$TBBB: Tiendas 3B is Mexico's Aldi. Is it too late to buy? | Fruit Tree Capital

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0:31You're about to listen to the Yet Another Value podcast with your host, me, Andrew Walker. Today, I've got a great one. Why? Because, well, if you're watching on YouTube, I busted out the mustache and my wife has been on me saying, you can't be wearing that mustache anymore. And I shaved it a few days ago and I said, honey, it's going to have to wait. We're going until I can get proof of this beautiful thing on the YouTube and I'll probably shave it tomorrow. But more importantly than that, today we've got Alberto Badia from Fruit Tree Capital. This is his first appearance on the podcast. I think you're really going to like him.

1:02So we're talking about TBBB. This is a dominant, burgeoning dominant discount retailer in Mexico. And as you're going to hear in our conversation, discount retailers have worked all across the world. This, you know, the potential to buy into one is really interesting. I wish I'd done it when I first saw it about a year ago. But it's a really interesting, fascinating long-term story. And really the key question to, hey, they're at 3 ,500. Do the economics as they go from 3 ,500 stores to potentially 15 ,000 stores in Mexico, do they stay the same? That's question one. And then question two is, hey, the valuation here is rich.

1:40The stock has run a ton. And I hate to just look at a stock price and say, did we miss it? But did we miss it? You know, I hear from a lot of people who used to be bulls who say, hey, it's hard for me to underwrite this at really attractive IRs anymore. But again, 3 ,500 to 15 ,000 stores add to your paybacks. That's how you get. It kind of doesn't matter if you pay 20 times price earnings, 40 times or 100 times price earnings at the start, because when you go from 35 to 1 ,500 to 15 ,000, the earnings go up really quickly. So I push Alberto on all of that. He's got great answers. I think you're really going to enjoy it.

2:12I think this is an awesome interview. So we'll get there in one second. But first, let's just go straight into the word from our sponsor. My sponsor this time, as so many of my podcasts are, Trata, T-R-A-T-A dot com. If you like this podcast, you will love Trata. Why? Because it's two buysiders talking about stocks. This podcast is two buysiders talking about stocks. There are two buysiders talking about stocks. But it's two smart buysiders who have a position in the stock talking about what they're thinking about with the stock, what they're worried about, the upsides, the downsides, why they own the stock.

2:40And guess what? they've got not one, but two interviews on TBBB, which I use to help prep. You'll hear me throughout the conversation saying it was so used for me for prepping for it, for getting ready for this, for thinking about the business, for understanding, you know, as somebody starting from almost here on this company, what's the history here? So if you like this podcast, I can guarantee you will like go to trotta.com slash TBBB. That's trotta.com slash T and then three B's behind it. And you'll actually see a sample of one of the calls that I used to prep for this podcast. So thank you to Trotta for sponsoring this podcast.

3:17And now let's get to the interview. All right. Hello, and welcome to yet another value podcast. I'm your host, Andrew Walker with you today. I'm happy to have on for the first time, Alberto Viada from Fruit Tree Capital. Alberto, how's it going? Good, good. I just butchered your last name tonight. It's Vadia. Vadia. Sorry. Don't worry. I was reading. Well, hey, that's an embarrassing start on my end, but we're going to push through two things before we get started. First disclaimer, remind everyone, nothing on this podcast is investing advice. There's a full disclaimer at the end of the podcast and in the show notes.

3:46And second disclaimer, Alberto, you came highly recommended by David Bastion from Kingdom Capital. He's a friend. I think really highly of him. When I first trained my first AI model, I actually fed it Kingdom's letters. I said anything that Kingdom's interested in, I want it to be. So my AI loves him. I love him. You're coming highly recommended. So I hope you're ready to bring the heat yeah let me just say that david is is brilliant in the sense first of all david bastin of kingdom kingdom capital like i i learned about i started doing research on warrior mccall he was like a year ahead of me on that one so hcc yeah yeah yeah and and then uh i'd also like to say that in your case what i really like about your podcast is you bring on people that actually have in most cases skin in the game and two of our ideas have come from and one of them we still have to have come from from this podcast and we're very concentrated we have like eight names well i really appreciate that uh and look i'm happy to have you on so let's dive into the the company we're gonna talk about today the company we're talking about it It trades on the NYSE under TBBB.

4:58It's Tiendas 3B is the company. They're a Mexican retailer. I believe it stands for good, cheap, and better in Spanish is what it is, but I can't remember for sure. But I'll toss it over to you. What is TBBB and why are they so interesting? Yeah, it is good, cheap, and better. But in Spanish, it's like an alliteration, so it actually sounds nice. um so tnsv is i consider the most affordable way to buy groceries in mexico you know they do it really simply by they copy the aldi model instead of selling you 30 ,000 products they sell you a thousand and they're able to buy them in bulk get a better price there and also move them a lot faster than the other grocers.

