Stran Delivers Rewards To Consumers And Shareholders (NASDAQ:STRN)

Brand and Identity concept. Text from letters of the wooden alphabet on a green chalk board

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It Begins with a Box

The parcel arrived as promised, holding a small and soon-to-be cherished reward – a medallion commemorating the completion of the 2021 Virtual Marathon sponsored by the New York Road Runners (NYRR) club. Policies to stop the spread of COVID-19 had shut down the usual round of footraces in New York City, including the iconic 2020 New York City Marathon, all orchestrated by the NYRR. The NYRR turned to ‘virtual events.’ Even more important than the accomplishment of running 26.2 miles, this particular trophy bestowed proof of a return to normalcy after a punishing year and half of lockdowns and social distancing – a calendar with more footraces and fewer Zoom calls.

Little did this analyst know, there was a sophisticated apparatus behind her package and the treasures it held. It was the efforts of Stran & Company (NASDAQ:STRN), a specialist in promotional products and branded merchandise, that ensured the medallion was promptly delivered to the right person at the right address. Stran also made certain the prize was accompanied by a proper ‘race bib’ with the correct entry number.

Much was at stake for the NYRR. The Virtual Marathon was intended to attract as many runners as possible back to the NYRR sphere of influence – especially those who could not qualify or did not feel safe enough to rejoin their fellows in the resumed-live, but scaled-down marathon in early November 2021. Thus, Stran delivered more than medallions for NYRR. It delivered motivation to renew NYRR membership and pay fees for additional races – virtual and in-person – cash flows critical to NYRR’s future.

The Art of Branded Incentives

The case is strong for using branded products to promote consumer loyalty. The Promotional Productions Association International (PPIA) found in a 2017 survey that 90% of consumers later recall the brand of a promotional item. This compares to 67% brand recall for print ads and 44% recall for digital ads, according to neuromarketing firm True Impact. What is even more impressive is that 70% of consumers remember the call to action that came with the promotional item. Such effective results give brand owners a good reason to make incentives and gifts a consistent part of their marketing program.

Industry research firm IBISWorld estimates the addressable market for promotional products in the U.S. alone is near $17.8 billion in 2022. The COVID-19 pandemic negatively impacted the industry beginning in 2020, but it has returned to pre-pandemic levels as regular activities resumed in late 2021. IBISWorld analysts have forecast an annualized industry growth near 1.9%.

Distinguish by Custom Services

Stran offers businesses and organizations a unique mix of promotional solutions for the achievement of their marketing and programmatic goals. Central to Stran’s service menu is sourcing and distribution of promotion and rewards products on behalf of brand owners. Stran takes care of the nitty-gritty, including artwork creation, print-on-demand, kitting, inventory management, warehousing, point-of-sale displays, and delivery to the door, among other essential activities for successful loyalty and incentive programs.

The Company also offers sophisticated e-commerce services such as designing and hosting online retail shops and online business-to-business platforms. To make things even easier for a client with an online shop, Stran can take care of product sourcing, inventory management, and fulfillment.

Stran personnel work closely with a client’s marketing department or consultants to design and promote the right merchandise to win the widest brand recognition and loyalty. The Company’s creative team can design gamification tools, integrate social media exposure, or set up incentive plans to reward employees or customers.Customer Logos

Customer Logos (Stran & Company Presentation)

Clients are wide-ranging from small brand owners to large, multinational corporations. The Company offers a well-populated ‘look who loves us’ slide in its investor presentation, providing evidence of a diverse client base. Of course, the logo of New York Road Runners with its signature blue runner silhouette is in the mix. Many of the other client brands are more quickly recognized such as Verizon (VZ), Samuel Adams, Coca-Cola (KO), Timberland, Abbott Laboratories (ABT), and Samsung (OTC:SSNLF), among other international operators.

Strong client links appear to be a key driver of revenue for Stran. Indeed, the Company reports revenue in segments according to the nature of its relationships. Clients that have contracted for ongoing services are classified as Program Clients. Such services are often related to inventory management, warehousing, creative services, or an online retail platform. The rest are considered Transactional Clients who engage Stran for a particular event or task, leaving Stran with no ongoing responsibilities…or revenue. For example, in 2019, Stran was hired by a third-party to provide support to the U.S. Census Bureau for the 2020 Census, an event that will not come around again for a decade. (More on the census project below.)

