You don’t have to be an MBA to know that retail sales make up a significant chunk of the global economy. One estimate from eMarketer says consumers bought nearly $30 trillion worth of stuff in 2023. About $5.8 trillion, or 20%, of those sales occur online, so brick-and-mortar stores are still very much alive. Most of our direct exposure to the retail landscape is through Quantigence, our dividend-growth strategy, which includes retailers like Walmart (WMT) that have been returning money to shareholders longer than some of you have been alive. We have also made a few pick-and-shovel plays on retail through the Nanalyze Disruptive Tech Portfolio by holding a couple of digital payments stocks and a warehouse robotics stock.
One could argue that these tech stocks are fairly far removed from the retail theme, even for pick-and-shovel plays. It would be great to get more tech exposure to a multi-trillion-dollar market that has essentially doubled in just a dozen years. But most of the companies we’ve covered have been startups developing technologies like automated checkout systems or niche services like reverse logistics. There is one tech company out of Europe that we have liked for a long time but have yet to find a compelling reason to hold. However, VusionGroup’s 30% revenue growth in 2023 has renewed our interest in this retail IoT stock.
A Brief History of VusionGroup Stock
Your first question may be: Who the hell is VusionGroup (VU.PA)? You may know the French company better by its previous name, SES-imagotag. We first covered VusionGroup 10 years ago when it was simply known as Store Electronic Systems (SES), a pure play on electronic shelf labels (ESLs). ESLs are basically e-paper displays that replace traditional paper price tags. They use wireless technology like Bluetooth to dynamically and automatically update pricing and other information about a product. On the back end, the technology helps stores optimize inventory management. At the time that we published that first article, SES was in the process of merging with a key competitor, iMAGOTAG, and had a market cap of less than $200 million.
Fast-forward eight years to our last article in 2022: SES-imagotag had grown in value to $1.5 billion and become the global leader in smart ESL technology. The company was also expanding its services in other ways, including a cloud-based platform for data management and connectivity. In that piece, we did a deep dive into the company’s humble beginnings in e-paper tech to its rise as a dominant player in IoT retail solutions. We had some concerns about the 60% majority ownership of SES-imagotag by BOE Technology Group, a Chinese electronics company that is one of the biggest manufacturers of display screen technologies such as LCDs. Since then, BOE’s share in the company has dropped to about 32%.
About the New VusionGroup
The convoluted ownership of the company aside (for the moment), VusionGroup adopted its new name earlier this year to differentiate its current business beyond its core ESL product line. Specifically, the company is touting itself as a key player in the digitization (or digitalization, in English-French) of retail through the use of IoT, computer vision, sensors, data, and (of course) artificial intelligence. It added or enhanced some of those capabilities last year through the acquisition of Belive.ai, a French startup specializing in AI and computer vision for physical retail, and Memory, which specializes in data analytics and decision-making tools for the retail sector. The new VusionGroup consists of six “families” of solutions that leverage these different technologies:
However, VusionGroup does not report its revenues with the same sort of granularity. It basically boils down to ESL revenue and everything else – what the company calls value-added solutions (VAS).
That means out of €802 million ($857.5 million) in total revenues, only about 13.5% came from all other products and services. Recurring VAS revenues include VusionCloud subscriptions, data analytics, and software-as-a-service for computer vision. Non-recurring VAS revenues include installations and one-time professional services; the sale of equipment such as Captana cameras, video rails and other screens used for retail media advertising, and the PDidigital segment. While recurring revenues are modest at €42 ($45 million) or 5% of total revenues, they nearly doubled from the year before. That number needs to grow significantly so once the electronic tag boom subsides, the company can still keep the lights on. Recurring revenues also stand to boost gross margins which came in at 28% last year, rather low for our liking. Despite their low gross margins, VusionGroup managed to more than triple profit to nearly €80 million ($85.5 million) last year.
