I agree with your conclusions regarding the poor free cash flow generation. I mentioned an increase in working capital in my initial post, but more specifically I was referring to an increase in inventory.
One of the qualities I look for when evaluating a business as an investment opportunity is scalability. A quality I believe SNL is lacking. I came to the conclusion the blowout in inventory was due to the rollout of new stores (as you highlighted in your 'point 1'). So, as SNL continues to roll out stores, the amount of distributable cash available to shareholders will be stagnant at best, and declining at worst.
Ironically, SNL's free cash flow seems to have an inverse relationship with profits. Shareholders will only benefit from the SNL's true cash generation once it's expansion plans have ceased. At this point, the market will probably price the stock ex-growth and investor's will probably have an opportunity to buy SNL at a lower valuation multiple, but a higher free cash flow yield.
Regards
Gralynchett
SNL Price at posting:
$2.35 Sentiment: None Disclosure: Not Held
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