GBT.TO - BMTC Group

[Cigarbutt]

This is a company which was briefly mentioned in the share buyback thread that LC started.

 

Thesis: The company recently reported poor results and there are expectations of more to come. IMO, the company will benefit (growth of sales and margins) when there will be a return to a more ‘normal’ competitive landscape and when it will no longer be considered out of favor.

 

It is a relatively small and Quebec-based furniture retailer that was formed about 30 years ago and has grown significantly and profitably during the first 20 years. From year 2000 to 2009, it grew sales by about 50%, improved margins and shares performed well during that time frame. The industry is boring and the corporate level is very low profile. Since public inception, if my numbers are correct, the company has repurchased and retired 83% of its shares, repurchasing activity has been regular but occasionally opportunistic and a significant part of the total return has resulted from this capital allocation decision. They are strong operators, have been able to grow or maintain market share in key customer segments and have adapted well to the changing dynamics of the industry. I would say that, because of their relatively high margins, absence of debt and free cash flow potential, they are likely to outperform peers, especially during downturns.

 

Since 2009, the competitive landscape confirmed evolving changes with the expansion of national retailers (Leon and The Brick, which have combined), the appearance of many small players as well as the online Wayfair-type of threat in a relatively fragmented and highly competitive industry. The national chains gained market share and achieved adequate net margins (4 to 5%) and return on capital. Since 2009, BMTC has reacted by lowering net margins from 8-10% to 5-6% and basically revenues have remained flat (essentially the same number of retail outlets) and have even come down lately.

 

The 2019 annual report (end of yr Jan 31st) reveals revenues of 740.0M. The thesis relies on basically a reversion to the mean, given specific circumstances. Given the below-mentioned assumptions, a CAGR of 15 to 25% could be achieved (including an assumed dividend yield of 2-3%).

 

-Over the next 5 years, revenues grow by 20%, net margins reach 8%, a PE of 12 and 15% net reduction in share count

-Over the next 10 years, revenues grow by 40%, NM at 8%, PE at 12 and a 30% net reduction in share count

-The daughter of the founder, who has recently been named CEO will continue along the same principles

 

-----

 

There is a risk of adverse results with macro concerns but this seems to be, at least partly, priced in already and management has painted a picture with dark clouds. There has been a recent auditor change but I find corporate governance to be overall strong (given top execs pay level and structure, the elimination of the dual share structure along the way, the composition of the Board, the way they dealt with an asset-based paper crisis a while back and generally how conservative their reporting is).  Another negative includes a relatively high pension obligations.

 

An additional potential negative for them is the advent of e-commerce in their sector of activity. They have invested significant capital to establish an online platform in order to get sales from that channel and, especially, to increase customer presence in their physical stores to actually complete the transactions.

 

On the positive side, the company has now, on its books, 116.7M of net cash and investments, which comes to about 3.39$ per share (last share trade = 10.75$).

 

A potential catalyst may come from the founding family whose percentage of ownership has crept up over the years. As last reported, the Chairman holds 62.0% of shares. He was the CEO in 2015 when the company completed a significant buyback (15-16% of shares outstanding for 108M, per share 15.50$) so he may find the trajectory interesting along the way to the return to the mean.

 

The discussion is open here and now but will become quiet if the level of interest shifts into higher gear as the liquidity is fairly low.

[Spos]

I find this interesting as well.  Very cheap, strong financial position as you mention (they also own a lot of their real estate), buybacks, conservative management.  My one issue is the lack of growth, especially given the turnaround in the Quebec real estate market.  I appreciate the increased e-commerce competition, deflation, the growth of larger chains (the Ikea store in Quebec City is not helping), but I would like to see more growth.  Same store sales growth was negative in 2018 and looks to be negative this year as well.

 

I think the 2015 share repurchases were blocks from two directors selling their shares.  Would be nice to see something similar again as the small float/low volume limits their repurchase activity.  I do wonder if the family would like to take this private.

 

[Cigarbutt]

^They have located their stores very well and have unrecognized value in their real estate holdings. Last January, they sold their Repentigny store for 9M resulting in an after-tax gain of $4,5M or $0.13 per basic share. Their new Laval store has a different look and has been built in a very strategic location.

