Marvelous Microcaps

Alliance Entertainment Holding Corporation (AENT)

INTRO:

At Perritt Capital Management, we take focused positions in companies where we have a high conviction in their success; companies that are out of the mainstream of small cap investing. To highlight our process, we are pleased to present the newest installment in our ongoing series “Marvelous Microcaps – Big Ideas on Small Companies.”  This series profiles companies that we believe have a niche in their existing markets or are launching a product that could disrupt their marketplace.

THE COMPANY:

Alliance Entertainment Holding Corporation (AENT) is a wholesaler, retailer, distributor, and e-commerce provider for the entertainment industry worldwide.  The company offers vinyl records, video games, DVDs, blu-rays, toys, collectibles, compact discs, and other entertainment and consumer products.  It also provides third party logistics products and services.  They distribute their products through a multi-channel strategy.

The global physical media industry is a $10 billion dollar business and Alliance Entertainment is the category leading distributor.  In this capacity, they serve as the gateway between brands and retailers, representing over six hundred suppliers and distributing products to over 4,000 channel partners.  Brands represented include such prestigious names as Walt Disney Studios, Universal Music Group, and Sony Pictures.  Channel partners include large retailers such as Walmart, Target, Best Buy, and Amazon as well as 2,500 independent music stores.  In total, Alliance Entertainment ships a selection of 325,000 SKUs to over 35,000 storefronts in seventy countries.

The company is led by Executive Chairman Bruce Ogilvie Jr. and CEO Jeffery Walker.  Jeff Walker founded the company in 1990 with one retail music store and subsequently started a music wholesaling business in 1995.  Through this wholesaling business, they merged with Alliance Entertainment in 2013 with Jeff taking over as CEO of the combined entity and retaining the name Alliance Entertainment Holdings.  Today, the company is based in Plantation, Florida with their primary operations being run out of a state-of-the-art warehouse in Shepherdsville, Kentucky.

WHY WE OWN: THE PERRITT ADVANTAGE

We view Alliance Entertainment Holdings as an attractive name for several reasons.  We were originally drawn to the company after it went public via a SPAC, or Special Purpose Acquisition Company and subsequently sold off in the open market.  To offer a brief synopsis, a SPAC is a publicly traded shell company listed on the stock exchange with the purpose of acquiring (or merging with) a private company without going through the initial public offering process which often carries significant and regulatory burdens.  Often, the companies that go public via this method are under followed by analysts on the street and have difficulty getting traction with the investing public which puts pressure on the stock.  This was the case for Alliance Entertainment, which rapidly sold off from the price where it went public at $10.00 to a low of $0.70 over the course of 2023.

Aside from the lack of attention that many SPACs get from the investing public, Alliance Entertainment also had several one-time issues hit them in 2023 that caused the company to go from making money to losing money.  First off, they accumulated too much inventory in 2022 and subsequently had to sell off some of that at a discount.  They were also hit with one time supply chain disruptions that caused them to experience excessive transportation costs for the year.  All this culminated in them going from making $60 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2022 to losing $17.6million on an EBITDA basis in 2023 (the company operates on a June end fiscal year, and all numbers cited here reflect that). However, during this time and carrying into 2024, the company initiated several investments and cost savings initiatives in the business that we believe could lead to a robust turnaround of their prospects.

First off, they consolidated their distribution facilities from two to one location, shutting down their facility based in Minnesota and consolidating all activity in their facility in Kentucky.  At the same time, they made a comprehensive investment in automation and operations streamlining in their facility in Kentucky that reduced shipping times and improved overall warehouse performance. Through these efforts, they were able to realize nearly $400K in annual labor savings and save $460K by retiring equipment that needed to be modernized.

These efforts began to bear fruit for the company in fiscal 2024 as they were able to recover from losing money to making $24million in EBITDA, which we view as a partial recovery from losses of 2023.  They were also able to reduce inventory levels by 35%, which allowed them to free up much needed working capital, which was used to reduce indebtedness by 40%, reducing their interest expense.  This has left the company in an advantageous position to execute on their inorganic growth strategy via acquisitions.

The company has made ten successful acquisitions in its history including the namesake Alliance Entertain Holdings group.  This Merger & Acquisition strategy has allowed them to grow rapidly in a physical media product category that only grows in the mid-single digit percentages each year.  They plan to use acquisitions to get into new, complementary product categories, acquire new e-commerce distribution channels, and roll up strategic distributors in the space.

We believe that during 2024, the company has overcome the challenges of 2023 and re-emerged stronger and more nimble heading into fiscal year 2025.  Their investments in automation and process improvements will continue to bear fruit and we expect they can get EBITDA margins back to 5%, which equates to $55milliom in EBITDA at today’s run rate.  It is our thesis that they will be able to build upon this success going forward and contribute positively to value creation for shareholders.

Data here is obtained from what are considered reliable sources.  We consider the data used to be relevant and reliable.

Fund holdings and sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security. Please click PRCGX and PREOX for a list of the top ten holdings.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternative measure of a company’s overall financial performance.

Before you invest in the Perritt MicroCap Opportunities Fund or Perritt Ultra MicroCap Fund, please refer to the prospectus for important information about the investment company, including investment objectives, risks, charges, and expenses. You may also obtain a hard copy of the  prospectus by calling 800-331-8936. The prospectus should be read carefully before you invest.

Mutual fund investing involves risk. Principal loss is possible. The Funds invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Funds invest in microcap companies which tend to perform poorly during times of economic stress. The Ultra MicroCap Fund may invest in early-stage companies which tend to be more volatile and more speculative than investments in more established companies. 

Past Performance does not guarantee future results.

The Perritt Funds are distributed by Quasar Distributors, LLC.

First published October 2024.

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