Shares of Bluegreen Vacations Corporation (BXG) received a double whammy in May from the parent company BBX Capital’s (BBX) decision to back out of its offer to buyback BXG’s public float – equal to 10% of outstanding shares – and by Bass Pro Shop’s decision to cancel its marketing arrangement with BXG. Since the May 22 close of trading, the day before BBX announced that it would not proceed with its plan to take BXG private, the stock has lost nearly 50% of its value.
The BBX tender would have given BXG shareholders a sure $16 per share. After the plan was announced on March 4, the stock gapped up from its previous close of $13.46 and ended the day at $15.76, up 17%. From there, BXG drifted up gradually to a high $16.51 over the next 13 trading sessions, above the $16 tender price, perhaps in anticipation that BBX might sweeten its bid.
Investors got a rude surprise on March 25, however, when BXG disclosed that it had received a notice from Bass Pro Shops of its intention to cancel their marketing and promotions agreement within 30 days unless BXG cured certain alleged breaches in the agreement to Bass Pro’s satisfaction. As a result of that notice, BXG’s share price fell nearly 12% over the next three trading sessions to a low of $14.27, but that was still above where the shares had been trading prior to the going private announcement. The shares traded in a fairly tight range between $14.50 and $15.50 for the next two months until May 22, when BBX announced after the close of trading that it would not proceed with the merger.
Negotiations between BXG and Bass Pro to resolve their dispute continued after BBX’s announcement. But two days later, after the close of business on Friday May 24, BXG received a notice from Bass Pro of cancellation of their marketing agreement effective immediately. (Bass Pro published a brief announcement of the contract cancellation on its own website on the same day.) By the close of trading on Monday, May 28, BXG’s share price had fallen 44% to $8.35 from its May 22 close. Since then, the stock looks like it is beginning to form a base at around $8.
Estimating the Profitability of the Bass Pro Marketing Arrangement. The loss of the Bass Pro marketing relationship would have a significant financial impact on BXG. In its press release, BXG reported that sales of vacation ownership interests (VOIs) generated through Bass Pro stores constituted 14% of its total system-wide VOI sales, 29% of its system-wide VOI sales to new customers and 9% of its total revenues in 2018. That works out to about $66.5 million of 2018 revenues.
Bluegreen has not disclosed the profitability of its marketing arrangement with Bass Pro. Costs associated with those sales include staffing kiosks at 69 Bass Pro locations, producing and distributing marketing materials and the administrative/overhead costs associated with closing the sales. It probably requires two full-time equivalent associates to cover a kiosk, if the kiosks are staffed 12 hours per day, seven days per week. At an assumed annual total cost of $50,000 for each associate (including salary, bonus and benefits), plus another $100,000 to cover marketing materials production and distribution and management, that works out to an annual cost estimate of $200,000 per kiosk or roughly $14 million.
Overhead costs are almost certainly significant, but they are harder to estimate. Most potential VOI owners probably take a tour and/or experience a vacation at a Bluegreen resort before signing a contract. Bluegreen spent $307 million on VOI sales and marketing costs in 2019. At Bass Pro’s 14% share of total VOI sales, that works out to $43 million, but a large portion of those sales and marketing costs are probably fixed. (For example, the marginal cost of adding one additional prospect to a property tour is probably low.) If we assume that half of the annual marketing spend is fixed, then the portion of those costs that are variable that we can assign to the Bass Pro relationship is $21 million. That brings my total annual cost estimate to $35 million or just over 52% of Bass Pro-related sales.
(BXG may be able to reduce some of its fixed sales and marketing costs as a result of the loss of volume, but I do not include that in my cost estimate for purposes of this analysis.)
In addition, Bluegreen has paid a commission to Bass Pro on these sales at an average rate which I estimate to be roughly 5%. (Bass Pro earns a lower commission if Bluegreen incurs additional costs beyond in-store marketing to close the sale and a higher commission if the customer signs up on the spot or with no additional marketing effort.) The total commission paid to Bass Pro could amount to as much as $4 million annually, but the net payment is adjusted for cancellations, recissions, equity trade allowances and defaults. In 2018, defaults represented 8.2% of BXG’s total system-wide VOI sales. (The impact of defaults on the total commission paid has been a major sore point for Bass Pro.)
Ignoring the negative adjustments on the commission rate, I estimate that the total costs associated with the Bass Pro marketing relationship were about $39 million in 2018. Subtracting this figure from estimated total revenues of $66.5 million gives estimated pre-tax profits of $27.5 million. At the 2018 effective income tax rate of 24%, the estimated 2018 net profit associated with Bass Pro is $21 million or $0.28 per share. If my estimates are correct, the Bass Pro marketing relationship accounted for nearly one-quarter of BXG’s net earnings attributable to shareholders and EPS in 2018.
Even if my estimate is not exactly on target, it is clear that the Bass Pro marketing arrangement is very profitable and helps to cover a significant portion of Bluegreen’s sales and marketing overhead costs.
This assessment does not take into account the profitability of Bluegreen/Big Cedar Vacations (BG/BCV), the 51%/49% joint venture between Bluegreen and Bass Pro. BG/BCV develops, markets and sells VOIs at three wilderness-themed resorts adjacent to Table Rock Lake near Branson MO: The Bluegreen Wilderness Club at Big Cedar, the Cliffs at Long Creek and Paradise Point. The joint venture generated over $25 million of EBITDA annually over the past two years. (nearly $13 million for Bluegreen or about 9% of Bluegreen’s total adjusted EBITDA.) So far at least, the BC/BGV joint venture has been unaffected by the cancellation of the Bass Pro in-store marketing agreement.
