ZO1 - Zooplus

[AccentricInv]

We just published a piece this morning on Zooplus (ETR: ZO1), the largest online pet food retailer in Europe, which I hope the board will find interesting.  It's a fantastic business model, which should continue growing at 20%+ rate over the next decade, trading at a cheap valuation of only .9x sales or 10x normalized EBIT.

 

I haven't seen too many European ideas posted on this board, and would greatly appreciate any feedback, criticism, or just telling me my thesis is flat out rubbish.  Additionally if anyone has first hand experience with the company, even better!

 

Enjoy!

 

http://www.haydencapital.com/wp-content/uploads/2017/01/ZO1_Writeup.pdf

[glorysk87]

Devils - are you affiliated with Hayden Capital? Or just another investor in Zooplus?

[glorysk87]

Yea I was just curious, it doesn't matter

[Grox]

Devils -

 

I haven't done any real work on the name, yet, but the thesis is interesting.  My worry is (obviously) Amazon - does it make sense for AMZN to buy them?  or just compete / crush them?  Why haven't they done either option, yet?  Can't say I understand the competitive dynamics.

 

I will point out, though, that the LA Times article you cite notes that chewy did >$900 million sales in 2016 and is expected to do nearly $2 billion in 2017.  That is a much higher growth rate than Zooplus, so i don't think the valuation gap is nearly as large as you indicate on a forward/2017 basis. 

[AccentricInv]

Devils - glad you found the thesis helpful, and hopefully shed some light on a situation that we find very interesting.  (By the way, I can attest there's no relationship, but always glad to have smart investors invest alongside).

 

On Amazon, it would be idiotic to ignore them.  I know the management team at Zooplus is keeping a close eye on Amazon (just look at the Analyst Day... they spent 50% of the time talking about the Amazon threat).  However, we believe there are pockets of eCommerce in which Amazon doesn't have a "right to win", and pet food/heavy logistics is one them (at least not yet).  I'd encourage anyone interested to take a look at the Investor Day Presentations first, and reach out with any follow up questions.

 

On Chewy's projected revenue, the $2BN 2017 number is a bit iffy... I've seen other reports cite $1.5BN.  I've heard thru my VC contacts that the CEO is notorious for not letting anyone disclose the valuation of each individual round.  However, I've heard from reliable sources that the total valuation was actually closer to $4BN including earn-outs, rather than the $3.35BN reported by recode.

 

Multiple analysis is never accurate, but it does give a ballpark figure.  I see Chewy's slightly higher growth rate ($900M in 2016 -> $1.5BN in 2017; vs ZO1's $950M -> $1.2BN) countered by the fact that they're still unprofitable while Zooplus is.  When thinking about a "fair multiple", I'd think of those two factors cancelling each other out.  Even at a 3.35BN price, that's 2.2x EV/Sales.  Applied to Zooplus, that'd equate to a ~EUR 380 stock price (vs. EUR 150 today).  Even if you give it a significant haircut (say 1.5x sales), you can still see a large valuation gap. 

 

Yet four years later Chewy is one of the nation's largest and fastest-growing privately owned e-commerce companies, on track to book revenue of $900 million in 2016 and more than $1.5 billion in 2017.

https://www.forbes.com/sites/susanadams/2017/01/10/the-man-who-found-gold-in-dog-food/#6023c1b53095

[spartansaver]

"Ruane, Cuniff & Goldfarb own 9% of the company (Yeah, the same guys with Buffett linkage going into early 1970s and whose largest holding is Berkshire Hathaway)."

 

They also purchased back in 2014 at ~1/3 of current prices and have unloaded some shares at YE2016.

Not that it should matter but I have no affiliation to the above author or firm.

 

I think it does matter, "who's bread I eat, who's song I sing."

 

Normal EBIT margin seem pretty high. Unless there is a significant shift in the economics of retailers, 10% for any retailer is pretty generous. Petco earned 8.1% in 2013 which has trended down to 7.3% as of 8/16.

 

Seems like a bull case scenario, although if it does play out the way you describe you could do very well.

 

 

[AccentricInv]

They also purchased back in 2014 at ~1/3 of current prices and have unloaded some shares at YE2016.

 

Actually, they've been involved even earlier, since at least Q2 2012 (http://investors.zooplus.com/downloads/zooplus_report_H1-2012.pdf).  See pg. 5 "Shareholder Structure" chart.

 

Also if we're pointing out other notable investors, I'd note that Nomad was involved for several years up until they closed the fund.  I believe Mr. Sleep still sits on the board (slide 5 of attachment).

