Episode Transcript
The Finance Ghost: Welcome to episode 250 of Magic Markets. What a lovely milestone, and Moe's internet has decided to help us celebrate by being absolutely useless. Moe, I think we should actually host the G19 (as it now is) on your internet and perhaps the Gauteng ANC government can then quickly swoop in and fix it.
Because I've got to tell you – they've put a lot of work into fixing Joburg ahead of this event. I'm going to go and see it for myself next week. But perhaps that's the way to get your internet sorted out. We'll just import some skills and tell people we're hosting an event there.
Mohammed Nalla: We'll tell Mark Carney when he's down in South Africa to just get some decent bandwidth and bring it up here to Canada. I think our telecoms are more expensive than South Africa and probably, I’d say “as bad”, except they're probably worse, much worse.
The Finance Ghost: No, they're worse. That is my lived experience – your internet is worse than mine. Let's not pretend any different.
Mohammed Nalla: At least in Joburg you've got some decent internet. You might not have roads without potholes, and you might not have lights and water at certain times. But Ghost, you don't have that problem. You sit in Cape Town.
The Finance Ghost: I've got this Venn diagram of all these things: internet, water, roads. It's wonderful. You should try it, Moe.
Mohammed Nalla: It is lovely. Ghost, we are getting sidetracked. I think what we want to talk about this week is something slightly different to internet connectivity – it's specialty retail. And the reason we're actually looking at this is that, in Magic Markets Premium this week, we are covering a very interesting stock: Build-A-Bear.
That's a company I didn't even know was listed. It's one you've put on the radar (again, testament to your very playful character) and I'm glad we've done it because it's actually shown us some very interesting things.
But we thought, as a nice complement to that show, we'd have a look at specialty retail across the board. Because it's not just toys - the US market has this massive specialty retail segment. And why it's usually quite difficult is” normally on a stock screener, for example, if you pull up a specialty retail player – let's use Dick's Sporting Goods as an example, that's another stock that we've covered on Magic Markets Premium – when you pull that up, it actually brings up a whole bunch of “competitors” that are not always directly comparable because they cut across different industries.
What I want to try and show in our discussion this week is: what do some of those players look like?
We've discussed Dick's Sporting Goods – that's obviously sportswear, sports equipment, that kind of stuff. But you've also got a company called Ulta Beauty (that's another company we've covered on Magic Markets Premium). Then there are companies that operate in the automotive space like AutoZone and O'Reilly. These are some of the names I want to bring into the mix to just show you how big that specialty retail segment actually is when you look, not just even in the US, but pretty much globally.
And then also drilling down into: what's worked, what's not worked? Is it a segmental view that works? Is there something deeper behind that?
But before we even go into all of that detail, I want to come to you on this. In South Africa, we know you've got some pretty strong retail players (well, there are some very large players, I don't know if they're all strong), but there isn't really a specialty retail segment that investors in listed markets can get exposure to, if I'm not mistaken. Ghost, what does the lay of the land look like down there?
The Finance Ghost: Yeah, there isn't really. So the problem is that the South African market is actually just too small, and it's too expensive to be listed. And small caps have very weak liquidity in their stock (as we know) and there's been more delistings than anything else. So when you add all of this together, what you find is a world where specialty retail is actually really difficult as a standalone listed company.
There have been examples of it in the past. You might recall a business that was listed on the JSE – I think the listed company's name was Holdsport (it was basically Sportsmans Warehouse). If memory serves, it had one of the golf retailers and one of the cycling retailers. This was a long time ago. And then that eventually delisted. Then there was another thing called Long4Life that listed at a point and tried to do this specialty retail thing, and it was like a buy-and-build kind of consolidation model with some big hitters.
Look, none of it really worked. And the reason it didn't work is because private equity in South Africa tends to offer a better exit for a lot of those entrepreneurs once they've reached what they can scale to in the South African market as a niche retailer. It's just not worth trying to list and go through all of those headaches and then sell down. It just doesn't make sense, because you're going to list on the JSE, you're going to be lucky to trade at a high single-digit P/E, maybe.
Well, private equity will pay you that!
So, what does happen is: if you can't get the private equity exit, then you get the corporate exit. And we've seen lots of examples of this. I think that Yuppiechef is a great example. Obviously, Absolute Pets is also a really good example at Woolworths.
