{ "title": "The Hidden Number on Tiendas 3B's Earnings Call That Spells Trouble in Paradise", "content": [ { "type": "image", "src": "https://i.ibb.co/jM5P9CF/Dummy-Art1.png", "alt": "Tiendas 3B Store" }, { "type": "text", "value": "Tiendas 3B, the Mexican discount grocery chain, just held its first-quarter 2024 earnings call, and on the surface, it was a celebration. Record store openings! Soaring same-store sales! EBITDA margins expanding faster than a teenager's appetite! Investors should be ecstatic, right? Not so fast. " }, { "type": "text", "value": "Hidden amidst the flurry of impressive figures, almost an afterthought really, was a seemingly innocuous comment about private label penetration. See, Tiendas 3B, like many discounters, loves to tout the success of its own-brand products. They're cheaper, they offer higher margins, and they build customer loyalty - what's not to love? But here's the thing: Tiendas 3B's private label growth might be a canary in the coal mine, signaling an impending slowdown in its breakneck growth." }, { "type": "text", "value": "Now, I know what you're thinking: \"Slowdown? They just said same-store sales were up nearly 15%!\" And you'd be right. But bear with me. Here's the crux of the issue: Tiendas 3B is tight-lipped about the actual numbers when it comes to private label sales. We know from their F1 filing that branded products made up 50% of sales in 2023, with private label at 45%. But during the call (see transcript), they refused to give concrete figures for Q1 2024, only saying the trend is \"upwards.\"" }, { "type": "header", "level": 2, "value": "Why the Secrecy?" }, { "type": "text", "value": "It's possible that the pace of private label adoption is accelerating much faster than expected. Imagine this: customers, squeezed by inflation, are ditching more expensive branded goods and flocking to Tiendas 3B's cheaper private label alternatives. This would certainly explain the strong same-store sales growth - after all, more customers buying more of the cheaper stuff equals a revenue bump." }, { "type": "text", "value": "But here's the catch-22. While a surge in private label sales might boost revenue in the short term, it could strangle Tiendas 3B's future growth. Here's why:" }, { "type": "header", "level": 3, "value": "Private Label Plateau" }, { "type": "text", "value": "There's a ceiling to how much private label a consumer will buy. At some point, they'll crave variety, they'll want that specific brand they trust, or they'll simply run out of private label options within Tiendas 3B's limited 800 SKU assortment. This means that at some point, private label sales will plateau, and Tiendas 3B won't be able to rely on this lever to drive growth." }, { "type": "header", "level": 3, "value": "Basket Size Conundrum" }, { "type": "text", "value": "Anthony Hatoum, Tiendas 3B's CEO, himself admitted that private label growth puts downward pressure on average basket size. Customers might be buying more items, but those items are cheaper. This means that Tiendas 3B needs to constantly attract new customers or convince existing ones to shop more frequently to maintain their growth trajectory - a much tougher task than simply increasing basket size." }, { "type": "header", "level": 3, "value": "The Margin Mirage" }, { "type": "text", "value": "Yes, private label products offer juicier margins, but can they offset the potential slowdown in sales growth from the factors mentioned above? Remember, Tiendas 3B operates on a razor-thin margin model. Any slowdown in top-line growth could quickly erode those hard-earned margin gains." }, { "type": "text", "value": "Now, it's important to note that this is a hypothesis. Without concrete figures on private label penetration, we're left to connect the dots. However, the company's own words about \"upward trends\" and the potential impact on basket size raise red flags." }, { "type": "header", "level": 2, "value": "What Should Investors Watch For?" }, { "type": "text", "value": "Concrete figures on private label penetration in the next earnings call. Continued obfuscation will only heighten concerns." }, { "type": "text", "value": "The trajectory of same-store sales growth. Any deceleration, even from the lofty 15% level, will signal that the private label strategy might be reaching its limits." }, { "type": "text", "value": "New category expansion. Tiendas 3B's pilot programs for fresh produce are crucial. Success here could offset potential slowdown in other categories, but failure could spell trouble." }, { "type": "text", "value": "Tiendas 3B has built an impressive business, but as with any high-growth company, cracks can appear in the facade. This private label conundrum, however, is one that investors should monitor closely. Is it a blip on the radar or a harbinger of a storm brewing? Only time, and more transparency from the company, will tell." }, { "type": "header", "level": 2, "value": "Visualizing Tiendas 3B's Growth" }, { "type": "graph", "graphType": "line", "data": { "labels": [ "2019", "2020", "2021", "2022", "2023", "Q1 2024" ], "datasets": [ { "label": "Number of Stores", "data": [ 1000, 1150, 1322, 1520, 1749, 2382 ], "backgroundColor": "rgba(54, 162, 235, 0.2)", "borderColor": "rgba(54, 162, 235, 1)", "borderWidth": 1 } ] }, "options": { "scales": { "y": { "beginAtZero": true, "title": { "display": true, "text": "Number of Stores" } } } } }, { "type": "highlight", "value": "Did You Know?" }, { "type": "text", "value": "Tiendas 3B's aggressive expansion strategy has seen them open over 1300 stores in just the last five years, a testament to their rapid growth and ambition in the Mexican market." }, { "type": "header", "level": 2, "value": "Tiendas 3B Q1 2024 Earnings Call Transcript" }, { "type": "text", "value": "BBB Foods Inc. (NYSE:TBBB) Q1 2024 Results Conference Call May 23, 2024 11:00 AM ET\n