5:45And they're able to pass those savings along to the consumer. And then, so really a quick history that's, I think, important is started by a guy named Anthony Hatoum. And Anthony invested in BIM, which is the Turkish version of this company. and he said, this is an amazing model. Where can I do it for myself? And he looked, he said, Mexico has all the characteristics I need to be successful. The guy did not speak Spanish, moved to Mexico in 2004, 2005 opens his first store. Today, he hasn't hit Northern Mexico or Southern Mexico. He's only in Central Mexico and he has over 3 ,700 stores. Just to put it in perspective, that's more than all he has in the U.S., and that's the second largest growth in the U.S.

6:43So the guy's a force of nature. Why we like this business so much is there's four basic things we look at. We're long-term focused investors, Charlie Munger style we could call it. So we like something, a business that's going to grow for the next 20, 30 years and be strong in 20, 30 years. And that's hard to tell, but instead of asking, there's so many changes that could happen that are really hard to forecast. But what we can ask ourselves is, in probably Munger fashion, hey, invert, hey, what's not going to change? So everyone needs to eat, everyone wants convenient groceries, and three, they want the most affordable groceries.

7:28No one's ever said like, oh, I love the chicken nuggets you sold me, but I wish they were double the price. I'm just laughing because you say everyone wants to eat, and I do agree with you. But, you know, the rise of GLP-1s, who knows how long everybody's going to want to eat at this point. I say it jokingly, but it popped in my head, and I just wanted to interrupt so people knew I was here. I thought about that, and I was like, how many GLP-1s are there in Mexico? I don't think it's neat as much. That's a great point. But please, I'm sorry I interrupted. Please continue. No, no, it's great, yeah.

7:59But people still need to eat, even with the OP ones. And then what else? So that's number one. Number two, if you're long-term, you don't like a lot of debt because that's going to drown you in the worst time. And they paid off their long-term debt when they IPO'd. They have a little bit of cash reserves. Number three, great management. I mean, and we judge management based on what they do, not what they say. the guy's track record speaks for a seller. He's a rock star. And third, sorry, and fourth, valuation-wise, you know, we like a margin of safety, but if you looked at this from a static perspective, it's not a deal.

8:43It's not a screaming hot deal. But what it is, it's a compounding machine. And we think 38 % last year, we think it's going to continue to compound. And let's just, the 38%, let's divide by two. We think it's going to compound for the next two or three decades, and that's a potential hundred bagger. And, you know, it's just a phenomenal business that puts its customer first and passes their savings along to them. And I think they're building that goodwill. That's basically a summary of our thesis. That's a great summary. And look, I will say, I've had this, I have notes on this from a year ago.

9:21and I don't know and look sometimes the process primes me but when I was prepping for the podcast I was like Andrew how dumb were you for passing a year ago because as you said like there is a long history of discounted retailers working I mean Aldi in Europe is the most famous example right but there's Trader Joe's in the U.S. everyone wishes Trader Joe's was publicly traded right But these things where they come in, they're super low cost, they're largely private label, like they just eat market share and the one that gets big kind of dominates and they just kill it. And that's kind of what's happening with TBBB.

10:00So I think a lot of the things, hopefully, I think you gave a great overview. Hopefully listeners understand this is discount Aldi in Mexico. So that's a great overview. I think the main place, well, let's start here. What are you seeing that the market is missing? Because as you mentioned, the market has caught up to the story. And I think a lot of my questions will be on that. The stock is up a ton over the past year. It trades pretty richly. People have come around to, hey, you know, maybe a year too late. What I've said, hey, this is great business. What are you seeing that the market's missing that says, hey, the market's kind of caught up here.

10:32I still think I can make a lot of alpha in this as a risk adjusted opportunity. Look, if you're looking for the way we see it, you're looking for the next year. I have no idea what's going to happen the next year. And there's a lot of volatility, but when you add the compounding aspect of this business, then, you know, over time, the cash flows will reflect. And we just think we can't deny it and we don't see it. We don't see it stopping. And I can I can give reasons. Let me one side note. you know we actually went to mexico and without you know without the management we met with management afterwards but and we toured the store so what we could say is we toured stores in different cities and it is the lowest cost producer there's three um we could call like competitors uh but they're all way i can i can go you know farther down but they're they're all behind way behind and they're all just copying this model well and some of them aren't this isn't their main model so there is kind of a conflict of of interest we could call it the going back to the trader joe's they actually bought a company called yet they don't publish it it's called yema and we toured they have when we toured a year ago there was two of them today there's four and it's the trader joe's model they copied it a lot a lot more products in their base model which is the ns3b and you know but but that's early on i would consider cherry on the sun on the on the sunday i wouldn't i wouldn't bet on this company just because of yaml their their core business is such a phenomenal business you don't need to but it is extra um so that's essentially what we see is is a great business happy to talk a little bit more this is like one of our babies so let me just rewind for a second so i'm interested in the history here because as you said um you know these businesses there's a proven proven track record across the globe and the ceo here the founder didn't speak spanish she was just like i I saw how this worked in Turkey, I believe.