Again – these are good businesses, but they're not big enough to be separately listed. And the sellers can get a good price. I don't think Mr Price actually disclosed what they paid for Yuppiechef in the end, but I do recall working it out roughly at the time based on the commentary and the whole story, and it was several hundred million rand. And I don't think that they would have really done any better had they gone and listed. You can't go list a sub-R500 million company in South Africa and actually get a good multiple.
So, that's the lay of the land down here. There are some exceptions. There's a business, Safari & Outdoor, that sits inside Astoria – that's one example. But there aren’t many.
There are lots of stores that you would think would roll up - stuff like biltong. I don't know when last you were – I know when last you were in South Africa, but I don't know how much you noticed this, Moe – you get all these specialty biltong stores outside supermarkets. It's remarkable. Clearly the supermarkets do a bad enough job of actually having the right assortment of stuff like biltong that it creates a market for other people to open biltong stores outside supermarkets. Isn't that amazing?
Mohammed Nalla: I love that. I was last down about a year ago, and no, I didn't notice... In fact, now that you mention it, I guess I've noticed the biltong stores that sit outside of, let's call it, the larger retailers. And again – maybe someone from Checkers is listening in on this – Shoprite has done a fantastic job. Maybe they'll go and build out a nice curated biltong section. As long as they make that halaal, I'll be a happy customer. That's the one qualification there.
The Finance Ghost: Well, Moe, while you're on Shoprite, let me make another point about Shoprite and then I'll let you jump back in. Shoprite is a really interesting example of a building-from-zero type of strategy. That's because they actually just can't do the transactions that they would love to be able to do, because the Competition Commission down here makes it really difficult for them to do deals – because Shoprite's too big. So, they have to actually go and build from the ground up.
And this is not me speculating, this is a discussion I've had with their CEO on calls. Kudos to Shoprite. They always give me the chance to chat to Pieter Engelbrecht after they release results, which is an opportunity I really grab, obviously. A 5- to 10-minute phone call is lovely. I’ve gleaned some of these insights from him.
And that's why they're building out. They've got a baby business, they've got an outdoor business. They started UNIQ Clothing (the logo for which is maybe not so unique, as was discussed at the time of launch - it was very close to UNIQLO). They build this stuff from zero. And it's actually very small still in the Shoprite context, but they're getting there. They're doing it on the pet side as well.
A lot of their competitors will go and buy something, and then obviously you're paying a premium for what someone else built. It takes a little bit longer to build from zero, but also not necessarily if you've got a ton of capital, you've got all of the relationships with the landlords – as is the situation at Shoprite.
So, specialist retail, very interesting. That's essentially how Clicks started at the end of the day. Where do you start to draw the line when it's specialist retail or not? Basically, supermarkets were doing a bad job on health and beauty – that allowed Clicks to do its thing. The pharmacy at Clicks only came later. People don't necessarily realise that.
Dis-Chem is a pharmacy-first business. Clicks was a health-and-beauty-first business (essentially copying their homework over in the UK of how to actually do that really well) and then they added pharmacy.
So, that's the thing with specialty retail: if you (as one of the big supermarkets) let it run away, you may never get that market back.
Mohammed Nalla: I love the Clicks analogy there, because you're right. I remember way back when it was your health and beauty store. That literally was the jingle: “Clicks. Your health and beauty store.”
The Finance Ghost: Showing your age now, Moe. I've only ever known Clicks. I don't know what you're talking about.
Mohammed Nalla: Clicks and the little unicorn. Look, I think you've touched on something very interesting here. Let's maybe hone in on health and beauty, because we've discussed how the market's pretty small in South Africa. Maybe you get some specialist retail, but Clicks, like you say, pivoting and then broadening out their offering, and now competing more in that pharmacy business along with the likes of Dis-Chem.
But when you're looking at health and beauty specifically, what seems to have worked quite well up in North America (here we've covered a company like Ulta Beauty, but they're certainly not the only ones to have done it) is that they first and foremost give you a blend of selling you some of the products, but then there's also a strong services component to that.
They make you feel as though they're talking you through your skincare range, for example (this doesn't apply to me, but I've got young daughters). They talk you through that, and they seem to lock in the customers this way.
So that blend – almost creating a perception that a very big business is actually your local small business with good service levels – that's quite powerful.
And then remember, all of these companies really layer on top these ties to their loyalty programs. When you look at Ulta, 95% of their sales are actually tied to loyalty members. This gives them a very strong reinforcing loop of customers coming back.
