BBB Foods Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading Mexican grocery hard discounter, TBBB operates a high-volume, low-margin model with a focus on value for the cost-conscious consumer in Mexico.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

TBBB Foods Inc., known as Tiendas 3B, is a prominent player in the Mexican retail market, particularly within the hard-discount grocery sector. The company’s strategy centers around providing “Good, Nice, and Affordable” products, appealing to value-conscious consumers in Mexico. Let’s delve into various aspects of their business:

  • Revenue Distribution: TBBB primarily generates revenue from the sale of groceries, household products, and other everyday items in its retail stores. The focus is on high-volume, low-margin operations, catering to a wide range of consumers seeking affordable prices. The revenue distribution is primarily centered in Mexico. TBBB has some revenues from their financial sector in Latin America, however it’s an insignificant number for now.

  • Industry Trends: The Mexican grocery retail industry is characterized by intense competition and changing consumer preferences. There’s a growing demand for value-driven options, alongside increasing adoption of online grocery shopping. Competition is very high between retail grocery chains. There is a rising trend among consumers to purchase private-label products. Also, as the economy grows in Mexico, new avenues are created for these companies, with an opportunity to capture more market share as they penetrate other regions in Mexico, and abroad.

  • Margins: TBBB operates in a cost-conscious environment, with a consistent strategy to drive growth through low pricing. The company’s EBITA margin for Q1 2024 was 4.9%, which is considered low-medium and is a slight increase of the 4.6% margin in Q1 2023. Their goal is to improve the sales growth and gross margins, while holding and improving operating efficiencies. They are aiming for more penetration of private labels, increase scale to lower costs, and improve operational productivity.

Historically, TBBB has not focused on having good margins-they focus on high-volume, low-margin, and low cost strategy. They consistently improved their operating margins to become more profitable. This is a good strategy for a hyper growth company.

  • Competitive Landscape: The hard-discount grocery market in Mexico is competitive, with both local and international players present. There are also specialized retailers. TBBB has to compete with retailers like Walmart Mexico, Soriana, Chedraui, and many local and private labels. The challenge lies in maintaining price competitiveness while sustaining profitability and a strong supply chain to keep cost low. The company believes its local roots and discount model gives it an edge in the market. However, that is not a permanent advantage. They will have to keep adding more values as their scale increases. Also, the Mexican market is rapidly expanding, hence the more value creation they have, the more market share they gain.

  • What Makes the Company Different: TBBB differentiates itself through a “hard-discount” model, focusing on lower prices and a streamlined operations. They have a strong focus on private labels and an efficient supply chain. TBBB has a good distribution network throughout the Mexican market. As they focus on low operating cost, it can create an economic moat for their operations. TBBB is also trying to add more tech capabilities and new payment methods in its stores, creating more value for customers.

The most significant competitive advantage for TBBB is its distribution channels, where it is able to deliver products on a daily basis to its stores in Mexico. This gives it a strong operational capability. It differentiates from local distributors.

Financial Analysis

TBBB’s financials provide some insights into its operating performance and financial health:

  • Revenue Growth: TBBB has shown consistent revenue growth over time, driven by new store openings and increased same-store sales growth (14.8% in Q1 2024 compared to 19.2% in 2023). This indicates a growing demand for its products and a good operational strategy.

Total revenues for Q1 2024 reached Ps. 12.6 billion, an increase of 30.9% compared to Q1 2023. These increased are due to more revenue from existing stores as well as increased revenues from new stores opened in the last 12 months. However, Same Store Sales Growth in Q1 2024 is 14.8%, a significant decrease compared to 19.2% in Q1 2023, showing a slowdown in sales growth.

  • EBITDA and Net Income: TBBB’s profits have been steadily improving. The company’s EBITDA reached Ps. 626 million in Q1 2024 (an increase of 57.9%) and net profit for the quarter was Ps. 261 million (increased from a loss of Ps. 16 in Q1 2023). All of that is attributed to the success in cost management and increase in revenues.

  • Capital Expenditure: TBBB has been constantly investing in its store infrastructure to fuel its expansion plan, it is investing in opening a lot more stores. CapEx for Q1 2024 was 365 million Mexican Pesos compared to 335 million pesos last year.

Although its revenues are growing at a faster rate, its profitability needs to be increased. TBBB needs to increase the revenue per store. And as their net incomes are increasing, the debt should also be reduced.

  • Balance Sheet: TBBB’s balance sheet appears to be in a good spot with cash and cash equivalents improving by 25% year over year. It is a low-debt company, and it is mainly utilizing debt for its expansion efforts. Even with the increase in borrowing, their leverage is not too high, giving flexibility for any financial changes, if needed. They are a pretty liquid company. They are able to pay off their short-term debts and also pay a good amount of debt that they accumulated during their initial IPO, as seen by their cash flow statement.

