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17The cannons are loaded, every pocket is searched for remaining coins and they are mentally prepared to jump into the deep, red sea.
Next to one $GOOGL (-1.34%) which barely scratched the 100% plus mark a few months ago and is now at a nice 25% (the obligatory screenshot remains as a reminder, of course), even shares such as $III (+1.46%) opened at minus 20%.
Which companies do you have your eye on now and are you already buying them?
TTWROR: 27%
Top holdings:
Worst trades:
I participated in Dollar General's conference call last week ($DG (+4.98%) ) on their fourth quarter 2024 results last week. I would like to summarize my insights here:
Todd Vasos, CEO , was pleased with the fourth quarter performance, which was characterized by solid execution and good sales numbers. He emphasized that the "Back to Basics" initiative showed positive results and that the company is well positioned for 2025. An important milestone was that Dollar General achieved annual sales of over USD 40 billion in the 2024 financial year for the first time in the company's history. annual turnover of over 40 billion US dollars has achieved. This underscores Dollar General's significant role as a local supplier in over 20,000 communities. In the fourth quarter, Dollar General increased its increased its market share in both consumer and non-consumables.
The same-store sales increased by 1.2 %driven by growth in the average transaction amount of 2.3 %. This was partially offset by a 1.1% decline in customer traffic due to continued financial pressure from core customers and the strong prior year comparison. The increase in comparable sales was exclusively attributable to the consumer goods category, while the seasonal items, household goods and clothing segments recorded declines.
Vasos also addressed the financial situation of customers, which it said had deteriorated over the past year. Many customers only have money for the bare essentials and even have to save on necessities5 . No improvement in the macroeconomic environment is expected for 2025, especially not for core customers. The focus will therefore remain on offering value and convenience. With regard to the announced tariffs, Vasos was confident that the impact could be mitigated in 2025.
An important point was the announced portfolio optimization. A review of Dollar General and pOpshelf's real estate portfolio was carried out in the fourth quarter. As a result 96 Dollar General stores were selected for closure mainly in urban locations that were increasingly difficult to operate. At pOpshelf were 51 stores were identified as candidates for closure of which 6 will be converted into Dollar General Stores and the remaining 45 will be closed. After these measures, there will still be 180 pOpshelf stores. In the fourth quarter, these decisions led to a negative negative impact on operating profit of 232 million US dollars in the fourth quarter..
Vasos was optimistic about the future of pOpshelf and referred to positive customer feedback. Various initiatives are planned to increase sales, including new brand partnerships, an improved in-store experience and new categories. A new store layout with a focus on toys, party goods, sweets and beauty products is showing initial success. Insights from pOpshelf will also be used to strengthen the non-consumable offering in Dollar General stores.
The presentation was followed by questions from analysts.
Kate McShane from Goldman Sachs asked about the expected course of margin expansion until 2028 and the biggest structural changes that will prevent a return to historical operating margins. Kelly Dilts explained that it would not be a linear increase, but that many measures were being taken to achieve the targets. Key drivers are the improvements in inventory differences and losseswhich are already showing positive developments. Initiatives such as the DG Media Network and an improved non-consumable strategy would also help to improve margins.
Simeon Gutman from Morgan Stanley asked about the current situation of the consumer, in particular about changes in recent months. Todd Vasos described the situation as still tense for the core customers, but he is observing an increasing "trade-down" tendency among both mid-range and high-end customers. This trend intensified in the fourth quarter and appears to have continued in the first quarter.
Zhihan Ma from Bernstein asked whether more closures are to be expected after the announced closures and how the returns from new store openings compare to Project Elevate and traditional remodels in the long term. Todd Vasos explained that the portfolio review had been thorough and the closures were strategic decisions. He continues to see potential for new stores in the USA and Mexico. Positive contributions are also expected from Project Elevate (expected sales increase of 3 % to 5 %) and traditional Remodels (6 % to 8 %).
Rupesh Parikh from Oppenheimer inquired about the current status of the stores (inventory, staffing) and the possibilities for further improving working capital. Todd Vasos was satisfied with the condition of the stores, which had improved thanks to the "Back to Basics" initiative. Inventories are at a high level and there is still potential for optimization. Kelly Dilts emphasized the successful reduction of inventory while at the same time increasing availability, which has had a positive effect on working capital. She announced further debt reductions for 2025.
Seth Sigman from Barclays noted that the sum of the margin drivers mentioned would exceed the long-term margin target of 6 % to 7 % and asked about possible compensation effects or whether the targets were conservative. Todd Vasos emphasized that the long-term framework strikes the right balance in order to do justice to customers, employees and shareholders. They are always striving to achieve more and the target should be seen as a good anchor point.
