I really enjoyed your post! A couple of things to consider- I'd love to hear your thoughts based on my comments.
First, I'm wondering why you're choosing to value VVV on the RFCF metric. Do you think most of the capex is being spent on maintenance? Most of the capex is being spent on growth, per their latest 10-K (~85%). I think that this should result in RFCF increasing to $217.2M, based on your stated goal of the RFCF. This puts VVV at a much lower multiple (~22x). IMO, paying ~22x FCF for a business w/ ROIC of ~20%, revenue growing ~7%, a large TAM, and the potential for a large increase in margins, is well-worth the investment.
I also think that you're not measuring true revenue growth properly. For example, Valvoline is selling some corporate locations to franchisees- decreasing revenue (temporarily) but freeing up capital to invest in higher RoR investments (e.g. franchisees). On my calculations, unit growth of 10% and SSS growth of 6%, would lead to a 16% revenue growth for VVV, on the basis of assuming all stores were corporate (which isn't true). In other words, I think that the GAAP measurements are unfairly decreasing VVV true growth. I think of franchising locations as being like transitioning from products to SaaS- you're going to experience a temporary decrease in revenue, during the transition period.
Lastly, a huge growth driver IMO is operating leverage- overhead doesn't need to increase at the same rate as revenue, leading to large margin expansion.
Personally, I think that VVV is eerily similar to AZO & ORLY- and not just because they both operate in the vehicle industry. They all represent a company scaling rapidly, operating in a fragmented industry dominated by mom-and-pop stores, deploying capital wisely (share buybacks), high ROIC, and a strong customer experience.
Regarding ROIC, I can't help but wonder if it is misleading, due to the huge growth in the retail segment. If I were to guess, in a few years, ROIC will have increased significantly due to many stores reaching maturity.
Let me know your thoughts- would love to hear them!
Second, you make a great point about the growth vs maintenance CapEx. Looks like I missed on that and should've included it in my update. Zeroing out the growth CapEx portion would make the RFCF multiple much more reasonable. Still, 22x is a high, although not ridiculous, multiple to pay.
Per p. 41 of the 2024 10-K, "The decrease in free cash flow from continuing operations over the prior year was driven primarily by lower cash flows provided by operating activities in the current year as described above. These changes, in addition to higher capital expenditures, resulted in lower free cash flow from the prior year. New store construction primarily drove increased capital expenditures during the current year, as the Company continues to focus the majority of its capital spend toward growth, which is expected to drive a high return on invested capital." The question I have after reading this is: What has the ROIC been from these locations historically and what do they look like going forward? Basically, what's the ROIC and ROIIC on each new store that VVV adds to their network? Do you have any input on this?
Third, your point about selling locations to franchisees for higher future revenue. I think you're generally correct.
Fourth, you're right about ROIC lagging as new stores come online. If true, then ROIC should be materially higher in the next few to several years.
Please respond at your convenience. Would love to hear your thoughts on this.
I really enjoyed your post! A couple of things to consider- I'd love to hear your thoughts based on my comments.
First, I'm wondering why you're choosing to value VVV on the RFCF metric. Do you think most of the capex is being spent on maintenance? Most of the capex is being spent on growth, per their latest 10-K (~85%). I think that this should result in RFCF increasing to $217.2M, based on your stated goal of the RFCF. This puts VVV at a much lower multiple (~22x). IMO, paying ~22x FCF for a business w/ ROIC of ~20%, revenue growing ~7%, a large TAM, and the potential for a large increase in margins, is well-worth the investment.
I also think that you're not measuring true revenue growth properly. For example, Valvoline is selling some corporate locations to franchisees- decreasing revenue (temporarily) but freeing up capital to invest in higher RoR investments (e.g. franchisees). On my calculations, unit growth of 10% and SSS growth of 6%, would lead to a 16% revenue growth for VVV, on the basis of assuming all stores were corporate (which isn't true). In other words, I think that the GAAP measurements are unfairly decreasing VVV true growth. I think of franchising locations as being like transitioning from products to SaaS- you're going to experience a temporary decrease in revenue, during the transition period.
Lastly, a huge growth driver IMO is operating leverage- overhead doesn't need to increase at the same rate as revenue, leading to large margin expansion.
Personally, I think that VVV is eerily similar to AZO & ORLY- and not just because they both operate in the vehicle industry. They all represent a company scaling rapidly, operating in a fragmented industry dominated by mom-and-pop stores, deploying capital wisely (share buybacks), high ROIC, and a strong customer experience.
Regarding ROIC, I can't help but wonder if it is misleading, due to the huge growth in the retail segment. If I were to guess, in a few years, ROIC will have increased significantly due to many stores reaching maturity.
Let me know your thoughts- would love to hear them!
Hey, Ben. Thanks for reaching out.
First, I apologize for the delay in responding.
Second, you make a great point about the growth vs maintenance CapEx. Looks like I missed on that and should've included it in my update. Zeroing out the growth CapEx portion would make the RFCF multiple much more reasonable. Still, 22x is a high, although not ridiculous, multiple to pay.
Per p. 41 of the 2024 10-K, "The decrease in free cash flow from continuing operations over the prior year was driven primarily by lower cash flows provided by operating activities in the current year as described above. These changes, in addition to higher capital expenditures, resulted in lower free cash flow from the prior year. New store construction primarily drove increased capital expenditures during the current year, as the Company continues to focus the majority of its capital spend toward growth, which is expected to drive a high return on invested capital." The question I have after reading this is: What has the ROIC been from these locations historically and what do they look like going forward? Basically, what's the ROIC and ROIIC on each new store that VVV adds to their network? Do you have any input on this?
Third, your point about selling locations to franchisees for higher future revenue. I think you're generally correct.
Fourth, you're right about ROIC lagging as new stores come online. If true, then ROIC should be materially higher in the next few to several years.
Please respond at your convenience. Would love to hear your thoughts on this.