Current Price: $0.185
Market Capitalization: $15.8M
Shares Outstanding: 83.5 million
Introduction: It started with a call on a Sunday afternoon. Marcello Leone, the CEO/President of RYU (Respect Your Universe) Apparel, asked me to give him a call to discuss the company with him after I initially expressed interest in learning more about the direction the company was moving in. Based on my due diligence prior to the call by talking to others that have had a former experience with the company my expectations were not high. However, I left the call with a gut feeling that Leone and his team are onto something quite big. I decided I wanted to be a part of the journey ahead, so I opened a position the day after speaking with Marcello after spending 5-6 additional hours that Sunday evening doing even further due diligence on the company, industry, and the brand.
What does RYU do?: RYU is in the business of designing and selling “tailored technical training apparel”. The company is clear to point out that this is distinct from pure athletic apparel because they innovate well-designed, best-in-class products to live in 24/7 without compromising fit, value and design. RYU’s belief is that athletic apparel category is now full of “me too” brands, which means consumers start to look for something new and distinct. RYU believes they are “the new" that consumers are looking for and considers their brand as being able to reach people differently and in a way the big players can no longer do. Distinct looks and advancement in technology is key to the company. As the VP/Brand put it to me: “we bring solid and very credible newness to a tired market. Consumers want to feel a connection and our brand speaks authentically to people. Every brand that was ever built starts with the core believers, and everyone at RYU truly believes in what we are building.”
Background: In 2014, after being an investor in RYU for several years, Leone recognized the value in the RYU brand but wanted to see the company move in a totally new direction. After being named the CEO/President of the company, he began to focus on two things: 1) the DNA of the brand, and 2) bringing in the best talent possible. The company successfully raised equity in order to accomplish both of these things and spent a considerable amount of time taking a hard look at themselves to determine exactly what it was they want to stand for. Or, as Leone passionately states, what was going to be the "DNA" of the company going forward? Leone clearly understood that future success within a highly competitive industry was not going to be possible without ensuring that the company's foundation was rock solid and that everyone involved with the company knew exactly what the company's purpose for existence would be. Once the internal team bought into the DNA, Leone focused on ensuring the city of Vancouver, the company's headquarters, understood the DNA of the company and started to become excited about what this little apparel company was concocting on a sleepy street in Vancouver. As a result of these efforts, the community has embraced the brand and the flagship retail store that opened in late November, 2015.
Interesting to note that RYU Apparel's flagship store is located just down the street from where Lululemon's first retail store was opened in 1999. There are definitely some interesting parallels and correlations between RYU and Lululemon when they first began retail operations.
Photos of RYU's flagship store:
It's also important to understand that Marcello Leone was raised in the retail world. Leone’s parents, Alberto and Maria, launched a chain of Alberto’s Boutique locations in Vancouver in the 1970s. They then consolidated their retail operations and opened their iconic high-end retail store called Leone in 1987. Marcello was intricately involved in the business, helping it reach levels of significant success before the family later sold the business.
Investment Thesis: When Marcello inherited the company as CEO, he had a real mess on his hands. The company was in financial ruins with no vision for their business. When Marcello took the helm he immediately raised a significant amount of capital that has allowed him to build the DNA of the company and hire very successful team members from all walks of retail, including folks with significant past experience and success with companies such as Lululemon and Nike.
Here are the reasons that I believe the company will be successful in the months and years ahead:
- The company had no real meaningful revenue to speak of, but that all changed on November 27, 2015 when RYU opened their flagship store in Vancouver. As announced by the company on March 17th, For the period commencing November 27, 2015 to February 29, 2016, RYU posted revenues of $432,121. Why is this meaningful?
- The $432k in revs is meaningful because the company has accomplished this with only approximately 15 SKUs for men and 20 SKUs for women in their retail store, with very small contribution from their e-commerce side of the business. The company is in "beta testing" mode, meaning that now that the market has shown acceptance to their products, they will work on rolling out about 50 SKUs for men and 50 SKUs for women. If $432k represents 3 months of revenues from roughly 35 total SKUs, imagine what revenues could be with around 100 total SKUs...for just ONE store. Once you factor in the company's plans to grow the store count by 5-7 stores by end of 2017 than those revenue figures get quite exciting.
- The e-commerce site for RYU is setup nicely and presents an enjoyable buying experience for the customer, but there has been little focus on growing it to date. I believe this will all change now that the market clearly is showing demand and acceptance for their products. We all know the significance of e-commerce sales in today's world, and Marcello understands this as well. I believe we will see an aggressive strategy in ramping up the e-commerce efforts throughout the remainder of 2016. The best part is the overhead associated with generating e-commerce sales really isn't that significant.
- The company is differentiating itself in the competitive market that it has chosen to be involved in. For example, one thing Marcello is passionate about is community involvement and building excitement about the RYU brand. The flagship store, and concept for future stores, has a workout room that allows for the company to connect with the community with workshops, training sessions, and other events that immerse people in the community with the RYU brand.
- The company has a significant amount of Intellectual Property, specifically Patents, that have been filed, with a handful already issued, as it relates to the design of their clothing.
- Marcello spent the money and has re-built this company from the ground up, with a solid foundation (or "DNA" as he so passionately calls it) to ensure that the culture and purpose was in place before focusing on the products. This is something he was and is incredibly passionate about-- to make it all about product you have to start with a strong and unquestionable, contagious DNA. He has achieved that.
- The Leone family continues to add to their stake in the company. They are very much aligned with shareholders.
Risks to the investment thesis:
- As with any retail brand in their infancy, the ability to raise money is paramount to their success. The company has been able to do this to-date, and I expect them to continue to be able to do so, but there are no guarantees.
- There is an open Private Placement right now priced at .25. However, the stock has been languishing here around $.18-.20. It is possible this PP will have to be re-priced to make it more attractive to current and/or potential investors.
- The RYU products are not cheap, and the strategy of the company is to not ever mark down products with sales prices. This works until it doesn't, and while it allows for very nice margins on items when they are sold, it also may hamper some growth and ability to turn inventory.
- The biggest risk, in my opinion, is the inability for the company to truly distinguish itself in an ultra-competitive space. I think for a young company they have focused on distinction and their “DNA” perhaps more than any other very successful companies have done in their infancy (think Lululemon and Nike), but that doesn't translate to automatic success. It is about continued execution and differentiation in a tough market.
Conclusion: This is a bet on Marcello Leone and his vision for the company. The vision is transitioning from just a vision/concept to an actual, revenue generating business that clearly is being accepted by consumers. Leone is passionate about the brand, about the products, and about achieving success. He has built a world-class team around him that are executing on Leone's vision...execution that could lead to serious investor returns in the years ahead.
Disclosure: Long shares of RYU.V