Transcript Notes: 2024 Q2
Weather has a pronounced effect on AutoZone’s ticket size and overall demand quarter to quarter. Longer term, the main drivers of the business are miles driven and age of the car park (both continue to head in the company’s favor).
highly discretionary items have been challenged for a while. Some of those have a great ticket. There's probably slightly fewer pieces in the basket. But I think some of that has been driven by the environment and the weather. Big jobs like air conditioning, if you will, those have been definitely muted in the spring time. Those are big jobs that have big tickets, multiple parts in them. When it rains, you're probably going to sell 2 wiper blades, and when it's nice, people decide to do a tune up, you may have all kinds of filters that have significantly more parts transactions -- pieces per transaction.
So I think ticket average will improve. It's not going to be improved based on hyper inflation like we've had over the last couple of years, but I do believe it will improve as we move through the summertime and get a better mix of product as we move through some of this more challenging weather scenario.
The aftermarket car parts segment has been rationally pricing for years, a dynamic that management does not see changing any time soon.
We like where we're priced today, and we don't see the need to go move the needle on pricing as a way to go accelerate sales growth. I'll just remind you that the lion's share of the demand in this business is relatively inelastic. So this industry has been disciplined about pricing for decades, and we continue to see that being the case.
Pershing Square Holdings - May 29, 2024
We’ve studied Bill Ackman closely and learned a lot from him. Specifically, to prefer simple businesses with predictable and replicable unit economics. However, we have always struggled to get comfortable with the statistically expensive multiples many of his investments trade at. Here he explains how he thinks about Chipotle’s valuation. Ultimately it comes down to correctly predicting growth.
The pushback on Chipotle since we first invested at around $405 a share. It was that the multiple was high. It's interesting. High earnings growth buys down your multiple really quickly. So that $405 purchase price in the summer of 2016, was an entry multiple, about 35x our view of next 12-month earnings at the time. $405 now is about between 6 and 6.5x our view of next 12 months earnings. It just shows you how powerfully the multiple can be brought down with a business that grows rapidly.
So how do investors kind of get this wrong in the stock 7.5x our purchase price from about 8 years ago. I think they missed 3 big things: one, underestimated same-store sales. So consensus has this tendency to assume everything will revert to a mean. And if you look beyond 2024, it's like, okay, the company is going to go to 5% same-store sales and maintain that going forward. And that's just wrong.
I mean, in the 10 years prior to the food safety crisis, so -- 10 years ending 2015, the company averaged [ 80.8% ] annual same-store sales growth. And it's interesting in the 6 years that Brian Niccol has been CEO, that average same-store sales growth has been 8.7%. So this is a high single-digit same-store sales growth brand.
Second thing that investors underestimated was the power of the economic model. So there was a lot of pushback when management introduced this 40% incremental margin framework a few years ago, lot of skepticism how they really hit it bubble bot. Well, it turns out they've delivered almost exactly at this level.
So Q1 was right at 40%. 2023 full year was 42%, and the average over the last 3 years was 39%. So is that below 40%, sure. But I'll call it 40% just in the interest of funding. You look forward, consensus is forecasting kind of restaurant margins just flatlining in the 28% range. I don't think that's reasonable.
The third thing that has been underestimated is unit growth. So our view -- the view kind of in the market of Chipotle store potential in North America when we invested in 2016, it was 5,000 store total addressable market. That's since been increased by management to 6,000 in October of 2020, then 7,000 at the beginning of 2022. 8,000 is the next step, we look forward to that. And growth overseas beyond the U.S. and Canada presents upside to that figure.
There are a variety of fears swirling in the QSR space. One is that healthier concepts like Chipotle and Sweetgreen will take share from “legacy” models like McDonalds and Sweetgreen. The other is that McDonald’s one-month $5 meal promo will ignite a price war. Both are fears shortsighted and creating bargains.
So due to these fears, QSR now trades at only about 17x next year's free cash flow, when adjusted for these investments at Burger King, one of its lowest multiples in recent years. And we think the near-term and long-term setup for the business is great…
We don't see any reason why a business-like Restaurant Brands should trade at a discount to a more franchise business like Yum, Domino's or McDonald's. When in fact, it has much higher longer-term growth potential, especially in its international markets.
British American Tobacco — June 4, 2024
Inflation continues to pinch the low-end American consumer. Illegal vapes are accentuating the pain.
