Geoff Gannon – Page 8 – Focused Compounding

Geoff Gannon June 24, 2017

All Supermarket Moats are Local

Following Amazon’s acquisition of Whole Foods and the big drop in supermarket stocks – especially Kroger (KR) – I’ve decided to do a series of re-posts of my analysis of the U.S. supermarket industry.

Today’s re-post is a roughly 1,300 word excerpt from the Village Supermarket (VLGEA) stock report Quan and I wrote back in 2014. This section focuses on how the moat around a supermarket is always local.

Read the Full Report on Village Supermarket (VLGEA)

In the Grocery Industry: All Moats are Local

The market for groceries is local. Kroger’s superstores – about 61,000 square feet vs. 58,000 square feet at a Village run Shop-Rite – target customers in a 2 to 2.5 mile radius. An academic study of Wal-Mart’s impact on grocery stores, found the opening of a new Wal-Mart is only noticeable in the financial results of supermarkets located within 2 miles of the new Wal-Mart. This suggests that the opening of a supermarket even as close as 3 miles from an incumbent’s circle of convenience does not count as local market entry.

In the United States, there is one supermarket for every 8,772 people. This number has been fairly stable for the last 20 years. However, store churn is significant. Each year, around 1,656 new supermarkets are opened in the United States. Another 1,323 supermarkets are closed. This is 4.4% of the total store count. That suggests a lifespan per store of just under 23 years. In reality, the risk of store closure is highest at new stores or newly acquired stores. Mature locations with stable ownership rarely close. So, the churn is partially caused by companies seeking growth. Where barriers to new store growth are highest – like in Northern New Jersey – store closings tend to be lowest. Village’s CFO, Kevin Begley, described the obstacles to Village’s growth back in 2002: “…real estate in New Jersey is so costly and difficult to develop. New Jersey is not an easy area to enter. This situation also makes it challenging for us to find new sites. It’s been very difficult for us, and for our competitors, to find viable locations where there is enough land especially in northern Jersey and where towns will approve a new retail center. With the Garwood store…we signed a contract to develop that piece of property in 1992; it just opened last September (2001). So it can be a long time frame from when you identify a potentially excellent site and when you’re able to develop it. Finding viable sites is certainly a challenge that we face, as do our competitors.”

New Jersey is 13.68 times more densely populated than the United States generally (1,205 people per square mile vs. 88). It is about 12 times more densely populated than the median state. This means New Jersey should have about 12 times more supermarkets per square mile to have the same foot traffic per store. The lack of available space makes this impossible. As a result, the number of …

Geoff Gannon June 23, 2017

Examining Your Own Past Sell Decisions

Check out this video inspired by my “Have My Sell Decisions Really Added Anything” post:

Video

Original Post

You might try the exercise of examining your own past sell decisions.

If you do, feel free to email me about what you learned by examining your own sell decisions.…

Geoff Gannon June 23, 2017

Can Howdens Joinery Expand to the European Mainland?

Richard Beddard has added Howdens Joinery to his Share Sleuth portfolio. I mention this because I’ve written a little about Howdens Joinery in the past. And some of you know Howdens is the stock I like best that I don’t yet own.

This raises the question:

Why haven’t I bought Howdens yet?

There are two reasons:

1. I try to buy stocks I’m confident I’d be willing to hold for more than 5 years if necessary

2. I try to simply hold cash till I’m confident a stock will return at least 10% a year while I hold it

I believe Howdens may – in about five years from now – have fully covered the U.K. with about as many depots as it ever will have in that country. I’m not 100% sure this is true. I’ve seen companies raise their estimates of the size of their chain’s footprint that their home country can support. So, Howdens may have more years of depot growth ahead of it beyond 2022.

But, there will eventually be a limit to how many depots Howdens can build in the U.K. So, the next question is:

Can Howdens expand to other countries?

Richard Beddard writes:

“The other risk is Howdens might fill the UK with depots within my 10-year scenario, in which case it would need to find some other way to grow. Due to its entrepreneurial culture and decade long experimentation with European stores, I think it probably will be able to adapt its business model and establish profitable stores abroad.”

I don’t doubt Howdens’s entrepreneurial culture. But, at the risk of ethnocentrism here (I am an American writing about a British company), I am not 100% certain that Howdens’s entrepreneurial culture will – at the depot level – be easily exportable to non-English speaking countries. I’ve researched a few organizations in the past – notably Tandy Leather (TLF) and Car-Mart (CRMT) – where scuttlebutt taught me the importance of delegation and incentivization of the branch managers.

