Author Topic: ZO1 - Zooplus  (Read 3936 times)

AccentricInv

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ZO1 - Zooplus
« on: January 10, 2017, 07:52:53 AM »
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
A Concentrated Value Approach to Public Markets Investments | www.haydencapital.com


glorysk87

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Re: ZO1 - Zooplus
« Reply #1 on: April 20, 2017, 06:46:29 AM »
Devils - are you affiliated with Hayden Capital? Or just another investor in Zooplus?

glorysk87

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Re: ZO1 - Zooplus
« Reply #2 on: April 20, 2017, 07:05:37 AM »
Yea I was just curious, it doesn't matter

Grox

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Re: ZO1 - Zooplus
« Reply #3 on: April 20, 2017, 08:11:17 AM »
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

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Re: ZO1 - Zooplus
« Reply #4 on: April 20, 2017, 09:56:10 AM »
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. 

Quote
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
« Last Edit: April 20, 2017, 09:59:45 AM by AccentricInv »
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spartansaver

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Re: ZO1 - Zooplus
« Reply #5 on: April 20, 2017, 10:04:44 AM »
"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

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Re: ZO1 - Zooplus
« Reply #6 on: April 20, 2017, 10:22:16 AM »
Quote
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).
« Last Edit: April 20, 2017, 10:32:56 AM by AccentricInv »
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spartansaver

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Re: ZO1 - Zooplus
« Reply #7 on: April 20, 2017, 10:55:02 AM »
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. 

Schwab711

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Re: ZO1 - Zooplus
« Reply #8 on: April 20, 2017, 03:10:33 PM »
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

_JJ_

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Re: ZO1 - Zooplus
« Reply #9 on: April 21, 2017, 03:45:13 AM »
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.