Company Participants

Anthony Hatoum - Chief Executive Officer
Eduardo Pizzuto - Chief Financial Officer

Conference Call Participants

Bob Ford - Bank of America
Rodrigo Alcántara - UBS
Joseph Giordano - JP Morgan
Alvaro Garcia - BTG
Aleksandar Nikolic - Morgan Stanley
Hector Maya - Scotiabank
Santiago Alvarez - ALIVE Ventures

Operator

Good morning, everyone. My name is Leonor, and I will be your conference operator. Welcome to Tiendas 3B's First Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session after the speaker's remarks and instructions will be given at that time. [Operator Instructions].

Any forward-looking statements made during this conference call are based on information that is currently available. Today, we're joined by Tiendas 3B's Chief Executive Officer, Anthony Hatoum; and Chief Financial Officer, Eduardo Pizzuto.

I will now turn the call over to Anthony. Please go ahead.

Anthony Hatoum

Good morning, everybody. Welcome to our first quarter 2024 earnings call. We will review our key results for the quarter. Special welcome to those of you joining us for the first time. Eduardo Pizzuto, our CFO, will follow presenting our financial results. This will be a brief and to the point presentation, so that we can have more time for the Q&A session.

Some highlights. As expected, we delivered strong results for this first quarter of 2024. We opened 94 stores this quarter to bring the total number of stores to 2,382. Compared to the same quarter of last year, same-store sales grew by 14.8% and revenues by 13.9%. Operating cash flow grew by 36.4%, supported by EBITDA growth of 57.9%. We ended the quarter with a net cash of Ps. 4.3 billion due to the proceeds from our IPO and organic operating cash flow generation.

Let’s turn to operational performance. The momentum continues with our store openings. In term of store expansion, we maintain the brisk grade of store openings in what is traditionally a soft quarter for new stores. We opened 94 stores, bringing the total number of stores to 2,382. This is a 27% increase in the number of stores opened this quarter compared to Q1 2023. We have been very consistent with our growth. From 2019 to 2023, we have maintained a compound annual growth rate of store openings of 15% plus.

In our last earnings call, I mentioned that, we have a significant runway to sustain these growth rates, and we maintain our view that Mexico offers a potential of no less than 12,000 3B stores. I would mention, successful 3B stores. The strong performance of our stores opened in the last two years supports that view.

