Briscoe Group (NZX: BGP)
The Briscoe Group (NZE: BGP), referred to as Briscoes in this writeup, is a retailer headquartered in the mean streets of Auckland, New Zealand. The business has two concepts, Briscoes Homeware and Rebel Sport, which make up all of its revenue. There is a third concept, Living and Giving, which has one location, but the business does not list its sales or discuss it in any capacity besides stating that it exists. I found out about the Briscoe Group after searching for publicly traded business in New Zealand several months back. Why I was searching for them remains a bit of a mystery, but I remember that it was somewhat related to looking for publicly traded businesses in Australia. Per the most recent fiscal year end, 1/30/2022, Briscoe Group generated NZ$744.4 million of revenue, NZ$340.6 million of gross profit and NZ$87.9 million of net income. All three figures were record amounts for the business. The business also trades in Australia as ASX: BGP. I was not able to find out why the stock trades in both countries even though it only does business in New Zealand.
Briscoe Group History
Briscoe Group is a much different business now compared to what it started out as. Per the “History” section of its home website which is linked here, “While the store is today well known for its homeware products, it began life as a hardware retailer supplying prospectors during the gold rush with shovels, picks, tents and lanterns in the early 1860’s.” “Briscoes brought the best manufactured goods of the world to our shores and became the first international mercantile business to establish a presence here,” says author and business historian Dr Ian Hunter.” Per the “History” section and quoting Dr. Hunter again, “Briscoes’ rapid expansion in its early days was tightly connected to the country’s own economic progress, as it became a major supplier of products for the building of New Zealand’s core infrastructure… The company was the national supplier for government contracts to construct bridges, railroads, stations, telegraph lines, water systems and tunnels, to name a few.” The business ran in to trouble during the depression but managed to survive after cutting costs, implementing a 10% pay cut, firing employees who were single and keeping married staff members while only allowing them to work one week on and one week off. After WWII was over the business did well until the 1980’s when it became “caught halfway between the perception of being an outright wholesaler and a wannabe retailer as product ranges struggled between premium and bargain-basement goods.” Rod Duke, the current CEO, rescued the company during that time and acted as a “white knight”. He has run the business ever since. After his takeover the business refocused its efforts on the homeware concept followed by a franchising and exclusive rights agreement that brought Rebel Sport from Australia to New Zealand in 1995. The agreement was terminated in 2005, but Briscoe’s was allowed to keep the exclusive rights to the Rebel Sports brand. Per the annual report, the business currently operates 47 Briscoes Homeware and 42 Rebel Sport stores respectively.
CEO
As stated above, Rod Duke is the CEO and has worked at Briscoe Group since he rescued the business in 1988. There is a quote on in the “History” section of the Briscoe Group home website which is linked above that provides some insight into Mr. Duke’s business strategy. He stated that, “You don’t want to be number three or number four in New Zealand selling particular categories. Unless you’re number one or two you’ll struggle to make money.” Per the “Director” section of the Briscoe Group homepage, “In September 1988, Rod was appointed Managing Director of Briscoes (New Zealand) Limited, at that time a subsidiary of Hagemeyer of the Netherlands, with a mandate of returning the company to profitability and preparing it for sale. In January 1990, Rod reached agreement for the RA Duke Trust to purchase 100% of the shares of Briscoes.” Per the “History” section again, Mr. Duke stated, “My original contract had been for a maximum of three years to get the company out of trouble and to find a buyer. But the longer I stayed at Briscoes, the more potential I saw.” His time before taking over Briscoe’s was very under the radar and not indicative of his future success. Taking from the same “Director” section, Mr. Duke has been in the retail sector for his entire working life and it is unclear if he went to or graduated from college. His previous jobs were at other retailers where he worked his way up through various management roles. This is just my opinion, but I think it’s remarkable what he’s been able to achieve in his career. He controls Briscoe’s through his family trust and owns over 77% of the outstanding shares with a net worth approaching NZ$1 billion. I was very impressed by this stake to say the least. You’d be hard pressed to find another CEO that owns more than 3/4ths of the outstanding stock of the business they run.
I couldn’t find out much more about Mr. Duke outside of the Briscoe Group website besides the video below which details the ongoing saga involving the development of his new home in an exclusive part of Auckland, New Zealand. Per the video, Mr. Duke and his wife are or were installing a helipad which they’re only allowed to use three times a week. The issue is that their neighbors are allowed to use their respective helipads six times a week. A link to the video can be found below and hopefully provides some comedic relief. There are also news articles which have discussed this in more detail over the last several years, but they are behind a paywall. Feel free to Google “Rod Duke New Zealand helicopter” if you want to learn more.
