Now 21 years since buying my first 6 stocks: $DAKT, $ATVI, and basket of railroads Still nothing "new" since 2017. Result of limited capital, conviction in existing holdings, and lengthy due diligence If I were to deploy new capital at current prices: $LEAT, $RX.V, $GLXZ, $XPEL

Some may enjoy this recent e-mail I wrote to a fellow microcap investor. I discuss a few unique aspects of evaluating mgmt of small capital-constrained businesses, particularly those where long-term strategy and capital allocation may remain unclear $XPEL $LEAT $GLXZ references

Products reviewed as not only functional but stylish Bold/flashy colorways outsell conservative Rising social media Nearly-exclusive Leatt shops on at least 4 continents Long way to go, but a reputation for innovative R&D isn't the worst foundation from which to build a brand

Products are reviewed as not only functional but stylish Social media is more than just sponsored athletes There are nearly-exclusive Leatt shops on at least 4 continents Long way to go, but a reputation for innovative R&D isn't the worst foundation from which to build a brand

2: 100% product-driven story when I invested. Apparel was yrs off. First helmets were undeniably "uncool" It's almost as if, in their yrs of capital-constrained growth, they didn't yet have a graphic designer on the payroll ;) Now there are SOME indications of brand resonance..

Base rates suggest this is unlikely, though I believe an approach to building the core in a methodical + sustainable way increases those odds Importantly for an investor, there are less aspirational outcomes that will generate healthy returns. This isn't your typical moonshot...

Interesting questions I've never been asked - 1: $LEAT success would be a ubiquitous global cycling brand. This is years off as they've only just begun to penetrate niche segments. "Breakout success" would be achieving mainstream appeal as a broader "authentic" outdoor brand...

Meanwhile, most potential investors wait until #6, then ask: 1: What took so long? 2: Why can't anyone do this? 3: Where's the moat? Of course Buffett has the more poetic and pithy answer: Someone is sitting in the shade today because someone planted a tree a long time ago.

Most get stuck at #3, struggling to compete in single product categories and/or geographies They may have quality products + devoted customers, but lack both scale to rationally build out in-house distribution AND product breadth req'd to attract quality third party distribution

4: Now you gain willing buyers but still few sales b/c your products are largely unavailable in most markets 5: Assume a couple more yrs for each distributor to build out your brand through their local sales channels 6: A decade of work begins to be reflected in your financials

I'll answer in your context of $LEAT but this applies broadly 1: A new product takes ~3 yrs from conception to market 2: In market, assume 2-3 more yrs to refine + gain consumer acceptance 3: Repeat w/ 6-7 categories to reach needed scale to obtain quality distribution cont...

@Aperitifinvest I'll be as cautious about this as I was when $XPEL entered China circa 2014. Hope it works out as well. Hey, at least they got a head start with $LEAT knockoffs selling by the thousands on AliExpress ;)

@Aperitifinvest What happened on 3/14? Viral post/video? Any consistency with the Baidu Index? Thanks for sharing

I suspect it may be late '24 before returning to sales levels of recent Qs. Still, my long-term thesis remains largely unchanged. Admittedly, "no sentiment" (<2020) tends to offer even better value than "bad sentiment" (2023), but I averaged up with some more $LEAT today.

Painful reminder today of operating leverage on the ride down. If you assume 40% gross margin floor and ~$20M annual opex (significant recent investments in personnel + marketing), Leatt is profitable >$50M sales. A bearish but not entirely unreasonable benchmark for 2023 (8/9)

Q4 gross margin is typically ~500 bps lower than FY due to end-of-season closeouts, but seasonality was muted in 20/21 due to inventory shortages. Even in a soft 2023 w/ industry-wide discounting, it's probably reasonable to assume ~40%, esp w/ geographic mix tailwinds (7/9)

Margins expectedly weak on a 53% decline but further impacted by one-offs 1: inventory write-down of $348k (~320bps impact to Q4 gross) 2: annual stock grants vested 100% at issuance ($715k Q4 SG&A) instead of quarterly vesting as was done a year ago (6/9)

3: I'm fairly optimistic that some recent distributor changes will further develop key markets 4: Recent trademark + patent filings are promising 5: In six months we'll see the '24 line which adds two very large (and competitive) markets: endurance MTB and adventure moto (5/8)

2: Significant cash flow now that WC has peaked. In prior five Qs, cumulative NI was $19.1M while inventories expanded $18.8M (6M -> 25M). I suspect Q3 was near-term inventory peak. With minimal capex, OCF should ~= NI (w/ quarterly AR/AP variability) over next couple yrs. (4/8)

2: Sustainable US growth remains elusive, down 50% YoY vs Q4'21. Past 3 years: US +84%, Int'l +212% Wins 1: US e-commerce +27% both Q4 and FY22. Just 6% of total but evidence that broader declines are more reduced sell-in (inventory) than sell-through (consumer demand) (3/8)

Fails 1: High growth helmets/apparel/footwear fell as much as established categories ~50%. Meanwhile I've seen dealers w/ these products actually out-of-stock. Working capital tied up in one overstocked brand/product preventing purchases of another. Frustrating times. (2/8)

$LEAT Q4 thoughts. May be the last time I do this, but didn't want to "quit" on a bad Q. I expected neg comps Q4'22 thru Q3'23 due to elevated inventory and resulting strain on dealer working capital, but thought helmets (and apparel) would soften the blow, so to speak. (1/8)

@MoS_Investing A large customer offers the full 2023 line ~50% off, breaking MAP and selling at-cost to raise cash. Even if you maintain pricing discipline, the actions of your competitors (and sometimes customers) can be disruptive. Numerous examples like these to be bearish w/ a short horizon

@MoS_Investing A competitor recently pressured partners into more favorable payment terms. Meanwhile Leatt distributors are offering generous inventory buyback programs to aid dealers. One prioritizes near-term cash flow, the other takes a margin hit to maintain relationships and brand momentum

@MoS_Investing The industry has a long history of boom and bust cycles and irrational behavior at the peaks and troughs. $LEAT has the financial strength and management discipline to weather the storm and emerge competitively stronger, but they're not immune to the headwinds. Couple examples...