TBBB has an outstanding cash and cash equivalents of Ps 4.290 million as of March 31, 2024, compared to Ps. 1.245 million in 2023. Their net cash flows from operating activities has improved to Ps 1.256 million compared to Ps 1.005 in previous year same period. Their net cash flows from investing and financing are both negative. All of this indicates a healthy cash flow situation, as they are improving their operating profits, investing a lot more in their businesses, and also paying off debt.

Moat Assessment

TBBB’s competitive advantages are still developing. Let’s rate the moat and the key drivers of its rating:

  • Scale and Cost Advantages: TBBB’s hard-discount model is based on economies of scale, allowing it to offer lower prices. They use a “low cost” method of operation, and are very good at making a business as lean as possible. They are trying to achieve scale to compete with larger players like Walmart. So, for now, they have a small advantage and are trying to build an economic moat by reaching critical scale and increasing operational effeciency, as well as penetration of private labels.

  • Distribution Networks: TBBB has created a strong distribution network, allowing them to have better inventory control, deliver products to stores faster, and better economies of scale within distribution. This gives them a competitive edge over smaller companies.

  • Switching Costs: Currently there are low switching costs for consumers to change between the grocery store chains. Hence they have to keep providing better value than competitors and continuously try to acquire customers, build loyalty, and provide a better brand.

  • Brand Identity: TBBB brand is becoming recognizable among local communities. However, the brand is still not as strong as larger competitors. So, the brand is valuable, but it can’t be a full source of economic moat, as of now.

  • Intangible Assets: TBBB does not possess a lot of unique intellectual property or other intangible assets like a patent.

It is imperative to understand that, the TBBB has a fast-growing business model, and is only beginning to establish the various facets of its moat, it has great potential, as long as it keeps its operational efficiency, and continues to grow its revenues and profits, it might become a strong contender in the Mexican retail market. This company is mostly a play on growth, however, they are also creating some moats on their operations and the brand image.

Moat Rating: 2/5 - The company has made strides in creating a moat, however, a lot of it is dependent on the scale and operational efficiency, as well as brand awareness. They are very new to the game and still have to prove themselves in this sector with more penetration and growth.

Business Resilience and Risks

TBBB’s management team believes that the business model is robust and is designed to perform well even during economic downturns. Let’s analyze:

  • Business Resilience: TBBB’s core business revolves around providing necessary groceries and everyday essentials. This makes them less susceptible to drastic swings during economic downturns. However, increased competition and low margins may make it difficult to maintain sales and profitability.
    • Risks to the Moat:
      • Competition from established and new players is a major risk for TBBB. If the competition starts to give better prices or offers a better product at the same price, TBBB can lose its market share. To counter this, TBBB will have to keep investing in private label products.
      • Economic slowdown can affect consumer spending and could reduce TBBB’s profitability. Especially the low-end segment that are mostly employed by TBBB can get affected by bad economies. TBBB should be ready for all types of economies.
      • TBBB has a very expansionist agenda, and hence there is risk in spending on large capital expenditure on building more stores, and increasing distribution facilities. As we have seen with many other companies, not all expansions are profitable and should be monitored closely.
      • Supply chain disruptions can affect availability and costs, potentially impacting profitability. TBBB will have to focus on creating more diverse supply lines. Also, as they expand to a larger scale, this problem might be minimized.
      • Technological disruption could impact the traditional business model. TBBB will have to adapt their operations and distribution according to newer technologies and consumer preferences.

Understandability Rating

TBBB’s business model, while centered around a simple “low-price grocery store,” involves complexities when you consider the operational strategies. Evaluating the financial statements and analyzing the economic moat can be challenging.

Understandability Rating: 2/5 While the core business model is easy to understand, the intricacies of its operational aspects and financial implications makes its complex for an average investor.

Balance Sheet Health

TBBB’s financial position is considered generally healthy. They have a good and improving cash situation, a relatively low debt burden, and they have a disciplined capital expenditure policy.

Balance Sheet Health: 4/5 - They have good liquidity, they are trying to maintain their capital structure to provide maximum value to shareholders. All those facts make them a healthy business overall.

Summary of Recent Concerns / Controversies and Management Response

  • Inflation: Management stated that their Same Store Sales growth slowed down to 14.8% in Q1 of 2024, whereas the previous year it was 19.2%. Also, EBITDA margins were up by only a small amount of percentage points. The slowing down in sales can be due to external factors, such as inflation.

  • Expansion and CAPEX: The company has been rapidly expanding which has been good, but they need to continue their operation efficiency and cost control.

Management seems to be optimistic about long-term prospects and maintains a focus on growth and cost-control. They do believe that there is a lot more room to grow in the Mexican retail market, as they have a very small market share of it, but they still have a clear growth path ahead.