CEO Compensation
Mr. Duke’s compensation is made up of a base salary, other benefits and a short-term incentive.
Base salary - There wasn’t a lot of information provided as to how his base salary is determined. I looked through the annual report and coulnd’t find anything. I then went online and found Briscoe’s Remuneration Policy which is linked here. It is states in the policy that “wages are benchmarked against the wider market for the same or similar talent” as one of their approaches to employee remuneration. The Remuneration Policy goes on to state that the “base salary is determined by role size and the remuneration midpoint applicable to that role. The salary of an individual is generally set between 85% and 115% of the midpoint, dependent upon competency and performance.” Again, these are policies for “employee remuneration” and it is unclear whether this applies to the Briscoe Group executives. This is all the information that I was able to find regarding his base salary. Mr. Duke’s base salary for the fiscal year ended on 1/30/2022 was NZ$942,256.
Other benefits – Per p. 84 of Briscoe’s 1/30/2022 Annual Report, other benefits “contributions to superannuation, life insurance, health insurance and a fuel card.” I looked up what “superannuation in New Zealand” is on Google because I had never heard of this term before. The main result that came up was the New Zealand Superannuation Fund. This is a sovereign wealth fund which provides pensions to those who pay in to. I’m not sure if this is the superannuation that Briscoe’s was referring to or if they have some sort of individual plan for him. Either way, the business is contributing to his pension. Other benefits for the year amounted to NZ$117,052.
Short term incentive – Per p. 84 of Briscoe’s 1/30/2022 Annual Report again, “Short term incentive (STI) payments are at risk cash payments designed to motivate and reward for short term (within each financial year) performance. The target value of a STI payment is set by the Managing Director with a specified dollar potential available to each participant in the scheme. The target areas for all employees who are entitled to a STI payment are set based on a combination of company financial performance, specific financial performance relative to the employee’s areas of responsibility and individual goals. The weightings applied to each of the target areas will be largely consistent throughout the company for roles entitled to a STI payment but may vary depending on specific areas of focus as determined by the Managing Director. The Board approves the STI payments to be made to senior management at the end of the financial year and approves the senior management targets for the following year.” Something that I don’t understand about the STI is that the Managing Director sets the incentive amount, but Mr. Duke himself is listed as the only Managing Director that I can find at Briscoes. I guess he sets a reasonable figure for his short-term incentive and the Board simply approves it? I was unable to find any further information about the STI. His short-term incentive payment amounted to NZ$1,107,011 for the year.
Briscoe’s also offers medium-term incentive and long-term incentive payments. Mr. Duke does not participate in these due to his controlling stake in the business. However, I think they’re worth mentioning and describe them in further detail below.
Medium-term incentive payments - Per p. 85 of the 1/30/2022 Annual Report, the medium-term incentive payments (MTI) “are at risk cash payments designed to motivate and reward for medium term (crossing two financial years) performance. A two-year term provides for evaluation of performance over a longer term than used for purposes of STI and ensures a degree of impact or sustainability thereby avoiding or reducing the risk of “short-termism”. MTI participants are members of the senior management team who significantly influence achievement of the Company’s performance. The target value of an MTI payment is recommended by the Managing Director for approval by the Board, with a specified dollar amount potentially available to each participant in the scheme. Performance is assessed at Company rather than individual level with measures aligned to those of the Long Term Incentive Scheme (LTI) scheme, albeit over a slightly lesser timeframe. The Board will review performance and approve any MTI payments to be made to senior management at the end of the financial year and approve objectives for the following year. Participants in the MTI do not participate in the LTI.” The Remuneration Policy states that medium-term incentive payments “will be for those in non-executive senior roles and those in specialist functions that have a significant and material impact on the performance of the company.”
Long-term incentive payments - Per p. 85 if the 1/30/2022 Annual Report, long-term incentives payments are granted as “Performance Rights which upon vesting would reward the employees with ordinary shares in the Company. Vesting of the Performance Rights occurs after three years and is subject to the achievement of certain performance hurdles, relating to the Company’s achievement against Total Shareholder Return and Earnings Per Share growth targets. This plan replaced the Share Option Scheme which had been in place since 2003. Participants in the LTI do not participate in the MTI.” The Remuneration Policy states that “a limited number of Long Term Incentive (LTI) Plans may be offered, with participation determined on the basis of intended outcomes and as recommended by the Managing Director with approval by the Board.” It is unclear who exactly can and cannot qualify for long-term incentive payments. The screencaps below show the performance metrics for the Total Shareholder Return and Earnings Per Share targets. They are taken from pp. 66-67 of the 1/30/2022 Annual Report.
