Breach Inlet Capital Issues Public Letter to Board of Daktronics
Expresses Support for Shareholder Alta Fox and Encourages Board to Act in Best Interests of ALL Shareholders
Offers Recommendations to Improve the Company
Breach Inlet Capital, LP, an investment firm focused on underfollowed and misunderstood small cap equities, today issued the following letter to the Board of Directors of Daktronics, Inc. (NASDAQ:DAKT).
The full text of the letter follows:
December 17, 2024
Daktronics, Inc.
201 Daktronics Drive
Brookings, South Dakota 57006
Attention: Board of Directors
Dear Members of the Board:
Breach Inlet Capital, LP (together with its affiliates, "Breach Inlet Capital" or "we") has been a patient and supportive shareholder of Daktronics, Inc. ("DAKT" or the "Company") for more than a year. Based on public information, we are a top 10 shareholder of the Company with ownership of nearly 2% of the outstanding shares, which is more than any of the Company's directors or executive officers. We have a history of constructively engaging public company boards to create value for shareholders, so we urge the Board of Directors (the "Board") to carefully read this letter and expeditiously enact our recommendations.
Over the past six months, our concerns about the Board have grown. First, it is inexcusable that DAKT did not announce its search for a new CFO until nearly two years after DAKT's going concern notice.1 Also, DAKT did not announce it had hired consultants to accelerate growth and improve margins2 until after DAKT's revenue and margins began to fall in fiscal 1Q25. Further, after we pushed DAKT's leadership to provide long-term financial targets, these metrics were finally provided in February 2024.3 However, the financial targets were vague and have not been formally reiterated, which renders those targets useless in our view.
Most alarmingly, we have become concerned by the Board's public response to Alta Fox Capital Management, LLC ("Alta Fox"). Alta Fox is DAKT's largest equity holder and recently provided recommendations to enhance value for all shareholders.4 We would like to remind the members of the Board that they have a fiduciary duty to all shareholders, not just the Kurtenbach Family. To be clear, we have no agreements, arrangements or understandings with Alta Fox regarding DAKT or any other company. But, as a concerned and unbiased shareholder, we thought it was necessary to express our agreement with Alta Fox's stated concerns regarding the Company's leadership, governance practices, and incentives.
In addition to the myriad of issues identified by Alta Fox, we want to highlight another example that supports the belief that the Board seems entrenched and beholden to the Kurtenbachs. In early May 2024 (four months before the Company's 2024 Annual Meeting of Shareholders), we emailed Lead Independent Director Andrew Siegel and Chairman/CEO Reece Kurtenbach to propose Glen Herrick as a Board nominee.
During his 10+ year tenure as CFO of Pathward Financial, Inc. (NASDAQ:CASH) and despite three different CEOs, Mr. Herrick helped drive a ~15% EPS CAGR and ~15% annualized total shareholder return. In addition to his superb track record, Mr. Herrick resides in South Dakota (where DAKT is headquartered), is a former engineer with an operations mindset, and is a longtime DAKT shareholder who is passionate about seeing the Company be successful. In our view, Mr. Herrick is more qualified than any member of the current Board.
DAKT informed us that Mr. Herrick would be fairly evaluated as a director candidate for the 2024 Annual Meeting. Instead, the Board waited until July 26th to interview Mr. Herrick and the Company filed its proxy statement in connection with the 2024 Annual Meeting just 10 days later. At the end of that interview, Mr. Herrick was told that, "Daktronics is simply getting to know potential candidates for future board openings and building a bench." Therefore, it appears the Board had no intention of seriously considering Mr. Herrick as a nominee at the 2024 Annual Meeting, despite telling us the contrary.
Furthermore, Mr. Herrick contacted Chairman/CEO Kurtenbach and Secretary Carla Gatzke (who is also the sister of Chairman/CEO Kurtenbach) to offer himself for the open DAKT CFO position. He was thanked for his interest and told his resume would be submitted to the recruiting firm leading the CFO search. More than 7 weeks has passed since then, yet Mr. Herrick has not heard from the recruiting firm. Instead of fair consideration, it appears the Kurtenbachs have again rebuffed a highly-qualified candidate. We do not have confidence that the Board will select a CFO who is best for all shareholders.
Adding to our concerns, members of DAKT management and the Board have sold or distributed a combined $19 million of stock in the past six months, which represents an estimated ~35% of their holdings.5 If current leadership has so much confidence in its plan and the trajectory of the business, then why are they selling so much stock?
Lastly, every member of the current Board (other than Howard Atkins) was on the Board when DAKT received the going concern notice. At that time and under their stewardship, the long-term viability of DAKT was in question. Thus, it gives us serious pause that the same Board is still leading DAKT today.
Ironically, Alta Fox is the firm that potentially saved DAKT from bankruptcy. Now, the Board is wasting shareholder capital in a public feud with its largest investor. DAKT shareholders deserve much better. We implore the Board to immediately stop fighting with DAKT's shareholders and focus on its fiduciary duty, which is to maximize value for all shareholders.
To reiterate, we agree with Alta Fox and expect that DAKT's non-insider shareholders share our views. We believe DAKT is a high-quality company that is severely undervalued because the Company is not being managed to maximize its potential. We believe it would be in the best interest of shareholders for the following changes to be implemented immediately:
- Declassify the Board.
- Reconstitute the Board with at least four shareholder-nominated directors.
- Separate the CEO and Chairman roles, while naming a shareholder-nominated director as the new Chairman.
- With the involvement of shareholder-nominated directors, attract a CFO with a proven track record in operational excellence and capital allocation.
- Issue annual guidance, which should provide specific ranges for Revenue, EBIT and adjusted EPS.
- Issue three-year targets, which should include the expected specific benefits from spending ~$10 million on consultants and the "Digital Transformation".
- Restructure executive compensation, which should include a greater mix of stock compensation and more stringent/updated criteria.
- Restructure the salesforce compensation, which should be more heavily weighted towards commissions and incentivizing outbound sales.
- With the refreshed Board and new CFO, develop and communicate a clear capital allocation plan.
- Remove the poison pill.
We are happy to discuss our views in more detail with the Board. We look forward to your prompt response, which should be in a cooperative, not a combative, manner. In the absence of Board action, we plan to continue to make our voice heard to ensure the Board grasps the severity of the situation and the need to act in the best interests of all shareholders.
Best Regards,
Chris Colvin, CFA
Founder and Portfolio Manager
Breach Inlet Capital, LP
1 Source: DAKT 8-K filed 12/7/22; "substantial doubt about the Company's ability to continue as a going concern"
2 Source: DAKT fiscal 1Q25 Earnings Calls on 9/4/24
3 Source: DAKT fiscal 3Q24 Presentation filed 2/28/24
4 Source: See SC 13D/A filed by Alta Fox on 12/11/24
5 Source: DAKT Def-14A filed 8/5/24; DAKT Form 4s filed during the past six months
View source version on businesswire.com: https://www.businesswire.com/news/home/20241216340543/en/