 

It seems to me that they will grow mostly, when that is possible, by gaining market share when others retreat.

One of Mr. Buffett's quotes comes to mind (1996):"The inflow of money and outflow of money should not be, in our view, attempted to be matched too carefully in this world, because you get investment and business opportunities at times that differ from the times that funds come in. And one of the most important disciplines in running a business or managing investments is to not try to coordinate your actions simply with the availability of cash."

[ECCO]

^They have located their stores very well and have unrecognized value in their real estate holdings. Last January, they sold their Repentigny store for 9M resulting in an after-tax gain of $4,5M or $0.13 per basic share. Their new Laval store has a different look and has been built in a very strategic location.

 

Totally agree. Real estate have been manage pretty well over the years. The price they sold the Repentigny store is a little more than the property assessment value.There is other exemple over the years and I dont remenber them not realise a gain by selling a property.

 

About 2 years ago, I have check all their property assessment and that is about 100M$ over the amount on the balance sheet, +/- 3$ per share (100M$ / 34M shares).

 

So you got:

 

4,00$  cash and investments (july 31st)

3,50$  land and property

3,00$  hiden value of land and property

 

Total of 10,50$ is the actual stock price so we could say that you got the operating business for free.

 

Yes the 2015 share repurchases were blocks from directors. Many years ago they did 2 (might be 3, not sure) dutch auctions. There is certainly a probability that they can do a dutch auction again. That being said, Desgroseillers own 62% and Fidelity 18%. Fidelity will certainly not sell at the actual price, so there is not that much float left to buy back in a dutch auction.

 

To take this private they would need to buy back 13M shares (38% of 34M shares). Fidelity would certainly need a premium and I think a price of 18$ could be accepted by Fidelity. The value of their property and land give them the fexibility to pay that price. Do the math and they can take the company private right now.

 

Disclosure: I own BMTC shares since 1997 and I recently bought more.

[Spos]

About 2 years ago, I have check all their property assessment and that is about 100M$ over the amount on the balance sheet, +/- 3$ per share (100M$ / 34M shares).

 

Funny, I went through this exercise as well.  I agree that there is extra value in the real estate, I think mostly in the Greater Montreal area.

 

To take this private they would need to buy back 13M shares (38% of 34M shares). Fidelity would certainly need a premium and I think a price of 18$ could be accepted by Fidelity. The value of their property and land give them the fexibility to pay that price. Do the math and they can take the company private right now.

 

For sure they would be able to privatize this right now.  I think a Fidelity exit would be great here whether or not the family wants to privatize.

 

For disclosure, I own this as well.

[spartan]

Can someone from Quebec tell me why their Google reviews are so bad??

 

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

 

If you're not getting a bargain from a NAV standpoint, the value of the operating business is really important. Why would I want to buy a business in an intensely competitive industry?

 

This reminds me of a talk Peter Cundill gave at Ivey a few years back. He made this exact kind of investment because "the business was free". Turned out that the business was worth way less than zero. (In case anyone's interested, it's a great talk -

)

[ECCO]

Can someone from Quebec tell me why their Google reviews are so bad??

 

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

 

If you're not getting a bargain from a NAV standpoint, the value of the operating business is really important. Why would I want to buy a business in an intensely competitive industry?

 

This reminds me of a talk Peter Cundill gave at Ivey a few years back. He made this exact kind of investment because "the business was free". Turned out that the business was worth way less than zero. (In case anyone's interested, it's a great talk -

)

 

I certainly agree that Brault et Martineau and Economax does not have the best reviews. That being said, it seems that it is something that is not exclusive to them and it is more an industry caracteristic, just take a look at reviews of Leon's, JC Perreault, Brick or Surplus RD. The fact that Brault and Economax sell low to medium quality stuff also does not help to get the best reviews.

 

Tanguay, that is also own by BMTC, seems to have better reviews.

 

I dont think that customers satisfaction of BMTC have change over the years, it is probably not worse than it used to be.

