Investment Thesis

TRS's share price last week was on par with its IPO pricing in 2003 (i.e., ~$2.00/share).

Upon IPO there were 24.1m shares on issue (so market cap of ~$48m, which is not that much lower than the level recorded last week (~$58m)

Yet, today, the scale of the business is a multiple times greater than it was 15 years ago:

No of stores:
- Today:  350
- @ IPO:  100

Sales:
- Today:  ~$800m
- @ IPO:  ~$163m

Gross Profit:
- Today:  ~$345m
- @ IPO:  ~$80m

EBITDA:
- Today:  ~$44m
- @ IPO:  ~$10m

EBIT:
- Today:  ~$25m
- @ IPO:  ~$7.5m

EPS:
- Today:  57cps
- @ IPO:  ~22cps

  
Of course, readers with a keen analytical eye will have gleaned from the above information that there are some adverse financial metrics to be found when comparing operating performance of the company today, with that at the time of its listing 15 years ago.

Specifically, the EBIT margin for the TRS Group is today ~3% (FY2018 result), compared to 4.5% in 2003.

While EBIT/Ave. Number of Stores is roughly unchanged ($71,000 per store in FY2018 vs $73,000 per store in 2003), this masks what has happened between then and now, namely a rapid deterioration over the past 8 or so years, after an impressive start to listed life:


(Note: The 2019 (F) figure is derived from management's first-half guidance combined with my own modelling for the second-half)


It warrants drilling down into what's happening here and into the drivers of this deterioration, because, for sure, it can't continue without putting the viability of the entire company at risk:

The reason I investigate this on a per store basis is because - based on precedent over the years with other bricks 'n mortar retailers that approach maturity  - I have an inkling that the deterioration in TRS financial performance in recent years has left a meaningful number of stores operating at a loss today.  

And that the path to restoring value is to shut down tho se loss-making stores.

So then, looking at TRS's per store performance, at discrete P&L line items:

Starting with the top line:  

Sales per store has been an problem for TRS in recent years, having declined by 11% since the 2010 peak:




And, to compound this, the Gross Profit on each unit of sale has declined, too, resulting in Gross Profit Per Store today being a whopping 17% lower than its peak (2008):




And then there is the actual costs of physically running each store (mainly store staff costs and and leases), the Store Costs (i.e., unrelated to CoGS) which, have been well-controlled in recent years, but not sufficiently so to offset the fall in Gross Profit:




This all suggests to me that there is a wide variation between TRS's best- and worst-performing stores, which is not uncommon after an aggressive store roll-out program such as this (these guys expanded their store count by 3.5 times over a 15-year period (i.e., a CAGR of 9%pa)).

The first stores to get developed are the most attractive (location, demography, customer base, supply chain logistical proximity etc.) and the stores that are rolled out in the latter stages of the process tend to be the more marginal ones... which is all good and well when the consumer environment is on the boil, but when it slows - like it is now - then those sub-optimal stores are invariably found wanting.

Which is precisely the situation at TRS today, I am convinced.
And what has driven the share price down to near all-time lows.

Why I have started buying shares in TRS in recent days is because I believe the point of maximum pain is at hand:

$800m of Revenue being represented by just $50m in Enterprise Value.

You don't come across that sort value proposition very often.

The operating leverage is acute: it requires only small wins in the cost battle for highly significant uplift in profitability.

Until now management could afford to "do nothing" because the business isn't on its knees, thanks to the fact that it has no debt (despite all the jawboning, it looks to me like "doing nothing" has been the very situation!).

But they either do something now, or someone else will come along, acquire the company and do it themselves.

One of TRS's redeeming feature is that its balance sheet is in the best condition it has been in for years, so it can afford to fund the restructuring exercise that is sure to occur over the next 12 months - whether conducted by the current management, or a different one appointed by the company's new Private Equity owners.



PS.  And its not just the in-store level  that there are low-hanging gains to be made (e.g., terminating unprofitable stores, improving merchandising, re-negotiating lease terms, staff rostering, etc.); the admin cost base is currently in excess of $40m today, having more than doubled over the past 15 years (corresponding to 5%pa CAGR, which is well in excess of inflation).

There are sure to be $1m or $2m or $3m in costs that can be pulled out of the fixed over heads (starting with management salaries, I should think, which are offensively high given the dismal performance of the business in recent years).  And given NPAT this year is likely to be less than $10m, a couple of million from lower fixed cost overheads will make a meaningful impact. And that's even before chopping off the tail of unprofitable stores.