12:55I want to bring it somewhere, right? So how did he, there's a chicken or the egg problem when it comes to these businesses, right? Because all these businesses will tell you, hey, we have a thousand, two thousand, three thousand stores. We use, I think this company has 3 ,500 at the end of Q2. We use our store base to go negotiate, our scale, negotiate the best things. Private label, you know, they say, hey, we've got the DCs. So we're more efficient for the DCs. But how do you get started? You know, if you and I said Canada doesn't have a discount retailer for some reason, how would we get started?

13:30Because we don't have the DC when we start. We don't have the store base. You know, you're kind of starting from one. So how do you solve that chicken and egg problem? And I ask both because I'm curious and because when you think like they have a two-year payback on their stores, when you say two-year payback, the first thing I think is competitors. So if we explain how they overcame it, it might help people understand why no one else can overcome it or why it would be really difficult to overcome it, if that makes sense. Yeah. So I think, first of all, the guy's been successful at everything he's done.

14:03And this is, you could see it from the record. He started with one store, but he had the model. He had seen it be successful. And I think that was his edge. Today, they have a little over 900 products, I'd say 1 ,000 just to round up. But at that time, they had 300. They didn't have freezers. And he just, he sticks to like what you could call basics. And I'll give you a few examples. One is, so they didn't have freezers. Now they have freezers. So it was a grocery store, a convenient grocery store. By the way, the model is, instead of being 12 ,000 square feet, like Aldi is 6 ,000. So it's a very, very, think double the size of a 7-Eleven.

14:49So it's very convenient for people to go, you know, you get off the bus, you buy what you need. And then over time, he has created the white label model. So yes, he probably, I don't know what his pricing was early on, but he definitely knew that he was going to do this. His first white label was a uh was early on because he knew it was going to happen so it was a couple years in don't it was i remember it was milk and then you see now today he has over 60 percent of his products are white label or probably label and that's just over time so and not only that if they it takes them about three years to develop a white label like because you're so and that's local, like it's the local milk producer.

15:40And the most amazing thing is, and not only that, what's happening is that people that went there 10 years ago, today it's a store that has a lot more. So that's part of the compounding aspect to it. For just same store sales. And the most impressive thing is they still don't have fruits and vegetables. So it's not even a complete grocery stores. Like 20 years ago, Costco was pretty complete compared to what it is today. They're still not complete. And that's one of the reasons for the same-source sale compounding. And they also don't, one of the ways they send, they save money, it's word of mouth advertising.

16:20They don't spend money on marketing. So they're able to pass the savings along to the consumer. Let me give you one specific example. They created kind of a medicine line, just basic things you need, cough medicine, ibuprofen. They have an ibuprofen that sells for 22 pesos. They have one that's even cheaper, but this one's good for comparison. 400 milligrams, it was 22 pesos. I went to Walmart, which is the biggest grocer in Mexico, and owns Aurea, which is their competitor. Walmart had same exact ibuprofen, same exact quantity, 58 business. That was a private label. Advil was 80. So, I mean, I think Sam Walton would be rolling his gravy if he heard that.

17:10Because what he's doing is he's passing along the savings to the consumer, and that's just going to build you goodwill. We've seen it with Costco. We've seen it with Aldi. And it's just going to continue. you? No, I mean, look, once again, shame on me for missing, but if you've studied this industry, and I've seen, you know, I went through all my notes, and I read some other things that other people, I mean, there is a history across the globe of this model working. And once you have one that works, I mean, it really takes off and these things really work. So let me, let's assume and hopefully listeners, I mean, look, this company, and I've never, I don't know if I've ever seen a retailer grow this fast.

17:55I mean, in Q2, their store count was up 20 % year over year, and their same store sales were up 20 % year over year. I mean, those are just mind-blowing numbers. Now, some of that is seasoning. These things do have a ramp period, and they're opening so many stores, they've got a lot of seasoning, but it's still crazy. So let's assume, hopefully listeners can agree with this, this is a very good business, right? The thing I keep hearing when I'm researching it, when I'm reading other people, there's some traffic calls that I'll link in the show notes because A, they're the sponsor and B, they're really good.

