Grupo Chedraui, the fast growing Mexican and US grocer, provided their modeling template on US and Mexican expansion.
A total of 16 larger grocery stores (grocers and supercenters) as well as 100 of the smaller format (supercito) mini-grocers, for a total of 116 new locations, are planned for opening in 2024. This compares quite favorably to the 2023 expansion plan that had projected a total of 64 new locations, of which 14 were larger format and 50 were smaller format.
The capex program for 2024 is estimated at 3.8% of sales, vs 2.8% of sales for 2023. In 2023, Chedraui estimated that net incremental square footage of retail space was to have grown by about 2.8%. As for 2024, the company assumes that incremental square footage of retail space (sales floor) will grow by 3.6%.
The direction of the majority of additional capex towards a supercito format, virtually doubling the planned new store count in 2024, as compared to 2023, suggests that the return on capital invested in the smaller locations is high.
It appears that Grupo Chedraui intends to shake out the many mom-and-pop local grocers in their Mexican markets. Given the inability of small family retailers to source grocery items at discounts obtained by large grocers on volume, this would appear to be relatively low hanging fruit for margin capture. Food inflation impacts not just the consumer, but the retailer as well. Chedraui has enormous purchasing clout in Mexico and is well situated to consolidate sales in their markets, given their deep reach in food distribution and warehousing, the solid reputation and the tight geographic footprint.
Forecast growth of the Costa Maya region is a highly positive demographic development for Grupo Chedraui and could represent a secular trend.
Grupo Chedraui will, logically, be looking to source out additional real estate in the newly opened Mexican tourist region south of Tulum, referred to in marketing brochures as the “Costa Maya“. This will be a fast growing tourist market past Tulum Mx, potentially the fastest growing tourist region of Mexico on a go-forward basis, heading up to Chetumal.
Chedraui is already the dominant grocer in the Cancun-Tulum area and is the #1 grocer in the state of Quintana Roo, even ahead of Walmart Mexico. South of Tulum, there are no grocery stores of significance, only mom and pop sized locations. Chedraui has locations in Puerto Aventuras, Tulum and Chetumal, but virtually nothing in between those two cities. A brand new international airport with an annual capacity of 5.5 million persons, in Tulum, should result in a development boom for the area.
I consider the development potential in the Costa Maya to be as great as was the population explosion in the Cancun-Playa Del Carmen region. That suggests long-term population growth in the millions, driven by free-spending tourists, expats and retirees, all of them requiring groceries. There will be a pressing need for additional Super Chedraui locations. The only meaningful grocer in the sparsely populated Costa Maya area is a very small private chain (St. Francis de Asisi).
Supercitos can be built very quickly, generally in just one year. They would serve as place-holders by Chedraui to capitalize upon interim population trends, with strategically important Super Chedraui locations to be built as the numerous hamlets up and down the coast become towns, and eventually some becoming cities. Playa Del Carmen, up the coast, had a population of 44,000 in 2000 and in 2023 reported a population of over 413,000 persons. Chedraui now has 4 locations in Playa Del Carmen, featuring an upmarket brand targeting tourists, expats and snowbird type retirees under the banner Chedraui Select. I see the potential for another two Playa Del Carmen type cities eventually developing in the Costa Maya region, provided that the infrastructure grows apace. WalMart Mexico will also consider this area as a prime growth target, but Chedraui has the market share, the scale, the infrastructure, to maintain their regional dominance. Of equal importance from a competitive perspective, Chedraui possesses the internally generated capital to grow out as quickly as they choose; with a cash rich balance sheet, the company is unburdened by the expense of financing which serves to limit leveraged competition.
Overall, Grupo Chedaui is presently guiding for net sales growth (midpoint) of 7% all in, with no margin expansion beyond what was achieved for 2023 (Q4 2023 figures are due on February 20th, 2024).
The company is pointing to labor expense trends as the major headwind against an expectation of further margin growth. Given the EBITDA margin performance reported in the first 9 months of 2023, even a repeat of the 2023 figure would represent a noteworthy achievement, should no negative revisions come about.
Return on invested capital and return on equity are also expected to rise for 2024, which would be notable when one takes into account that such improvements are taking place on an unlevered balance sheet. If those goals are achieved, it would suggest a healthy increase in EPS is being forecast in 2024, as compared to 2023.
The greatest factor preventing a more formal EPS estimation is entirely due to foreign exchange (forex) of the Mexican peso to the US dollar.
Chedraui presently earns most of its revenues from US operations as a result of the Smart & Final acquisition, but is directing the majority of its capital plan in 2024 towards Mexican expansion. The company does not hedge forex, and reports all revenues in pesos, leaving it up to analysts to determine an EPS in USD. Therefore, any negative revision to potential EPS growth, for Chedraui, would come about from a decline in the US dollar against the Mexican peso. Modeling EPS growth is relatively easy given the data supplied, but making an exact estimate in USD, given the wide swings in the US-MX exchange rates evidenced in the past three years, that’s the challenge.
As to the balance sheet, Grupo Chedraui is forecasting a negative bank debt by the end of 2024 (net cash-net bank debts).
Should no bolt-on acquisitions be found to consume capital, the company is leading analysts towards a potential surplus on the books of $400 million-$500 million US (equivalent), by the end of the year. There will still be outstanding interest charges to be modeled into 2024, due to the the non callable nature of the majority of the remaining existing long term loans, but interest income earned on cash balances will increasingly offset such charges.
At this time, there isn’t any specific indication as to how Chedraui intends to invest what looks to be a steadily growing cash pile, nor would I look for the company to telegraph potential uses of that cash to the public, to competitors, or to any potential acquisition that may, or may not be, on the radar.
Were the company to take some one-time charges in 2024 on retirement of remaining bank debts prematurely, it would signal, to me at least, that no potential candidates for purchase are available. Conversely, letting cash continue to build might be a sign of something on the horizon. At this rate, the war chest available, and to be available, with internally generated forecast cash flow, could easily permit a purchase of a privately held food retailer, either in Mexico or the United States, at the range of $1 billion to $2 billion US, without even remotely straining the balance sheet.
If Chedraui was my firm to manage, and it is not, my nearer term corporate objective would be to bulk up or grow revenues in order to achieve a minimum annual revenue run rate of $20 billion, or $2 billion in annualized EBITDA, whichever comes first. At that time, a listing on the NYSE, via an ADR, could result in further institutional interest from passive funds. Absent some regional acquisition capable of generating $3-$4 billion in incremental annualized sales, a $20 billion annualized revenue rate isn’t at all likely, until at least the end of fiscal 2025.
Regardless of M&A chatter, one could certainly model another dividend hike in 2024, above the rate of inflation.
https://inversionistas.grupochedraui.com.mx/wp-content/uploads/2024/01/2024-Guidance.pdf
Leave a Reply
You must be logged in to post a comment.