If you look at revenues and gross margins, we see that our first quarter of 2024, revenues reached Ps. 12.7 billion, that's a 30.9% growth over the first quarter of last year. Our gross margins increased by 80 basis points over last year's quarter, largely explained by our increase in scale and negotiating better terms with our suppliers, most of which we passed on to our customers.

I'll pass on the mic to Eduardo now.

Eduardo Pizzuto

Thank you, Anthony. Good morning, everyone. Our EBITDA and EBITDA margin is a consequence of everything we do. In Q1, we increased our sales, increased our gross margins and reduced our expenses as a percentage of sales, as a result, our growing EBITDA and EBITDA margin.

As illustrated in the graph, our EBITDA grew 57.9% from Ps. 396 million to Ps. 626 million and our EBITDA margin from 4.1% to 4.9%. If we exclude expenses from the IPO of Ps. 70 million incurred in Q1, our adjusted EBITDA would have been Ps. 695 million and a margin of 5.5%.

As we've mentioned in our last call, our discount is a unique business model. It generates a significant amount of cash through changes in negative working capital. In Q1, this trend continued. If we adjust our working capital by excluding IPO proceeds, net of cash used to pay down the promissory and convertible notes, then our negative working capital stands at Ps. 4.8 billion versus Ps. 4.6 billion at the end of last year. That is an increase of Ps. 287 million in Q1.

As explained before, this trend will continue as long as we continue to increase our sales. At our last call, we set guidance for the year to open between 380 and 420 stores and to increase the sales in the range of 28% to 32%. We maintained this guidance. Consumptions remain solid in the segments we target. The minimum wage increases have benefited our targets at customers, in particular.

Our decentralized approach to store opening is working well and we opened the record number of stores for our first quarters. Notwithstanding the IPO, our operating costs as a percentage of sales continue their trend downwards. As we get larger, the opportunities for efficiency improvements grow, and we continue to dilute cost with a larger revenue base. Our growth is self-funded, thanks to positive EBITDA margins and attractive negative working capital generation.

Our business model is simple, yet very powerful. A virtual circle of opening new stores, continuously increasing the value for money that we offer to our customers, and as a result, attracting new customers and growing sales per store, resulting in turn in more sales and with scaling becoming even more efficient and then allowing us to offer increasing value for money to our customers, while all this time continuing to generate cash.

Thank you for your support and for being on this call with us. And now, we can start our Q&A session.

Question-And-Answer Session

Operator

Thank you. We will now conduct the Q&A session with Anthony Hatoum and Eduardo Pizzuto. [Operator Instructions]. Our first question comes from the line of Bob Ford. Please state your name and ask your question.

Anthony Hatoum

Bob, you're on mute.

Bob Ford

Thank you so much. Apologies for that, but congratulations on the quarter. Anthony, post-IPO, are there any tangible benefits you're seeing to the business? Are suppliers perhaps taking you a bit more seriously? Are there new multinational private labor operators maybe that are knocking on your door or are you seeing better offers in real estate? Is there a halo benefit for your existing vendor base, or is it just a big headache? And, given your ability to self-fund growth, how are you thinking about the use of that that Ps. 4.3 billion?

Anthony Hatoum

There's definitely a positive halo effect as you say Bob in a sense that, the level of motivation and enthusiasm on the part of all our suppliers has gone up significantly. What I see is people that are more fired to do more and to do things faster.

In terms of what do we do with, our cash, as we have mentioned to some of you previously, there's a number of initiatives with high returns on invested capital that we have started undertaking, namely in terms of human resources and some others in IT, efficiency projects that we have started putting to work.

But anything that we look at is always looked at through the lens of what's the return on invested capital? What's the return on time invested? The rest basically gives us more strength in a sense that, we have a very solid balance sheet today and we've cleaned it up. There is no debt on it. That is comfortable in terms of weathering any turbulence down the road that might happen

Bob Ford

Very helpful. Just one follow-up, and that is, are you seeing any deterioration in terms of the quality of your new store openings in terms of locations, occupancy costs, or the initial performance of your sales as you ramp in new markets?