18:25But there's some Toronto calls with people from about March and they are gushing about the company, right? They're saying, hey, they know the model works, all this sort of stuff. This is growing. There are people who are saying, hey, both of them kind of say on the call, hey, I think in 2030, fair value here is about$80 per share. The issue is, you know, we're in 26 and they're talking in March and they're saying, hey, this stock's in the mid 30s. So that IR is coming down a lot. And guess what? We're not in March anymore. We're in the beginning of September. The stock is approaching$50 per share, right?

18:57It's in the high 40s right now. The company just did a big equity offering. So I guess my first question to you would be, hey, I'm with you. The market's with you. This is a great business. But I hate to say about something that's up into the right, have we missed it? Because that's really lazy thinking. But everything here is screaming to me, the market's caught up here. So I guess my question to you, haven't we missed it? That's a great question. I think, again, if you're just looking for the next year, you probably have. But, you know, true Charlie Munger, if you really see the compounding, I mean, you'll be very happy owning your 5-10 years.

19:40the other thing I'll say about

19:46I think of it similar to buying I remember Peter Lynch talking about Walmart, you could have, 10 years later you could have bought Walmart and it went up 10 times and you were still 100 baggers and that's, I feel like this is like buying Costco in the 90s or buying Walmart in the 80s And the other thing I think that really tells you a lot about this type of business is you have Aldi, private. You have Lido or Lido. I never know how to say it. Private. Both Aldi, private, by the way. You have De Uno with BIM, private in Turkey, private. You have De Uno, which is a Colombian version where they copied this model, also private.

20:37Why are they public? Well, I think this, so one of the ways to grow, Anthony was said, well, he, he was, he had a private equity background and he got a lot of private equity investors to keep control of the company. He went public and also pay off their debt. But I think this is me talking my opinion. So that's why you have this, you have the opportunity to buy it. And I would say as a risk perspective, as part of the IPO, there's a pretty aggressive incentive plan. So even then, worst case scenario, you're at 160 million shares. That's about 25x on free cash flow. uh so again i if you if it's just for tomorrow or the next week or two years from now i i would say don't buy it but if you're looking at a long-term business that i think you'll be very happy if you buy it no look and own it for five or ten years i think it's a great point right like all you really don't have a chance you mentioned aldi I understand traders are slated.

21:49All these businesses are private because the payback periods are unbelievable on them. The economics are great and they keep them like that. And you mentioned not missing it, right? As you said, I pulled up a Costco chart. Costco is a 20X over the past 20 years. Sorry, that's understanding. It's up 27 and a half times over the past 20 years versus the S &P is up seven and a half times, right? So you thought you missed it? No, the huge business. And guess what? Once it kind of hit 2020 and people really started recognizing it, a lot of multiple expansion came. So I think you're right there. I guess I have two questions on that.

22:26The first would be, you know, whenever someone comes on and pitches an international stock, right? The first thought is Costco is a different model, right? But I went to, oh, Costco trades for 40 times price to earnings right now, right? So that's kind of what I'm thinking about. I think the thesis here would be, hey, what is this trade in 2030, 2031? It's an interesting thought, right? Because on one hand, you get the unit economic protected killer discount business that we talked about, right? On the other hand, this is a Mexican retailer. There's a lot of crime. There's a lot of... So how do you think about kind of that long-term compounding or maybe a long-term valuation target when, you know, Costco at 40X is the top, top end, right?

23:10How much do you discount that back to, hey, Mexican peso, crime risk, all this other risk? How do you kind of think about that in the long run? I'll address the Costco one first, and then I'll talk about the other one. The Costco one, I see this, Costco's a phenomenal business. Like Charlie Munger, I would never sell it, but I wouldn't buy it. It's a mature tree, I would call it. It's still growing, but it's pretty mature, is what i feel um this this is a this is a tree that's strong but still growing at a pretty fast pace as far as country risk this is uh mexico is definitely there's definitely country risk i would say if this were trading in the u.s it'd be double the price so you're i might you know based on their growth and all that.

24:03This were a U.S. grocer. So you're getting a discount for that. They've proven themselves to operate successfully in Mexico for 21 years. And politically, this is my opinion, you know, you're probably not the savviest politician if you're going after people's most affordable groceries. As far as another aspect to Mexico risk is currency risk or currency exchange risk. So short-term, it might affect you. As a business, it's able to, about nine months, it takes them to adjust pricing because it's not like an office building that has pricing locked in for 10 years.