The U.S. macro environment remains challenging, with consumers continuing to feel stretched, driven by slower than expected growth, stubborn inflation and interest rates remaining high. In addition, the ongoing proliferation of illicit flavoured single-use vapes, and lack of effective enforcement is continuing to impact industry volumes. As a result, combustibles industry volume is down around 9% year to date, and around 11% excluding the deep discount segment where we are not present.
Illegal vapes from China are a major public health problem. Governments are just waking up the problem, and there will be a lag between legislation and enforcement.
given the scale and proliferation of these products, which we estimate to represent over 60% of the total U.S. Vapour market, and the phasing of enactment of recent State regulation, we do not expect government engagement actions to have any meaningful impact on our 2024 performance or guidance….
We are encouraged mainly from the State's movement, but a lot of them are coming in place mostly from January, 2025 onwards….
So in terms of the state's measure, Louisiana, we are seeing a reduction of high single digit volume decline in the illicit vapour, and it's around 20% at least, or a bit more than 20%, and Vuse is gained the vast majority with 7% of that. And most of this is really sticking within the vapour category.
BTI has been repuchasing bonds at a discount to speed its deleveraging.
In April, we completed a liability management exercise to repurchase some long dated bonds. We utilised surplus cash to create extra leverage headroom by targeting bonds from 2040 to 2055, priced well below full value.
The transaction was well received and allowed us to upsize our initial scope. Through this, we bought back £1.8 billion worth of bonds, with a cash spend of £1.2 billion, which means around £600m of net debt reduction….
We expect to be within our narrowed target range of 2.0-2.5x adjusted net debt to adjusted EBITDA by year-end 2024.
Flavor bans, including menthol bans, do not affect the overall nicotine market’s growth.
Because California, after the implementation of the menthol ban, the nicotine consumption barely moved…
The likes of Canada, 99% of consumers stay smoking non-menthol brands. In Europe, 93%, the other 7%, 70% moved to vapour and still using nicotine.
British American Tobacco — June 5, 2024
BTI has a significant amount of cash tied up in Canada. It’s value is contingent on pending litigation. Worst case (and likely), it’s a zero. But even if this happens BTI will hit is deleveraging targets by 2026 and be in a position to repurchase stock then.
In terms of the numbers of Canada, and I have been saying to investors that the best way to think about Canada because I cannot speculate on Canada, even though is confidential -- is to consider out of the BAT numbers. And if you do that, your leverage will be up another 0.3x. So what we are aiming for is to get to this new corridor by 2026, ex Canada. And because when I mean about reaching this target by the end of this year, for sure, Canada is still consolidating the BAT numbers. So we want to make all we can to be able to get to that range ex Canada in 2026. And we believe that we have -- with the cash generation we generate, conversion rates that we generate and to do it in a way that we can get keep the share buyback, which we believe that is part of the capital allocation policy of the group moving forward and at the same time, being able to manage the leverage of the company and do the right investments for the growth of the business moving forward.
PM has retained its pricing power despite its shift into reduced-risk products.
So on top of a rather favorable evolution of volume, we see also very strong pricing power. You have seen that we were north of 7% in Q1, and we are now targeting 6% to 7% price on CC for 2024,
PM is increasingly a nicotine company, not a tobacco company.
At the end of the day, I mean less and less tobacco company, but a much more nicotine company. I know that nicotine is not well understood. And therefore, sometimes it's mixed with issues that are coming from smoking. It'll be clear what is driving the issues and the disease coming from smoking is smoke, not the nicotine. Nicotine is legal stimulant.
Penske Automotive — April 30, 2024
EV inventory continues to pile up on dealer’s lots.
New vehicle inventory increased $50 million from the end of December. Total inventory was $4.4 billion, up $100 million from the end of December. Long-term debt was $3.9 billion. Importantly, we had a 40-day supply of new vehicles and a 36-day supply of used. Days supply of new vehicles for premium was 41 and volume foreign was 29. The days supply of new battery electric vehicles in the U.S. was 91 days.
Domino’s Pizza — April 29, 2024
Domino’s focuses on providing value to drive basket size rather than take price.
The best way to raise price is not to raise price, it's to give people something that they want to pay for and then they choose to pay more versus you telling them they need to pay more. And so over time, what we've done year after year is introduce different platforms. So we introduced sandwiches in 2008. We introduced pasta in 2009, and we had desserts and breads and all these other things. And what we find is we just add them to our promotional core offer, this Mix & Match offer. It used to be -- we had an offer that was $5.99 for any 2 of these things. For 12 years, we had it. We just changed it to $6.99. So we've been very consistent with any of these things on our menu, either $5 or now $6.99. What happens when we introduce a new platform is instead of charging people more money, they decide, I want to add this item. And so that lets us drive ticket without charging more.
