Source: wallpaperflare.com

Business Description:

Leatt designs & sells personal protective equipment for individuals who participate in different form of motorsports like off-road motorsports, bicycles, snowmobile, ATVs, etc. It was incorporated in the USA but is mainly operated & now headquartered in South Africa.

It started with selling its flagship products — neck braces, neck protection system used in different kinds of power sports in United States & Europe. Over time, it has grown & evolved into a company with variety of products. As off 2022 there are ~600 SKUs listed on its website (Note: sometimes more SKUs can deteriorate company’s profit instead of improving it).

Today, In the sports community, Leatt is known for its high quality. The company makes sure that it goes beyond minimum protection standard required by local regulatory bodies and provides high quality protection across all its protective equipment.

Enough with a summarized description, now lets dive into what you are here for — nuts & bolts of this business.

What does LEATT exactly sell ?

It mainly sells Neck Braces (7% of the revenue) , Body Armor (51% of the revenue), Helmets (19% of the revenue) and other apparel (23% of the revenue).

Even though its flagship product is neck braces, Body Armor and Helmets have been the fastest growing revenue stream for LEATT.

How does it develop products?

LEATT, produces its product the same way as most of the western product company does, uses 3rd manufactures from mainly China and a bit from Thailand & Vietnam.

Most of the time raw materials are directly bought by the 3rd party manufacturer (Unless if there is a special material required). These raw materials are abundant & easily available. The company keeps a tight leash by doing regular & tough quality checks to make sure that the products manufactured meets the desired quality level.

How does it sell & how does it get paid ?

The company has a complex supply network (& may be inefficient) and multiple ways to reach the end user:

1. Through lots & lots of middlemen 🙁
It sells it products to its distributors in different countries. And these distributors further sells these to dealers in their assigned zone. And these dealers finally sell these to end users (Riders who actually use Leatt’s products).

The company has 100% ownership of distributors in the USA and SA. Thereby eliminating one level of middlemen at least in these two markets.

In my opinion, this type of distribution network helps a company ,in its initial stage, to reach the customers faster, build brand value and tap different markets. But the downside of this strategy is lower margins (due to concentrated buyers & many levels of middlemen).

2. Direct to Consumer
Management knows that too many middlemen reduces margins (even though it doesn’t explicitly agree). And therefore it has slowly (extremely slow) also started “Direct to Consumer” selling by starting its online store in the USA. DTC is growing fast but it is still less than 6% of its total sales.

Who are Leatt’s main suppliers?

Leatt’s main suppliers are its manufacturers, infrastructure providers, logistics companies that it uses to ship its products, real estate companies from which it leases its office & warehouse space and labor market.

The products, services and skills required for Leatt to operate smoothly are easily available and it doesn’t have a big dependency on any specific supplier to operate. (This is a good thing. A strong supplier can be a huge risk — imagine what will happen if Apple & Google decides to take down the Instagram app from app store. You get the idea 🙂 )

What is the approximate market size, current market share & potential upside in revenue & earnings?

Note: The goal here is not accuracy but rational approximation of the market size. We want to see if the company has enough room to grow or not.

There was no explicit data available from a reliable source on what is the market size of Motorsports Helmet, Neck braces & Body Armor. So I did my own analysis to come up with potential market size. Here are the details:

Number of off road motorbikes sold in a year: 1.4M (Source: Statista)
Number of mountain bikes sold in a year: 50M (Source: GlobeNewswire)

Conservative assumptions:
– Each person who uses off-road motor bikes have 2 motorbikes, therefore total annual buyers of off-road motor bikes in a year: 700K

– Each person who uses mountain bikes has 2 mountain bikes, therefore total annual buyers of mountain bikes: 25M

– At least 80% of the new buyers will buy a Helmet (Since it is mandatory is most of the countries). So total new protective helmets sold for off-road riding = 80 % of (25.7M) = 20.5M (Lets call it 20M)

– At least 40% of the new buyers will buy a neck brace (Very important for off road riding). Therefore, total new neck braces sold in a year = 40 % of 25.7M = 10.2 M (Lets call it 10M)

– Just 10% of the new buyers will buy body armor (for chest, knees & elbows). Therefore, total body armors sold in a year = 2.5M

Conservative Assumptions of Price of Leatt products:
– Average Neck Brace price = $180 (after assuming Leatt sells at 40% discount to distributors & dealers)
– Average Body Armor kit price = $150 (after assuming 40% discount to distributors & dealers)
– Average Helmet price = $120 (Same assumption as above)