24:54however it's proven in the u.s in other countries for example in the u.s aldi in 2009 time frame had a lot of customers come in because people didn't have as much money so generally when you have a currency risk it's associated with an inflationary event that inflationary event people have less money in their pocket they're going to go to the most affordable grocer I'll give you a story so the way when we went to Mexico and toured the stores in different cities and the competitors we hired a driver and our driver he was telling us about a tough time they had in the family and all his kids that are grown would shop at another grocery store and they started shopping at Tienda 3B and after you know they they clawed the you know that thankfully things got better but they still stop at the end of this space so it takes the people a while to to move but once they move it's hard for them to to get out no look i mean i i'm not comparing myself to the mexico driver but for me like you know i was always trader joe's i was like oh that the line wraps around the building again i understand trader joe's a little different the line wraps around the building.

26:11They don't have any of the brands that I like because almost everything at a Trader Joe's is private label. Right. And I was always kind of resistant. You know, it's a different experience. But once you do it once or twice and then once you like you see the prices and by the way, the Trader Joe's quality is unbelievable. And I'm sure the quality here is very good, too. Once you kind of like see the difference, like I always want to shop at Trader Joe's now, you know, so it's just funny how it obviously very different. But once you kind of have to go do it and then once you're like oh this is what i want like better quality cheaper prices like that's what i want there so right now the company has uh i can't it's 3.7k stores i can't remember off the top of my head yeah well it's they reported in uh 3 ,600 plus i don't remember the exact number i say 3 ,700 plus because that's q2 so there's no doubt they've they're about at they're at plus 150 stores a a quarter.

27:10So by now they're, they've passed 3000. Growing rapidly, as you said, I mean, they're growing 500 stores per year. You know, my, the other word here is because you're, we're talking about this as a compounder, right? And if this stock is going to work, it has to grow into this valuation and then some, right. And it can do that if it's opening 500 stores plus per year at two year paybacks. Right. But my word, the other worry you have is you You mentioned they're not in North or South Mexico. You know, I've seen this happen. Now, again, I might be a little too domestic based, but I've seen it happen with U.S.

27:43retailers before where they opened their first 200 stores. Right. And it's all on the East Coast and dense cities. Let's just be New York centric biased. It's all Boston, New York City, Washington, D.C., Philly. So, you know, they've got transplants going around. They've got it's very dense and people model out and say, oh, this is going to be a killer. Right. They're going to go to the West Coast. If they've got 300 stores in the Northeast, this is going to be a 5000 box unit and people might out. And then once they start going other places, you know, first, they don't have the brand when they go to let's just choose something dense.

28:19You know, they try to transplant it to Los Angeles. Well, it doesn't have the brand it does in New York. And then they try to transplant it. Forget New York City. They try to go to Syracuse or they try to go to, you know, wherever else in New York City, in New York or in the Northeast. and it's not as dense. So box one through 200 have unbelievable units, but boxes 200 to 2000, the returns start deteriorating. Here they've got approaching 4 ,000 boxes open as we speak, but it's all kind of where in their sweet spot where they've got the DCs, where they've got the brand, where it's really dense.

28:51Cause I know a lot of people walk to these. My other worry would be, hey, stores one through 5 ,000 were unbelievable returns. But when we go stores 5 ,000 through 10 ,000 and source$10 ,000 through$15 ,000, does that two-year payback become a four-year payback? And all of a sudden, the returns look a lot worse, and it can't grow into that valuation. So I threw a lot out there. I'd love to hear how you think about that risk. Well, I think it's best to just understand how they grow. That's not a big concern as far as within Mexico, greater Mexico. And the reason, first of all, is they can grow.

29:27They've already grown from Mexico City to other cities to the east. You know, they're all the way to Acapulco, which is, I'm sorry, Acapulco is on the west coast, to Veracruz on the east coast. So those are different cities, different jurisdictions. They've already proven that. They just have to go north and south.

29:47So how they grow is really interesting. It's basically like a cell-splitting model. They have a distribution center. The distribution center, ideally, they service 150 stores. And one of the other ways they grow is that Hattun's very intelligent. He's not micromanaging. Whoever runs the distribution center runs everything about that zone, meaning leasing. You know, the person in northwest Veracruz is going to know better than somebody in Mexico City where to find leases. And the growth is really simple. So it's two to three. So every distribution center has to grow two to three stores a month.

