Good analysis and I've done similar work on various retail concepts that have been beaten down but there is still one fundamental issue I have. The basis for the entire compounding of value is that they can open new locations with the proposed ROIC over a decade plus timeframe. It is easy to say they target 30% ROIC on their growth but outside of COVID they have never achieved those numbers. Yes it's possible the new management fundamentally improved the business, indeed this seems likely, but by how much?

So far all of the underlying trends are still negative. 2022 was a post-COVID hangover against tough comps but comps, transactions, and visits are still negative and the tracking data shows no inflection. So when you underwrite the long-term thesis, what is the true $/sq. ft. and margin per store they can have in a normalized environment?

If the right answer is more like $20M/store revenue and high single-digit margins (both large improvements over pre-COVID) the ROIC is only mediocre. Then you layer in all the risks you mentioned on a consumer discretionary concept that has been plagued by bankruptcies and it looks a bit different. I'm willing to believe this will be a good investment and is potentially cheap but I'm not sure it could be called inevitable until they demonstrate what the real, sustainable store economics are.

Expand full comment

Great analysis. I might aim for a discount post earnings announcement if possible. But still good value right now

Expand full comment