Symbotic – Making the Supply Chain Work Better for Everyone

1 Company Introduction

Symboitc Inc. (SYM or the ‘company’) is a supply chain optimization company focused on developing, building, and deploying automated distribution centers. The company’s customized warehouse product is designed around a palletized system that handles inbound freight (from trucks) and dynamically stores and retrieves the cases / pallets / items with a proprietary mobile robot.

Symbotic generates revenue through the design and installation of inventory management systems to automate customers’ warehousing processes (depalletizing, storage, selection, and re-palletization). Contracts with Symbotic have a hardware component and software component enabling system customization to operate within specific customer environments.

A distribution center acts as a hub to receive and redistribute inventory in bulk quantities, typically to retailers, servicing B2B transactions as a logistics hub. Fulfillment centers often handle picking, packing, and shipping of individual items to consumers; distribution centers ship products in bulk quantities on pallets or in large shipments (cases) vs. individual orders. Symbotic builds automated distribution centers, not fulfillment centers.

Rick Cohen is current Symbotic CEO (and CEO of C&S Wholesale Grocers) which was originally founded in 2006 to develop advanced technologies with the vision ‘to make the supply chain work better for everyone’. Cohen’s foundation holds 69% of shares outstanding.

The company reports 3 revenue segments:

1. Systems: $1.7bn 2024 Revenue (96% of Revenue) – design, assembly, installation, and configuration of the systems. The contract structure is cost-plus as well as fixed-fee. Revenue is generally recognized on a “percentage of completion” basis.
2. Software Maintenance and Support: $14.2mm (1% of Revenue) – maintenance license and support services that Symbotic provides its customers
3. Operation Services: $69mm (3% of Revenue) – assistance and services for operating the systems and ensuring user experience is optimized for efficiency and effectiveness.

The company’s backlog stood at $23.3bn in Q4 2023. Walmart represents $6.1bn of backlog, GreenBox $11.5bn (an affiliate entity / JV with SoftBank), and $5.7bn are other customers. The backlog figure reported by management represents the total gross value of the contracted ‘remaining performance obligation’ (RPO) including both the construction of systems and operation for (typically) 15 years. Said differently, there is a one-time systems revenue component and ongoing recurring revenue summed together in the backlog figure. Customers don’t have the right to terminate the RPOs / unfulfilled contractual commitments without paying a penalty.

Symbotic has actively deployed systems in the warehouses of the world’s largest retailers including Walmart, Albertsons, Target, Giant Tiger, and C&S Wholesale Grocers (C&S), which is the largest private grocery wholesaler in the U.S. and a closely related affiliate of Symbotic.

2 Situation Background

In 1974, Richard Cohen began working at the family company, C&S Wholesale Grocers which was co-founded by his grandfather, Israel Cohen, in 1918. Cohen took control of C&S after his father retired and in 2003, and moved company HQ to Keene, NH.

As of 2023 C&S is the largest wholesale grocery supply company in the U.S. with around $22bn in revenue, one of the largest private companies in the country and the largest employer by headcount in the state of NH. C&S has been able to attain efficiencies in the low-margin grocery business by using performance incentives combined with self-managed teams responsible for assembling orders thereby eliminating costly supervisors. Mr. Cohen has been building, running, and innovating warehouses for two generations.

Symbotic was founded in 2006 by John Lert and at the time was called Casepick Systems. John Lert thereafter sold Casepick Systems to Rick Cohen. John Lert left Casepick Systems in 2011 and went on to found Alert Innovation, which was acquired by Walmart in 2022 and internalized / rebranded as Walmart Advanced Systems and Robotics. Casepick Systems rebranded as Symbotic in 2012

In 2014, Target adopted Symbotic’s technology rather than building a new distribution center in Woodland, California. By 2017, Symbotic began working with Walmart at their distribution center in Brooksville, Florida, where the company’s automated technology was deployed to sort, store, retrieve and pack freight onto pallets. In the same year, the company also began working with Albertsons.

In July 2021, Walmart began introducing Symbotic systems to 25 additional (out of 45 total) regional distribution centers.

In December 2021, the company announced it was going public through a merger with SVF Investment Corp. 3, a special-purpose acquisition company sponsored by an affiliate of SoftBank Investment Advisers which has invested materially in Symbotic.

The deSPAC transaction completed in June 2022. Since publicly floating, WalMart and SoftBank have materially increased their positions via equity contributions to Symbotic.

The company still has zero debt. The Cohen family retains a 69% ownership position, leaving the publicly traded shares a very thin minority of total shares.

In July 2023 management announced the establishment of GreenBox Systems LLC, a 65% / 35% JV between Softbank and Symbotic, focused on the warehouse-as-a-service market. The idea being because Symbotic systems are generally too large for a single buyer, you could create a fractionalized warehouse where multiple companies contemporaneously store inventory. GreenBox placed a ~$11bn “non-cancellable” order on Symbotic’s backlog. C&S Wholesale Grocers placed the first orders with GreenBox.