So what happened between Bluegreen and Bass Pro? Despite signs of potential problems that were evident when BBX first floated its 10% stake in Bluegreen in November 2017, the marketing and promotions agreement between the two companies dates from 2007 (and that 2007 agreement amended a previous agreement from 2000). Thus, the relationship between the two companies has been in place for nearly two decades or more.
In 2017, Bluegreen paid Bass Pro $4.8 million to resolve a potential dispute over the calculation of the commissions payable on VOI sales generated from Bass Pro stores. As noted above, the dispute centered on the deduction of defaulted VOIs in the calculation formula. At the time, Bluegreen said that it believed that it had previously calculated those commissions correctly, but made the extra payment as a goodwill gesture to avoid further problems with its partner.
That action obviously did not resolve the dispute and it is still not exactly clear why Bass Pro broke off the relationship a week ago. In its website posting, Bass Pro said that it “does not tolerate high-pressure or offensive salesmanship in its stores.” (emphasis added) It also said that Bluegreen had not “lived up to its contractual obligations on this point” and “due to this issue and other defaults (emphasis added), it had terminated its contract with Bluegreen.
While high pressure sales tactics may be an issue with Bass Pro, the other defaults to which Bass Pro refers, are unspecified. We know from Bluegreen’s previous disclosures of only one issue: the calculation of the sales commission. In its March federal court filing, Bass Pro stated that its VOI sales commissions should not have been adjusted for certain purchaser defaults. Bluegreen, meanwhile, as already noted, maintains that it has calculated VOI sales commissions due to Bass Pro correctly and in accordance with the terms of the contract.
I believe that the Amended and Restated Marketing and Promotions agreement between the two companies is clear on this point: defaults are to be deducted in the determination of Net Sales Volume upon which the commissions are based. The exact formula for the calculation is unspecified, which undoubtedly provides some support for Bass Pro’s position. Nevertheless, it seems that Bluegreen does have a legal foundation for standing its ground.
Based upon its own analysis, Bluegreen estimates that its total potential liability might be as high as $20 million (presumably based upon its assessment of the difference between what Bass Pro was paid and what Bass Pro thinks it should have been paid over the years), but Bluegreen also believes that it is unlikely that Bass Pro’s claims will be established in court. Thus, Bluegreen intends to pursue all legal and equitable remedies available to it, including filing a counterclaim for wrongful contract termination.
Besides the uncertainties evident in this dispute, it also seems – if Bluegreen’s description of recent events are accurate – that Bass Pro has behaved in a somewhat bizarre manner, especially in the days leading up to the contract termination. In its press release dated May 28, Bluegreen said that it had been holding numerous meetings and discussions with Bass Pro up until Monday, May 20, when it proposed a comprehensive plan to address the outstanding issues between the two companies. On Thursday, Bluegreen received a question in an email from Bass Pro to which it responded on Friday. After the close of business on Friday, apparently without any warning or further explanation, Bluegreen received the termination letter.
The Potential Earnings and EPS Impact of the Loss of the Bass Pro Marketing Arrangement. Even though VOI sales from the Bass Pro relationship have been declining in recent years, this is obviously an important relationship for Bluegreen. The loss of revenues and profits would have a big impact on Bluegreen’s overall profitability, reducing the earnings cushion that supports the $0.68 annual dividend. With the sharp drop in its share price, BXG’s dividend yield is now 6.8%, which implies concern over whether the company will be able to sustain the dividend with the loss of the Bass Pro relationship.
My estimates suggest that 2018 base earnings for BXG would drop to about $0.90 without the Bass Pro marketing arrangement. At the current share price of $8.08 (6/4), the stock is valued at about 9 times 2018 “pro forma” earnings, well below the market averages, which suggests market nervousness about a more significant drop in the company’s profitability still to come.
Bass Pro Loses Too. Yet, I believe that Bass Pro stands to lose from cancelling the contract as well. Given the challenges faced by nearly all retailers in the current environment, it should not be easy for Bass Pro to walk away from $4 million or so of annual commissions and the potential for an increase in commissions, if the Bluegreen kiosks are added to its recently acquired Cabella’s stores.
A break in the marketing arrangement also casts a potential cloud over the future of the BG/BCV joint venture, which we know is highly profitable for Bass Pro. It is also reasonable to assume that the in-store marketing arrangement and BG/BCV joint venture have had a positive impact on Bass Pro’s product sales over the years.
It is possible that Bass Pro could attempt to replace Bluegreen in-store with a competitor, such as Marriott Grand Vacations, but Bluegreen would most assuredly put up a fight to force Bass Pro to compensate it for the lost profits. As noted above, I believe that both the contractual terms of the agreement and Bass Pro’s behavior support a potential Bluegreen lawsuit for damages. Unless Bass Pro were to substantiate clear violations of the terms of their contract, Bluegreen would likely prevail on this point. If so, Bass Pro may have to pay a significant sum, perhaps as much as $80 million, to compensate Bluegreen for lost profits, which would change the economics of bringing in a competitor.
It would be better, obviously, for the two parties to preserve their long-term arrangement by coming together and reworking the terms of the marketing and promotion agreement. Ultimately, I think that Bass Pro just wants a higher annual commission payment and Bluegreen has the capacity to increase it. By all accounts, therefore, there is still a significant incentive for Bluegreen and Bass Pro to resolve their differences and put their relationship on a more sound long-term footing.
June 5, 2019
Stephen P. Percoco
Lark Research
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