Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: Absolutely. And I like the very holistic breakdown of that valuation approach too. That was extremely helpful to hear. This has been very interesting. You're instructing a lot of us again on a business that probably many weren't familiar with. We close these out with the lessons that you can take away, potentially apply elsewhere. Seems like there's a lot that could be applicable elsewhere from this one, but what would you say stands out the most?
· Markus Hansen
[00:00:00] S1: First and foremost, I love history. I'm a bit of a history buff. My son who's 19 now, he's heading off to college, recommending some books to read. Firstly the Sam Walton one's a great one. I just want to read about the ups and downs of retail, the business model, how he got there. Sol Price's book, if you can't get it, you can find some online reviews. It's definitely one worth reading. And it speaks to anyone from an older generation, and ask them about FedMart. And if you go online, you see the older club members who have the original card, and they talk about and laugh about it. But it is very interesting, this idea of the dynamic of a club. If someone had told you starting out fresh, you didn't know anything – you have to pay to shop here. You'd be like, I'll just go shop next door. But you do understand, if you pay, what you're getting on the other side. The whole concept is an interesting one, but a very interesting dynamic. So again, it's a reminder there are people who are able to come in and change industries in the way they look at it and set something up for others going forward. And like I said, Sol Price arguably influenced the likes of Home Depot and these other giants we know. So his impact or the impact of their ideas are very prevalent across the board. It ties in also with this idea I think of – the Europeans call it ESG, but very often, some of the greatest companies have also thought about their customer base in terms of their image, but also what they're bringing and adding to the community. And that's in a good way in terms of jobs, local jobs in terms of supply chains coming in. I think more and more if you look at the younger generation customer base, I know we keep saying they love their stories and stuff, but these are fantastic stories to follow. And very often capitalism gets a bad name. This is good capitalism. And I think that's important in an era where – I'm not being political here, but it gets thrown around, good or bad. America is a capitalist society at the end of the day. This is important to understand how these things can combine and work very well. The final part is, it's fun when you talk about these things. I have a bunch of friends who are from South America and actually, anyone you mention from the Caribbean, you know, anyone from – and there's a lot of people.