By mid-2024 management reported construction delays and increased implementation costs which had squeezed profit margins, and spurred Cohen and his team to warn that fixing the issues might temporarily slow revenue growth. With the broader industry seeing notable distress, and the broader grocery industry facing material regulation-driven risks, many speculators are shorting / betting against the stock.

On November 27, Symbotic disclosed it had “identified errors in its revenue recognition related to cost overruns on certain deployments that would not be billable, which also affected system revenue recognized in the second, third, and fourth quarters of fiscal year 2024.” As a result, Symbotic’s restatement is expected to reduce system revenue and other key financial figures by $30mm-$40mm for FY 2024.

3 Investment Highlights

Established Leadership with Extraordinary Industry Connections: Cohen has an uncommonly strong relationship with Walmart – supporting their entry into the grocery market in the early 2000’s, which soon enabled their ascent to become the #1 grocer in the U.S. Cohen has built a team of experienced board members and executives with a diverse range of technology expertise acquired at industry leading companies and institutions, unlike most other SPACs. While many senior positions are also employees or connected to C&S Wholesale Grocers, management has been completely transparent about transitioning toward two separate operating structures and managing the rapid growth Symbotic is experiencing. Cohen, C&S Wholesale and Walmart have tremendous experience in logistics and grocery. We think they are likely to experience measurable success despite operational and accounting road-bumps in the early days of Symbotic’s public existence.

Strong Cash Position with No Debt: $727mm cash on the balance sheet as of Q4 2024. Extremely well capitalized partners (Walmart, Cohen Family, SoftBank). It is challenging to see a future where near-term obligations will challenge a going concern of the company.

Strong Value Proposition: Symbotic’s automated systems can be retrofitted into existing warehouses, and they accelerate the movement of goods through the supply chain, improving SKU agility, fulfilling orders with 99.9% accuracy and involve less inventory and operating costs. The architecture and applications are differentiated from legacy distribution centers (higher cost, limited modularity and throughput) and from more modern fulfillment centers (human-centric models / partial automation and or item picking).

Moderate Industry Tailwinds: COVID-19 illustrated the global supply chain is stressed and the demand for warehouse automation across many industries has experienced an inflection point. As the labor force shifts toward an older, more highly educated demographic, the warehouse labor pool is shrinking and becoming more expensive. Many well positioned distribution centers are either operating manually or utilizing outdated, static mechanized conveyor systems. The dramatic growth in e-commerce has increased supply chain complexity by putting pressure on retailers to support multiple sales channels and orders of individual items in addition to cases and pallets. Meanwhile, consumer expectations have evolved to demand a larger variety of items to be delivered quickly and seamlessly. This has placed strain on traditional supply chain infrastructure and workers.

Consistently Scaling and Growing Operational Footprint & Services: 39 system deployments with 21 of the 39 fully operational. Backlog has grown to $23.3bn as of FY 2023. Walmart represents $6.1 of backlog, GreenBox $11.5bn, and $5.7bn other.

Timing & Valuation: Excellent time to purchase the stock, near it’s 52 week low.

Governance Structure: Rick and family own 69%, Walmart 16%, SoftBank 8%. Only ~7.0% is liquid or commonly traded. Ballie Gifford & Co hold 2.4% of the public 7.0%.

Decently Attractive End Markets: While grocery is a very thin margin industry, it is nearly guaranteed to be a significant part of the future economy. People consume food every day and efficiencies in the supply chain are desperately needed.

4 Why this Opportunity Exists

Several short seller reports were published on the web late summer 2024. The short interest on the stock since that time has been about 33% of the total float, or about 40mm shares, likely initiated when the stock was trading between $40-$45 per share.

Also mentioned above, Symbotic has experienced recent construction delays, increased costs, and identified errors in revenue recognition / cost attribution for the past few quarters.

Summary of short reports below – in their own words…

• Misled investors through broad / vague disclosure on actual systems in progress
• Astronomical valuation relative to ‘peers’
• SYM is far more penetrated in its WMT Systems rollout than investors appreciate – and thus is almost already at peak WMT Systems Revenue
• Misleading disclosure on sites in deployment and revenue recognition
• Affiliated entities & Arms-length agreements: Cohen appears to have gone to extreme lengths to “buy” SYM business to mask the fact that the “backlog” should be shrinking materially on account of its inability to win real new business

5 Why the Short Sellers are Potentially Incorrect

COMMENT: The short reports rely to an overwhelming degree on wall street consensus estimates, imagery analysis from private drone companies and analysis on import / export logs. We believe wall street consensus estimates are not the appropriate benchmark for evaluating this business. This should be thought of as a speculative venture with a higher-than-average probability of a reasonable level of success due to the expertise of the company leaders, the brief but positive track record, the well capitalized partners (Cohen family, Walmart, SoftBank), and the strong net cash position of the company. Further, while drone imagery is pleasing to look at, we find it often holds little merit for arriving at reliable conclusions. Symbotic is a very closely held entity, and very few shares are publicly traded. The future is likely to be volatile however we see the company’s story as materially better than these temporary road-bumps illustrate.