There are two points of concern regarding the hurdle rates of the long-term incentive payments. The first concern is with Tranche 4 of the Total Shareholder Return (TSR) component. It only requires that Briscoe’s stock price compound between 5-5.5% from the announcement date of fiscal year 2020/2021 results through the announcement date of fiscal year 2023/2024 to be achieved. I think including TSR growth rates as a component of long-term incentive compensation is great, but I wish the rates were higher. To me, these low TSR hurdle rates for the next few years indicate that management doesn’t think that they can compound a lot of value over the next few years especially when Tranche’s 2 and 3 have TSR hurdle rates of 10.1-13% and 12.4-16% respectively. The second concern is with the Earnings Per Share (EPS) hurdle rates because they aren’t very high either. The requirements range in total from 0.8-4.6% compounded EPS growth across all three tranches. That’s not what I want to see. Like the TSR hurdle rates, these low EPS hurdle rates also indicate to me that management doesn’t believe that they can compound the value of the business at a high clip over the next few years.
What Does Briscoe Group Do?
As stated above, Briscoe Group operates two retail concepts. The first one that I will discuss is Briscoes Homeware. A link to their website and online store is here. Their slogan is “You’ll never buy better” and they do a great job of sticking to that promise. Their product assortment is vast. Briscoes Homeware sells everything from mattresses to bedsheets to heaters to towels to backpacks to storage containers and everything in between at low prices. I would provide more information about it but that’s all I could really find. Briscoe Group’s Wikipedia page claims that the Homeware stores exclusively import a lot of the brands that they sell which is what allows them to have such low prices. However, there was no citation for that claim and I was not able to confirm it after searching their website or via Google.
Rebel Sport is the other retail concept under the Briscoe Group umbrella. A link to their website and online store is here. It is the largest sporting goods retailer in New Zealand. It seems similar Dick’s Sporting Goods from what I can tell. They sell merchandise for basketball, football (soccer), cricket, field hockey, rugby players, etc. They also sell fishing, camping and other outdoor equipment. One thing I noticed is that they sell NFL jerseys, hats, t-shirts, etc. with an oddly specific focus on the Raiders. Not sure why this is the case, but it was something that stuck out. Like Briscoes Homeware, I would provide more information, but Rebel Sport is a straightforward concept. They sell sporting goods that are catered to the New Zealand market. There doesn’t seem to be anything revolutionary going on with their stores or product lines.
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Valuation
*** Before I show you the free cash flow and returns on invested capital for Briscoe’s, I want to let you know that I chose 2005 as the start date for my calculations because I use TIKR and that’s as far back as their data goes on the business. ***
I will start off with Briscoe Group’s free cash flow (FCF). It is shown in the screencaps below.
I calculate FCF as Cash from Operations minus Capital Expenditures. Since 2005, Briscoe Group has grown its FCF from NZ$20.78 million to NZ$78.34 million which is a CAGR of 7.65%. That’s alright, but not great. At a current market capitalization of just over NZ$1.3 billion, the business currently trades at a 16.5-17x multiple of FCF. I think this is a little on the high side given that FCF has CAGR’d at <10% since 2005, but I don’t think it’s ridiculous.
What about their returns on invested capital (ROIC)? I did those too. The results are shown in the screencaps below.
Briscoe Group has achieved pretty good returns on capital since 2005. ROIC ticked down considerably during the Great Recession and COVID lockdown over the last few years. They’re a retailer so it makes sense that ROIC would decline during those two time periods. During the so called “normal times” ROIC has consistently been close to or exceed 20%, but rarely above 25%. A ROIC of 15+% is the baseline of what I would want to see, so I think Briscoe’s deserves credit for the results they’ve produced over the last 18 years.
So, their FCF is alright and their ROIC is above average, bordering on pretty good. What about their returns on incremental invested capital (ROIIC)? The results are shown in the screencap below.
By my calculations, Briscoe Group has been compounding the value of the company between 9%-11% per year since 2005. A lot of this value has been returned to shareholders via dividends. Like their FCF, this is alright, but not great. Per TIKR, Briscoe Group’s stock price has CAGR’d at 9.8% per year since 2005 which is right in the middle of my calculations. I think the market is fairly valuing this business.