Anthony Hatoum

If you've looked at our spaghetti chart previously, you've seen that every vintage seems to be doing better than previous vintages. As we have maintained our discipline in store openings and our methodology and our approach and our models have not changed. There is no reason to believe that going forward, we don't maintain the same positive results from new store openings. We haven't seen anything like that.

Operator

Our next question comes from Rodrigo Alcántara. Please state your company name and ask your question.

Rodrigo Alcántara

Hi. Thanks for taking my questions. Congrats on the execution, Anthony, Eduardo. My question would be a simple one, regarding on gross margins. If I recall on the investor rep process, the base case was here, to some respect flattish or even slight contraction on the gross margin as you're investing in prices. But you have surprised to the upside in the sales mix effect and the efficiency that you can generate on the gross margin. I mean, just curious here, if the outlook or if your view regarding how to handle the gross margin has changed, Anthony. Perhaps instead of a flattish scenario for gross margin, we may see gross margins structurally trending up? That would be my question. Thank you. Congratulations on the quarter.

Anthony Hatoum

Thanks, Rodrigo. The increase in gross margin in this first quarter should be seen as a normal fluctuation in our business. Don't read too much into it. It's a very dynamic metric that will move around. As we are scaling up, we are getting better terms from suppliers and our suppliers are getting more volumes from us. In general, we aim to pass these savings to our customers, which then will generate more traffic, more sales and ultimately, more cash flows. But it's highly dynamic and it's normal for it to go up a little bit, come down a little bit over time. Just look at the long-term trend, and I think we'll be in line with what we've expected.

Operator

Our next question comes from Joseph Giordano. Please state your company name and ask your question.

Joseph Giordano

Hi there. Good morning, everyone. Good morning, Anthony, Eduardo. Thanks for taking my question. I want to explore a little bit, more, the very high operating leverage that, we continue to see. Looking on a unit economic basis, same-store sales is in the mid-teens range for quite a while. But I think, this hides an even stronger metric, which would be real mature locations for those stores with over of five years. This is probably very, very powerful for the EBITDA margin levels that we have been seeing. My question to you here is, to explore a little bit of, this network effect that you're seeing on the consumption based on those stores and try to quantify a little bit, how are you seeing checkout growth or average basket size and ticket in those mature locations. How those are trending? That's my question. Thank you.

Anthony Hatoum

Let me break down your question in various parts. If I heard you correctly, you're asking about, what's going to be the performance of older vintages as we move forward.

Joseph Giordano

Exactly.

Anthony Hatoum

Again, if I go back to fundamentals, we haven't seen a slowdown in growth for older vintages. When we ask ourselves why the fundamental driver is a continued improvement in the value offered to customers. I think I mentioned in our last earnings call that, if you compare what we offer today in our basket versus what we offered five years ago, you'll see a notable improvement in what would be attractive to customers, and that is basically the fuel that keeps on generating increased same-store sales across the board, across vintages.

As long as we do that, I don't see a slowdown. Now eventually, theoretically, yes, you will reach a point, where you've touched every customer and penetrated as much as you can every wallet, and then you'll see a slowdown. I think we're a far away from that point yet. In terms of network effect, yes, it is definitely present in a sense that we benefit from an increased recognition of the 3B brand as a value driven brand. One of our objectives is to build trust with our customers.

I mean, in an ideal world, you walk into our store and you trust that you are going to get the best value for money. You don't even have to compare with other chains that anything you buy in 3B is going to be giving you high value for money. As long as we don't violate this trust, I think we can continue to see an improvement in this halo effect, as you call it.

We can end up selling, anything in the Tiendas 3B store, as you know, in and out basket, our irrepetibles where the prices are so low that they don't get repeated. We've sold a wide variety of goods, including bicycles and televisions and clothes and shoes. We are not limited, at least in that section of our store to selling groceries. That's very powerful.

You had one more question, Joe, but it escaped me. Please go ahead.

