Tuesday, January 12, 2010

The Knot loses some VERY high margin sales (KNOT)

This press release could hardly be more misleading, with the positive-sounding headline: "The Knot Inc. Renews Stretegic Registry Partnership with Macy's."

The Knot Inc, (KNOT) describes itself as "leading lifestage media company devoted to weddings, nesting, and first-time pregnancy." "Nesting?" Anyway, in advance of of its presentation today at the Needham Growth Conference, they announced some, um, "changes" to their agreement with Macy's:

"NEW YORK--(BUSINESS WIRE)--The Knot Inc. (NASDAQ:KNOT -News), a leading lifestage media company devoted to weddings, nesting, and first-time pregnancy, today announced it has signed a new registry agreement with leading bridal registry retailer, Macy’s Inc. The new agreement terminates the previous agreement that had been scheduled to expire in January 2011. The new, three-year deal is expected to begin in February 2010, at which time the Company will cease to host and manage registry websites for Macy’s and Bloomingdale’s. Macy’s and Bloomingdale’s will become link-out affiliates similar to the Company’s other registry retailer partners."

Soo, the Knot will no longer control the registry website for Macy's and Bloomingdale's. As explained below, they were collecting 100% gross margins on this business, and will transition to a referral fee structure. What took you so long, Macy's and Bloomingdales??!!

"The Knot expects that it generated approximately $8.9 million from the Macy’s relationship, including hosted registry commissions, advertising, and other revenue, in 2009. The impact of the new contract on the Company’s 2010 results depends on multiple factors that cannot be reasonably predicted at this time. However, the Company believes that it is unlikely to generate the same level of revenue from the Macy’s relationship in 2010 as it expects for 2009, primarily because it will no longer receive commissions on 100 percent of Macy’s and Bloomingdale’s online registry transactions."

Well it looks like the company cannot "reasonably" estimate what the effect of losing millions in 100% gross margin dollars, so the analyst at Merriman Curran Ford did it for them. They estimate that this will be a reduction of $4million in revenue and $4billion in EBITDA, seeing as it's 100% margins. At that EBITDA level, this could be an 8cent impact to the bottom line.

8cents might not sound like a massive number for a $9 stock, but the company's expected earnings for 2010 is a whopping 11cents, probably now dropping closer to 3cents. Total 2010 revenue estimates are about $110million, so it's illustrative that 4% of the company's revenues have wiped out almost the entire year's net income for 2010...

The Knot clearly defined this relationship in the company's 10k:

Key Customer

One customer, Macy’s Inc., accounted for approximately 9% of our consolidated net revenues during the year ended December 31, 2008, the substantial majority of which was related to the registry services agreement with WeddingChannel. For as long as the Macy’s registry agreement with WeddingChannel is in effect, we expect that Macy’s will continue to represent a significant portion of our net revenues in the future, especially with the consolidation that is occurring in the retail industry. The loss of Macy’s as a customer, whether as a result of Macy’s terminating or electing not to extend its registry services agreement with WeddingChannel, or a reduction in the amount of our net revenues generated by Macy’s, under the registry services agreement or other advertising agreements, could have a material adverse effect on our business, results of operations or financial condition. As of December 31, 2008, Macy’s beneficially owned 11.4% of our common stock

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