Value’s great, but it can’t come at the expense of franchisee profitability though.
Now you might say, well, okay, good. Your value to customers, that's great. Order count's positive, that's great, but you didn't take pricing, what about your profitability? And profitability this year, we're -- it's going to be up. It'll probably be $170,000 or above. And that's because it's great to make a lot of quarters versus $1 or $2….
It costs about $400,000 to build a Domino's. You're making, on average, $170,000 a year without incentives.
Domino’s latest menu innovation is genius. It requires no added ingredient or complexity and has higher margins.
When you get a large New York Style pizza, it's a medium dough ball stretched to a large.
Domino’s revamped loyalty program is also a great innovation
And here's the beauty of it. When they get the free item after 2 purchases, it's usually a side, which means they buy a center plate item, like a pizza. So actually, the ticket is much higher than when we give them a free pizza and they order the side. And so when you jumble all that together with frequency, the ticket increase and all that, it's actually a win-win for customers and for franchisees.
Some call Domino’s a tech company that happens to sell pizza. But Domino’s thinks of itself more like a logistics company.
We're really more a logistics company because it even starts -- the one thing we didn't talk about is supply chain. Which we own every pizza starts in our supply chain. And unlike other companies, the pizza and the ingredients themselves never leave our hands until they become in your hands as a customer. And I think that's a huge competitive advantage.
COVID whiplash continues to drive consumption trends.
Year-to-date, I think services spend is a portion of PCE. I've been running like 6%, 7% up year-over-year. We're back to 67.6% of total PCE spend on services. Goods by contrast, have only been growing 1% to 2% for the first 4 months of the year. PCE, it just came out last Friday. So you see this shift still from goods to services, still a bit of a recoil from the COVID years of '20 and '21.
Tractor Supply has no direct competitors with anywhere remotely close to its scale.
So as we mentioned earlier, $180 billion TAM, there's tens of thousands of retail locations in the context of that TAM that we compete against. We think about it in 2 buckets. About 1/3 of that TAM call it, $60-ish billion outside of our revenues is in what we would call the core farm and ranch channel, the kind of legacy farm and ranch channel.
That's dominated really by 2 sets of competitors, about 8,000 of these co-ops and mom-and-pops that are across the country and then another 1,000 or 2,000 that are regional chains chains like Atwood and Murdochs, Rural King, Family Farm and Home, they typically between 50 and 100 stores or 30 to 100 stores, and they're regional in nature. And that's about 1/3 of our market. It's very fragmented, no one at the same scale that we have again is we have 2,250 stores.
Our online revenues are larger than any of our direct head-to-head competitions total revenues with the exception of one competitor. And then the other, call it, $105 billion of our market is really just a fragmented list of category-specific competitors.
So on the pet side, we compete against grocery. We compete against mass. We compete against pet specialty, on tools and hardware and trailers and those sorts of things, we compete against home improvement and some of the other more hardlines players against garden, again, home improvement and mass. So kind of as you go around our store, we're going to compete against a variety of different competitors.
But in total, it's 2 main segments of competitors, but very fragment in the context of that and tens of thousands of locations, and to your point, not really a head-to-head competitor at a national level, which I think gives us a lot of advantages from a competitive and a defensibility perspective.
Dollar Tree has outsized exposure to Easter for some reason.
Easter is historically a major driver of discretionary demand -- in fact, to put things in perspective, Easter discretionary sales represent about 1% of our annual sales. For the largest retailers, that figure is closer to 0.1%. Looked at another way, Easter is 10x more important to Dollar Tree than it is for other retailers.
Switching to multi-price has been a huge win for Dollar Tree, but it still has its challenges. It’s a good reminder that the view from the ground is often different than Microsoft Excel would have you believe.
There is a bit of a learning curve with multi-price as we evolve from our fixed price legacy. This is a new discipline for us and it will take us a little bit of time to fully build out our core competencies. But we're off to a good start…
So you have to create a section, quite frankly, that bears prices, so the consumer knows how much they are. And when the consumer changes their mind, that product has to get back into the right spot on the shelf. And that's all about teaching our associates how to handle that product in regards to stocking it and then what to do with it when they condition the store.
Now it's a very comparable discipline but it's not something that we've had over the years. We're doing all kinds of things to manage that. We put a shelf label literally on the outside of the case that allows the associate to put the product on the shelf, put the shelf tag on the shelf. But believe it or not, we also have to teach the people in the warehouse when they pull the item, they had to pull the right item because they're used to pulling 1 item that has the same price and in regards to the store's inventory, it stays true. But now the difference is if they're pulling a multi-price point item, it has to get there as it was supposed to be selected.