Joseph Giordano

Just to try to quantify this effect in terms of basket size and number of checkouts for mature client? Just to try to see how the volumes are evolving here and just try to extrapolate that a little bit further.

Anthony Hatoum

I mean, what we can say with firmness is the number of tickets driven by the number of visits of customers and attracting new customers has been a very solid trend upwards. In basket size, there's a perverse effect, as more people buy private labels, which are priced 20% to 30% lower, the peso basket size is pulled downwards.

And then, what we need to do is, basically increase the number of items they have in their basket, which is happening. But as we've talked about before, happens at a much slower pace over time, but happens. What you'll see more is more frequency and more tickets as opposed to a very high bump or a very rapid bump in the peso average ticket size, and that's what we're seeing today.

Operator

Our next question

Our next question comes from the line of [Gulrez Arshad]. Please state your company name and ask your question.

Unidentified Analyst

My name is, [Gulrez Arshad], and I'm a private investor. Congratulations to Anthony and Eduardo and the team on outstanding quarter. I have one question, which is on the competitive landscape and whether any of your competitors are adopting your hardwood's discount model.

Anthony Hatoum

Hi, Guli. At least this quarter, we haven't seen anything notable in the market neither on pricing or in terms of change of strategy of any of our direct competitors. It wouldn't surprise me if something happens down the road, but keep in mind that, we're a hard discounter. We're sticking to our knitting. As we say, we are doing more of the same faster. We have, I would say, a significant lead. It's hard to catch up to somebody who's already scaled up. It's not impossible, but it's difficult. We're not staying still. Competition is healthy for everybody, and I think we're a very strong competitor to the rest of the market.

Unidentified Analyst

One last question, Anthony. Are you committed to continued organic growth for the Company, or would potential M&A activity be in the future, especially when you go into the more remote parts of Mexico?

Anthony Hatoum

If you ask me right now today, I would say it's organic growth. We never discard an M&A, but the challenge with M&A is exactly what are you buying. What I found over time is, the scarce element is talent. Unless you're buying talent in your M&A, it's a low probability event.

Operator

Our next question comes from the line of Alvaro Garcia. Please state your company name and ask your question.

Alvaro Garcia

Hi. It's Alvaro Garcia from BTG. Hi, Anthony, Eduardo. Congrats on the quarter, and thanks for the call. One specific question on the Easter calendar shift in the first quarter. Would it be fair to assume that, relative to hypermarkets, which obviously saw a nice bump, given the Easter calendar shift into 1Q, you maybe saw less of a boost given the Easter impact?

Anthony Hatoum

I think you're absolutely right, Alvaro. I mean, these shifts do see an impact. But, in terms of a full quarter, it's not going to be significant.

Alvaro Garcia

That's fair. And then just one on gross margin. You also the scale is understandable. But you also mentioned the better sales mix, and I was wondering if you can maybe give a bit more color on what that is exactly that's driving the higher profitability.

Anthony Hatoum

Again, highly dynamic. Let's break it down in its pieces. On one side, you're buying from suppliers and on that pricing and costing side of the equation, your scale naturally drives a better terms and conditions. And then, on the market side, as you know, we dynamically price. We are continuously elasticity testing to optimize volumes and peso margin. We do that on a

Again, highly dynamic. Let's break it down in its pieces. On one side, you're buying from suppliers and on that pricing and costing side of the equation, your scale naturally drives a better terms and conditions. And then, on the market side, as you know, we dynamically price, we are continuously elasticity testing to optimize volumes and peso margin. We do that on a SKU-by-SKU basis.

And then, at the end of the quarter, we get a result, which is gross margin that we look at. In this case, it happened to be higher than the previous one. Really, we don't drive for gross margin. It's always a consequence of this very dynamic process that's going on both on the purchasing side and then on setting price aside. Again, as I mentioned earlier, I wouldn't read too much into it. It's going to be very dynamic and will continue to be dynamic. But in general, if there is a trend, it would be to pass on value to our customers.