Outlook
What about the future growth of Briscoe’s Group? My main concern isn’t the business model; it’s the business’ growth. The business has only added 32 stores since the end of 2005. Management hasn’t provided same stores sales growth since the 1/26/2020 Annual Report which makes me think they aren’t increasing by much, if at all. With that being said, Briscoe Group is one of the largest retailers in New Zealand and they deserve credit for that. However, I think this lack of growth can be explained by the market they operate in. The population of New Zealand isn’t growing a lot nor is their GDP. Per New Zealand government statistics linked here, the country’s population has only grown by 1.29% compounded per year since 1991 while GDP has oscillated around the 3-4% range over the last several years. Screencaps of population and GDP growth graphs are shown below and were taken from the New Zealand government statistics site linked above.
I keep referencing New Zealand because, as I mentioned in the introduction, it is the only market that Briscoe Group operates in. I’ve read their annual reports since 2008 and there hasn’t been any mention of international growth meaning they’re tied to their country’s population and GDP growth. I try and stay away from macro-based ideas and decisions, but I can only see two ways in which Briscoe Group can significantly expand their business. One is that New Zealand experiences a dramatic increase in population. Although I have no data to back this up, my gut says that I shouldn’t count on this happening. The other thing they could do is expand their concepts internationally. The natural move would be to Australia considering the proximity, market size and language. The problem is that while the business owns the Briscoes Homewares concept, they only own exclusive rights to the Rebel Sport concept inside of New Zealand. The kicker is that other country where Rebel Sport operates is in Australia so they would only be able to expand one of their concepts in that market. They could try expanding into other parts of Oceania or China, but I’m not sure how it would work out. I would bet that their business environments and dynamics are significantly different than those of Australia. You may be thinking that they can expand their online sales internationally, but I will discuss that in the next paragraph.
Let’s move on to the positives for Briscoe Group. I believe that retail will be with us for as long as humans exist because people love to shop and I don’t see that behavior changing any time soon. Will retail evolve and continue to change? Yes. Will there be a new business that comes along with a better mousetrap than Amazon and forces retailers to pivot to new sales channels and operating strategies? Yes. That doesn’t mean that retailers are doomed. It means they must adapt and evolve to survive. One thing I do know about Briscoe’s is that it has adapted and evolved with the times. Why do I say that? First, it is a survivor which counts for a lot in my book. As stated in the “Briscoe Group History” section of this writeup, Briscoe Group has been around since the 1860’s and has constantly evolved and grown into what it is now. Did the business have hard times? Yes, but it managed to pull through. I mentioned above how the business is one of the largest retailers in New Zealand meaning that Mr. Duke came through on his quote about being #1 or #2 in each market. Having two different retail concepts under its umbrella also shows another form of evolution. The business made the correct decision to get into sporting goods retail and not operate solely through Briscoes Homeware. The biggest source of growth and evolution today is their online sales. Per annual filings, online sales have increased from 4.5% in 2016 to 21.5% as of the most recent annual report. This is mainly due to the Amazon effect, COVID and current customer preferences, but Briscoes has managed to pivot their business to the ever-increasing online sales channel. One thing I will mention about their online sales is that I don’t know how profitable they are. Their annual reports do not provide this information. This could also be another reason why their ROIC has ticked down over the last few years. Building out and developing an online sales presence costs money and may not provide immediate returns. In their defense, why would they offer online selling if it wasn’t profitable? One last thing about their online sales is that they only ship in New Zealand. They do not take international orders and this of course limits their growth potential. It remains to be seen how their online strategy will work out, but the sales growth of almost 5X in that channel makes me think they’re bullish on it. You never know how things are going to work out, but I think a business like Briscoe’s that has survived through the good and bad times for ~160 years is well prepared for what the future holds.
Conclusion
Is Briscoe’s a compounder? I think it could be at some point. As things currently stand, I don’t think this is the case. I love that the business has constantly evolved over time, operates two different retail concepts, has a CEO who owns a majority of the stock and has above average returns on capital. However, I think that the low hurdle rates for their long-term incentives combined with low rates of growth in store count, low growth in FCF and their continued operations in a relatively small market aren’t what I want to see as an investor. I also think that the market is fairly valuing the business based on my ROIIC calculations, so I don’t think there’s a ton of value in owning stock in the business as of now. That’s not to say that the business cannot or will not pivot internationally or figure out some other way to grow store count and sales. I’m going to pass on Briscoe Group for now, but keep my on it.
Thanks again as always for reading. Please feel free to like and subscribe if you like what you’ve read today. Don’t forget to tell someone that you love them. If you have any further questions, comments or concerns please contact me at possiblevalueresearch@gmail.com, @Possible Value on Twitter and @Heshy on MCC.
Disclosure: I do not own stock in Briscoe Group.