Now, in South Africa, maybe the market's too small. But I also think when you get this conglomeration into some of the bigger groups and it's not a dedicated specialty retail line - so, Ulta Beauty is literally personal care, beauty products. When you go to Clicks, because it's a bit of that and it's a couple of, I don't know if they even still do the small appliances, and a bit of a pharmacy…
The Finance Ghost: Oh, they very much do. They very much do.
Mohammed Nalla: …you tend to lose that feel that you're getting from some of these more specialised retailers. Now, again, that conglomeration into larger groups is not something that's unique to South Africa. A good example, while we stay in the segment, would be Sephora, because Sephora exists within the wider LVMH group.
It's an odd fit because LVMH is selling you fancy leather handbags and very expensive luggage and that kind of thing, but Sephora has actually been a very powerful part of their overall ecosystem. And they've managed to keep that offering and that brand pretty distinct, even though it sits within LVMH.
And Ghost, before we actually pivot away from health and beauty, I wanted to ask you a question – because I recall you were saying people build from the ground up.
In South Africa, there was a brand called Sorbet that I remember seeing all over the show. They set up these nice little spas where people could go get their nails done. And again, they were starting to really hit that same kind of stream that some of these global beauty players actually had. And if memory serves, I think they were recently taken out. I don't know if they actually got conglomerated into a larger group or if that was a private equity takeout.
But again, that's just interesting for me. Because we see South Africans do create these businesses. The need is out there. But at the end of the day, when it comes to scaling, when it comes to e-commerce, for example – they sometimes need deeper pockets, bigger balance sheets, or maybe a strong, large operational partner in order to take that business to the next level. That's because it's a lot harder to do it at a smaller scale in South Africa than it would be in a market like the US, or maybe even Europe.
The Finance Ghost: Yeah, so it was Clicks who bought Sorbet (or, as they would say where I grew up in the East Rand, “Sore-BIT”, which hopefully you won't have by the time you go to one of their salons) from Old Mutual Private Equity. They were the ones who did the takeout of Long4Life. So, this thing changed hands a lot, as these specialist retailers always do. Moe, I'm surprised that you're not more familiar with this given your glowing skin that no one gets to see because we don't do this on video, unfortunately.
But the beauty side. You raised an important and serious point, in and amongst all my nonsense, which is that when you start to get into a Clicks, for example – yes, they're very good at health and beauty, but they're still not a specialist in beauty.
And so what I've noticed recently, you might remember Edgars – Moe, remember that genius retailer? These days actually, Retailability owns it, and they've managed to turn it into something. They've made it a lot smaller, there's less of the department store side. It looks like - based on what I've seen at the stores that are at least in malls near my house - there’s a big focus on the beauty side. Edgars always had a big focus on beauty, but it was in and amongst everything else. Beauty is making a lot of money for these businesses now.
Mohammed Nalla: I've got an interesting story there. So, in fact, my very first job (when I was still a teenager, you go out and you get the holiday and weekend jobs) was at Edgars Red Square. It's because I'd gone to every other store in the mall and I thought, "Gosh, you know what, I've got nothing to lose. Let me actually just try this store. Are they going to hire this young kid who knows nothing about perfumes and the rest?" And that was my very first retail job.
And it was such a fantastic niche because that tiny business that sat within Edgars really did very, very well for a long time. Now, the Edgars story is a long, drawn-out story. Interesting to see that they've now actually latched back onto this theme, because beauty seems to be a megatrend globally. And it's interesting, because it's actually comes at the cost of another company that I want to discuss here.
When you look at jewellery and accessories, there's a small specialist retailer out of Denmark called Pandora. What they’re really offering you is affordable, luxury, niche charms that your teenagers can buy. And what's been interesting is some of the recent narrative around Pandora is that they've been feeling the pressure of shifting consumer spend.
If I just juxtapose the stories we've indicated here: Ulta Beauty and Sephora on one hand, and then the likes of Pandora on the other hand, or any business similar to Pandora (I think you've got similar businesses down in South Africa, like Claire’s – I don't know if you get that down there). These smaller, niche businesses where teenagers used to go out and buy little trinkets and so forth – they're actually losing spend. Because teenagers are now pivoting towards that health and beauty segment.
So it shows you that yes, as a specialist retailer, you've got to run your business really well – but you also have to be riding the right wave. That's just a passing comment on Pandora.
Where I wanted to go with this, Ghost, is that we can actually move to a completely different vertical. When it comes to specialist retail (and again, I don't know if you even have these businesses down in South Africa, certainly not at scale). But what's been very successful, if you look at the share price movements, has been the auto parts business in the US.