I believe Howdens’s model depends heavily on good management at the depot level.

As a rule, English speaking countries tend to be among the most “flexible” when it comes to labor in the sense employers can easily fire workers with little cost. And, as a rule, continental European countries tend to be among the least flexible when it comes to labor.

In its 2015 annual report, the company said:

“Managers hire their own staff locally and develop relationships with local builders. They do their own marketing to existing and potential customers. They adjust their pricing to suit local conditions. Managers manage their own stock. They work out where to put everything they can sell – old favourites and new introductions. Every day, they balance the needs of builders, end-users, staff and everyone in their local area who has an interest in the success of their depot…Managers are in charge of their own margin, and effectively of their own business. Both managers and staff are strongly …

Geoff Gannon June 17, 2017

Do Supermarket Stocks Have Long-Term Staying Power?

Read the Free Report on Village Supermarket

Check Out Focused Compounding

Today’s re-post is a roughly 1,300 word excerpt from the Village Supermarket (VLGEA) stock report Quan and I wrote back in 2014. This section focuses on whether or not a supermarket can be a durable investment. The full 10,000+ word report on Village – along with 26 other reports of similar depth – are now available at my new site, Focused Compounding.

Some facts have changed since this report was written. For example, Amazon’s companywide sales figure is much, much higher than it was in 2013 (the last year for which we had data when we wrote this report).

And – more relevant to the grocery industry – Amazon Fresh has gone from a $300 a year add-on to Amazon Prime to a $15 a month add-on to Amazon Prime (so 40% cheaper).

Durability (From the 2014 Report on Village Supermarket)

High Volume Supermarkets are Durable Local Market Leaders

Demand for food is stable. Most grocers do not experience meaningful changes in real sales per square foot over time. Changes in real sales numbers almost always reflect changes in local market share. There will be online competition in the grocery business. However, in Village’s home market of New Jersey, direct to your door delivery of groceries has been available for 18 years. Peapod started offering online grocery shopping in 1996. The company was later bought by Royal Ahold. Royal Ahold owns Stop & Shop. Peapod has 4 locations in Somerset, Toms River, Wanaque, and Watchung. These locations offer grocery delivery in Village’s markets. They are direct competition and have been for years. Peapod does not require a $300 annual fee like Amazon Fresh. Instead, Peapod simply adds a delivery charge. Customers also tip the driver. Since the driver normally carries the bags into the customer’s home and puts them on the kitchen counter for the customer – the tip is usually a generous one. Peapod charges $6.95 for orders over $100. The charge for orders under $100 is $9.95. The minimum order size is $60. Customers can also order online and then drive to one of the 4 Stop & Shops mentioned above (Peapod often uses the second floor of a building where the ground level is Stop & Shop’s retail store) and pick up their own order. Pick-up is free. However, a Peapod employee still collects the groceries and brings them to the customer’s car. So, a tip is still expected. Common tips are probably $5 to $10. So, the total cost of a Peapod home delivery order is probably anywhere from $12 to $20 higher than a trip to a Stop & Shop grocery store. Even a pick-up is probably $5 higher than a normal Stop & Shop visit – …

Geoff Gannon June 16, 2017

Supermarket Stocks Down: Start Your Industry Research with a Free Report on Village Supermarket (VLGEA)

Read the Free Report on Village Supermarket

Check Out Focused Compounding

Kroger (KR) is down 11% today. The stock’s P/E is now about 11.

Kroger is guiding for same store sales of flat to up just 1% this year. This guidance – combined with Amazon’s purchase of Whole Foods – is probably why the stock is down.

Supermarket stocks are a good area for value investors to research now. One way to learn about the supermarket industry in the U.S. is to read the report Quan and I wrote on Village Supermarket (VLGEA) back in 2014.

That stock is now at roughly the same price – $25 a share – it was when we wrote about it.

A membership to my new site, Focused Compounding, gives you access to this report on Village Supermarket as well as 26 other stock reports just like it.

A membership to Focused Compounding costs $60 a month. If you enter the promo code “GANNON” at sign-up, you will save $10 a month forever.

