Hour Loop (HOUR) is an innovative retailer operating primarily with Amazon (AMZN). Numerous traders are currently talking about the stock. Since management began operations in 2013, revenue growth has increased dramatically, so many traders are currently buying stocks at incredibly high prices. My research on the company’s facilities revealed cost-cutting measures, which may explain why the profitability of the company is so high. Keep in mind that management seems to report better revenue per employee than Amazon. With this, the location of offices and employees does not convince me. I cannot explain how the company does this number of transactions in the United States without having many offices in the country. Take into account that most employees seem to be operating from Asia.
Incorporated in Delaware, Hour Loop claims to run an Amazon resale business:
Our business model is wholesale, also known as resale, which involves purchasing wholesale products directly from the brand or manufacturer at a wholesale price and making a profit by selling the product on Amazon. Source: Prospectus
The company also claims to get a negligible amount of revenue from Walmart. (NYSE: WMT). For my calculations, in this article, I will assume that most revenue is generated by Amazon:
We pay a fee to Walmart to allow us to sell our goods on their platform. As stated above, to date we have only generated a negligible amount of revenue as a Walmart third party seller. Source: Prospectus
In general, I do not discuss the financial statements of small businesses. However, I must admit that the revenue growth of Hour Loop impressed me, so I decided to launch a study on the business plan of HOUR. Note that the company’s sales grew from $1-2 million in 2014-2015 to $38.65 million in 2020 and a net profit margin of 10% in 2020:
According to Similarweb, Hour Loop’s website doesn’t get a lot of traffic, so I assumed most of HOUR’s sales came from its partnership with Amazon.
My due diligence on the company’s store inside Amazon was interesting. The company has reported 79,599 transactions over its lifetime and 15,287 transactions over the past 12 months. Interestingly, 100% of customer feedback over the past 12 months was positive. I have never seen an online store with such perfect feedback from consumers. There is another aspect that I did not quite understand. If we assume that almost all revenue is made on Amazon, I expect more transactions in the last 12 months. HOUR reported 15,287 items sold in the last 12 months and annual revenue of $38 million. This means that the average price per item could be close to $2,485, which doesn’t make much sense. Take into account that most products in stores do not exceed $100:
Revenue per employee, virtual office and facilities
I am quite concerned about the facilities and commercial activity carried out by Hour Loop. Management noted that it targets US residents with internet access, however, most of HOUR’s facilities are located in Asia. I don’t really see how the company can make a profit selling $24 barbies and shipping them from Asia. In my opinion, shipping from Asia is more expensive than the product itself.
As an e-commerce company selling retail in the US market, our total addressable market covers all US residents with internet access, including by segment regular customers and new customers who shop online every year. Source: Prospectus
In my opinion, Hour Loop should be one of the NASDAQ companies that took remote work more seriously when COVID-19 started. The company’s global headquarters are located in a virtual office in Washington:
Our head office is located at 8201 164th Ave NE #200, Redmond, WA 98052-7615, where we rent a virtual office from an unaffiliated third party under a virtual office/meeting room agreement. Source: Prospectus
According to the latest prospectus, HOUR has 3 operating leases including leases in Taiwan and Xiamen. The company mentioned in the annual report a warehouse lease in Seattle. However, there is no information in the prospectus about the amount of money paid for this lease or its location:
The company has 3 operating leases (Hour Loop has a warehouse lease in Xiamen and a warehouse lease in Seattle, and Flywheel has an office lease in Taiwan). Source: Prospectus
We also lease a warehouse located at 35th Floor, No. 1123-1139, Fangshan Beier Road, Xiangbei Industry District, Xiamin, China, where we lease approximately 1,680 square feet to an unaffiliated third party. Source: Prospectus
To operate in Asia, HOUR uses Flywheel Consulting Limited, which has 60 full-time employees. I did not find much information on this subsidiary. There is a company of the same name in the UK, but it is not active. Thus, investors should not be mistaken.
