Quietly Growing

Lets look at a highly esteemed premium retailer run by an honest 2nd generation family owner which grew from their domestic base (where they are number one) to grow in a much larger neighbouring market (where they are also number one), and went on to grow in a third, much further and much larger market.

Recently they overtook their greatest nemesis in this third market to also become number one in their category. This company grew organically and steadily over two decades, and it took them 9 years to finally breakeven in their 3rd, much further market which is in a different hemisphere.

However, If we were to look at their headline reported numbers, we might be disappointed to learn that they have not grown much in the recent 5 years. Their share price has also been moving sideways as market participants hammer them for their seemingly slow (or no) growth.

We feel that the broader market has misunderstood them tremendously and hence overlooked their potential – the company was in fact growing their 3 geographic segments strongly, but had a 4th geographic segment and a 5th new category burning cash. Most unfortunate, and that explains why their reported figures appear to be not growing.

There were only two apparent paths from here on out – One is to bring the unprofitable segments to profitability and grow, and the second is to cut off these cash-burning segments for now and hopefully re-entering the 4th country when they are ready. How wonderful is that? Both options lead to organic and sustainable growth.

Fast forward a few months, and in January 2018, the company indeed announced that they will be cutting off not one but both segments radically as a decade of experiment had proved that they are not ready for their 4th geographic segment yet.

In the same announcement, management shared that the 3rd geographic segment had grown tremendously over the past year, and they will have more resources to continue growing the first two.

Their strategy for the (5th) new segment was to grow with a small capital outlay, seemingly an eCommerce approach coupled with less brick-and-mortar stores.

How marvelous.

The very act of exiting and limiting their losses in the 4th and 5th segments will save the company more than 15 million dollars a year, thus single-handedly increasing their core earnings north of 25%.

Meanwhile, market participants over-reacted and sold their shares in a doomsday manner from the exit loss they were going to incur or had incurred in their 2 unprofitable segments.

As investors, do we then lament in sadness as the market sell down our company? Now that is subjective – if you intend to sell out tomorrow and retire, then that’s very bad news. But if you intend to invest more into said high quality company over time then that’s very good news!

It also helps to know that the family’s entire networth is in their one company and 3 decades of reputation built bare-and-singlehandedly by the founder rest in their one company too. The business is the only commercial interest the family has.

Its closest global peer, also another premium retailer, trades at more than 100% premium to this company and offers a dividend yield around 2% at a similar payout ratio. Knowing that there are such role model retailers thriving in this eCommerce age increase the probability of the investment community re-rating this company significantly in time to come.

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