Check Out Focused Compounding

Read the Full Report on Village Supermarket…

Geoff Gannon May 30, 2017

The 3 Ways an Investor Can Compromise

GuruFocus: Pick the Winners First – Worry About Price Second

“There are 3 ways an investor can compromise:

1. He can compromise by paying a higher price than he’d like to

2. He can compromise by buying a lesser quality business than he’d like to

3. He can compromise by not buying anything when he’d rather own something

You could use these 3 compromises as a test of what kind of investor you are.

A growth investor – like Phil Fisher – compromises by paying a higher price than he’d like. He won’t compromise on quality. So, he has to compromise on price. A value investor – like Ben Graham – compromises by purchasing a lower quality business than he’d like. He won’t compromise on price. So, he has to comprise on quality. Finally, a focus investor – like me – compromises by not owning any stock when he’d much rather be 100% invested.”

GuruFocus: Pick the Winners First – Worry About Price Second…

Geoff Gannon May 29, 2017

I’ve Decided to Stop Deciding Which Stocks to Sell

Over the Last 17 Years: Have My Sell Decisions Really Added Anything?

“The stocks I pick don’t benefit much from well-timed sales. There’s usually little harm in holding on to them much, much longer than I do.

So, I’ve decided to hold the stocks I own indefinitely. When I find a really, really good stock idea – which might happen once a year – I will need to sell pieces of the stocks I already own to raise cash for that purpose. I’ll do that. So, if I’m fully invested and want to put 20% of my money into a new stock – I’ll have to sell 20% of each stock I now own. But, I’m not going to eliminate my entire position in a stock anymore. Those decisions to completely exit a specific stock haven’t added value for me. So, I’m not going to try to make them anymore.

From now on, I’m going to be a collector of stocks.”

Over the Last 17 Years: Have My Sell Decisions Really Added Anything?…

Geoff Gannon May 26, 2017

The Fastest Way to Improve as an Investor

Study a series of related stocks.
Give each stock your absolute undivided attention – focus like you’ve never focused before (it’s fine if you can only do this for like 45 minutes at a time).
Put your thoughts into writing.
Bounce those ideas off another person.

Geoff Gannon May 22, 2017

The First 8 Things to Look at When Researching a Stock

The other day, someone I talk stocks with on Skype asked how I normally go about starting my initial research into a stock. What documents do I gather?

Here’s what I said:

“Basically, I start by finding the longest series of financial data I can (GuruFocus, Morningstar, whatever) and then look at that along with reading the newest 10-K and the oldest 10-K in detail. So, 10-year+ financial data summary, 20 year old 10-K (or whatever), this year’s 10-K, and then the investor presentation if they have one, and the going public/spin-off documents if that’s online. Also, I read the latest proxy statement and the latest 10-Q as needed for info on management, share ownership, the balance sheet etc.”

I also check the very long-term performance of the stock. So, I will chart the stock – at someplace like Google Finance – against the market over a period of 20, 30, or 40 years.

So, here’s a full list of my usual sources:

1. Check long-term stock performance (what is the compound annual return in the stock over 20, 30, or 40 years?)

2. Find the longest series of historical financial data possible (search for a Value Line sheet, a GuruFocus page, or go to Morningstar or QuickFS.net to see the long-term financial results)

3. Read, highlight, and take notes on the latest 10-K (so 2016)

4. Read, highlight, and take notes on the oldest 10-K (On EDGAR, this is usually around the year 1995)

5. Read, highlight, and take notes on the company’s own investor presentation

6. Read, highlight, and take notes on the IPO or spin-off documents (On EDGAR, this will be something like an S-1 or 424B1)

7. Read, highlight, and take notes on the latest proxy statement (On EDGAR, this will be something like a DEF14A)

8. Read, highlight, and take notes on the latest 10-Q.

Why Check the Long-Term Stock Performance?

This is something a lot of value investors wouldn’t think of. But, I find it very useful. Any time you are looking at a stock’s performance your choice of start date and end date are important. The good news is that your start date will be fairly arbitrary if you just look as far back as possible. So, if the stock has 27 years of history as a public company – and you look back 27 years – you probably aren’t picking a price near an unusual low point in the stock’s history. In fact, you’re probably picking the IPO price, which will rarely have seemed a “value” price at the time. The other good news is that – as a value investor – you’re probably attracted to stocks that seem cheap now. They trade at low or at least reasonable multiples of earnings, EBITDA, sales, tangible book value, etc. This means that any stock you are looking at as a possible purchase is unlikely to be benefiting right now from a particularly good choice of an end point.

Here’s an example.

If …

Geoff Gannon April 27, 2017