2016_AR-Elections_to_Supervisory_Board.pdf

[spartansaver]

I was only responding to your statement that it shouldn't matter. I took the counter that it does.

 

It's a decent question to ask when a person with 9 posts responds to a 3 month old post with only positive things to say.

 

I try not to be too paranoid in life. But when investing, skepticism/paranoia doesn't seem like the worst trait to have. 

 

[Guest Schwab711]

Interesting company. Here's a couple of things I noticed so at least we have some pushback on the bull thesis:

1. Any time estimates are based on % market share, I'm generally weary. It's hard to accurately capture market size (I think EUR 25b is a fair guess, but I've seen estimates ranging from EUR 21b - 30b). Also, see attached as the estimates don't seem to line up for me. Last thing, 20% growth for the next 10 years implies EUR 7b in revenue in 2025. I don't think they have a great shot at that, but that's what makes a market. Even AMZN had to drastically expand SKUs to continue to grow double digits for a decade.

 

2.  This business model has been tried and tried. Besides the infamous pets.com, there was (and is still?) PetFlow.com (and dozens of co's I've never heard of). See the links below for a discussion. The original thesis (which was well presented imo) mentioned that folks prefer to ship 30lb bags of food. Absolutely! However, shipping those bags is what has limited the operating leverage for previous entries into the market (from what I've heard). The counter to this is the former Pets.com CEO's comments on their failure, which I thought was really interesting. I'm still not sure shipping 30lb bags of commodity products is ever going to be a fantastic business. I could also see ZooPlus creating their own line of food to boost margins as the loyal following grows. I don't know yet.

 

3. ZooPlus's incremental margins aren't as good as I would have expected. I'm not sure there's much operating leverage here, though I still have to spend more time looking into this. Incremental margins need to expand exponentially AND revenue needs to grow at double-digits for a decade to make the current valuation reasonable. They have great adjusted ROIC, I'm just not sure they will ever get to deploy much capital. It already looks like a great company, I'm just not sure how much gold is available at the end of the rainbow.

 

4. Just because PetSmart overpaid for Chewy does not mean someone will overpay for ZooPlus. I'm not sure how much higher the multiple can get without ZooPlus displaying greater operating leverage.

 

5. Depending on where you live, there is some very real short-term currency risk at the moment. The French elections will likely do something to the FX rate, since the race is so close (based on estimates I've seen). I suppose you could argue that the time to buy is during high uncertainty, but there are other similarly great EU-based companies that are more stable and trade at lower valuations. Unless you own 100+ positions, why ZooPlus? They will almost certainly not maintain a 80x or 100x multiple as they mature, which will be a headwind on future growth.

 

6. This stock has a EUR 1b market cap and EUR 72,500 $ Vol/day. The float, measured by share count, is tiny.

 

7. Ruane, Cuniff & Goldfarb also bet BIG on VRX.

 

Overall, I like the business a lot, especially after reading about the Pets.com CEO's comments. You really have to believe all of the problems are solved with regards to the business model to see value at the current price but this will be an interesting company to follow. Cool idea.

 

Links:

http://www.businessinsider.com/petflow-startup-2011-1#

http://www.businessinsider.com/petscom-ceo-julie-wainwright-2011-2

ZooPlus_Assumptions_Reasonableness_Test.xlsx

[_JJ_]

Their core business may be low margin, I think there is also quite a lot of value in the platform itself (almost 5 million active customers). In the conference call they mentioned pet insurance as a potential opportunity. It could generate advertising income or performance based fees. This should all be really high margin.

[Guest Schwab711]

Margins for an etailer are as much a function of asset turns and packet throughput as it is of mix. As packet density rises with each year, the unit logistics cost falls as network gets better utilized and fixed assets are sweat better. As basket size grows (and it has consistently grown for Zooplus), the logistics cost would fall as % making the business gradually more profitable. Private labels would also help improve the margins. The key then becomes the volume growth and ticket size growth (both remain very healthy for Zooplus).

 

You should double check your marginal analysis for ZooPlus and Amazon. I'm guessing you have poor assumptions or you misunderstood the lesson. ZooPlus is not Amazon, best I can tell.

 

2. Zooplus has been around since late 1990s. It has seen the dot com bust and survived and flourished during the last 20 years. The founder still runs the business all these years later. Peers have come and gone; that it has survived and continues to flourish and has essentially a self funded business model now (not requiring dilution), i think that is its own statement of success.