[Cigarbutt]

Can someone from Quebec tell me why their Google reviews are so bad??

 

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

 

If you're not getting a bargain from a NAV standpoint, the value of the operating business is really important. Why would I want to buy a business in an intensely competitive industry?

 

This reminds me of a talk Peter Cundill gave at Ivey a few years back. He made this exact kind of investment because "the business was free". Turned out that the business was worth way less than zero. (In case anyone's interested, it's a great talk -

)

BMTC has consistently ranked high in annual consumer complaints surveys and will echo ECCO's comments as this seems to be part of the regular cost of doing business in their specific consumer segment category. They also voluntarily participate in a resolution process that seems to take care of most of the 'real' complaints.

 

The investment mistake referred to versus Mr. Cundill seems to be Cable & Wireless which is a different story altogether. C&W had a margin of safety when Mr. Cundill bought shares (cash from opportunistic sales of subs) but the business obtained for free suffered from poor capital allocation, poor expansion projects and a significant 'burn' rate in the interim. For BMTC, historically, management has shown strong capital allocation skills and have not relied on financing or warranty for bottom line results. They have consistently earned profits from their core business which is selling furniture, à la Nebraska Furniture Mart. If following Mr. Cundill's playbook (which is pretty contrarian these days): "we always look for the margin of safety in the balance sheet and then worry about the business". The two-step analysis, IMO, reveals that there is a margin of safety in BMTC which is unlikely to be dissipated and the upside resides in the potential for a more 'normal' competitive environment, whichever way one wants to define 'normal'.

 

I think a 'lesson' that was learned by Mr. Cundhill was that he learned to worry when the 'team' discussion was unanimous versus an investment target. "So my thought is, if there's no natural sceptic on an investment maybe it would be wise to appoint one of the team to play Devil's Advocate anyway". Page 158, from There's always something to do.

 

Looking for more substantive push-back.

[spartan]

Can someone from Quebec tell me why their Google reviews are so bad??

 

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

 

If you're not getting a bargain from a NAV standpoint, the value of the operating business is really important. Why would I want to buy a business in an intensely competitive industry?

 

This reminds me of a talk Peter Cundill gave at Ivey a few years back. He made this exact kind of investment because "the business was free". Turned out that the business was worth way less than zero. (In case anyone's interested, it's a great talk -

)

BMTC has consistently ranked high in annual consumer complaints surveys and will echo ECCO's comments as this seems to be part of the regular cost of doing business in their specific consumer segment category. They also voluntarily participate in a resolution process that seems to take care of most of the 'real' complaints.

 

The investment mistake referred to versus Mr. Cundill seems to be Cable & Wireless which is a different story altogether. C&W had a margin of safety when Mr. Cundill bought shares (cash from opportunistic sales of subs) but the business obtained for free suffered from poor capital allocation, poor expansion projects and a significant 'burn' rate in the interim. For BMTC, historically, management has shown strong capital allocation skills and have not relied on financing or warranty for bottom line results. They have consistently earned profits from their core business which is selling furniture, à la Nebraska Furniture Mart. If following Mr. Cundill's playbook (which is pretty contrarian these days): "we always look for the margin of safety in the balance sheet and then worry about the business". The two-step analysis, IMO, reveals that there is a margin of safety in BMTC which is unlikely to be dissipated and the upside resides in the potential for a more 'normal' competitive environment, whichever way one wants to define 'normal'.

 

I think a 'lesson' that was learned by Mr. Cundhill was that he learned to worry when the 'team' discussion was unanimous versus an investment target. "So my thought is, if there's no natural sceptic on an investment maybe it would be wise to appoint one of the team to play Devil's Advocate anyway". Page 158, from There's always something to do.

 

Looking for more substantive push-back.

 

Ok, let me ask you this: what is stopping competitors from entering this market (i.e. IKEA, which they already have) and customers from visiting other stores? Are there barriers to entry?

 

It is my understanding that we gather at this forum to discuss the validity of ideas. We are people with similar interests and differing perspectives. If you don't agree, then that's fine. In my opinion, questioning the long-term staying power of EconoMax and B&M furniture in a French-Canadian province is a perfectly reasonable thing to do.

