BBB Foods: Impressive Operations, Yet Overzealous Evaluation Suggests Selling Opportunity
A taunt at Tiendas 3B:
Tiendas 3B, aka BBB Foods Inc., struts its stuff as the boss of the hard-discount grocery scene in Mexico. But, listen up, 'cause I'm here to spill the beans on this so-called unstoppable giant.
Bargain, Beauty, Budget
Known for its boastful slogan, "Bueno, Bonito y Barato," or "Good, Nice and Affordable," Tiendas 3B thrives in the world of cut-rate groceries, serving up a mix of in-house labels, name brands, and random goodies that appeal to the budget-conscious shoppers of Mexico. In '22, they raked in a whopping $219 billion from those folks, accounting for 70.7% of the country's total current spending.
Their methods? Cozying up to suppliers to churn out economical picks for daily needs (supposedly comparable to the top brands, but at rock-bottom prices, with the goal of being 20-30% lower). They peddle nationally acclaimed labels, too, just to keep things livelier. And, oh yeah, every now and then, they toss a quality food or non-food item into the mix, which changes like every two weeks or so.
Growth and Profit, Pals Forever
So, what's the secret to this pocket-pleasing pricing strategy? Turns out, it boils down to smart business principles, headed by leadership's persistent pursuit of value and cost control. As Tiendas 3B CEO, K. Anthony Hatoum, so artfully put it, "It's all about keeping it simple, zeroing in on customer value, making decisions on-site, empowering peeps, encouraging entrepreneurial energy, and uplifting society."
The results? Red-hot revenue expansion, thanks to their tactical growth strategy and a 23.85% compound annual revenue growth rate (CAGR) a year, stepping up from $32.58 billion to a cool $61.89 billion in the last twelve months. Heck, even credit pushovers recognize that's off-the-charts growth—just 8% of companies managed to see a 3-year sales CAGR of more than 25%. Tiendas 3B ain't no slouch.
Scale Economies: The Not-So-Secret Weapon
You know what else helps them reel in those big bucks? Tiendas 3B leans on its hefty buying power and snug supplier relationships to milk cost savings for its shoppers. Worried about beating these prices? Forget about it, 'cause you'd need to match 'em on investments and accept lower net profit margins just to stand a chance. Plus, you'd have to snag as much industry know-how and skilled personnel as the company has, which ain't easy. In other words, competing against Tiendas 3B requires dedication and an appetite for loss, so… good luck with that.
But Wait, They're Still Losing Value
Despite all this, Tiendas 3B has been drowning in red ink, earning an economic loss by not snagging a return on invested capital (ROIC) greater than the weighted average cost of capital (WACC). Since '22, they've averaged a bottom-tier 4.16% ROIC, which translates to a hefty value loss. And in the last twelve months, economic loss deepened, from $145.61 million in '24 to a hefty $484.01 million today.
Free Cash Flow: An Illusion of Profit
So, what about their free cash flow (FCF)? It only went positive in the last twelve months, and it's pitiful at $6.16 million. Lamentable, considering they've been swimming in negative FCF, with an average FCF level of -$3.33 billion since '22. Yeah, they've got a lot of investment opportunities on deck, but that doesn't justify their overinflated pricing.
Money, Money, Money: The Wrong Kind of Addiction
With an euphoric stock price of $26.48 a pop, Tiendas 3B has a price-to-economic book value (PEBV) of 35.29—implying the market expects the company to grow NOPAT by an insane 3,429% from today's levels. Spoiler alert: that ain't gonna happen.
So, in the name of cold, hard logic, I'm putting the kibosh on this since it's doomed for failure. Buy low, my friends, and ditch businesses that think they're clever enough to game the system. Tiendas 3B, you might be the ruler of the hard-discount grocery market, but ya ain't getting away with this one. Sell, sell, sell!
- Despite Tiendas 3B's impressive growth, it has been losing value as its returning on investment capital (ROIC) has been lower than its weighted average cost of capital (WACC), resulting in economic losses.
- Investing in a business like Tiendas 3B, with a high price-to-economic book value (PEBV) and an expectation for NOPAT growth of over 3,000%, might not be a wise move due to its questionable financial performance.