Robby Ohmes from Bank of America concluded by asking about estimates of the competitive environment in 2025 compared to 2024, particularly in relation to Walmart, the expansion of delivery services and the closure of competitors. Todd Vasos emphasized that competition is always present, but he sees opportunities through the closure of competitors such as Party City and the continued market share gains against drugstores. The accelerated "trade-down" movement is playing into Dollar General's hands. The expansion of the delivery service should be a competitive advantage, especially in rural areas. The DG Media Network is an important building block for the digital strategy and offers margin potential.
The conference call gave the impression of a company that has taken the right steps to strengthen its base after a challenging 2024. The strategic portfolio optimization through the closure of unprofitable stores is a logical step. The financial guidance for 2025 is moderate, but takes into account the ongoing challenges for core customers and higher investments in the first half of the year. The long-term financial framework with ambitious targets for sales and margin growth as well as the resumption of share buybacks from 2027 signals confidence for the future.
Overall, Dollar General appears to be well positioned to benefit from the current economic situation and changing consumer habits, even if headwinds are still expected in the short term.
I personally have Action (via 3i Group $III (+1.46%) ), a European counterpart in the portfolio.
Here is the share price performance of the companies I track continuously. I focus on the period from 01.12.2024 - 15.01.2025
My portfolio currently contains shares in 3iGroup.
Action published its latest figures in November, which underline its strong growth in Europe. Action has achieved achieved net sales of 10.733 billion eurosaccompanied by an operating EBITDA of 1.532 billion euros - an impressive increase of 26 %. increase of 26 % compared to the previous year. What particularly impresses me is the like-for-like growth of 10.1%, driven entirely by volume increases. In a rising cost of living environment, Action shows how effective a strategy that passes on discounts directly to customers can be. Despite industry-wide price increases, Action remains a model of efficiency. In the first nine reporting periods of the year, 189 new stores were opened and 350 new stores were planned for the full year 2024. I assume that this target has been achieved. I find the rapid expansion in Italy, Portugal, Slovakia and Spain particularly exciting.
Basically, it can be said that US stocks (e.g. Dollar Tree and Dollar General) recorded high losses in 2024. Among other things, this was due to a lack of efficiency, but also to the threat of Trump's punitive tariffs on goods from China. Therefore, another exciting candidate for me is Dollarama, as they operate exclusively in Canada and Latin America.
Today, Action opened a new store at Vienna Central Station. As an investor, I made the long and arduous journey to be there.
The choice of location at the main station was a very clever one, as special permits allow for longer opening hours.
Exterior view of Action Store Vienna Central Station in the basement.
The new store at Vienna Central Station has an excellent location and was able to attract an extremely high number of customers on the very first day.
The staff were very friendly and motivated and customers were busy shopping.
In addition to many interesting and useful items at reasonable prices, there are also a few exotic items, for example I discovered this cat's milk. I put the milk back, but I think it would be a good idea for people to use cat's milk instead of cow's milk to make their muesli, as it would certainly save resources and CO2.
🤥🤪 on that note, have a nice evening
Third installment:
In my opinion, the investment in Action alone justifies the current valuation
The 3i Group is a private equity investment company listed on the London Stock Exchange and specializes in building long-term corporate value. With a market capitalization of several billion pounds, it is part of the FTSE 100.
3i invests in various sectors, including consumer goods, technology and sustainable infrastructure. Its best-known investments are probably companies such as Action and Valorem.
Leading global investment firm 3i Group focuses on two main sectors: Infrastructure and Private Equity. The company was founded in 1945 and focuses on investing in mid-market companies in North America and Europe.
Private Equity:
3i primarily uses its own funds to invest in companies with a market value between 100 and 500 million euros. Their approach focuses on promoting growth as a means of long-term wealth generation. They invest heavily in sectors such as software, industrial technology, consumer services, healthcare and consumer goods. A prominent example of this is Action, a rapidly expanding European discount retailer, which makes up a significant part of their portfolio and has been a key driver of their recent returns.
Infrastructure:
3i oversees a portfolio of infrastructure holdings and focuses on sectors such as healthcare, communications and energy. Its investments in this area are designed to generate both capital appreciation and high returns from fund management fees.
3i's portfolio was valued at £6.7 billion for infrastructure and £21.6 billion for private equity in March 2024.
Action:
The fast-growing cheap non-food business Action currently occupies around 72% of 3i's portfolio. The company was founded in the Netherlands in 1993 and is now the fastest growing bargain chain in Europe with more than 2,300 locations in 12 countries, including the Netherlands, France, Germany, Austria and Spain. The core of Action's business strategy is to offer consumers a regularly curated selection of great value goods across 14 different categories including toys, fashion, personal care and homeware. Action is a popular option for those looking for the best deals due to its effective sourcing and extensive sourcing that guarantees high quality items at the lowest cost.
Promotions bring in revenue of around €8 billion per year and are still growing at a steady pace. In 2023, there was a 30% increase in sales and a 46% increase in EBITDA to 1.2 billion euros. Every week, the company adds over 150 new products to its range to continuously update its inventory. Its range is still changing, with only around 35% of it still fixed. Action also prioritizes sustainability, sourcing 90% of its cotton goods through the Better Cotton Initiative and using sustainably sourced materials in 92% of its paper and wood products, which sets it apart from other low-cost suppliers, particularly Chinese ones like Temu.
