Of particular interest is the corporate indication that management of Chedraui intends to, more or less, eliminate net long term debts by the end of 2023 via internally generated cash flow.
Net long term debts on 09/30/22 were indicated to be $450.6 million US. The final fiscal year balance sheet has not yet been produced, but subsequent to the end of Q3 2022, Grupo Arteli was purchased for a price I estimated to be in the $60-70 million million range.
For fiscal 2021, Chedraui reported long term debt reduction of just over $371 million US.
This balance sheet expectation accompanies the fastest projected store count growth rate, via new-builds, in corporate history.
Up to 64 new locations are planned for 2023. The bulk of the new stores will be built in Mexico, but 3 of these locations will be constructed for the recently acquired Smart & Final cash and carry warehouse banner. 14 of the total planned locations will be larger format or conventionally sized grocery stores and 50 will be smaller footprint locations.
To put that floor space growth into some perspective, the planned square footage increase in retail space will be roughly akin to far better known retailers such as Costco building 7 of their giant new warehouses in the coming fiscal year or the equivalent of 5 massive Walmart Supercenters, or 8 of the largest new Kroger Marketplaces, 8 of the BJ Warehouse clubs locations, or 16 of the larger Publix Markets stores.
Two further points deserve to be mentioned.
1. Chedraui reports higher operating and net margins than any of the aforementioned retailers.
2. Chedraui’s capital expansion budget implies that they are building new locations at all-in costs far below any of the retailers mentioned above, both in Mexico and within the United States.
Importantly, Chedraui anticipates further margin expansion from both the Mexican and the US divisions. It seems hard to believe that incremental margin improvement is even possible, given the industry leading operational rates previously reported. On a historic basis, Chedraui generally meets their guidance objectives.
The ability to source out complementary acquisitions, at extremely low valuations, has been evolutionary.
In the past 4 years, two deals were completed and they effectively doubled the store count. These purchases not only added revenues; more importantly, they were completed without negatively impacting operating margins or unduly burdening the balance sheet with high cost debts.
At projected rates of revenue growth, Grupo Chedraui intends to exit 2023 with quarterly annualized sales pushing through the $15 billion market, heading into 2024. None of this would have been possible without the two grocery centric acquisitions. Smart & Final and Arteli accelerated the revenue and profitability of Grupo Chedraui, propelling growth in the store base a full 6 years ahead of schedule, when compared to forecast regular organic growth via new store openings.
Many companies boast about their acquisitions; few actually exhibit the discipline to execute purchases that are immediately accretive, while maintaining or increasing operating and EBITDA margins. Should all go to plan, Grupo Chedraui intends to be a virtually debt free company, exiting 2023 with annualized EBITDA of as much as $1.2 billion.
It is sounding more and more like US central bankers hope to reduce the ongoing rate of inflation to a new normal target rate of 3%, as a goal.
If that aim is achieved, the strong prevailing tailwind advancing grocery profits during 2022 won’t end, but will diminish in intensity for 2023. This means that it won’t be an “any grocery investment is a good investment” year. Companies with strong cost controls, the right mix of goods, fiscal balance sheets that won’t have profits eaten up by higher interest charges and those sticking to disciplined capital expansion programs will be advantaged, but isn’t that the case in any year, inflationary or not?
The consuming public, and maybe even the investing public at large, largely misunderstand the math behind the potential accomplishment of a 2023 inflation target. Meeting a 3% overall CPI range doesn’t mean that prices will drop overall in 2023. No, what it indicates is that all of the inflation for 2021 and 2022, which resulted in grocery spending by the average American consumer increasing by 31% in 2022; those prices remain on the books, fully baked into the cake, and from that point, prices rise by a further 3% in the coming year. This is what the federal reserve board will call a victory.
So, what central bankers hope to announce at some point in the next year as being “inflation under control” still represents further price hikes for for consumers and producers; the coming years’ percentage move might be smaller, but it starts off from a far higher base. Consumers want lower prices, but central bankers will settle for deceleration of price increases. To hope for more is to cheer for a steeper recession, nobody wants that. Is a 3% continued CPI inflation rate on the backs of 8% CPI inflation a victory? Yes, but arguably still a Pyrrhic one.
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