Now lets calculate the potential market size:
(# of Neck Brace buyers x Avg neck brace price) + (# of Body Armor buyers x Avg Body Armor price) + (# of Helmet buyers x Avg Helmet Buyers) =

(10M x $180) + (2.5M x $150) + (20M x $120) = 4.5 billion $

Beyond this Leatt also sells protective shoes, googles and other apparels. Lets assume that an extremely conservative market potential of just ~500M (even though it will be much more than that, but we want to be extremely conservatives unlike CEOs who always present potential market opportunity of trillions of dollars )

In total, the total approximate market size for LEATT is $5B .

Current Sales:
As of 2022, Leatts sale was just $76M.

Potential Revenue & Earnings Upside:
Now if Leatt is able to capture 10% of market share (reasonable assumption as Leatt has much more market share in their local markets it operates in), and also assume that the market will stay constant (not grow or drop) then
Leatt’s potential revenue can be ~ $500M in future.

And with $500M revenue & market average operating margins of ~15%, this company has an opportunity of making operating earnings of around ~$75M USD (Almost 25 times more than its current operating earnings).

But to achieve this, Leatt not only will have to keep developing cutting edge products in expanding markets but also execute well on its marketing & sales strategy. One way to achieve this would be to invest more in DTC strategy in established markets like USA & Europe.

Who are the LEATT’s main competitors?

The Company faces strong competition from Atlas Brace, Alpinestars, EVS Sports & Fox racing. Most of these competitors provide cheaper alternatives. And it seems like Leatt is trying to establish itself as a premium quality brand.

What are the long term headwinds & tailwinds for Leatt?

Headwinds:

– Safety Regulations: Authorities in many countries generally make protective gears like helmet, neck braces, etc compulsory for such sports.
– Growth in biking(cycling) in developed countries: if you live or travelled around developed countries, you must have observed how these countries are making policies that promote biking(cycling). And events like COVID has just accelerated that trend.
– Asia: There are many Asian countries like China, India, Vietnam, etc where the per capita GDP is about to explode. And when citizens get richer they tend to leave bikes & motorcycles for daily transport. This creates a big market shift from 2 wheelers for daily commute to 2 wheelers for sports & exercise. And this shift gives a boost to companies like Leatt.

Tailwinds:
– Weather: Extreme temperatures (hot or cold) discourages individuals from pursuing outdoor activities. In areas with rising/falling temperature due to climate change or natural calamities can shift the trend from outdoor activities to indoor activities.
– VR Sports: Virtual Reality has given boost to indoor cycling. Individuals can ride bikes at their home and still travel the world and also compete with others. And bike riding at home will reduce the need of personal protective equipment.
– Supply Chain disruptions: Currently the company is able to produce in Asia, manage from SA and sell it in rich markets, thereby able to produce at low cost and sell at high prices. But ongoing trade wars, regulations and political rivalries are slowly reducing & killing the arbitrage opportunity.

What is Leatt’s competitive advantage (MOAT)? if any.

In my opinion, Leatt’s narrow competitive advantage doesn’t come from just one thing but due to many things done right.

– Low cost operation: Manufacture in Asia & Management from South Africa keeps the operational cost low, compared to competitors.
– High Quality products due to R&D: Instead of writing a general statment to praise Leatt’s R&D, I want to provide an example. Leatt’s latest helmet release is ~8% lighter that competitors, has better ventilation, surpasses safety requirements by a mile and also made with better/stronger materials. You will be able to find differentiating factors like these in all of Leatt’s flagship products.
– Brand Value: Over the years Leatt’s has slowly been able to develop its image of being a premium protective gear producer.
– Distribution Network: Leatt is also able to build multiple distribution channels (indirect & direct) to reach to customers. Although in my opinion, there is a lot of room of improvement here.

Overall management has done a very good job of maintaining & expanding the moat. And last 5 years ROIC validates that. And if Leatt’s management keeps focusing on & improving the above mentioned factors, the moat will widen further, giving a long run way to Leatt.

Note : The goal of this post was to discuss Leatt’s business model, qualitative aspects and future potential. I have intentionally left detailed financial numbers like cash flow from operations, balance sheet strength, valuation models, etc from this article because this is not a buy or sell recommendation.