30:30And then once they get to close to 200, they split it in two. Now, if you look at it, one of the things you could probably look at stock based compensation, even past the, you know, the post IPO is a little high. but that's because they invest in talent and they have a meritocracy which in the u.s there's a lot of meritocracies there's less in mexico that's again my opinion um so so they so they grow with this self-splitting model so it's not like they're growing i i've said hey i actually asked them why don't you just go straight to monterey which is uh after mexico city that the city you want to be in and they're like no we're just gonna go organically like hey we split here and then we grow and then we grow so it's really a methodical way that they're doing it and it's been successful so i just asked once and hey i'm gonna get out of the way i could any other follow-up to that no i could be wrong but that reminds me of my memory of how walmart grew in the 70s, right?

31:36Like they started and they said, hey, you know, we start in Arkansas and we grow and then like our distribution center kind of fulfills here. And then we opened the distribution center like right next door or the state over or whatever. And then it grows from there. Now, it's slightly different, but it's reminiscent of that. Let me come back to about, you know, on to your point, that's actually a good point you make is I think if you look at the Aldi, the Walmart, the more affordable grocers and even Costco, like those haven't had an issue growing within the U S maybe the higher end. Uh, but, but that's just a quick observation without any data to really back me up.

32:16Yeah. You know, I do hear you though. I worry it's easy to say, Hey, the successful retailers that we can think of have had, have had a good job, done a good job of growing, you know, but there's always the counter examples that I'm having trouble. I mean, all the, I don't think they've crushed it in the U S I haven't really paid too much attention. But I can think of a few lower end US things, especially ones that have run slightly differentiated models. Like, you know, I think the grocery outlet, people used to be really excited about the growth, the growth really stalled there. Now that is on a slightly different model, right?

32:52That's a lot of overstock and misprints. I think some of the really cheap, the$5 and under stores, I think they've had trouble. But yeah, let me come back to valuation, Right. Again, I think I don't think there's anyone who's going to look at this model, study it for longer than I did last year and not come away with the conclusion. Hey, this is a pretty damn good model. Right. I think the questions are, can you expand? And I think you've addressed that. But then I would come back to valuation would be the second question. You know, the other thing as we're talking, as I'm thinking about our conversation that jumps out to me is all the competitors are private.

33:26You've talked about why this is public. They took private equity money, probably needed a little bit of cash to open up a bunch of stores to get that chicken egg problem that we talked about earlier, really growing. But all the competitors are private. They can self-fund stores. I mean, the stores here are actually super negative working capital. So when you open a store, you actually have an influx of capex, right? Or influx of cash. Correct. They did an equity offering earlier this year. I think when the stock was in the mid-30s, right? They did an equity offering. So I would come back to you and I'd say, hey, you've got this brilliant founder CEO.

33:58He does not need capital because every store he opens self-funds future growth. And they chose to raise equity. And when I look at that, again, I come back to valuation. I'm saying, hey, everyone I've seen who loves this model loves it. The pushback I'm hearing from a lot of people who loved it a few years ago is, hey, it's starting to look a little pricey to me. And I see the company issuing equity. And we've talked about why this business model doesn't need it. So I just love to talk about that for a second. Yeah, absolutely. They've done more than one. They've done two, I believe now, equity offerings.

34:34So yeah, two. I won about, I think, February 2005. And won recently about two or three months ago. So the first, if you look at one of the things they did when they IPO'd, they didn't just want everyone to sell all their stock like a SPAC where 60 days later they sell it or 180 days later they sell everything off. They had these Class C shares that were locked up. And this is, again, my opinion just from reading the documents. most of that was hey let's get whoever in the class c range they were locked up for two and a half years and now they're unlocked now they've all become a class a shares but let's let's get some of these people paid that want to get out that was my interpretation of it uh it i may be mistaken but it's kind of like if they don't if you do look at the business and they don't uh raise any more money i don't i don't see an issue no i you i think it's i think it's ipo centered and you know getting everybody paid and and there's a little like you know you'll have that i think that'll work itself out in the next year or two you you are spot on you know i did not see this so i'm looking at the june offering they sell call it 500 million of stock and 410 million goes to selling stockholders.

36:06So not to the company and only 90 million goes to the company. So, you know, you do look at that 90 million and wonder what I'm thinking about, wondering, hey, they could have self-funded, but I just saw 500 million and it was not a 500 million raise for the company. Go ahead. No, and the 90 million is basically something they offer the investment bankers. Hey, if you get X, you can sell it, buy it at X price. We'll take the cash, but you know, you're getting a discount. So it's kind of, I think, part of the way of doing business. That makes total sense. What other, is there anything else you think we should be thinking about when it comes to this company or this business?

