Term Loan B has a term of 60 months and was paid to an undertaking formerly under common control and used to refinance or otherwise discharge the existing debt of subsidiaries of the Former Parent Undertaking.” Taking from p. 54 of the 2022 Annual Report, “Under the five-year Senior Facilities Agreement put in place on 7 January 2022, the Group’s committed facilities comprise a Term Loan B of £175.0m and a RCF of £20.0m. Fees capitalised on the balance sheet as at 30 April 2022 were £4.8m (April 2021: £6.3m).

Net debt is a non-GAAP measure and is defined as total borrowings less cash and cash equivalents. Group net debt as at 30 April 2022 was £83.8m (April 2021: £115.1m), comprising total debt of £185.5m (April 2021: £181.1m) less cash and cash equivalents of £101.7m (April 2021: £66.0m). The year-on-year decrease in net debt reflects an increase in cash of £35.7m offset by an increase in lease liabilities of £3.3m as a result of the new UK lease commencing during the year (less the unwind of the existing leases in the year).”

The business paid £124 million to acquire Buyagift last month. Part of the acquisition was paid for in cash while the rest of it was financed with a £60 million revolving credit facility. Regarding this additional debt, and again taken from p. 54 of the 2022 Annual Report, “Following completion, the combined Group’s pro forma net debt to Adjusted EBITDA as at 30 April 2022 would have been approximately 2.3x. We expect this leverage ratio to increase by approximately half a turn by 31 October 2022 (based on pro forma Adjusted EBITDA for the preceding twelve months) driven by working capital seasonality, after which the combined Group will de-leverage rapidly to below 2.0x by April 2023.”

Free Cash Flow

My calculations for what I call “real free cash flow” (RFCF) are shown in the screencap below.

Moonpig was able to more than double its real cash flow from FY 2021 through FY 2022 due to not having the one-off IPO stock-based awards. On top of that, the relatively low amount of stock-based compensation overall in FY 2022 was encouraging especially for a tech business. It currently trades at a 18x multiple of RFCF based on its current market capitalization of ~£675 million.

Return On Invested Capital (ROIC)

The screencap below shows Moonpig’s returns on invested capital since 2018.

The business’ ROIC has been above 20% every year which made me think that I had found a winner. Two things I noted were the spread between NOPAT and Net Income along with the Long-Term Debt figure. The spread between NOPAT and Net Income was due to interest expense on debt payments. The long-term debt has been a drag on ROIC and will continue to do so for at least the next year or two because of the additional debt taken on to partially finance its acquisition of Buyagift as described above. To its credit, I was impressed that the business has managed to perform so well from a ROIC perspective despite its debt load.

Returns On Incremental Invested Capital (ROIIC)

Moonpig’s ROIC was exceptional, but ROIIC is what matters at the end of the day so let’s see what it looks like for the UK’s favorite card and gifting platform. My ROIIC calculations are shown in the screencap below.

Per my calculations, Moonpig has been compounding the value of its business between 14-19% a year since 2018. Its stock price has decreased more than 50% since it IPO’d a little over a year and a half ago indicating a huge spread between what the business has been doing versus how it’s perceived by the market. I will admit that I thought the value compounding rate of the business would be higher considering its revenue growth over the last five years combined with its impressive ROIC figures in the previous paragraph. It appears that I deceived myself and that this business is more capital intensive than I first thought.

Risks

In addition to Moonpig’s debt load, there are a few other risks that I came across while researching the business. The first one I’d like to mention is the acquisition of Buyagift. This represents a shift in Moonpig’s strategy as Buyagift offers experiences and not anything like cards or physical gifts. I think the acquisition makes sense and understand how it could fit in to Moonpig’s overall business, but the uncertainty of not having any previous involvement in an “experience” based business is concerning.

The second risk that I will mention is that Moonpig doesn’t seem to be experiencing a lot of growth here in the United States which is by far the largest market for its products. Per p. 15 of the 2021 Annual Report, the business estimates that the size of the U.S. card market is £5.8 billion and the overall gifting market is £158 billion. The size of the U.S. card market is more than double that of the UK, Netherlands and Ireland markets combined and the overall gifting market is almost triple the size of the same combined markets. Yet, Moonpig derives ~1% of its revenues from the United States which is concerning. It has operated in the U.S. since 2010 so that makes me think that it must not be a priority. It just doesn’t make sense that management wouldn’t try to expand here.

The last risk I will mention is that Moonpig hasn’t really expanded outside of the UK, the Netherlands, U.S. and Australia for what appears to be several years now. The business did recently expand to Ireland, but that’s not exactly a huge market. Per p. 54 of the Prospectus under the “Broader international opportunity” section, “There are large markets in other English-speaking countries where card giving and gift giving are important culturally, including the United States and Australia. The Directors believe that the Group has the opportunity to expand in these markets in the future, and to further its reach as a gifting companion internationally.” Given the lack of expansion into other geographies, I feel like Moonpig may already be operating in most or all of the markets that it can. As a counterpoint, the Buyagift acquisition helps with this as it offers experiences in mainland Europe, but, as mentioned above, this is entirely new business for Moonpig so I’m not sure how it will work out.

Tailwinds

The 2022 Annual Report mentions three “key drivers for growth” on pp. 24 - 25. They are customer acquisition, share of wallet and driving gift attachment. I have posted two screencaps below from pp. 24 – 25 because I think the information in the annual report does a good job of describing each driver, what they mean and what the future priorities are.

The next tailwind on my list is the structural shift to online card shopping. The screencap below was taken from p. 18 of the 2022 Annual Report.

This is great for Moonpig when you consider its dominant position in both the UK and the Netherlands. It will continue to gobble up share each year as more and more people buy their cards online. On the flipside, the overall market for cards hasn’t grown much over the last decade plus. Citing data from p. 19 of the 2022 Annual Report, the UK single greeting cards market has grown by about 1% per year between 2006 – 2019. This means that Moonpig’s growth in this product line will slow down at some point in the next several years and eventually match the minimal growth of the overall card market.

A third tailwind is that that overall gifting industry is large and underpenetrated. The screencap below was taken from p. 19 of the 2022 Annual Report.

I think it’s fair to say that Moonpig has a large runway for growth in its markets considering that total revenue for FY 2022 was just over £300 million which is only 15% of the total size of the single card market of £2 billion shown in the screencap above. Remember that the data above does not include the U.S. market which is much larger than the combined markets of the UK, Netherlands and Ireland.

Conclusion

Is Moonpig a compounder? I don’t know so that makes me think that it’s not. To be fair, I think it could be in the future. On the one hand, I love that it has a flywheel business model, dominates its European markets, has great reviews and ratings, is asset and operationally light and has high ROIC. On the other hand, I don’t love the bonus structure for the CEO, its debt load, that ROIIC is materially lower than ROIC and that it hasn’t expanded into what is obviously the largest market on the planet for each of its products. I’m conflicted here, but I shouldn’t have to question whether a business is a compounder or not. It should be pretty obvious that the positives outweigh the negatives and this unfortunately isn’t the case for Moonpig at the current time. I will keep tabs on it, but I’m going to pass on the business for now.

Thanks again as always for reading. If you liked this writeup then please feel free to share it and subscribe!

Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.

*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***

Disclosure: I do not own shares in Moonpig.