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George Ronan
George Ronan
Articles (67) 

Barry Honig, Michael Brauser Take a Position in Vapor Corp

May 06, 2015 | About:

On March 4, Vapor Corp (VPCO) filed a report with the Securities and Exchange Commission announcing that Barry Honig had acquired 6% of Vapor Corp stock. On the same day, the company also reported that Michael Brauser had acquired 8.9% of the company's stock. Both of these individuals are renowned for investments across a range of spaces including biotech, technology and finance and also work closely with world-renowned investor and biotech entrepreneur Phillip Frost.

Honig, Brauser and Frost

Brauser and Honig ran and sold internet marketing company InterClick to Yahoo (YHOO), following an investment by Frost, for $270 million in 2011. Credit-reporting company Equifax (EFX) bought an e-mail marketing business from Brauser in 2002 for $135 million. The two individuals are known for their investments in small and microcap companies, many of which go on to be acquired by larger organizations.

Honig and Brauser's involvement in Vapor not only presents it as a potential winning speculative allocation to any portfolio, but also flags up the possibility of future investment by Frost, something that – while obviously not securing the company's future – could stand it in good stead as far as management and capital resources are concerned going forward. With this said, what is Vapor Corp, and how does the company intend to expand?

Company Description

According to the description posted on the company's investor relations site, Vapor Corp is a leading U.S. based electronic cigarette company, whose brands include Fifty-One®, Krave®, VaporX®, Hookah Stix® and Smoke Star®. The company reports that it also designs and develops private label brands for a range of distribution customers. Vapor Corp's electronic cigarettes and accessories are available online, through direct response to aired television commercials and through national retail locations in the US.

Recent Merger

On March 5, subsequent to the Brauser and Honig announcements, Vapor Corp reported the closing of a merger with Vaporin, Inc. Just as is Vapor Corp, Vaporin is involved in the sale and distribution of electronic cigarette and vaporizer products, but what separates the two companies – and what Vapor Corp management have slated as the driving factor behind the merger – is Vaporin's focus on brick and mortar retail. The company has built a number of physical retail locations under the trademark "The Vape Store" – a brand that it acquired itself in August 2014.

The Vape Store

At the end of last year, there were a reported eleven physical locations and, shortly after the merger announcement, Vapor Corp announced it had opened four new locations in Florida – three in Orlando and one in Port Charlotte. The company expects to open between 10-15 further locations before the end of this year. The key factor here is that the locations are not just retail outlets, but also serve as a place where vaporizer enthusiasts can meet and socialize. If Vapor Corp is successful in expanding its Vape Shop network across the US, and successfully building a national brand, it could become a market leader in the social vaping space. This is the strategy on which management has stated the company is focusing, and is what will likely drive an upside revaluation in the company's market capitalization throughout the next twelve months.

Turnaround Strategy

The physical location strategy is just one part of what the company refers to as its "turnaround plan" for this year. Market wide sales of electronic cigarettes declined during 2014, and this had the effect of stalling the growth of many companies in the space, Vapor Corp included. To illustrate the effect this had on the company, the image below highlights the last six years' worth of revenues.

Source

As the chart shows, the company achieved a between 20% and 50% annual revenue growth during the years 2009 to 2013. However, between year-end 2013 and year-end 2014, revenues declined by a little over 41%. The company attributes the decline to a shift in preference from electronic cigarettes to vaporizers, and this is where its turnaround strategy comes into play.

The turnaround strategy is a three-layered approach. The first layer is a product-focused shift from electronic cigarettes to vaporizers. The next is a continuation of the expansion of its Vape Store brand, and an increased footprint across the US. This increased footprint derives from approximately 10-15 new centrally operated stores, as well as the introduction of a franchise model through which franchisees can operate a retail outlet under the "The Vape Store" brand. The image below offers a snapshot of current and forecast financials from Vapor Corp's Vape Store brand locations.

Source

Finally, the company expects to continue to market its products through an established distribution network, with a focus on retailers with high and fast sell-through capabilities. More information on the turnaround strategy is available in the company's latest presentation here.

Current Reach and Market Potential

Currently, Vapor Corp distributes its products nationally in the US from nearly 24,000 locations, including 11,500 Dollar General retail outlets, 6,600 Family Dollar locations and 4,500 Rite Aid outlets. This said, how big is the market for vaporizers at the moment, and what growth do analysts expect? Current estimates put the expected 2015 vapor market size at $3.5 billion. Of this $3.5 billion, electronic cigarettes will total $1.5 billion, while vaporizers and liquids will account for $2.0 billion. Of this latter $2.0 billion, Nielson expects approximately $800 million in revenues to derive from convenience store and online retail channels. The same analysts expect vape shops, such as those operated by Vapor Corp, to generate $1.2 billion this year.

In short, if Vapor Corp can establish itself as a national brand both through its centrally owned expansion and franchise model, the company has the potential to become a market leader in a billion dollar industry. The company has announced that this is its focus, and early investors could benefit from a speculative position in this rapidly expanding industry.


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