Two companies really stand out here. One is AutoZone and the other is O'Reilly Automotive. What they offer you is almost a DIY offering – where you can go and buy your parts. People that repair their own cars, people that service their own cars. That has actually given them a fantastic runway. It's a very niche market.
And even though you could argue that the US market (that's where these companies operate) is still pretty mature and these companies don't have much ex-US exposure, the underlying performance in these businesses has been remarkably strong. They've managed to be successful. And it's the same themes that come through for me – one of the reasons why these businesses are so successful, if you go and read up on this, is that they offer a very personalised service.
I think that is the thing that moves the needle on specialty retail: the ability to offer that advice. If you go into an O'Reilly or an AutoZone and you tell them what your problem is, someone's going to sit down, actually talk to you, talk you through which parts you require. That locks you in as a return (and as a loyal) customer. That's a very important point to land on, Ghost.
The Finance Ghost: So, Moe, we do actually have these businesses in South Africa. Not only do we have working internet, but we also have Pandora, as you will recall. And we have, wait for it... because we also have cars, we have our very own AutoZone. It's also called AutoZone. I didn't realise there was an AutoZone internationally. I don't know if they're related or not.
But what happened with AutoZone down here is it ended up in business rescue. I don't know the exact details. I want to say that it basically just got stretched too thin on working capital. And I suspect it was private equity owned, but I stand to be corrected on that. Certainly, the company that bought it was Metair, who do a lot of components basically for OEM vehicle manufacturers in South Africa. They are trying to diversify by moving into the aftermarket parts side in South Africa. So less reliance on, you know, Mercedes-Benz manufacturing cars here or Toyota. Not a bad shout, in my opinion, given what's going on with Chinese cars.
They bought AutoZone out of business rescue. Quite an interesting deal and opportunity. Metair has had so much bad luck, it's incredible, actually. It's hard to think of a company that has had more bad luck than them. It's almost an entire podcast unto itself. But I hope that they will make that work, because I think they deserve it. They've really been through the ringer.
The one risk that this thing faces, aside from working capital etc. - maybe not AutoZone, but something you said earlier and you've reiterated it now again, was the service point. It's all good and well to be the best niche retailer and offer the service, but if your market goes away, you go away.
Remember Musica? Remember Look & Listen? Goodbye. Gone. I think Musica is finished. Or maybe it still has one or two sad stores, I honestly have no idea. It used to be part of Clicks, I think, back in the day. Anyway, it all broke. All of it's gone. No one buys CDs anymore and they don't sell enough other stuff to keep the lights on. You can just buy it all online – it's a disaster.
And so, remember those big Look & Listens? I used to love going with my dad. You could listen to the CDs. I’m sure the Gen Zs will never understand this life, Moe - you could listen to a CD before you decided to buy it! So you could make sure that that 50 Cent song you heard on the radio is not the only song you want to listen to on this album.
That was a time, man. Going to Look & Listen. It closed at 10 pm, I remember. Very exciting.
Mohammed Nalla: Now you are giving your age away. I was saying “Clicks, your health and beauty store.” Now you're talking about Look & Listen and Musica. I remember those two. And it's really sad to see some of those businesses die – sometimes a slow death, sometimes a very sudden death.
Ghost, at the end of the day, what's so important is that it's still a business. Even if you're in a niche, you still have to run the business well. And we've only given you some good examples. I'm surprised that AutoZone down in South Africa didn't survive. Again, it's probably not affiliated with the US ticker AutoZone, the listed company up in the US. If you go and have a look at AutoZone in the US...
The Finance Ghost: Sorry, Moe, it did survive. It got bought out of business rescue. It's running today. Business rescue worked really well there.
Mohammed Nalla: Sorry. That technicality is important. But I want to just touch on one additional point: even if you are a specialist retailer and you seem to be doing things really well, you are still vulnerable to where you play in the value chain. Some examples I'm going to use here would be JD Sports. Now, not to be confused with the Chinese company – JD Sports is actually a UK-based company, and they are a multi-brand operator. They're effectively sports retail.
What went wrong at JD Sports was actually very similar to what we saw at Foot Locker, which was vendor concentration. These companies were reliant on large suppliers – Nike, Adidas. And when Nike went through that phase where they were pulling back on their supply to some of these players out there, that really hit players like JD Sports quite hard. That shows you that, yes, you can be a specialist retailer. Maybe you're getting the servicing really right. But if you are exposed to, specifically, some vendor concentration coming through there – that gives you another angle where you've just got to be careful about what some of the drivers are behind the business.
