Thread by @puppyeh1

The amount of value you can find when you go down the mkt cap curve is fairly astonishing. Today's eg: The Works, $WRKS.LN, a UK-listed games retailer at <2.5x pre-COVID EV/EBITDA - w no debt.

As always the goal is to find situations where it's v difficult to lose $$

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If you look up 'world's best businesses' you won't find $WRKS.LN looking back at you but that's not what this is about. Post restructuring in 08 the concept has successfully grown to 500 stores, generated ~220mm GBP revs pre-COVID, and put up ~13mm in EBITDA:

Today's mkt cap is ~34mm GBP so ~2.5x EV/EBITDA. Note this biz was putting up positive LfLs, successively, pre COVID and growing the concept (toys/games/gifts, kinda like $FIVE in the US).

Ie this is not some left-for-dead shrinking concept.

That said this saw yrs of declining 4-wall profitability, driven primarily by costs - rents, lower GMs (competition), and labor.

The thesis is basically, a lot of cost levers have dropped out, demand is coming back, and pre-COVID EBITDA is a low bar.

First, on costs. Basically every physical retailer in the UK used COVID to renegotiate rents. $WRKS.LN is no exception:

Note $WRKS.LN can break their avg rent in 2yrs. Here are the main cost buckets from 2019. A simple 5% fleetwide rent cut - far lower than broken lease renegotiations, from what I've heard - adds 2mm+ to EBITDA (all else equal). Low hanging fruit.

Then there's COGS. Two drivers here: discounting (or lack thereof); and FX. As a purely domestic retailer that sources basically all product offshore, a stronger GBP is a big beneficiary.

Whilst the pound has come off from 1.42 to 1.38, its still massively higher than recently..

...meaning you're looking at between a 5-8% tailwind from FX, going forward, vs FY19-20:

Let's say 5% on the same COGS base (from 2019) 81mm = ~4mm of extra gross profit - again vs 13mm or so of baseline EBITDA.

Even if a good portion of this is given back in discounting/freight, it should still be quite additive.

Finally there's the underlying demand. When $WRKS.LN stores were actually open this fiscal yr (FY21 meaning basically mid '20 to mid '21) they generated strong LfLs:

More recent trends - post partial UK reopening appear to be quite positive. in recent trading update they said Store Lfls (meaning non-online sales) were +6% for full year, when they were actually open. This implies (to me) a double digit performance since re-opening...

...whilst performance since re-opening has been 'very encouraging.'

Obvi online sales will normalize but what are you really paying for here?

With 527 stores and a 34mm mkt cap and no debt you're paying ~65k per operating box. I think that's somewhere b/w 1/3 and 1/4 of replacement cost...and this historically is a solid cash flowing business (growing units consumed some cash in the CFS):

<2.5x pre COVID EV/EBITDA, and 4x pre-COVID PBT, seems wildly wrong. I think post-COVID EBITDA could be closer to 20mm than 13mm (FX, rent savings; stronger LfLs; less competition). Look at $FIVE, $BBW etc performance (admittedly US but same category) since re-opening...

Why couldn't this trade for 5x new-normal EV/EBITDA of 15mm++ EBITDA? that gets you a 150% return here.

Note that historical avg EV/EBITDA in 2018-19 - during post Brexit environment - was something like 4x EV/EBITDA. Even there on new normal earnings you should see a double...

Basically I'm saying the bar is v low, and if you're bullish on re-opening + 'return to normal' (which the mkt is clearly questioning, again, now) then there are many ways to win.

In sum, I don't think much has to break right over next 18mos to see this at >120.

GLTA, DYODD 👊