36:44Or do you think we've covered it pretty well? No, I think you're right. Like, if you were just looking at it like, hey, what's it worth? What's the cash flow? And what's it worth today? Yeah, it's not a great investment. If you're a long-term focused person and you've seen, this just reminds me, they have so many things that they do that remind me of Costco and Walmart. I'll give you an example. You could argue with Costco, they say that the hot dogs are lost leaders and maybe the chicken. But back in the day, Costco had an idea, no lost leaders. Meaning, I'm not going to sell any products for less, cheaper to bring people into the store because then I'm going to have to up the price on other products.

37:32And that's what they're, and they are like crazy about that. And that's the reason, in my opinion, that they don't have the fruits and vegetables yet. They're working on it. They have to retool all their distribution centers for it. That's why. and i another edge they have so is if they so that retooling distribution centers they gotta they need a different cold room for every single distribution center um and then they have to establish and and and they're not thinking about they have to establish suppliers not for 3 700 but for 7 000 because that's you know where their growth is going to be so it it is it's not like you know what what they're going to offer in two three years they're doing they're working on today that's another edge they have let me actually come back to that so offering uh offering fruits and vegetables right i have seen i've seen companies that are discounters that are really focused on one niche right and they expand and fruits and vegetables as you mentioned it is a much different system right because you have to go and they i believe they mentioned it on the q2 call they They also on the Q2 call talked about some of the selling stockholders stuff, if I remember.

38:48But they mentioned it. They're like, hey, we're going to go work directly with the farmers here, right? So we're going to cut out the middlemen. That's what we do. That's white label. We're going to cut out the middlemen. They're going to send everything straight to our DCs. They have to retool their DCs. They have to change the layout of their stores. If they want to do refrigerated items, they have to like all this sort of stuff. And I've seen this in other businesses before. And it's a risky proposition, right? You're completely changing the model. And I guess my question to you is, hey, I get fruits and vegetables probably driving a lot of repeat foot traffic.

39:23It really expands the box, really expands the ticket, all this sort of stuff. But to me, you've got a model that works and you're adding something with a lot of complexity. And by the way, this is a, you know, I probably would have said this about dry goods as well, but it's a pretty darn competitive environment. You know, plenty of places to buy an apple. Do you think this makes sense or does this increase your risk? because not that it's a full one-way street, but if you go and you're redoing your whole DC footprint, you're having to change the layout of these stores because the fruits and vegetables, either you have to build bigger stores or you have to take up the 800 SKUs, you have to reduce them in some way, shape or form.

40:02So it seems like a pretty risky maneuver to me. Do you kind of like this idea of them going with the fruits and vegetables? I don't have an issue with it at all. I do like the idea. I like the idea because A, hey, like at the end, you know, you want a complete grocery. Hey, I want to make a cheeseburger. You know, I want to be able to buy the bread, the meat, the ketchup, the cheese, and the tomato and lettuce, right? So it's a one-stop shop for a grocery, even though I don't know that makes sense. And that will mean, oh, I need, all I need is an onion, but I buy an onion or some tomatoes. I also buy the other stuff.

40:47So it's more a complete grocery. Going back to and but if you look at their track record, they didn't have freezers before and they adapted to now having freezers. Right. And they and when I went, we went about a year ago, they had fruits and vegetables in Mexico City. So they were, it was like a trial. They test, they test and they're not going to do it till they, you know, till it makes sense and it's not a loss leak. So in this case, in this management's case, there, I don't have an issue with it because, because I've seen that they're, they're not going to implement it until, until they can be successful at it.

41:38I will say, yeah, one of the things that makes it more difficult, I don't know about the farm, but your suppliers have to be in different parts. If you have dry coffee, you only need one private label supplier. In this case, you need a supplier in the West. Exactly. Mid, North. So it is more complicated. As far as the distribution center, what happens is, I don't know the exact degree, but regular refrigerated stuff is negative four. Sorry, it's like four degrees Celsius. And fruits and vegetables is like 18 degrees Celsius. I'm going off the numbers they gave me. I'm a Fahrenheit guy myself. No, I was about to make a joke.

42:21Hey, I think most of my audience is domestic. You say four degrees and I instantly go off. No, I'm a Fahrenheit guy. So don't, but you know. Let me ask one last question that's kind of floating around in my head. So you have – and this comes back to ownership structure. This is a – let's call it a Mexican category killer. They are going to hopefully, if you are correct, be the dominant Mexican discount grocer. When I think about category killers at large, generally they trade on domestic exchanges. right? The history of companies in the US, foreign companies listing in the US, and I get why they say, hey, these are the most liquid markets, but foreign category killer companies listing in the US, it's pretty mixed.

