COGS have always been and will continue to be high due to the nature of this particular business, i.e., third party manufacturing. Not a promising sign when your COGS have cut into roughly two-thirds of your top-line revenue.
When you drill down into OpEx, the picture becomes bleaker.
- Advertising expenses are simply out of control. It's difficult for me to ascertain the ROI that has been generated by these rich advertising deals. MP is an outlier in the industry in this regard - their unwavering faith that these endorsers will somehow drive topline revenue. Have not seen it yet.
- Salaries/benefits are crazy high. We all know this and its a topic that has adequately been covered on this board. So long as the guys who write the checks control the company, the change would have to come from within. I don't blame investors for having the perception that these guys are milking the proverbial cow until it runs dry. They are simply calling it as they see it.
- Promos are a part of this business and are to be expected. The buy two get one free promos on their products don't bother me. If the product is strong and delivers, then consumers will continue to buy the product following the promos. All of the big players have run these promos on bb.com, so its not like MP is an outlier. Not concerned about this.
It's pretty simple. You need to either decrease COGS (for e.g., bring manufacturing in-house, which would require an enormous amount of capital expenditures - question is how would they fund it) or cut OpEx (for e.g., cut salaries, kill these endorsement deals, etc.)
I assume that their expectation is that COGS will remain steady (despite Brad stating that he is looking into production facilities in Brazil, etc.). So, the expected approach would be to continue driving top-line growth while keeping salaries and advertising expenses pretty steady. What is problematic thought is that we have no indication that either salaries or advertising expenses will be held in check.
Said differently, if OpEx continues to rise in proportion to the amount of top line growth, then the company is simply perpetuating a dynamic that will continually have it in an operating loss position. And unfortunately, there won't be $5M of BZNE "bargain purchase gain" to offset this disappointing result every quarter.