United States Poised to Become No. 1 Market
VusionGroup claims it will pass €1 billion ($1.07 billion) in revenue this year, which would represent at least 20% growth in 2024. While Europe has long been its cash cow, the United States is expected to be the main source of growth in the near term, with triple-digit growth expected this year. A primary source of that growth is Walmart, which is phasing in 500 locations for a total of 60 million digital shelf labels.
The contract will span several years, with a first phase of 500 locations over the next 12 to 18 months, for a total of 60 million digital shelf labels. To put that number in perspective: Through H1-2023, VusionGroup had sold 350 million ESLs. The Walmart order represents 17% of that total. Or as Thierry Gadou, CEO and chairman of VusionGroup, told analysts: “We are very close to having more stores in the U.S. than in France, where we have worked for 30 years.”
In fact, as soon as this year, the United States could become the company’s No.1 country by revenue and installed base. Meanwhile, sales in Europe are expected to slow down this year before ramping back up in 2025 as one sales cycle ends and another begins, according to management.
Business with China Gets Weird
The question we usually want to know when we see this sort of significant, prolonged growth boils down to: When will the party end?
In our last article, one of our main concerns is that VusionGroup estimated the total addressable market (TAM) through 2027 at about $5 billion between ESL sales and adjacent markets for digital solutions such as shelf monitoring or stock-out detection. While not inconsequential, the TAM seemed limited to us at the time. Consider that the company may reach 25% penetration by this year, so how hard will it be to post double-digit growth consistently through the end of the decade? Certainly, the United States offers the company a fair amount of additional runway that may not have been part of the calculus just a couple of years ago. There are also adjacent products and services that may arise alongside their core offering of electronic tags.
We might be even a little more bullish on this front if China was also part of the conversation. And, in fact, the world’s second largest economy was very much in play not that long ago. In 2019, VusionGroup entered into a joint venture with BOE Technology (the company that owns a 32% share in VusionGroup) and JD Digits, a spin off from China’s largest retailer JD.com. The plan was to join forces and digitize China’s retail landscape. However, from what we can gather, VusionGroup pulled out of the JV around 2022. That’s also when BOE started to sell off parts of its stake in VusionGroup. It’s not entirely clear to us what was going on between BOE and VusionGroup.
Short Report on VusionGroup
And then things got even weirder last year. Short-seller Gotham City Research released a report that alleged a number of accounting irregularities by VusionGroup, some related to BOE Technology. For instance, Gotham raised some of the same concerns we did around BOE – the largest shareholder, largest supplier (accounting for over 70% of COGS), one of the largest customers (said to account for 10% of revenues), JV partner, and on the audit committee. The report sent VusionGroup stock into a tailspin, forcing the Paris exchange to suspend trading after shares fell 60%. VusionGroup denied the allegations and said external auditors verified that it did not overstate revenues or play hanky panky with BOE. Shares of VusionGroup stock later surged 40% on the news.
While we always approach short-seller reports with a healthy dose of skepticism, the seed of doubt has been planted. VusionGroup management did the right thing by responding vigorously to the report. In a response to a question from an analyst during the company’s 2023 earnings presentation, Gadou said VusionGroup was awaiting a decision from French financial authorities regarding its complaints against Gotham. The report was certainly a momentum killer. Prior to the event, the company’s shares had been one of the strongest performers on Paris’ SBF 120, a French stock market index, with a gain of nearly 40% compared to a 10% increase across the index through the first half of the year.
Conclusion
Frankly, VusionGroup has left us a little flummoxed on its finances. The company has issued press releases about buying back shares, beefing up its board, and taking on debt – all while proposing a one-time dividend to shareholders of €0.30 per share. Additionally, the math and money behind the Walmart deal are also a bit convoluted (Gotham alleges VusionGroup is losing money on every ESL unit sold, but that’s not illegal). On the other hand, VusionGroup is growing revenues by double digits, becoming pretty profitable, and now has significant positive free cash flow after only recently being in negative territory. It all seems a bit too good to be true.