Business Breakdowns
· Markus Hansen, Matt Reustle
The grandson who'd been working his way through took over officially as CEO, and they brought in a new CFO who comes with a strong track record of management in South America, which again adds to this understanding that South America is where we may see them lean into places like Chile's new markets. And he has some experience on that side, particularly with a place like Chile where e-commerce is a bit more developed. So I think 2, 3 years from now we'll hear a bit more of that CapEx going into that side of things. But right now, CapEx really is just building more of these stores, bring the DC along, and just leaning into this operating leverage over time. [00:00:00] S0: Yeah, it's interesting when you have a proxy in the US. I'm gonna beat it to death, but Costco and their ability to thrive throughout the e-commerce revolution is an interesting case study too, relative to this. Everything you mentioned there has some added credibility when you look at how things have managed here. In terms of looking forward and the risks that do exist, you've referenced many risks that theoretically exist, but what would stand out, if anything, the most to you in terms of what's most important to get right to fulfill what's possible in the future?
· Markus Hansen
[00:00:00] S1: Yeah, really keep doing what they're doing, not rushing anything, changing anything dramatically. I think certainly private label continues to be an area – if you look at best-in-class US, Costco about 33%, Sam's Club I think is just above 30% from the disclosure I saw. They're right now at 19%. The ability to maybe do more of that going forward. That tends to be more, if we think on the fresh side, the ability – so one area right now they'll talk about on the call is developing a private label chicken offer. And this is going out and finding some large farmers they can deal with locally. A lot of that is sourced, so it's building goodwill with the local guys. But getting the type of quality which is consistent, rather than just being one little store where you can come in, getting this across 10 stores. So in the bigger markets, I think that's feasible. We'll see more of that. That's margin improving, because generally you enter a private label transaction because it's margin improving for the same type of thing you're offering. It also builds your reputation. Once someone is buying something from you on the fresh side for the first time and is really good quality, you're more likely to go and try their other stuff. And as we know, Costco is renowned for its famous shrimps. Obviously then you do the things like the chickens, the hot dogs and all this stuff. Most of the time when we go for something fresh, we really want a brand at first, we're gonna go try something which is local but really good quality. So I think there's more they can do there. The other part I think is some of the other services they can do. So right now it's pretty straightforward. You talked about how you were going to the auto to get your tires. They don't do that right now. That is an area where – auto is an interesting one given how they're located, they have the parking area. It might be something they might do in some of these larger economies as well. It's an added service. And most of the times what they're looking at is areas where there is fragmented competition, but where – coming back to this idea of convenience – if you can go and get all this done and say – remember we talked about Casey's, we sell you time, the most valuable commodity you just cannot get enough of – makes your day even better. And that's very powerful.
· Markus Hansen
Also getting the benefit of then these are the kind of things where you can think about bulk supply, whether it's tires or auto parts. That could be something down the road. They haven't talked about that, but it's interesting. That's an area where, from both a dollar point of view, the ability to offer discounts, and the type of customer they're going for, that would make a lot of sense. These are still avenues of growth. So I think this is more once we get to a certain scale. But really it's bringing this great, consistent, good quality, solid reputation to these local markets and it's working very well. And then it's really leaning into this – there is this long-term structural growth of US citizens moving to these markets to live, sometimes for work and then staying there. But also, people from a lot of these countries who've come to the US, worked and gone back. And that experience immediately kicks in. And the more and more communication they're doing on that side is working very well. But the final part was really this ability to lift up the membership number. People at first thought that maybe they'd move from the average. When they started, it was like $30 going to $60, it's now $45 to $90. It's a big number going locally. It's working very well because I think they're emphasizing, yes, that's a big number, but look at all the benefits you're getting. When you do the math, it makes a lot of sense. And this is why we're seeing very low churn. You've almost got like a 90-91% renewal rate. It's higher at the higher end. It's almost close to 100, but granted that's a smaller base, but that's telling you that those who are doing it really are seeing the benefits and it's working, because this is just general spending anyway. People do maybe have another option, but this is really bringing them in.
· Matt Reustle, Markus Hansen
[00:00:00] S0: Fascinating. I'm curious, do you have a valuation framework for this business? What is the market? How do they approach this, where there's a growth story, it's broad, but yeah, I would just love to hear you talk on that. [00:00:00] S1: Tougher in the sense of valuation is always a tough one, right? [00:00:00] S0: Absolutely.
· Markus Hansen
[00:00:00] S1: This used to be a lot cheaper. This used to trade in the teens. It's now trading – I'm looking at forward numbers like in the low 20s. The US peers, which are peers to a certain extent in terms of the business model, are trading at much higher multiples. One would argue maybe fuller multiples. Now to be fair, having followed the US retail market for a while, the market pays for sustained consistent growth, maybe a bit too much. It tends to pan you very harsh when your growth hits a speed bump. So look at the differentiation between some of the department store companies, versus the Walmarts and the Costcos of the world. There's a bit of tech in there as well. That's true. This shouldn't trade up there with the US peers because there are three fundamental differences. One is with the US player, you're looking at one homogenous market. There's benefits of scale, there's deep size, there are much larger things. This one does have some added volatility of the markets it operates in, where there will be some volatility, However, that hasn't shown up just yet, but they continue to execute. This is a mid-cap name as well. Let's be clear, mid-caps tend to, in theory, trade more volatile. This one around earnings, you notice with mid-caps – can trade up or down 6-7%, and then goes back to its like normal consistent growth. And then it tends to make news flow. I think this is still being discovered as a stock though. And this is a weird one because it's a US company which sells all its business outside of the US. So this is one where we have it in our emerging market fund. But we are also able to, as it gets bigger, put it in some of the other funds. There's illiquidity – I mentioned about 25, 30% of the company pretty much is controlled. So that $5 billion becomes less in terms of what you can trade. So this is really much more of a longer-term story. Not too different to Casey's, by the way, when we first started talking about it, but a great story once you get it and see it perform, do well. Therefore, from a valuation perspective, this is not something you should be saying could get to a Costco-type multiple in the mid-term.
· Markus Hansen
However, the nature of the visibility of the sustainable top-line growth, combined through the ability to manage through volatile times and still execute on earnings is very strong for a company which has exposure to a more volatile region. So as an EM manager, this actually looks as one of the more interesting dynamic names I'd want to have in the portfolio on the retail side. And then finally, there's definitely worthiness for a premium here of the DNA of the management. It doesn't get better when you have these guys who've proven it, know it. It's a family business. Generally, you find some great long-run family businesses taking the long-term approach and view to where they're going to be. Because those tend to be the ones that, also through the volatile times, are less driven by the ups and downs of sentiment and really actually more often than not take advantage of the opportunities of volatility to improve the business and their exposure going forward. So that gives me a feel that this can trade up to the mid-20s and it's still fairly valued. Then we have to see obviously the execution keep coming through. But like I mentioned, if I'm looking at store count, revenue potential, earnings upside, all of these things are moving up and to the right. And in retail, retail generally is a tough business. I know we talk about the success stories, but speak to anyone in retail – this is why I always come back to Sam Walton hit it on the head when he said, the more you can control within your margin, that logistics – coming back to General Pershing – logistics is what wins retail wars. It's very important. They get a lot of consultants coming in saying, go asset light, you can generate – comes back to bite you in the tough times. You've gotta have that consistency. So I think they're right up there.