Less than 350 of the Company’s 2,000 active customer relationships are considered Program Clients, but their contracts provide as much as three-quarters of Stran’s revenue. Based on revenue reported in 2021, it is estimated that on average each Program Client contributes about $85,000 to sales each year. This compares to $5,800 average revenue per year from Transactional Clients. It is clear why Stran sales personnel try to upsell customers to service contracts involving value-added services such as creative work, an online store, or inventory management.

STRN Client Relationships

STRN Client Relationships (Company Reports, SEC, Crystal Equity Research)

Strengths Against a Well Populated Competitive Field

Stran generates value for its clients by transparently facilitating the special moments when prize boxes are opened and that coveted logo appears. The Company differs from most other players on the field by having a ‘triple threat’ of talents under one roof: promotional product sourcing, warehousing and fulfillment, and branded online retail platforms. As a consequence, Stran competes with quite a number of different companies in one arena or another, ranging from advertising agencies to online retailers to small, localized promotional products suppliers to larger branded merchandise vendors.

Stran management counts as many as 40,000 participants in just the promotional products segment alone. The trade organization Advertising Specialty Institute (ASI) lists HALO Branded Solutions as the largest player in this segment followed by Staples Promotional Products in second place. ASI estimates the top forty players account for only one-third of promotional products sales.

There is quite a bit of risk when there are many contenders. For example, most of the promotional items that are favored by clients, such as T-shirts or cups, can be procured from multiple sources and sometimes at discounted pricing. Price undercutting is a typical competitive tactic in the promotional products arena.

To meet competitive threats head-on, Stran holds out as a quality service provider with unique platforms that give clients convenience and rich benefits. For example, the Company has invested in well-established enterprise software platforms for its online retail offering, making it possible to offer sophisticated e-commerce solutions to Program Clients. The online shops are customizable and scalable. Even Transactional Clients get the benefit of efficient order processing through the Stran platform.

From Stran’s perspective, its software investments have made it possible to approach a wide range of prospects, large and small. The Company has also proven its platforms can be used across multiple industries, including sports, healthcare, food production, beverages, and clothing, among others.

Clients find it difficult to get the same optionality and service level from competitors, giving Stran the benefit of ‘stickier’ customer relationships. Management reports its client contracts average three to five years in duration.

Financial Performance: Rocking and Rolling with a Growth Operation

Stran has created efficiencies in its promotional products marketing process that can deliver earnings to shareholders. However, investors need to look very closely at recent financial reports to find the evidence. Indeed, at just a cursory glance, it looks like Stran is struggling.

The Company reported in its annual filing with the U.S. SEC, $39.7 million in total sales in 2021, representing 5.2% year-over-year growth at the top line. However, even as the previous two fiscal years had been profitable, the Company reported an operating loss of $437,879.

Up until the fourth quarter 2021, revenue had trailed the prior year. The unfavorable comparison at the top line was largely due to the completion of work related to the U.S. Census in 2020, which was by definition a one-time event and did not continue into 2021. In 2020, the U.S. Census work represented 27.1% of total sales. The Company also benefitted in 2020, from business related to personal protective equipment, but experienced a decline in volume as the coronavirus finally slowed in 2021. It was not until late 2021 that revenue contributions from acquired operations helped boost the top line to a 5.17% increase over 2020. Excluding the revenue related to the U.S. Census contract in 2020, year-over-year organic and acquired growth is estimated near 44% in 2021.

The operating loss in 2021 stemmed in large part from exceptional costs related to shipping of promotional products from low-cost manufacturing sites in Asia. According to the Freightos FBX Index, the cost of transoceanic shipping for a 40-foot container reached a high of $11,000 per container in mid-2021. This compares to $1,300 as recently as late 2019. Freight charges only abated about 15% in the final months of 2021. As a consequence, freight costs for Stran increased 85.5% in 2021, far faster than sales, cutting deeply into profits.

Stran management has also cited rising merchandize costs in 2021, largely resulting from pandemic-related inefficiencies in the world supply chain. However, the Company appears to be meeting the challenge, reporting that product costs fell to 60.4% as a percentage of sales in 2021. This compares to 64.0% in the previous year. Some of the improvement in gross margin on product purchases was accomplished in the first half of 2021, but the Company made significant improvement in the second half, when the cost of products was 58.1% of sales in the September quarter and 59.7% in the December quarter.

Gross profits appear solidly near 30% of sales even with high freight and product costs. Some of the efficiency may accrue from Stran’s affiliation with Facilisgroup, a software-as-a-service for the promotional products…

Read More: Stran Delivers Rewards To Consumers And Shareholders (NASDAQ:STRN)

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