BBB Foods Prioritizes Growth Over Profits In IPO Filing (Pending:TBBB)

BBB Is Growing Revenue And Profits

BBB Foods Inc. (TBBB) has filed to raise $300 million in an IPO of its Class A common shares, according to an SEC F-1 registration statement, although the final figure may differ.

BBB operates a large chain of “hard discount” grocery stores in Mexico.

The firm is growing quickly but operates in a low operating margin environment and is prioritizing growth over profits in the near term.

I’ll provide an update when we learn more about the IPO’s pricing and valuation assumptions.

What Does BBB Do?

Mexico City, Mexico-based BBB Foods Inc. was founded in 2004 to develop a network of discount grocery stores that has since grown to 2,250 stores across Mexico.

The firm’s stores serve low-to-middle-income households in Mexico with a limited product assortment that focuses on daily grocery needs while benefiting from lower prices from suppliers due to product concentration.

Management is headed by founder, Chairman and CEO Mr. K. Anthony Hatoum, who has been with the firm since its inception in 2004 and was previously a Managing Director at Merrill Lynch global private equity group where he covered BIM, the Turkish hard-discount food retailer.

The company’s primary offerings include the following:

• Branded products

• Private label products

• Spot products.

As of September 30, 2023, BBB has booked fair market value investment of $72 million from investors, including Quilvest Capital Partners and others.

The company operates with a “hub and spoke” structure of approximately 150 retail stores for each distribution center and with local management.

BBB has a 100% return policy with no questions asked and no receipt required. Management believes Mexico has a market opportunity for up to 12,000 additional BBB stores.

Sales expenses as a percentage of total revenue have fluctuated in a narrow range as revenues have increased, per the table below:

Click to enlarge

(Source – SEC.)

The Sales efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales expense, fell slightly to 2.5x in the most recent reporting period:

Click to enlarge

(Source – SEC.)

What Is BBB’s Market?

According to a 2023 market research report by ResearchAndMarkets, the market in Mexico for food & grocery (F&G) products was an estimated $232 billion in 2022.

The food segment represented nearly $174 billion, or 75% of the total market.

The F&G market grew by a compound annual growth rate of about 5.2% from 2017 to 2022.

Also, the growth in the F&G market was due to rising gross domestic product and increased consumer confidence.

However, some areas within Mexico have since undergone unrest due to drug cartel violence, hampering growth in the process.

Major competitors within the Mexico F&G market include these companies:

• Walmex

• La Comer

• Chedraui

• Soriana

• Others.

BBB Foods Inc. Recent Financial Results

The company’s recent financial results can be summarized as follows:

• Growing top line revenue

• Increasing gross profit and gross margin

• Higher operating profit and cash flow from operations.

Below are relevant financial results derived from the firm’s registration statement:

Click to enlarge

(Source – SEC.)

As of September 30, 2023, BBB had $58.0 million in cash and $1.1 billion in total liabilities.

Free cash flow during the twelve months ending September 30, 2023, was $89.2 million.

BBB Foods’ Initial IPO Information

BBB intends to raise $300 million in gross proceeds from an IPO of its Class A common shares, although the final figure may be higher.

Assuming a successful IPO, the company will have three share classes, with Class A and Class C shares being entitled to one vote per share and Class B shares having 15 votes per share.

The founder of the firm will retain approximately 45% of voting power immediately after the IPO, so he will have “significant influence over matters requiring shareholder approval.”

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

The company is also a “foreign private issuer,” which will exempt it from complying with certain corporate governance standards of the New York Stock Exchange and enable management to disclose substantially less information about the firm’s operations and financial results.

Leadership has said it will use the net proceeds from the IPO as follows:

The principal purposes of this offering are to allow us to repay in full the Promissory Notes and the Convertible Notes, obtain additional resources to support the development and growth of our business, provide us with greater financial flexibility, create a public market for our Class A common shares and facilitate our future access to the capital markets.

(Source – SEC.)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management said the firm is:

“subject to several legal proceedings, including civil and labor claims, which we generally believe are common and incidental to business operations in Mexico.”

The listed bookrunners of the IPO are J.P. Morgan, Morgan Stanley, BofA Securities, Scotiabank and UBS Investment Bank.

BBB Is Growing Quickly

TBBB is seeking U.S. public capital market investment to pay down part of its debt.

The company’s financials have produced increasing top line revenue, higher gross profit and gross margin and growing operating profit and cash flow from operations.

Free cash flow for the twelve months ending September 30, 2023, was an impressive $89.2 million.

Sales expenses as a percentage of total revenue have risen slightly as revenue has increased substantially; its Sales efficiency multiple fell to 2.5x in the most recent reporting period.

The firm currently plans to pay dividends according to Board policy, and BBB is subject to various restrictions and requirements under Mexican and BVI laws.

TBBB’s recent capital spending history indicates it has spent substantially on capital expenditures as a percentage of its operating cash flow.

The market opportunity for “hard discount” grocery stores in Mexico is large, and management believes there is significant expansion potential for up to 12,000 additional stores within Mexico.

Risks to the company’s outlook as a public company include substantial competition from major retailers and other independent operators.

The BBB Foods Inc. growth trajectory has been impressive, but its operating margin is characteristically small, while the company has not turned a net profit in the last several years, likely due to its prioritization of growth over stability.

This will likely continue based on management’s comments about the potential for market growth within Mexico, so prospective investors will need to weigh the trade-off of longer-term market size gain versus short-term lack of earnings.

Expected IPO Pricing Date: To be announced.