 

As I'm sure you know better than I do, there are no perfect comparables in investing. The Cundill example was meant to be illustrative and instructive.

 

Also, it seems to me that Nebraska Furniture Mart could be another factor here. "Buffett invested in a furniture store, therefore it must be a good business." I'm not saying that you are susceptible, but that others might be.

 

Again, healthy pushback. Nothing personal. I just don't see value.

 

1) No growth in both margins and volume (you could argue that you're limited to Quebec because of the French language barrier)

2) No bargain on NAV

3) More likely than not, furniture industry will become more competitive over time

4) Very bad Google reviews and customer dissatisfaction

5) Founder's daughter is now running the show (unproven track record of capital allocation)

 

Too many risks, in my opinion.

[Cigarbutt]

...

Looking for more substantive push-back.

Ok, let me ask you this: what is stopping competitors from entering this market (i.e. IKEA, which they already have) and customers from visiting other stores? Are there barriers to entry?

 

It is my understanding that we gather at this forum to discuss the validity of ideas. We are people with similar interests and differing perspectives. If you don't agree, then that's fine. In my opinion, questioning the long-term staying power of EconoMax and B&M furniture in a French-Canadian province is a perfectly reasonable thing to do.

 

As I'm sure you know better than I do, there are no perfect comparables in investing. The Cundill example was meant to be illustrative and instructive.

 

Also, it seems to me that Nebraska Furniture Mart could be another factor here. "Buffett invested in a furniture store, therefore it must be a good business." I'm not saying that you are susceptible, but that others might be.

 

Again, healthy pushback. Nothing personal. I just don't see value.

 

1) No growth in both margins and volume (you could argue that you're limited to Quebec because of the French language barrier)

2) No bargain on NAV

3) More likely than not, furniture industry will become more competitive over time

4) Very bad Google reviews and customer dissatisfaction

5) Founder's daughter is now running the show (unproven track record of capital allocation)

 

Too many risks, in my opinion.

For disclosure, I've held this in the years 2000's and sold for issues larger than GBT itself and because of some of the reasons you mention. I also held The Brick (units, warrants and debentures during their turnaround) around 2009-2011. I submit that now is a time to wonder if the timing is right to get back in, given the potential privatization and longer term upside. Once and if committed, due to liquidity of the shares, there will be little or no input when building the position.

 

Furniture retailing is brutally competitive (somewhat like a Spartan Race) and reversion to the mean may not happen. The value here is highly dependent on the people running the show. This has been a rewarding experience in the past and, at this point, it seems like GBT has built a relative but lasting edge which is worth following.

[dartmonkey]

Can someone from Quebec tell me why their Google reviews are so bad??

 

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

 

 

I'm curious to know, what reviews you are referring to?

 

I live in Quebec and have owned a small stake in this company for about 15 years. There is nothing very spectacular about the company, but they are arguably the first place you think of when you live in Quebec and you want to buy a new appliance like a washing machine or a fridge. They also sell furniture and electronics, and they have more competition in those parts of their business.

 

As far as I can tell, they don't have a particularly bad (or good) reputation for quality or service, but they are well known as a place that has a large inventory, will deliver for free throughout Quebec, and will set up your machine in your house and make sure it's working. Anecdotally, my daughter just bought a washer and dryer and she just went to their site and bought it, not thinking there was any practical alternative. With no prompting from me!

 

I think their share price stagnation in the last few years is because people think that Amazon and Wayfair will make big inroads. My guess is that they operate in a relatively protected niche where people want to see and touch the merchandise (at least for furniture), and where delivery is a hassle, costs a lot, and where some service is required (delivering a sofa, hooking up an appliance, removing the old appliance, etc.)

 

They have also taken a hit to their profit margins as they spent big bucks (for them) to have a reasonably well-performing transactional website and to begin to transform their stores into a new format that they think will somehow fit better with e-commerce; it is not clear to me how different these stores are really going to be, and how expensive the retrofit of their 20 other stores is going to be.