 

Since 2004, share count has grown by > 25% CAGR. Over any reasonable time period you can pick, the lowest share growth CAGR you can find is 5% from 2008-2016. But other than that, yes, it was self-funded.

 

Those market sizing numbers are meaningless to be frank, Adam. Nobody knows how they pan out.

 

I found it so interesting that you didn't mention how meaningless they were when addressing the original report. If you'll notice, I was the first to point out how unreliable they are. I wonder how long it would have taken for you to acknowledge it without my post.

 

It's also interesting you are the first to use my name in > 1000 posts. You really have to dig through my post history to find it. I'd be more impressed if I didn't provide the info to you. Should I reference your name/firm now? I don't know why you made this personal.

 

Illiquidity also means this stock will have sharper up moves during accumulation.

 

Yup. I think you picked up on why I brought up the issue in the first place. If I were to look for a P/D stock for this board, it would be a story stock, with a recent catalyst, with low float and low vol.

 

Good luck with your trade!

[Jurgis]

I have better things to do then dig through 1000s of post of yours. Just looked at your XLS spreadsheet's properties.  Next time remember to clear it up.

 

The fact that you learned poster's identity does not mean that it's cool to start flouting it on the forum especially if it's done in confrontational way.

 

Good luck.  8)

[Guest Schwab711]

I have better things to do then dig through 1000s of post of yours. Just looked at your XLS spreadsheet's properties.  Next time remember to clear it up.

 

As for dilution, I said they are self funded now as the CEO has also stated in calls. I didn't say they always were like that. No internet commerce company can grow to a critical mass without external funding.

 

As for P/D, if you think any of us on this board can manipulate a billion market cap stock, then you are deluded. Those that can rarely have time for stock boards.

 

Luckily, I'm not attempting to obfuscate my identity on this venue. As to the bolded part, again, we agree.

[KJP]

I have better things to do then dig through 1000s of post of yours. Just looked at your XLS spreadsheet's properties.  Next time remember to clear it up.

 

The fact that you learned poster's identity does not mean that it's cool to start flouting it on the forum especially if it's done in confrontational way.

 

Good luck.  8)

 

I wasn't confrontational in my initial numbered points post. Maybe read it again and see if it sounds confrontational ?

 

For whatever it's worth, I didn't read your numbered points as confrontational until you put the other poster's name in.  I don't know exactly why, but that read as overly aggressive and confrontational, rather than two people trying to have a friendly conversation and learn, which I assume is the purpose of posting on this board.

 

I hope the back-and-forth doesn't derail the discussion you were having on a key point, which I quote below:

 

"Margins for an etailer are as much a function of asset turns and packet throughput as it is of mix. As packet density rises with each year, the unit logistics cost falls as network gets better utilized and fixed assets are sweat better. As basket size grows (and it has consistently grown for Zooplus), the logistics cost would fall as % making the business gradually more profitable. Private labels would also help improve the margins. The key then becomes the volume growth and ticket size growth (both remain very healthy for Zooplus)."

 

"You should double check your marginal analysis for ZooPlus and Amazon. I'm guessing you have poor assumptions or you misunderstood the lesson. ZooPlus is not Amazon, best I can tell."

 

[KJP]

However, we believe there are pockets of eCommerce in which Amazon doesn't have a "right to win", and pet food/heavy logistics is one them (at least not yet).   

 

 

Accentric:  If your view about "heavy logistics" businesses vs. Amazon is correct, Wayfair should also be in a good competitive position.  Have you looked at it at all?  I don't want to derail this thread, but I was trying to think about whether Zooplus or Wayfair is better positioned to deal with Amazon over the next 10 years. 

[glorysk87]

what is with the bitchiness and fighting on these message boards lately? same thing is happening in the FB thread.

 

can we keep it on topic instead of personal criticisms?

[premfan]

what is with the bitchiness and fighting on these message boards lately? same thing is happening in the FB thread.

 

can we keep it on topic instead of personal criticisms?

 

The trump effect. Our collective software shifting. This shall too pass.

[AccentricInv]

However, we believe there are pockets of eCommerce in which Amazon doesn't have a "right to win", and pet food/heavy logistics is one them (at least not yet).   

 

 

Accentric:  If your view about "heavy logistics" businesses vs. Amazon is correct, Wayfair should also be in a good competitive position.  Have you looked at it at all?  I don't want to derail this thread, but I was trying to think about whether Zooplus or Wayfair is better positioned to deal with Amazon over the next 10 years.

