TBBB 3.4.26
Analyst 2
You're right. At the end of the day, I have a target in mind of what I think this company is worth in 5 years. I'm not trying to be one of the traditional compounders who think this is going to grow for 10 years and hold no matter what. Given that the business doesn't manage itself around margins and it's focused on payback period, I wouldn't say margins are irrelevant, but tracking this company is very difficult. It's all about store-count growth and same-store sales growth, and even same-store sales growth is muddled by the growth in new-store counts. So I personally track the company by looking at standardized profitability growth relative to how fast it's growing its assets. Just starting to see when that starts to decline might signal that newer stores aren’t as good as older ones.
In general, the biggest hurdle for this company will be, as it grows, can they hire enough people and get enough great talent? Setting up 200 to 300 stores in parts of Mexico where they aren't currently, because they're mainly in, I don't want to use the term civilized, but let's just call it places where you can find better employees, it's easier to launch, and there's better infrastructure. Once you start getting to other states, will they be able to replicate that like they are now? Like OXXO, I expect yes, but there will be some hurdles. I agree with what you're saying. I should keep a little on at all times and add more when the stock pukes.
Analyst 1
Yeah, I hear you, and that's been the struggle that I've had with it. It's a victim of its own success. I was surprised by its ability to grow its store count and by the seasoning of the stores relative to the median sales. The biggest risk to the story here is store vintage. As you roll out into less built-out regions and newer regions away from certain population centers, I would've thought the stub-the-toe scenario would've been similar to the dollar discounters here in the United States or abroad. Once you get out of that core competency early on in Act One, you usually stub your toe at some point here in Act Two with the seasoning of the stores. I was incorrect on that and have been proven wrong on the median sales per store for the vintage. Now, I think part of that is attributed to some inflationary pressures that have existed, so maybe not a pure, clean one-to-one on that.
I think over the next 5,000 stores you're rolling out on this concept, there's going to come a point where your returns aren't going to be as attractive as they were in the first few. I'm also a little worried that some of the competition seems to have slept on the concept here, whether it was Walmart, OXXO, or whoever else. You sleep on it for the first 500 concepts, but now that you're 3,500 plus with a runway to 5,000 pretty quickly here, and potentially 10,000, you start to do some pretty in-depth work as to how to win market share back. I always worry about somebody like Walmart. But the dollar stores have done exceptionally well in the United States and other countries where Walmart operates, and there's enough space for that.
From a cultural perspective, it's the most time I've spent on social media following a company in my life. I want to understand the consumer mindset versus your typical Manhattan finance pro focused on KPIs. Thank you for the rundown on the backstory behind the growth, massive adoption, and customer return rates. At some point, this is an attractive long-term hold, and I think it's one of the best bets on Mexico as an idiosyncratic name versus owning an ETF with adverse selection. I want to own it, and sometimes you have to ignore the valuation.
Analyst 2
Yeah, I wouldn't say they're insulated from competition, but the ones I listed are the biggest. Walmart Supercenters are an event to go to, so you wouldn't really drive to many of the Tiendas 3B stores. You'd probably walk. They're built so you can almost walk there, get dropped off, buy three or four things, and go back. The Walmart Supercenter use case is very different. You know that Walmart has a variety of concepts, and Bodega Aurrerá is one of them. That's the one most similar to what they're doing, and I think it's really great competition. They run very well. I just don't think they can compete on the margins and do their own private label to the extent that Tiendas 3B has.
From looking at a variety of these companies all around the world, I also think Tiendas 3B is really unique because virtually all of their manufacturing is done in Mexico. They don't need to go outside of Mexico. I've studied some of the hard discounters in Southeast Asia. They're all private, but they're growing very fast and disrupting some of the publicly listed retailers. They have to source from Egypt and Vietnam and leverage really great trade agreements. You don't need to do that in Mexico. Mexico has everything, so it's a pretty efficient operation. They don't even need to deal with anything outside of Mexico. They just find small-to-medium manufacturers in Mexico, go to them, and say, "Hey, we can bring you a lot of volume." They even put them in touch with banks, so if they need to expand capacity, they get really great loans. Then they work with them and don't sign agreements promising any volumes. It's just trust, which is unique. They've minted many wealthy manufacturers simply by working with and growing with them, so it's hard to see that slowing down.
