Opportunities abound in ‘boring’ businesses
Retail, restaurant chains offer growth
Iwas in sunny Miami last week attending a conference on public companies, mostly from the retail and restaurant industries — sectors I have always liked. For one thing, these businesses are easy to understand — I know how to eat at restaurants and shop at stores (or at least observe other people shopping at stores). Secondly, the idea of cloning a concept — store or restaurant — is quite powerful. Once a concept works in 100 different locations in the United States, it can work in 700 different locations.
Over the years, I’ve done quite well with retail stores like Bed Bath & Beyond, Dollarama (in Canada), Nitori (in Japan) and O’Reilly Auto Parts. A few years ago, I invested in Buffalo Wild Wings, a very interesting restaurant chain from Minneapolis. As the name suggests, its main menu item is chicken wings. It has done quite well since we bought it and its expansion potential is still high.
As I’ve written in previous columns, I am a fan of boring businesses. Auto parts, dollar stores, linens and bath products and chicken wings are not exciting industries. But if they are the best in what they do, they can make a very decent living (and so can their shareholders).
At the conference, I discovered many young chains I had never heard of. For example, there was The Tile Shop, which operates as a specialty retailer of manufactured and natural stone tiles and related accessories in the U.S. The company also provides installation products and even gives courses on how to install tiles at home. Tile Shop operates 68 stores in 21 states, up from 18 stores some 10 years ago, so it is still in its early stages of growth. Tile Shop earns higher margins than its competitors because it is totally integrated — from the raw materials in quarries to the final retail sale floor. The founder, Bob Rucker, is still the CEO, which is always a good sign. In recent years, Tile Shop has maintained strong same store sales growth. Even in tough years like 2009, when the industry contracted 24 per cent, its same-store sales fell less than five per cent. The bad news is that Wall St. is aware of the company: The stock sells at $17, which is 31 times this year’s earnings estimates. It’s not cheap, but it’s worth following.
Another interesting chain presenting at the conference was Bravo Brio Restaurant Group. BBRG owns and operates Italian restaurant brands in the United States. Its brands include Bravo! Cucina Italiana, and Brio Tuscan Grille. As of today, it operates 48 Bravo! and 52 Brio restaurants. The company considers itself in the “upscale affordable” category. The average cheque at Bravo! is $19.60, and at Brio it’s $25. The company has grown slowly but steadily. It started in 1992 and, by 2002, there were 23 stores. In the last 10 years, it has increased its number of restaurants almost fivefold. The company now targets a 10 per cent annual increase in the number of units. BBRG had quite a large level of debt when it went public a few years ago, but now its balance sheet has improved. The company reported lower-than-expected earnings in its latest quarter so the stock has fallen from $22 to $13.50 lately. It trades at around 13 times this year’s estimates, which seems quite attractive. So it’s also worth following closely.
I did just that: I went with a few friends to have dinner at a Brio Tuscan Grille in North Miami and we had a great time. The food was outstanding and the atmosphere very enjoyable. Now that is real fundamental analysis.
Finally, I saw a presentation by TJX Cos. TJX operates as an off-price apparel and home-fashion retailer in the U.S. and internationally. The company operates 3,000 stores under T.J. Maxx, Marshalls and HomeSense brands. In Canada, it operates under the Winners name. Now I know this company very well. I’ve been following it for the past 10 years and it’s been a source of great regrets. Since 2002, earnings per share have increased by 17 per cent annually. The stock has gone up from $8 to $42. I went to the presentation with an open mind and tried to see (with fresh eyes) if the company still had potential. And I was pleasantly surprised. It is expanding in Europe and its growth prospects are solid. The stock trades at around 16 times estimated earnings, which is reasonable considering the quality of the track record and, in my opinion, the outstanding qualities of management.