 

KJP - I actually took a look a month or two ago after someone pointed out the similarities.  However, my concerns (albeit from a cursory glance) is that Wayfair isn't a commoditied product.  My fundamental thesis for all retail and eccommerce businesses is that at a pure level, it's a logistics business.  WMT only had stores because it was too expensive to ship directly to a customer's door 30 years ago.  You can buy Kellogg cereal from any number of stores, but customers choose WMT because it's the cheapest.  And it's the cheapest, because they have the best in class logisitics and inventory fulfillment system.  Now that the logistics economics have changed, so have the "right to win" business models.

 

So going back to the commoditized topic, I believe the easiest way to win in ecommerce is to sell a commoditized product at the cheapest price, and with the best service.  Those are the only two qualities care about from a retailer (quality, safety, etc largely is attributed to the brand, not to the retailer).  Because price search is so easy online, it's very easy to see which online retailer you should choose (and thus makes Zooplus' advantage that much clearer to customers).

 

My fear with Wayfair is that it's a "discovery / showroom" business.  Unlike commoditized products, where you know what you get online is the same as in-store, with Wayfair you really have to "trust" the quality and that it will look how you envision it to.  Also with pet food, you generally order the same brand for years.  With furniture, it's something new each time.  However, it's 30%+ growth certainly shows there are others out there who enjoy shopping on it.  Also I've done some checks with consumers, and most of the purchases seems to be smaller ticket items (lamps, pillows, etc) that some people change every few months (ie new look for ever season).  It's not going to break the bank if it's not exactly what you wanted.  (Also you can corroborate this by backing this out / calc'ing the basket size per order, which if I remember right is <$200 per order.  They're not buying big ticket items here).  So all this to say the company will probably do well, and I know a few very smart people that are invested.  However, I just think Zooplus is a "cleaner" business model, for my view of how ecommerce works best.

 

Lastly, I'd like to make a disclaimer that I took down my LT margin assumptions since speaking with mgmt after publishing the report.  I was told optimized logistics will likely hit ~17% vs the 15% I indicated, as Poland, Czech Republic, and Germany were unique case (Eastern Europe has very low labor costs, and Germany has been operating for a decade so it's very efficient).  All else equal, this takes normalized op margins to 5 - 8% (let's call it 7%).

 

However what's not priced into this figure is 1) Private label taking off (which it has.  still a tiny absolute number, but growing ~70% y/y).  2) Gross margins hitting a bottom / recovering.  Grocers are the most competitive, and I'm hearing many of them are selling break even / below cost in order to drive traffic to store.  Suppliers are giving a lot of credit now, so if that ever turns, it should be a positive for margins.

 

And yes, let's please get the discussion back on track.  What makes markets is disagreement, but it's more productive if done in a friendly manner.

[KJP]

However, we believe there are pockets of eCommerce in which Amazon doesn't have a "right to win", and pet food/heavy logistics is one them (at least not yet).   

 

 

Accentric:  If your view about "heavy logistics" businesses vs. Amazon is correct, Wayfair should also be in a good competitive position.  Have you looked at it at all?  I don't want to derail this thread, but I was trying to think about whether Zooplus or Wayfair is better positioned to deal with Amazon over the next 10 years.

 

KJP - I actually took a look a month or two ago after someone pointed out the similarities.  However, my concerns (albeit from a cursory glance) is that Wayfair isn't a commoditied product.  My fundamental thesis for all retail and eccommerce businesses is that at a pure level, it's a logistics business.  WMT only had stores because it was too expensive to ship directly to a customer's door 30 years ago.  You can buy Kellogg cereal from any number of stores, but customers choose WMT because it's the cheapest.  And it's the cheapest, because they have the best in class logisitics and inventory fulfillment system.  Now that the logistics economics have changed, so have the "right to win" business models.

 

So going back to the commoditized topic, I believe the easiest way to win in ecommerce is to sell a commoditized product at the cheapest price, and with the best service.  Those are the only two qualities care about from a retailer (quality, safety, etc largely is attributed to the brand, not to the retailer).  Because price search is so easy online, it's very easy to see which online retailer you should choose (and thus makes Zooplus' advantage that much clearer to customers).