To be honest, the growth rate of sales and EBITDA is simply spectacular.
The company is growing by opening new stores as well as increasing sales per store.
Most exciting to me is Action's rapid geographic expansion, as mentioned above, they are currently present in 14 European countries, with more to come.
The undervaluation:
3i Group is currently trading at a P/E ratio of 8.75. That seems quite expensive if we exclude the big outliers in 2020 and 2021.
However, as mentioned in the title, I believe that only Action, with "only" 72% of 3i's holdings, justifies an even higher multiple. For this reason, I have performed a discounted cash flow (DCF) analysis for Action with the following assumptions:
EBITDA margin: I averaged over the last four years - including Covid-19 - and assumed that the margin would remain constant at the average 12.7%.
Sales growth rate: Action's average sales growth rate over 4 years is currently 22%, while the growth rate since the 3i buy out in 2011 is a whopping 26%. To adjust the bear case, I have used the following assumptions: Bear case: 15% p.a. Bull case: 22 % p.a.
Free cash flow: Since 3i does not explicitly declare the FCF of a particular holding in the earnings calls, it was quite difficult to get a suitable assumption for the FCF conversion from stock. Fortunately, however, the CEO stated in the last earnings call that the EBITDA to FCF conversion for 2023 was 101%, which gives us the following assumptions: Bear case: 80% of EBITDA Bull case: 101% of EBITDA
WACC: I used 10% for the WACC.
Perpetuity Growth Rate: I have assumed 3.5% for the perpetuity growth rate. This seems conservative if you look at the historical growth rates.
Within the bear case, our DCF gives us a share price with a fair value of around €44, which suggests that the company is currently fairly valued.
If we look at our bull case, we get a fair value target price of around €100, suggesting that the company could currently be undervalued by a whopping 57%.
Conclusion
Our two DCFs give us a price range of €44 to €100 or a valuation gap of 0% to 57%.
Considering that our DCF only takes into account one stake of 3i, one could argue that the remaining 28%, apart from Action, is completely free when investing in 3i. In my opinion, this increases the margin even further.
For me, there are two potential risks that could hinder our investment case: Economic downturns: although bargain stores often do well during downturns, prolonged crises can impact consumer spending and reduce sales. Measures could be under pressure to raise prices if inflation continues to drive up the cost of goods and transportation, which could scare off budget-conscious customers.
Competition: with Chinese players on the rise, Action needs to consistently innovate and differentiate itself from the competition to maintain its market position. This could put pressure on margins. However, the recent push on sustainability and higher quality compared to Chinese competitors sets Action apart.
Nevertheless, I think 3i is currently at a very compelling entry point even after the recent run the stock has had. I am gradually increasing my investment in this stock. I rate the share as a strong buy.
$III (+1.46%)
First Half 2025 Financial Results
Earnings Per Share (EPS): UK£2.12, up from UK£1.74 in 1H 2024.
Revenue: UK£2.04 billion, an 18% increase compared to 1H 2024.
Net Income: UK£2.05 billion, a 23% rise from 1H 2024.
Growth Outlook:
Revenue is projected to grow at an average rate of 14% per year over the next three years, outpacing the 3.7% average growth forecast for the UK's Capital Markets industry.
Performance Highlights:
Over the past three years, the company’s earnings per share have grown by 8% annually on average, while the share price has surged by 33% per year—significantly outpacing earnings growth.
Listed non-food discounters (direct and indirect investment)
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Last week, I read that non-food consumer spending at retailers such as Action, Tedi and Woolworth rose from €2.6 billion to €3.2 billion in Germany between the first half of 2022 and 2024. Lidl, Aldi and co. are losing more and more market share in this area.
This was enough to make me take a closer look at the industry.
The chart shows the individual relationships between the companies and any investors.
Let's start with #action let's start with The non-food discounter Action increased its turnover in the first half of 2024 by 20.1 percent year-on-year to 6.2 billion euros. Action now has a total of 2,685 stores in 12 different countries with 17.3 million customers. The company plans to open a further 330 stores this year alone.
Action itself is not listed on the stock exchange, so it is all the more exciting that the private equity company $III (+1.46%) (3i Group) holds around 80% of Action. Of course, 3i also holds stakes in other companies, but the Action stake accounts for around 72%. Action is therefore 3i's most important investment. The share price has also risen by 70% in the 1-year performance. 🚀
Interesting fact: The owner holding of Woolworth (by the way, they also own Tedi) is currently pushing for a sale of #woolworth and the only remaining bidder is the 3i Group. Having Action and Woolworth in one portfolio would be a huge market share!
Blackrock also has a stake of around 9% in the 3i Group itself.