As of January 3, 2022, our subsidiary Flywheel Consulting Limited had 60 full-time employees. Source: Prospectus
Our wholly owned subsidiary, Flywheel Consulting Limited, also has an office at 27F. No.251, Mingquan 1st Rd., Xinxing Dist., Kaohsiungcity, Taiwan, where we lease approximately 2,230 square feet of office space for lease from an unaffiliated third party. Source: Prospectus
Finally, there is another stimulating number concerning HOUR. Management seems to be reporting better revenue per employee than Amazon. According to the prospectus, the company’s average annual revenue per employee ratio is $644,254:
According to the CSI Market, the average annual revenue per employee in the retail industry in 2020 is $429,920, while in our business it is $644,254. Our revenue per employee is also higher than our industry competitors, such as Amazon $483,789, Walmart $238,165 and Costco $654,308. Source: Prospectus
My employee research indicates that HOUR can outsource a lot of work
Since I needed to understand where HOUR reported to its operations, I did a little research on the business profiles of HOUR employees. Most employees are located in Kaohsiung City, Taiwan, Pingtung City, Reykjavík, Taipei and Tainan. I found that only the CEO and CFO noted their actual US location. I still don’t understand how the company delivers 15,287 items to the United States with the current number of individuals seen working in the United States
In line with the previous comment, note that the company can work with many third-party logistics companies and many virtual assistants located in the Philippines and outside the United States. Outsourcing may explain how management pays so little in labor costs:
Our labor cost is less than 5% of our turnover. We use third-party logistics companies to route or prepare our shipments to Amazon, which reduces our labor costs related to logistics operations. We also worked with a labor outsourcing partner located in the Philippines. They provide virtual assistants to help us with data entry and repetitive work, which is a very cost effective way to do a lot of tedious work. Source: Prospectus
Risk: HOUR looks expensive at 25 times earnings
HOUR reports a market cap close to $100 million, which I think is expensive. The company has reported significant revenue growth in the past, and the US virtual office offers significantly low operating expenses. However, the total amount of cash available seems insufficient to launch sufficient marketing campaigns. If we assume a net profit of $3.8 million in 2023, Hour Loop is trading at nearly 25 times earnings. It is quite expensive for a small entity:
I also don’t like the organization’s employees signing loans with HOUR. In 2021, the company received a loan of $4 million, which represents a significant percentage of the total amount of liabilities:
On July 27, 2021, Sam Lai, our CEO, and Maggie Yu, our Senior Vice President, loaned us the unpaid retained earnings of approximately $4,170,418 in a single payment. The loan is recorded in a loan agreement dated October 15, 2021. Source: Prospectus
Risks related to the fact that Hour Loop is a controlled entity
Hour Loop is controlled by the CEO and Senior Vice President. Both own enough shares to control the board. This means that they can block any attempt to acquire the company by a third party. Furthermore, the board of directors cannot be independent. Directors can engage in transactions that are not in the interests of minority shareholders:
The “controlled company” exception to the Nasdaq Capital Market Rules provides that a company in which more than 50% of the voting rights are held by an individual, group or other company, a “controlled company”, does not is not required to comply with certain requirements of the Nasdaq Capital Market Corporate Governance Rules. As noted above, Sam Lai, Chairman and Chief Executive Officer of the Company, and Maggie Yu, Senior Vice President of the Company, who are husband and wife, beneficially own 33,300,000 common shares of the Company, representing 100 .00% of the voting rights of outstanding common shares of the Company. Source: Prospectus
Conclusion: I wouldn’t sell short, but I wouldn’t own stocks either.
Currently trading with a market capitalization close to $100 million, HOUR appears to exhibit an innovative business model driving smart cost-cutting measures. The virtual office in Washington and the fact that most employees seem to be located in Asia are smart management initiatives. With that, there are many aspects of the business that I don’t understand. I don’t see, for example, how the company can serve US markets with most of the employees located in Asia. I am a very conservative person, so I would sell stocks at the current price, which I consider a bit expensive. I also wouldn’t sell the stock short because I don’t consider this practice to be very ethical.