 

My fear with Wayfair is that it's a "discovery / showroom" business.  Unlike commoditized products, where you know what you get online is the same as in-store, with Wayfair you really have to "trust" the quality and that it will look how you envision it to.  Also with pet food, you generally order the same brand for years.  With furniture, it's something new each time.  However, it's 30%+ growth certainly shows there are others out there who enjoy shopping on it.  Also I've done some checks with consumers, and most of the purchases seems to be smaller ticket items (lamps, pillows, etc) that some people change every few months (ie new look for ever season).  It's not going to break the bank if it's not exactly what you wanted.  (Also you can corroborate this by backing this out / calc'ing the basket size per order, which if I remember right is <$200 per order.  They're not buying big ticket items here).  So all this to say the company will probably do well, and I know a few very smart people that are invested.  However, I just think Zooplus is a "cleaner" business model, for my view of how ecommerce works best.

 

Lastly, I'd like to make a disclaimer that I took down my LT margin assumptions since speaking with mgmt after publishing the report.  I was told optimized logistics will likely hit ~17% vs the 15% I indicated, as Poland, Czech Republic, and Germany were unique case (Eastern Europe has very low labor costs, and Germany has been operating for a decade so it's very efficient).  All else equal, this takes normalized op margins to 5 - 8% (let's call it 7%).

 

However what's not priced into this figure is 1) Private label taking off (which it has.  still a tiny absolute number, but growing ~70% y/y).  2) Gross margins hitting a bottom / recovering.  Grocers are the most competitive, and I'm hearing many of them are selling break even / below cost in order to drive traffic to store.  Suppliers are giving a lot of credit now, so if that ever turns, it should be a positive for margins.

 

And yes, let's please get the discussion back on track.  What makes markets is disagreement, but it's more productive if done in a friendly manner.

 

Thanks for the thoughts.  It makes sense that if you're selling a commodity into a market with price transparency, the only way to get a competitive advantage is to be the lowest cost seller, which, in turn, means having high volume and the most efficient logistics infrastructure.   

[spartansaver]

All else equal, if e-commerce players are turning their assets at a faster rate than in the past and returns maintain long term averages, margins should compress going forward.

[rukawa]

Yup. I think you picked up on why I brought up the issue in the first place. If I were to look for a P/D stock for this board, it would be a story stock, with a recent catalyst, with low float and low vol.

 

Yep that is what I picked up on too as soon as you mentioned the liquidity. Thanks for bringing that up...the market cap gave me a false sense of security. But neither of the two bulls on this thread has a post history that is consistent with being a shill. So I don't think they are. For instance Devils_Shadow made a comment on "Is Value Investing Dead". And his post on Treasure ASA appears more insightful and less blindly bullish than I would ever expect a real shill to be.

 

It's a decent question to ask when a person with 9 posts responds to a 3 month old post with only positive things to say.

 

I try not to be too paranoid in life. But when investing, skepticism/paranoia doesn't seem like the worst trait to have. 

 

I can't strongly agree enough. I would say most of us on here have a pretty false sense of security. A little more paranoia here is a good thing.

[whistlerbumps]

Margins are the most important question for Z01.

 

I think this is an interesting company but would be very surprised if they ever get above 5% margins.  Their best cohort (return customer with local distribution) is <4% margins currently and that's with Amazon only in a few parts of Europe.  Also, they are starting to get to the limit of how much more they can squeeze some of their opex costs.  If they can do 5% margins then its probably OK here but I think that's not a certain level that they can acheive.

[Guest Schwab711]

The best I could do for adj incremental margins is 3.5% (rounded up). Assuming 20% growth through 2026 gives EUR 6b in additional revenue (~EUR 7b rev in 2026). This implies operating income of roughly EUR 210m in 2026. That's approx 5.5x 2026E EBIT (assuming 0% share dilution for 9 years). There are plenty of alternative investments opportunities in the region (same macro risks) that would have returned most of your investment and have similar multiples by that point. ZooPlus is expensive. I'd like ZooPlus a lot at EUR 40/share or so, but I'm sure a lot of folks would be buyers well before that point. There's a very real chance that incremental margins are never positive by more than a 100 bps or so. Like Whistlerbumps wrote, I think the customers they currently have are probably the best they will ever have. Best I can tell at the moment, ZooPlus has also failed to build out the distribution network you'd expect to facilitate this growth. I don't see how you replicate AMZN's success without proportionally replicating their fixed asset investments, regardless of industry.

 

I also agree there should be some tailwinds from WC, but it will likely be trivial compared to the current price and they are not sustainable given the current investment trajectory.

[SlowAppreciation]

http://valuexvail.com/presentations/?mgc_48=61/2017&mgi_48=1319/2017-reinvestment-moats

[SlowAppreciation]

Was also written up in the recent Coho Capital letter