ST. LOUIS — David Kanen sent two letters to St. Louis companies on a recent Thursday, and neither was very friendly.
The Florida-based investor told appliance retailer Goedeker's that more than half its board needs to go.
The other letter hammered Build-A-Bear for lackluster revenues, declared its CEO overpaid, and suggested board members were asleep at the wheel.
Kanen also listed a number of opportunities he said Build-A-Bear had missed that executives needed to seize.
"The status quo is unacceptable," Kanen told the teddy bear seller.
And just like that, the two companies were put on notice. Kanen, a former A.G. Edwards broker, is an activist investor, one of a special class known for writing frankly worded missives laying out struggling companies' problems and demanding improvement in a hurry.
His firm, Kanen Wealth Management, managed $197 million in assets as of Dec. 31. By his own account, he's gotten what he wants about a half-dozen times in as many years and secured favorable results for clients and companies. But it's not easy: Executives can shun the advice, returns can be slow, and sometimes, he has to call for new leaders to right the ship.
In response, Goedeker's CEO Albert Fouerti called Kanen's complaint a "disturbing" distraction, and said Kanen and his nominees to take control of the board lack the skills to run an e-commerce company.
Build-A-Bear CEO Sharon Price John indicated the company is already doing several things Kanen wants as it looks to ride a pandemic-related boom back to long-term prosperity.
"The people at Build-A-Bear aren't stupid," said Jason Long, founder of local consulting firm Eye on Retail.
Kanen, 55, was born in Queens, New York, and grew up on Long Island. He went to college at Jacksonville University in Florida, where he majored in marketing. He then worked stints at two smaller firms before joining St. Louis-based A.G. Edwards, then the largest brokerage outside New York, in 1992.
He worked there for 12 years and it left an impression: Kanen still cites advice he received from the late CEO Benjamin Edwards III on the importance of building a reputation based on results, not rhetoric. Kanen spent the next dozen years at four other firms and gradually moved from selling investments to clients to advising clients on what to buy. He started Kanen Wealth Management in 2016 and called his fund Philotimo, after a Greek word that generally describes righteous or honorable behavior.
The activist bug bit later that year. Kanen had invested in a company called MagicJack, which made a namesake device allowing users to make phone calls through their internet connection, and he didn't like what he saw.
"They had a poor management team that just really didn't care, the stock was very cheap, and they were adding little value," he said. "I was very frustrated."
Then it dawned on him: He didn't need their permission to speak his mind. He sent an open letter excoriating the board and outlined a six-point turnaround plan in August 2016. He got a man on the board six months later, and within a year, the company was bought out at a nice premium.
CarParts.com was the latest big win. He bought into the online supplier in late 2018, a dark time for the company. Revenues were flat. Shares were hovering around $1, down more than 80% from their peak.
Kanen used his stake to push for new leadership and got it. Almost every executive exited in the first half of 2019. Kanen himself took a board seat that February.
By the time he was selling shares in June 2020, the stock was about $8. It's since risen to nearly double that.
"It is a 180-degree pivot that the company has done," said Ryan Sigdahl, senior research analyst at Craig-Hallum Capital Group in Minneapolis.
Kanen wants Goedeker's and Build-A-Bear as his next success stories.
Despite booming demand amid the pandemic and the successful acquisition of a key competitor, St. Charles-based Goedeker's share price is down 80% since early February.
At the same time, homeowners are sitting on record amounts of equity and spending more time at home with their appliances amid the pandemic. And a variety of research suggests more people will be making big home purchases over the internet.
The problem, Kanen says, is leadership. The company recently replaced CEO Doug Moore, who oversaw the decline, with Fouerti, who Kanen supports. But the board members that hired Moore remain.
Those same board members were also on duty when leadership made the decision in May to sell shares — well below market value — to raise money for the acquisition, sending the share prices tumbling. A few days later, the company gave Moore a raise and $150,000 bonus.
"They've demonstrated the ability to consistently make bad decisions," Kanen said. He proposed replacements from CarParts.com and other successful companies.
Build-A-Bear is in better shape. Surging consumer spending driven by government stimulus fueled some of the best quarters in company history in the first half of 2021. The share price has more than tripled since Jan. 1.
But it's still about half as high as it was in its mid-aughts heyday, when the company could rely on its shopping mall storefronts. It posted a net loss for the past decade. And while executives talk about parlaying the pandemic bump into more permanent growth, Kanen is skeptical. He said in his letter that despite making $20 million since John took the top job in June 2013, revenue for the past 12 months was 10% lower than it was in her first full year.
Kanen wants the company to partner with chains like AMC Theatres and Chuck E. Cheese to set up stores within stores and multiply its reach with little cost. He also wants a pet toy line to sell at PetSmart and Petco, which he thinks could add $50 million a year in revenue — a 10% bump from 2019's haul. And he wants leadership to try something like NFTs, the digital collectible items that exploded in popularity among cryptocurrency enthusiasts earlier this year.
John told Kanen in an earnings call last month that the company is working on a pet toy plan and is in the process of upgrading its online ordering experience, another thing he wants to see.
Kanen hopes it's true. If John follows through, he thinks the company could see big gains.
But if she doesn't, within about a year, he'll be calling for a new CEO.