Our biggest problem with multi-price right now is we can't keep it on the shelf. The consumer is responding to it. The consumer likes it. And I think it's going to be -- I don't think, I believe, truly believe it is going to be a very powerful piece in our ongoing future.
You will see, as we move through the calendar year, as you guys know, we have to buy multi-price products, seasonal product more than a year in advance as we get into the holidays, you're going to see more multi-price show up on the discretionary side.
The US carwash market is highly fragmented.
It's been one carwash out of time to get to close to 500 stores. I think the headline here is that while we're #1 in a very large category, we actually see ourselves as really, really small. And so internally, we say we're a little tiny spec on a little tiny dot in the outer most regions of the stratosphere because our growth potential is immense. It's under 5%, but if I were to be more precise, I would probably guesstimate that we're close to 3.5% market share on a national basis and just talking about U.S. share.
However, it is a local market and local market share matters most.
So on average, we believe that our current market share in our existing markets is roughly 15%. And what's a realistic number. We -- our goal is to get to 50% and where do we come up at 50%.
The car wash subscription model has dramatically increased frequency from once every six months to once every week or two. It is a convenience business.
What do you think that the average motorist in the United States is north of 280 million vehicles on the road today, how often they watch their car at a professional car wash? Once a month. Yes, you guys are way off. And you guys are making big bets on big companies. No. So it's a loaded question. So it's -- and the reason why I set that up, it's 2 times a year, which blows everybody away…
And so we have changed the way people care for their vehicles went from a once in a while treat. So now it's part of their weekly routine… so back to that $50 per year number, we have transformed you as a $50 per year valuable customer into a $330 a year customer. That's a 6x lift.
Competition from private equity has raised prices and required a strategy shift.
We've pivoted to greenfield development because as prices got too expensive, more private equity was bidding on more things. So more demand than was supply. Multiples got wonky, people were paying $10 million, $15 million in some cases, $20 million for a car wash.
Macro challenges have caused trade downs into the deep discount tobacco category.
During the first quarter of 2024, based on Management Science Associates retail data, the deep discount category increased 6% while industry volumes declined 8.9% compared to the same period last year. As a result, the deep discount segment comprised 15.9% of the overall market in the first quarter, up from 13.7% in the same period a year ago and 15.3% last quarter.
The million dollar question in tobacco is what future, long-term US decline rate will be.
that decline rate, it's certainly been elevated the last couple of years. I would argue that probably the underlying decline rate is more in the 4% to 5%. And then you're looking at both the macroeconomic factors in addition to kind of the growth of the illicit disposables that's accentuating the decline.
Wester Midstream — May 9, 2024
Investors remain scared from the prior MLP cycle and valuations remain low despite significantly better balance sheets and incentives.
the current average MLP valuation trades at approximately 8x, a discount of 5.5x compared to the average MLP valuation from 2011 through 2016. Furthermore, despite stronger balance sheets, plentiful liquidity and strong future business prospects, the average current distribution yield is just over 9% compared to the average MLP distribution yield of 7% from 2011 through 2016, a time when midstream MLPs generated negative free cash flow and leverage was increasing.
While Richemont has brought a lot of distribution in-house, they still rely on multi-brand wholesales like Watches Of Switzerland for ~20% of sales.
So, that leaves us somewhere in the area of 40%-plus with the franchise stores and the multi-brand wholesalers, the rest of the distribution. And as you can -- you can assume probably a 50-50 split for those 42% there. But this is really pretty much continuing the -- or showing the same structure of the numbers that we've shown at the half year.
The middle-class aspirational buyer is the most important for luxury watches and jewelry. It’s not high-net worth individuals.
If we look at Cartier, we look at Van Cleef for argument's sake, and the volume they sell, the biggest part of that volume is decidedly, let's say, for middle-class customers, if you look at the average price points, let's say, somewhere between [ 5 and 10 ] for watches, not for Van Cleef, but -- and probably [ 10 to 20 ] in jewelry or [ 5 to 20 ] in jewelry. This is more driven by -- if you look at the volume impact, by more middle-class customers than always the high-net-worth individuals.
We should have known that we were selling too many watches in 2015. The whole industry should have known that we are pumping the market full. And we had to take that remedial action. It cost us a lot.
The supply of luxury watches is closely controlled by the oligopoly of brands that make them. They learned the hard way not to stuff channels full in Hong Kong in 2015 when corruption crackdowns and protests decimated formerly white-hot demand.
