Company Overview
Appliance Recycling Centers of America, Inc. (NASDAQ: ARCI), together with its subsidiaries, sells and recycles household appliances through a chain of company-owned retail stores under the ApplianceSmart name. The company operates in two segments, Retail, and Recycling. Its stores offer new appliances; affordable value-priced, niche offerings, such as close-outs, factory overruns, and discontinued models, as well as special-buy appliances, including out-of-carton merchandise and others; byproduct materials, such as metals of recycled appliances; and carbon offsets created by the destruction of ozone-depleting refrigerants. The company operates 18 ApplianceSmart stores. It also provides turnkey appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. The company was founded in 1976 and is headquartered in Minneapolis, Minnesota.
INVESTOR INFORMATION
ARCA, Inc. is the Industry Leader in Appliance Life Cycle Services
Trusted for four decades, ARCA, Inc.’s three business sectors complement one another
and provide a full array of appliance services and programs.
See more here ARCI website – http://www.arcainc.com/investors/
Operations
The company operates in two segments: recycling and retail. The recycling segment income is generated from collecting, recycling, and installing appliances for utilities and other customers. The retail segment is comprised of income generated from the sale of appliances through ApplianceSmart ®.
ApplianceSmart has 18 locations in Georgia, Minnesota, Ohio, and Texas and sells virtually all home appliances. ApplianceSmart has relationships with major manufacturers with the ability to purchase special-buy appliances, such as last year’s models, factory overruns, close-outs, out-of-carton, or those with slight cosmetic imperfections, by the truckload. This retail segment also sells parts for appliances and offers financing.
The company’s recycling segment consists of: ARCA Recycling, Inc. (recycling and replacement programs in the United States), ARCA Canada, Inc. (recycling and replacement programs in Canada), ARCA Advanced Processing (appliance recycling). ARCA has 17 Regional Processing Centers throughout the United States and Canada.
For the quarter ended April 1st, 2017 the retail segment generated $15,789,00 in revenue (68%) and had a gross margin of 26.5%. The recycling segment had $7, 450,00 in revenue (32%) and a gross margin of 29.4%.
Recent Events
The company opened their Milwaukee area appliance recycling center on Thursday, April 20th. The center will process units collected through Focus on Energy’s Appliance Recycling Program. Focus on Energy is Wisconsin utilities’ statewide energy efficiency and renewable resource program. Open to residents in participating utility service territories across Wisconsin, the program lets customers schedule a free pickup of their old, working refrigerator or freezer. Appliances will be recycled and disposed of in an environmentally friendly way. Customers get $35 per qualifying refrigerator or freezer recycled.
In January, the company announced Customer Connexx an ARCA customer-care and contact center opened in November 2016, and a wholly-owned subsidiary of ARCA, Inc. The new contact center, located in Las Vegas, NV, supports scheduling and customer service for its current utility programs and other standalone ventures. The contact center seats 90 agents, with room for future growth. Customer Connexx provides a full suite of services, including inbound and outbound customer calls, chat, email, IVR solutions, and many other state-of-the-art call center capabilities.
Q1 Earnings Review
Revenues of $23.24 million, Net Earnings of 2.21 million.
Gross margins widened from 24.43% to 25.92% compared to the same period last year.
Year-on-year change in operating cash flow of -23.95% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
Earnings growth due to contribution of one-time items (sale of real estate).
The change in revenue this period compared to the same period last year of -8.31% is almost the same as its change in earnings, and is about average among its peers, suggesting that ARCI is holding onto its market share. The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from 24.43% to 25.92%. The company’s overhead costs have restricted it from translating these gross margin improvements to the bottom line.
Stock Influences
The company has a book value of $1.96/share and currently trades at 1/3 of that price.
The demand for recycling appliances can increase or decrease.
The company has a public float of only 4.5M shares.
Risk Factors
The Company generates revenues in Canada. It is not possible to determine the exact impact of foreign currency exchange rate changes;
The company is involved in lawsuits. ARCI does not anticipate any material impact from these actions;
The company relies on credit facilities to finance operations and could fall out of compliance from loan covenants;
The company has received a de-listing notice from NASDAQ regarding its share price and has until November 27, 2017 to regain compliance. These price requirement notifications are typically given ample time to formulate a plan to meet NASDAQ’s minimum bid price requirements either through organic appreciation or a reverse stock split. A reduction in outstanding shares could be a good thing for ARCI stakeholders as the share structure is already quite low and these securities are on the lower range of liquidity at the moment. Reducing them may create profit opportunities for shareholders with wild price spikes on positive earnings and or public announcements by the company.
Stock Performance
Shares of ARCI opened at $.60 on Wednesday June 7, 2017 and closed at $.68 (13.33%) hitting an intraday high of $.75/share. Volume was at 269,000 shares. The current 14 day RSI is 31.87.
ARCI shares are trading below their 50 day and 200 day moving averages of $.90 and $1.01 respectively.
Summary
The sudden drop in the ARCI share price over the past few days could be an over-reaction to the June 2, 2017 de-listing notice from NASDAQ. Recycling is a growth industry and appliance sales in North America, particularly the U.S., is forecast to jump from 84.43 billion U.S. dollars in 2014 to nearly 115 billion U.S. dollars by 2020. Given that ARCI is in a large growth industry and with a notable book value of $1.96 per share; a much higher share price could be justified.
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