Now, Ghost, I want to land on one key point before we can then wrap up the show and look at some of the performances of these stocks. And that is what I like to look at as the prime example of a specialist retailer that has done remarkably well. You're going to know exactly where I'm going with this – it's Dick's Sporting Goods.
They've actually gone through that entire chain - they give you the service, they've got that whole experiential retail coming through. You can literally go into a Dick's Sporting Goods store in the US and play the sports that you love, test out the equipment. As a result, this company is now north of $20 billion in market cap. They've done remarkably well and they continue to grow.
I'm not going to go into all of the details because we have covered Dick's Sporting Goods in Magic Markets Premium, but that is an example of a company – in stark contrast to what I just told you on JD Sports – doing it really well.
And in fact, when Nike decided to pivot and go back to supplying some of these retailers, they were actually a fairly large beneficiary of that because, with that kind of heft and scale, they had some bargaining power.
The Finance Ghost: So, a really good example (and maybe we can bring it home with that) is the one we just did in Magic Markets Premium – Build-A-Bear.
Over five years, when we looked before the show: share price up 1,000%. Over five years. It's absolutely bonkers. Now, obviously, if you go and draw a five-year chart, that percentage is going to move a lot if the share price just moves a tiny amount, because the base it's coming off is very small. But that's just a good example of a company that has figured out how to really get the margins going - how to make the big bucks!
And, maybe my last point around specialist retail – it's always a good thing to look at. Number one: you learn a lot about business from it. Number two: it can be very interesting to invest in. But what tends to happen is the valuations tend to stay relatively cheap. There are exceptions. Sometimes global markets get a bit crazy. But these businesses don't tend to trade at big multiples because they can pull a Look & Listen. That's the point.
You can be the very, very best at doing XYZ, but if XYZ is mined diamonds… If you were the best jewellery store doing only mined diamonds, and for whatever reason you couldn't get access to lab-grown – you're done. Unless you are Tiffany's in the middle of New York, you're gone. And that's the problem with these things – if someone moves your cheese, and it's the cheese that you were selling, then it's tickets.
Mohammed Nalla: Ghost, this is a nice place to look at five-year performance. I've just gone and mapped out some of the stocks that we've spoken about. Coming out close to the top of this list is actually Dick's Sporting Goods. That's the reason why we use that as a case study.
But surprisingly, in the number two and number three podium spots here, we've got those automotive retailers. That's AutoZone, O'Reilly – they come through very, very strongly.
And then if you look at other players, we've mentioned Ulta Beauty in the health segment – that's also done quite well, coming through in the number four spot.
Who's actually disappointed here? We've got Lululemon. That's a stock that was a darling. We've covered it on Magic Markets Premium before. And again, the fact that it's now actually down over that time period is really possibly a product of the fact that the multiple got quite extended. That was priced as a growth stock, and as that multiple started to rerate to the downside, that's actually come through with some pressure.
The TL;DR on all of this is that even if you are in specialist retail – if you are in businesses that are doing remarkably good jobs at making money, at getting the margins out there – just be very sensitive to the price that you actually pay for some of these stocks.
Ghost, I think that's probably a nice place to wrap up the show. We've covered a lot of ground, and there's actually a whole bunch of stuff that I'd love to have actually discussed, but we're out of time, unfortunately.
If you are more interested in specialist retail, this week there’s a great opportunity: go and have a look at that Magic Markets Premium report on Build-A-Bear. That's been a phenomenal performer. And again, we actually look under the hood to see what's going on underlying that business. Go and check out Magic Markets Premium. It's only R99 a month.
Ghost, I'm happy to drop the show over there, unless you have some parting thoughts.
The Finance Ghost: No, I think we can call that a day for episode 250. Thank you to everyone who's been on this journey with us for a long time. Some of you have been there since the very beginning. You've outlasted certainly Musica, Look & Listen, a few other things. Moe, we'll try and show some staying power. We're nowhere near done.
Just thank you to everyone who's been here for so long. Episode 250 is quite a big deal, I think. So, thank you, Moe, for doing this with me every week since forever.
Mohammed Nalla: Indeed. I think 250 candles on a cake is quite a bit. Let us know what you thought of the show, let us know what you'd like to see on the show.
Hit us up on social media. It's @MagicMarketsPod (one word), @FinanceGhost and @MohammedNalla all on X, or go and find us on LinkedIn and pop us a note on there.
We hope you've enjoyed this. Until next week, same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
