Buy BBB Foods

Whether you live in a city neighborhood or the smallest of rural towns, chances are you are within a 10-minute walk or drive to a grocery provider, whether that be of the supermarket or convenience store variety. Over 95% of Americans are.

In our modern form of living, these stores are the key endpoints for distributing the necessities of everyday life: food, drink, and personal care products. They are the places we rarely think much about but could not live without.

Today, I'm going to review a Green Screen stock that falls into this category, far beyond our typical SaaS software provider or e-commerce platform. A grocery chain as a growth stock? Yes! The stock is BBB Foods (TBBB), better known in its native Mexico as Tiendas 3B. Is this one we may consider for purchase? Let's have a look.

Tiendas 3B - Good, Nice, and Affordable

Tiendas BBB (Bueno, Bonito y Barato - meaning "Good, Nice, and Affordable") is a chain of small, local grocery stores in Mexico.

I usually try to come up with a similar U.S. concept to illustrate these foreign businesses, but it's a bit tricky with this one. 3B stores are "bare-bones" grocery stores, selling mostly private-label products and foregoing traditional grocery offerings like bakeries, delis, and pharmacies. In this sense, the chain's merchandising is similar to Aldi or Lidl in the U.S.

But those are not particularly good comparisons either, because Tiendas BBB stores are much smaller - about 3,200 square feet on average, vs. over 12,000 for your typical Aldi. At that size, the chain better compares with the size of a typical convenience store, somewhere between 7-11 on the small end and the regional convenience chains (Sheetz, Wawa, Buc-ee's, Casey's, etc.) on the larger end.

So, imagine a slightly larger 7-11 with a pure grocery focus and no gas, and you've got the idea.

Store locations are focused on poorer urban or suburban neighborhoods and are designed to be walked to and from. Tiendas 3B stores are meant to be low-cost neighborhood grocery destinations, focused on convenience and affordability.

Growth Outlook and Revenue Recurrence

If I'm considering investing in a retail concept, it needs to have serious growth potential. This is the stage where a good retailer can provide excellent investment returns - mature concepts generally have trouble with this once store growth is exhausted.

Fortunately, that's exactly what we have with Tiendas 3B. The company reported just under 2,900 stores at the end of Q1. Over the medium term, it is targeting 12,000 locations in Mexico, with a long-term goal of 20,000. Either way, that's 4x or more the current store base, representing substantial growth. At its long-term goal, Tiendas BBB stores would be even more ubiquitous in Mexico than Starbucks or McDonald's are in the U.S.!

Management is opening about 450-550 new stores annually, about 15-20% expansion.

Same-store sales are the other part of the equation, and here Tiendas BBB is also going gangbusters, delivering over 13% growth in 2024 and guiding for 11-14% growth in 2025. Most retailers are thrilled with same-store sales growth that exceeds inflation rates (typically 2-4%).

Retail often rates very poor on the "recurring revenue" test. But, given its focus on local convenience, low prices, and selling "non-negotiables" (things people need regardless of economic conditions), I think it is more than fair to assume that most of Tiendas 3B's customers are going to shop there on a recurring basis - weekly at least, and likely multiple times a week. So I'm comfortable that there is a majority percentage of recurring customer activity.

Moat

Another thing that is quite difficult in retail is building a strong economic moat. There is always a lot of competition, customer switching costs are close to zero, and there are no network effects to speak of.

It has a ways to go, but the one potential moat Tiendas BBB might be able to build is scale. At 2,900 stores, it has more than double the location count as its closest competitor (Bodega Express, run by Walmart). Rapid expansion of both its distribution network and store count could conceivably give it process advantages that allow it to be profitable at lower unit prices. It's a difficult business model that few have tried, but when it has succeeded, it has been quite powerful. This is the playbook Walmart used in the U.S. to achieve retail dominance in the 1970s and 80s.

Still, this is an emerging "narrow" moat, and far from being immune to attack. In addition to Bodega, Tiendas 3B faces competition from Mexican conglomerate FEMSA through its Bara chain (~1,200 stores), as well as the smaller Supercito chain (~200 stores).

Management and Financials

K. Anthony Hatoum founded BBB Foods in 2005, took it public last year, and today holds the two key leadership positions as Chairman and CEO. Hatoum has a background in U.S. business, with an MBA from Stanford and stints at JPMorgan, McKinsey, and Merrill Lynch.

He also continues to hold near-controlling ownership in the firm, with a 45% voting stake and over 15% economic stake. This kind of founder-based, highly invested leadership is exactly what I look for.

My only concern is Hatoum's age. While not the oldest CEO I've ever seen, he is 61 years old and approaching retirement age. Tiendas 3B is a decade-plus growth story, and it is a reasonable concern to consider what impact management succession might have going forward.

I have no concern with the financials - they are quite good for this kind of business. Debt-to-equity is under 25%, and free cash flow margin at 5-6% is about double what you see in grocery or convenience chains in the U.S. This is a very well-run and financially healthy company.

Risks

I'd place Tiendas 3B in the "high" risk bucket compared to our average pick.

We've already touched on the competitive picture and the comparative lack of identifiable economic moat. Like in the U.S., a successful location can easily be followed by new stores from competitors, diluting revenues and profits for everyone. I wouldn't expect double-digit same-store sales growth forever.

Low margin, high volume retailers like this are very sensitive to typical disruptions like labor costs, inflation, and supply chain (especially fuel costs). Profitability is likely to ebb and flow based on where in the cycle each of these factors is at any given time.

Geopolitical risk is another factor. Mexico has historically had a relatively stable economy in the context of Latin America, but still faces serious challenges. Security, corruption, unpredictable government regulations, tariffs, and inflation are all much bigger concerns here than in the United States. Any of these can lead to business disruption, stock price volatility, and generally lower valuations than you would get with a similar U.S.-based firm.

Conclusion

I appreciate a lot of things that TBBB brings to the table. Early-stage retail with big ambitions has been a recipe for huge stock gains in the past (think Walmart, Costco, Five Below, etc.). Tiendas BBB has a pretty interesting model that lends itself to scalability and, over a longer term, healthy and durable competitive advantages.

That's not to say there isn't risk, because there is - a lot. Investors need to limit their position size with this one, and we need to be especially conservative with a price target. I've modeled for 20-25% annual growth over the next 5 years - plenty achievable with their current rate of store openings and even a fraction of current same-store sales. I've used a free cash flow margin target of 5.5% (about what they do now), an annual dilution rate of 3%, and a very high discount rate of 12.25% to account for the riskiness. That gives me a valuation in Mexican pesos of ps. 797, which at current rates translates to $40.50 in U.S. dollars.

With the stock trading at about $28 right now (below its IPO price), that represents a pretty solid value, 30% below the target price. Given that, I'm going to go ahead and add TBBB to our Buy List today!