We should have known that we were selling too many watches in 2015. The whole industry should have known that we are pumping the market full. And we had to take that remedial action. It cost us a lot….
Today, we have the ratio where we sell out more than we sell in. And I don't know about everybody, but I can tell you that responsible competitors, like Rolex and Patek, are also not flooding the market.
Watsco has strong demographic and environmental regulatory tailwinds.
The installed base has never gone down. There will always be more people. There will always be more machines. There will always be more that break and conceivably more will be replaced over long periods of time.
3.9% growth rate in shipments in unit shipments over 40-plus years. Again, that's that simply the population consuming these products. It's the Sunbelt migration that's going on for 30, 40 years, that's still going on, building markets that use air conditioning in every home.
Watsco’s true customer are contractors, since you have to be licensed to install an HVAC unit. No one has comparable scale to Watsco and no on can invest in technology like they can.
We want to create an Amazon-like experience for everything we sell. So we went to Carrier, Honeywell, DuPont, Owens Corning and said, "Give us the product information on every product you've made for the last 10 or 15 years. And we're going to put that into a database, make it searchable help our customers find your products. Not 1 of them said that and not 1 of them said they would give it to us. They did -- so we had to create and this like and push and shove and finesse, and we couldn't threaten [indiscernible]. We have that data. There's over 1 million SKUs in it. We have the same quality of product information that you would find on any website for our industry, and no 1 else has it…
about 1/3 of our business now flows through that platform when it was zero, 7 years ago.
Casey's General Stores — June 12, 2024
Casey’s is benefitting from a trade down from QSRs.
With respect to the value, -- what we've seen, I think it's been broadly recognized in the restaurant industry that restaurants have taken a lot of price over the last couple of years. And we've probably taken a little bit more measured approach to that, and we like to say we try to price through the cycle. So as commodities had run off, we took some price, but we didn't try to pass on all the price to consumers, and we try to keep that relative value gap. And because we know the commodities will inflect and come back down. And as that has happened now we see our margins start to improve a little bit on Prepared Foods, but more importantly, that value gap continues to widen because and our QSR competitors. And so what we're seeing is people trading into our channel and specifically the Casey's for that value proposition.
One of the benefits of a non-franchised model is that the corporation can absorb cost inflation more than a mom-and-pop franchisees.
With respect to QSR competitiveness, it's an interesting question. Certainly, there's been a couple of large burger players have said that they're going to get a little sharper on value with some aggressive combo offers and that sort of thing. But I think the restaurant industry is a little bit of a trick bag because -- it's primarily a franchise business, and a lot of those franchisees don't have places to turn to or other levers to pull to absorb a lot of the operating cost inflation that they've experienced over the last couple of years. And they are seeing menu prices expand as high as they have. So you really -- in that scenario, the franchisees have to decide that they can absorb the inflation and really take a haircut in their profitability to be able to drop their restaurant prices. So I really don't anticipate that happening. I think you'll see what you're starting to see now with some spurts of promotional activity for a month at a time, which is I think what some of these guys have been doing. But I don't know that that's very sustainable over the long term given their -- the franchise dynamic.
Upper income customers are continuing to spend as usual. They’re increasingly buying Zyn.
They're also more likely to buy the alternative nicotine products. So the pouch products like Zyn and some of the others, that you see in the marketplace, those are skewing more higher income.
Alimentation Couche-Tard — June 26, 2024
Circle K is beginning to see green shoots of stabilization in US tobacco.
While we continue to see pressure on cigarette SIPs globally, in the U.S., we're starting to see some positive results with our tobacco customers….
Cigarettes has been an issue for the channel. You see Altria and BAT's numbers. They're kind of in that high single-digit even if losses. We performed significantly better than that. and our trends continue to improve, and our gap continues to widen there. But certainly, I still think that's a big reflection on the state of the consumer. That's more than just price. There's certainly people watching what they spend. On the bright side, the nicotine, other nicotine category continues to gain strength. And actually, in many of our regions now generates more gross profit than combustible cigarettes.
we're seeing more M&A opportunities than we have for quite some time.
we renewed our share repurchase program, now authorized to buy back more than 78.1 million common shares, representing 10% of our public float.
Canada is the latest country to demonstrate that prohibition doesn’t work.
The tobacco issue in Canada is a lot about illicit as prices have gone up, consumers have gotten squeezed. The percentage of people buying in the illicit channels continue to rise. And that's a big headwind to fight. So that's going to continue to be a bit of a drag on us in Canada.
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Very insightful, thanks