The only risk, besides execution, is that they don't do fruits and veggies very well, and Mexicans eat a lot of fruits and veggies with many of their meals. They're tapping into that. It hasn't been rolled out yet. That requires a whole different approach to sourcing and go-to-market. We'll see if they can execute that well, but there may be a cap on how much revenue each store can generate if they can never tap into fresh. I expect they'll do that, but it’ll be important to see how they do fresh.
Analyst 1
What do you think that would take from the store? The whole concept is a low SKU count, call it 800-plus, 55% private label. Then you have 10% of that SKU count as one-off items. So you've got 35% of national brands or store-name brands remaining. What would they clear out there? To your point, many concepts are trying to get into that space, and it's so low-margin and so competitive that I guess that’d be a potential stumbling block. I don't know what percentage of their SKU count you think would go that route.
Analyst 2
Not much, but I think that would add a whole other dimension to the use case of why someone would want to go there. They're just starting, but their whole thing is, I was shocked, I thought it was always, "Hey, we're going to raise margins a little bit, and we're targeting X margins." But these guys don't target margins at all in their businesses. It's purely payback. What that means is they want to squeeze as much excess fat out of the supply chain as possible.
So for their fruit and what they're doing with fresh fruit, veggies, and even a little bit of meat, I think they're going to farmers. Usually, if you send fruit to the stores, it has to go from the farmer to a central warehouse, you have to cut it up, package it, and do all these things. I think they're literally trying to go directly to the farmers. That's going to create a whole new supply chain where they just mass-bulk ship fruit and veggies from farmers to a centralized warehouse, where they can do it themselves and bring more in bulk into the stores. That would cut costs and bring use cases. But they also said they won't do that if they think it’ll harm their unit economics. They acknowledge that it's important to have it in their stores. Otherwise, you're missing use cases for when someone needs to buy fruits and veggies, which is a lot of the time.
Analyst 1
I hear you on that. The other risk people often discuss is the possibility of e-commerce disruption. It's been interesting to see Walmex at the forefront of efforts to understand e-commerce penetration and delivery. That's a slightly different end market that you're selling to.
Analyst 2
I'm not worried about that at all. They seemed to tell me they’d never do online sales. It's not economically viable, given the basket size and the value proposition consumers want.
Analyst 1
Yeah, on the 3 to 5 items, give or take, with people showing up. I find the funniest story about the whole thing is how Tony was literally sitting there with a clipboard asking people as they were shopping at certain locations what they want, how they want it, what in particular would get them to come back to the store, what novelty items get people excited on one-time offers, what are the key staples in households, and how do we undercut the pricing or do those prices at break-even.
The only thing in the growth story that could disrupt the rollout and the economics is the mismatch between stores and the distribution centers they serve, given a natural upper limit on how those DCs can serve stores at an optimal cadence. You might hit a small issue where you need to build out more DCs to support new unit growth, which might impact your financials. But again, I'm having a really hard time breaking this story. Every time I talk about it, I say, "Just put aside that you've got a self-funding vehicle with name-brand loyalty and the scale it has today. There are returning benefits to that scale." The key point you raised is whether you can hire enough labor and managers to oversee these regions, but I’d say that's where OpEx comes from. Shareholders may become frustrated if you're growing top line, but it's not funneling through. It's the classic "top line is X, margins are Y, and my operating margins haven't improved or have actually come down because I'm not getting the scale benefits I thought." Maybe that's the greatest risk here.
Analyst 2
Yeah, I think the risk is just that people will always find a reason to look at a 50 or 75x PE stock and puke it, asking "Is it going to scale?" when the business fundamentally is run from a "can I pay this back in 2 years?" mindset. It's not from a margin standpoint. So yeah, it's a hard stock for any quintessential value investor to look at. But their IR is improving. Their disclosure around their three-class shares is great, and how they're shrinking that. They just hired Joaquín Ley, a well-known sell-side retail guy in LatAm, as their head of IR. They're improving many things. It's also US-listed, which helps.