The Reporting Persons purchased the Shares based on the Reporting Persons’ belief that the Shares, when purchased, were undervalued and represented an attractive investment opportunity. Depending upon overall market conditions, other investment opportunities available to the Reporting Persons, and the availability of Shares at prices that would make the purchase or sale of Shares desirable, the Reporting Persons may endeavor to increase or decrease their position in the Issuer through, among other things, the purchase or sale of Shares on the open market or in private transactions or otherwise, on such terms and at such times as the Reporting Persons may deem advisable.
The Reporting Persons believe that the current market price of the Shares does not reflect the Issuer’s intrinsic value. In the Reporting Persons’ view, one of the key areas that does not appear to be well understood or fully appreciated by the market is the opportunity for the Issuer to improve the efficiency of its approximately $200 million annual marketing expense. Historically, the Issuer has relied primarily on short form television marketing.
Further, the Issuer’s cost of acquiring an individual customer has increased annually from approximately $184 in 2007 to over $300 in 2017 (per the Reporting Persons’ estimates). The Reporting Persons believe that the Issuer can lower customer acquisition costs materially over the next several years by shifting its media mix to more effective digital marketing channels and initiatives. In addition, the Reporting Persons believe improvements to the Issuer’s digital product portfolio (website, mobile application, social media presence, etc.) can substantially increase customer lifetime value.
The impact of gaining marketing efficiencies through digital advertising and upgrading the digital product portfolio should be reflected in a rapid expansion in the profitability of the Issuer. The Reporting Persons estimate that if the Issuer can improve its overall digital strategy and marketing efficiency, the resulting decline in customer acquisition costs and reacceleration in customer growth could double reported earnings per share from $1.90 in fiscal 2017 to almost $4.00 in fiscal 2020, causing the valuation of the Issuer’s Shares to move from current prices to approximately $90 per share.
The Reporting Persons note that the Issuer’s management team has begun the pivot towards a modern digital strategy. The Reporting Persons are highly focused on collaborating with the Issuer’s management and the board of directors (the “Board”) to significantly accelerate and improve these efforts in order to drive a substantial increase in the Issuer’s profitability. As part of this improvement initiative, the Reporting Persons may seek to add certain digital marketing and product development expertise to the Issuer’s Board.