Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[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? [00:00:00] S2: I think they saw that we have been involved in businesses for decades, not years. That we don't buy businesses and then flip them, and that we ourselves have operating experience running our businesses. And so I think the owner-operator and long-term nature of 3G was something they found attractive. And I think, given where they were in their life cycle and succession planning and whatnot, it made sense to explore. [00:00:00] S1: They stayed involved both personally. They'll keep running the business and they will have significant equity in the business because they elected this mixed-consideration election that allows them to stay invested. [00:00:00] S0: From the sounds of it, it sounds pretty well run. It sounds a little different than the Burger King story. And I'm so curious, it sounds like so much of the return that happened in Burger King happened because you did a lot of cleanup work. You made it efficient and then grew it. In this specific case, is it much more oriented towards – let's just make it a little more efficient and focus on growth? What's the balance of consideration?
· Patrick O'Shaughnessy, Alex Behring, Daniel Schwartz
[00:00:00] S0: From the sounds of it, it sounds pretty well run. It sounds a little different than the Burger King story. And I'm so curious, it sounds like so much of the return that happened in Burger King happened because you did a lot of cleanup work. You made it efficient and then grew it. In this specific case, is it much more oriented towards – let's just make it a little more efficient and focus on growth? What's the balance of consideration? [00:00:00] S1: You got it. I mean, we need to keep this thing growing is the first and second and third order of business for us. Because that's what got the company to where it is, and that's what will get the company to where it needs to go. And, of course, there are efficiency opportunities. Yes, there are. And we try our best to address as much of that as possible. Yes, never at the expense of altering that trajectory in any way, shape, or form. Different in this situation than what we had at Burger King, where we needed to actually create that trajectory. It wasn't there. [00:00:00] S2: Each transaction is different. I think they're all – BK, talking about Hunter Douglas, they're all great businesses, and I think there are different ways we were able to kind of help in each. And this business is certainly growing faster than any of the other businesses that we've been involved in.