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1/ A few thoughts on evaluating store / outlet based businesses. Most analysts value them on absolute earnings (ie corporate EBITDA, PAT) which mix SSSG and store expansion. Metrics like SSSG also don’t provide sufficient insight if store growth is high.
2/ I would rather value operational stores (min 65-70% value for today’s stores in market cap) + franchise value (~30% of market cap). % range will change depending on franchise quality
3/ At the store level one can run a DCF of a steady state store. You need capital invested per store and steady state margins. Assuming margins = cash since incremental working cap per store is not much unless product mix changes or heavy discounting takes place
4/ Iterations show that if you pay >1.5-2x cap invested / steady state store you are not likely to meet cost of capital hurdle. Because most costs are fixed and sqft (revenue potential) is limited. In that sense a single store is like a standalone infra asset. Hence book multiple
5/ Unless the product mix in the store changes or scale efficiencies are realised on the cost side. Or footfall / velocity change meaningfully. So applying consumer like multiples at the corporate level may not be the best idea despite it being a consumer business
6/ When paying for franchise value one must apply an outside-in approach since profitable locations (ie high footfall) are limited. Plus potential disruption by tech (food agg. for restaurants/qsr, marketplaces for apparel). Thoughts?