43:12Now, a lot of it is mixed because a lot of them came from the SPAC boom in 2021, and that turned out to be trash. But the one that really jumps to mind to me is Arco Serratos. I don't know if you're familiar with that, neither here nor there, but that's Latam McDonald's. And I remember tons of people loved this stock 10 years ago as Latam McDonald's, and it has not worked well for a lot of reasons. But I always just wonder, hey, you've got a company that's supposed to be Mexican category killer. Why aren't they listed in Mexico? Why are they listed here? Is there any signal there? No, I think it's just, if you look at their history, it's based on how they started.

43:54So Anthony, I mean, yeah, he started with one store in 2005, but he knew what he was going to do. He knew he was going to grow this business like crazy. So he got a lot of outside capital, you know, from mostly Europeans. And when you do that, you list. So he did it through BVI, British Virgin Islands. So he could have listed in Mexico or the US. So he was already, the company's already officially a BVI company. So that I think is the reason he said, I mean, I probably get more capital in the US, so I'll go to the US. That's what I think happened. I don't know, but that sounds reasonable to me.

44:37No, that's completely reasonable to me. And I will tell you, when I asked ChatGPT this, it told me, hey, the market for Mexican IPOs is basically dead. So it would have been really hard to IPO Mexico. So I think you're right. But I was just asking because we had a little time. And in the back of my head, I just always, you know, I always hear from people, oh, this German automaker, right? Germany might not be a great example. This Spanish automaker, it trades in Spain. I think it trades at a big discount. We need to relist it to the US. And I'll be like, hey, man, I don't I get U.S. markets are really liquid.

45:10But if something, you know, if all the employees are in Spain, if all the revenues are in Spain and the stock trades in Spain, I don't understand why relisting it to the U.S. would create any value. This is different. But this is just something, again, because it's like it could be the largest retailer or one of the largest retailers in Mexico and trades in the U.S. And like it seems weird, you know. Yeah, no, it is a little weird. But yeah, you can also tell with people's nature, like if they have a if half the business is investor relations, then, you know, it's kind of that sounds like something whereby they're listing, you know, they're trying to uplist, you know, even from OTC to the New York Stock Exchange, where just because they want more and more capital.

45:54uh i i really think it was based on their their history and and what you and your point is yeah it was just a better market and since they weren't being vi they just decided new york stock exchange no it's funny you say that on investment relations because uh i was laughing i'm looking at the deck right now and i was looking at it prep and it's the type of deck i like right where they have a deck it has the numbers but it is like if a college intern handed you this deck you or a college shooting you kind of like uh b plus like there's almost no images some of the color formatting you're like hey i think the colors might be different on this bullet versus this slide like it is very very bare bones so this is a company that they're focused on the business they're not trying to you know hit you with a lot of razzle dazzle and i really like that about them actually let me let me say though like that i i agree with you a hundred percent and that's what I saw and I'm like, and when I was, you know, I had, after we toured, I had a meeting with them at their headquarters and I thought it was going to be, man, I've been in two offices that really impressed me.

47:01And this is one of them. Just everyone, you could see a level of professionalism and you could tell when people are working and when they're not. And everyone is like, is, is working hard. It was a lot more impressive than what I had in my mind. Perfect. Cool. This has been super fun, Huberto. I think unless you've got anything else you want to talk about on TV, I think this has been a really comprehensive overview for 45 minutes. So unless you've got anything else, we can probably wrap it up here. No, just I would say at the core, you know, I like to say, like reiterate, this is a long term investment.

47:39If you and if you got to get to know it because there will be volatility. But we really like it for the long term. And at the core, they put the customer first. Well, it is funny because you say there will be volatility again, lazy thinking, but it's been up to the right for the past year. So that's the type of good volatility. But it is just funny. This is the first stock I've come across in a while where, again, the debate I am seeing has kind of shifted from – I mean, yes, people are worried about the business. But it's funny where you see a bunch of bulls who say, I love this business. I think this is going to do great on the long term.

48:17It is pretty rich. and again, when I read that Trotta call or when I read some fun letters, I'm hearing people like, hey, this is going to be really volatile. I think I'm going to be able to buy this on a 20 % pullback. And they're saying that at 35 and the stock is 48 now. And when I hear guests say, if you're willing to hold this for 10 years, it's going to be great. I don't know about a year. I'm kind of like, well, yeah, nobody knows about a year, but it's just, it's an interesting push and pull dynamic of, I think everybody gets how good it is. It's just how good is it?

48:46Alberto Vadia: Yeah. Yeah. Cool. Alberto, Fruit Tree Capital, this has been awesome. We'll have to do this again sometime in the near future because I know you mentioned you concentrated, but I know some of the other names. So we could have another discussion about something else. Anytime, man. It really has been a pleasure, man. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.