Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to talk about Kraft Heinz and the lessons learned from it. It's an interesting one, because, as we've talked about before, if you just looked on a piece of paper, you'd be like, ah, it was another investment you made, didn't do as well as RBI, it was fine. Everything underneath the surface is far more interesting. So I'm curious for your perspective on the story, now looking back on it. But most especially for just what you take away from the experience that altered how you think about your business, investing, or anything else.
· Alex Behring
[00:00:00] S1: If you look at the Kraft Heinz story for us, the Heinz investment turned out to be a pretty decent one. We made almost three times our money on it and were able to return our investors' capital. And the Kraft investment which didn't do, obviously, as well. And Patrick, I think the lesson for us there is basically, I don't know that we underwrote the quality of the business well. Meaning there were significant portions of the Kraft portfolio which were relatively commoditized, and therefore overly exposed to this changing dynamic where private label and the big retailers were essentially getting into the business and taking share. And I think we didn't fully understand that from the get-go. Looking at past financials would not show you that, really. And I think that was the main issue with it. Did we have some execution issues? Yes, but we fixed those. And I don't think those were determinant to the investment not having done so well. In fact, we have many years ago already, several years ago left our involvement there. I think the company has decent people working there and doing a good job managing it, but it's not like the stock did particularly better, frankly. The lesson for us is, again, how much more difficult and how much more diligent therefore we need to be in evaluating business quality in the investment process, which I think helped us beef up the process to make both the Hunter Douglas and its investment, and then subsequently the Skechers investment.
· Daniel Schwartz, Patrick O'Shaughnessy, Alex Behring
[00:00:00] S2: Even if a business has great historical financials, I think today we likely wouldn't be willing to take big customer concentration risk. And then that goes back to that likelihood of, or potential of being disintermediated, and an inability to price risk. [00:00:00] S0: What was the concentration issue in that specific case? [00:00:00] S1: Pretty much any CPG company in the U.S. is going to have a third of the business or so, sometimes more, with Walmart. Or another big chunk with Costco. And it's true in other countries as well, where between one and three retailers, you're going to have the bulk of the business. [00:00:00] S0: Is it ever fair to just apply like the thing you did with McDonald's market cap versus Burger King's, and just say – I used to do this for Spotify. It's like, I pay X for Spotify. I think I'd pay 3X really easily. And that's pricing power. [00:00:00] S2: With Skechers, you could do something similar to that. I mean, Skechers is the third largest sneaker company in the world. [00:00:00] S0: That surprised people, I bet. [00:00:00] S2: It surprised many people, including us, the first time we... [00:00:00] S0: First two being Nike and Adidas. [00:00:00] S2: And the numbers are a little skewed in that I'm referring to sneakers only, and a lot of these companies, like Nike and Adidas, have apparel businesses, and Skechers is 99% footwear. [00:00:00] S1: It's also surprising the distance, because Skechers sells $9 billion a year in sneakers, and Adidas sells $14. [00:00:00] S0: Yeah, I would not have gotten that right.
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: Yeah, I would not have gotten that right. [00:00:00] S1: In most people's minds, I mean, back to the McDonald's-Burger King analogy, most people would be surprised by those figures. [00:00:00] S2: Yeah. [00:00:00] S0: Is this the case where the business is ahead of the brand? [00:00:00] S2: No. [00:00:00] S1: Because it's growing so fast. [00:00:00] S2: Two thirds of the business is already outside of the U.S. And when you look at who is buying the brand and the market share the company has within those customer cohorts, it's actually pretty good. Broadly speaking, we like footwear. We like athletic footwear. We believe there is a casualization and an athleisure trend within society. [00:00:00] S1: That's why the industry is growing 7% a year.
· Daniel Schwartz
[00:00:00] S2: Yeah, that's largely here to stay. It's a multi-hundred billion dollar category. As Alex said, these trends are driving this mid-to-high single digits growth. There's not a lot of private label. The same, I don't know, seven or eight sneaker companies are the same seven or eight sneaker companies in most countries. We like the industry backdrop. This first came up on our screen as a fast-growing, good business some time around 2018, 2019. And we just followed it. We researched the sneaker industry. We followed the company. In 2021, prior to our acquisition of Hunter Douglas, we visited the company, we visited the Skechers company and the team out there. And we introduced ourselves through a mutual friend. As long-term business owner operators, we talked a lot about the global franchise restaurant business. And because they're also selling a lot of their footwear through a global franchise network as well. And we were really impressed with what they were building. I think they were pretty impressed by our businesses and the fact that we had also been in operating roles. And we stayed in touch and we'd visit them a couple times a year, and we toured their DC. And we'd meet them when they'd come to New York for the fall and spring buying seasons. They’d tell us each year, "Oh yeah, we're going to add a billion dollars in sales next year." And every time, a year later, it's like, wow, they did. They added a billion dollars. And sure enough, in the handful of years we knew them, they doubled the size of the business. It's one of these things where, to your point, maybe some people – especially maybe in New York – some people wouldn't know that the brand is as big as it is. But when you start looking into the numbers, if you look back over the last – and I'm not going to cherry pick years, so you choose the years – three year, five years, ten years, seven years, eight years, they would CAGR sales and volume in the double digits. And they had the second highest loyalty rate amongst customers, I think only after Nike. They were the most diversified – they had the highest SKU count – most diversified across all categories of athletic footwear, thereby reducing the risk. There's no hero SKU. There's no Air Jordan or Yeezy, or Samba, or equivalent.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: This growth has basically been anchored by great product development. The product is really good and is developed in such a way that it's accessible. It provides great value for the consumer. And then the second thing is, you basically have a great distribution on this business, where you don't rely on big boxes or retailers to get your product out there. The bulk of the sales are done through your own 5,000 plus stores and your sites. That's a big difference. [00:00:00] S2: Basically, you have highly experienced management, who essentially founded the business 30 plus years ago. And Robert and his product team coming up with incredible innovation. And Michael and his store team building big, beautiful stores. And David and the supply chain team making sure that they can deliver the shoes to the stores promptly. [00:00:00] S1: Great leadership in this company. Otherwise, how would you start from scratch and be reaching out closing in on $10 billion dollars? [00:00:00] S2: It's really impressive what the team built over the last 30 plus years. [00:00:00] S0: And so, as the transaction came together, what was the motivation of the other side to sell equity in the business?