Alvaro Garcia

Very clear. And then just one last one on new categories and on fresh specifically, if you can maybe give some color on the pilots, you're putting in place and what sort of results you're seeing and what your strategy is there? Thank you.

Anthony Hatoum

We won't comment on pilots and tests. In general, we will not introduce anything that has not been fully tested and that has come out successful in our tests, whether it's fresh or any other category that we would be testing in. But, it's fair to know for everybody that, at any point of time, there's about 50 to 60 SKUs that are being tested in 3B, and some of these tests are successful, and then you see basically a new product emerging and probably another product dropping off. Those that are not successful, you will never see on the shelf.

Operator

Our next question comes from the line of Aleksandar Nikolic. Please state your company name and ask your question.

Aleksandar Nikolic

This is Alex with Morgan Stanley. Thanks for taking the question, and congrats as well on this great execution. I mean, the majority of my questions have been answered, but just wanted to clarify on a couple of points here. First, regarding the efficiency improvements that you mentioned in the release. Just wanted to confirm if there's any new project that you are doing to offset, if you will the higher labor cost or this is just the regular operating leverage that you guys are seeing the at the stores? Second question regarding the SBC. I think, Anthony, you mentioned in previous call, around like an expectation for us to have SBC at around 1% of sales in the new term. Just wanted to confirm that remains the case or that should be higher volatility on a quarter-to-quarter basis for the next quarters? Thank you.

Anthony Hatoum

Alex, just a clarification on your second question. You cut off a little bit. Did you say share-based payments?

Aleksandar Nikolic

Yes. The share-based payments. It was 1% of as percent of sales in both the first quarter this year and last year? Just wanted to make sure that's the level we should expect for the next quarters.

Anthony Hatoum

Let's start with the last question. But, yes, you are right. But then, this is what you're seeing here are the expenses for our legacy option plan. You can expect that, overtime, this would trail off whereas our new option plan, which in the F1 we call our 2024 option plan, will only kick in December of this year.

We haven't yet decided on what the distributions are. But as you know, the strike prices on this plan are going to be set to market, and then any cost due to this plan are going to be 100% tied to the increase in value creation. Then I'll let you decide whether how much of a cost impact it is.

On your first question, which was on efficiencies. For us, it's business as usual. We have never stopped any project or not started post IPO, any new project related to becoming more efficient at something ongoing.

At any point in time, there's at least two to three initiatives going on, which have to do with improving efficiencies, whether it's something as simple as truck maintenance program on how to make it more efficient to better routing of such trucks to the stores, to better, more efficient ordering systems, faster response times from our systems, improving, making our reporting more user-friendly and therefore more focused on being able to pull out conclusions.

We've given many times the example of operating efficiencies in the stores, where our last generation of boxes is lidless, so saving us countless seconds per box opened that sum up to 100s and 100s of hours of labor cost saved. Then, our initiatives to use tech to again drive more efficiency in our operation and reduce hours worked has never stopped and will continue going on.

It's part of our DNA, and don't expect that, there's a sudden increase. Now that we're public, we do have a little bit more spending power, which is nice, which can accelerate things a little bit. But I would say, this is ongoing. And don't be surprised, if you see continuous improvements.

Operator

Our next question comes from the line of Hector Maya. Please state your company name and ask your question.

Hector Maya

Hi. Thank you very much. Hector Maya from Scotiabank. Hi, Anthony, Eduardo. Congrats. Very positive results. I know this is maybe too soon because you just came up with the IPO. Was it such a great milestone? Very strong numbers and openings, but also wanted to know, Anthony, what would be the next milestone that you have in mind for Tiendas 3B? If there is any project that excites you to think about, to deploy on top of what you and your team have built so far, you don't have right now at your stores? This taking advantage of more and more customers getting to know your brand as you expand.

Anthony Hatoum

Hector, it might sound boring, but for us," } ] }

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The Hidden Number on Tiendas 3B's Earnings Call That Spells Trouble in Paradise