Marvelous Microcaps
Lakeland Industries (LAKE)
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:
Lakeland Industries (LAKE) is a manufacturer of industrial protective clothing and accessories for the industrial and public protective clothing market worldwide. They also offer a full suite of firefighting and heat protective apparel to protect against fire. Their suite of product offerings includes high-end chemical protective suites that provide protection against highly concentrated toxic and/or lethal chemicals and biological toxins. They also offer a wide range of disposable protective clothing as well as woven garments. Applications for their products include but are not limited to electronic clean rooms, petrochemical and refining applications, and electrical utilities.
The company manufactures their products through a global manufacturing base spread across North America, Europe, and Asia. They market and sell their products to a worldwide network of safety and industrial supply distributors through an in-house sales team as well as customer service groups and independent sales representatives. End users include public safety, energy, clean room, utilities, industrial, and healthcare customers. The company was founded in 1982 and is based in Huntsville, Alabama.
WHY WE OWN: THE PERRITT ADVANTAGE
We were originally drawn to Lakeland as an investment due to their robust range of product offerings and sustainable cash flows. At the time, the company had a well-established position within the industrial safety garment space, having been operating in that segment for several decades. While these markets generated a robust cashflow, they represented mature markets for the company and growth in those markets was limited. After several years of low growth, the board of directors elected to change the management team and pursue a series of acquisitions that changed the face of the company.
Under the new management team, Lakeland has embarked on a series of acquisitions in the fire and safety space, entering a new $2 billion market. They have made several acquisitions, including Pacific Helmets based in New Zealand, Eagle Technical Products based in the UK, LHD Group based in Germany and Jolly Scarpe Boots based in Italy. These acquisitions have enabled Lakeland to provide a full product suite of head-to-toe offerings in the fire and safety space. The acquisitions also opened new markets to them including the public safety space in Europe, where they previously had no presence.
The acquisition of LHD also provides Lakeland with a blueprint to establish a new market in total care services. After each turnout, a fire suit must undergo cleaning to get toxic chemicals and other harmful pollutants off them. LHD provides these services in their European locations and Lakeland intends to bring these services to other markets, opening a compelling recurring revenue stream for a company that has previously relied on one-time sales.
The new management team is also focused on streamlining their sales organization. As part of these efforts, they transitioned their North American sales force to a third-party industrial sales organization called Line Drive. This transition allows their internal sales force to focus their efforts on engaging with end users and driving market penetration while Line Drive handles sales into their third-party distribution partners such as the large industrial catalog companies like Grainger. While it is too early to tell if this strategy will be successful, it opens new opportunities for them to further penetrate their mature markets in North America and could reignite growth in a stagnant sales channel.
We believe that Lakeland is well positioned to produce growth in their end markets over the next couple of years as they successfully expand their presence in the fire and safety space. We expect that they will continue to expand their market penetration through both organic growth and mergers & acquisitions activities funded by their internal cash flows and borrowing capacity. This in turn may lead to greater returns for shareholders.