Chit Chat Stocks - Seven & I (SVNDF) | Fundamental Analysis

Episode Date: February 28, 2021

Seven & I Holdings is the Japanese parent company of the popular convenience store chain 7-Eleven. Popular for its signature Slurpee product, the 7-Elevens in japan are seen as more modern than the convenience stores in the United States. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to us on YouTube: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Email us: [e-mail] Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now please enjoy this episode. Welcome in. This is the Fundamental Analysis Show, our Sunday episode. I will say this is going to be our last Fundamental Analysis Show on Sundays. We got something new cooking up

for the Sunday episode. It'll be very similar, but we're excited about it. Adding another member to the episode should be fun, but we don't want to spoil anything. On this episode, we're going to be talking about Seven and I Holdings, a company I don't think anyone listening knows about except for Kermit Capital. If you're listening, thank you for sharing this one. Good company. One that, you know, would be fun to illuminate on. I don't know. Yeah. Kermit definitely brought this one to our attention. And yeah, he kind of gave me my future growth opportunity, which we'll talk about. But before we get to that, Code CCM. Code CCM, yes. When this comes out, it'll be the day before the new recommendations come out. So very exciting. If you don't know what 7investing is, they do seven picks each month, long-term holdings, high growth stuff, value stuff, really a mix for everyone.

And if you use our promo code CCM, you get $10 off your first month, so only $7 to try out the subscription service. The team over there is great. Their performance has been great. You can go check that out. I don't have the exact numbers, but they're crushing the market. And, you know, what I was thinking about was, oh, I can't wait until they get their seventh member,

but that seventh pick right now is a combination of all of their analyses. It's the galaxy brain. It's the galaxy brain pick. So that's one coming together. Yes, exactly. Better. That could be the last month where you get one like that. So sign up now. Code CCM. Exactly, exactly. All right. Take it away. What is 7 and I?

7 and I, I am going to call them 7-Eleven Holdings because 7 and I just doesn't really ring off the tongue. It's Japanese, so, you know, translation. They didn't used to be, but they are the largest owner of convenience stores around the world, and they are headquartered in Tokyo, Japan. So the company does a lot, and we'll try to cover as much as we can, but we're not going to get to every segment. So we apologize in advance if we don't. Yeah, we'll try to get everything that's meaningful, but there are a bunch of smaller parts. Okay. Yes. And in addition to the convenience stores, 7-Eleven Holdings also has department

stores, super stores, specialty stores, financial services, and I believe restaurants now as well. So that's why I say we're not going to get into everything. And then there's even segments within those. So they have 71,000 stores in total. That's probably a lot more now because they just had an acquisition of speedway but just think if you're thinking 7-eleven holdings just think convenience stores and most of their business is done japan and the rest of asia but they also have a large presence here in the u.s um and i know you're probably thinking of like if you're in america you're probably thinking of the 7-eleven stores that are kind of run down it's very different in japan the stores are well kept cleaner bigger uh people actually shop there

for groceries it's not just pit stops um yeah so it's just a different culture in there it's worth going and looking at a youtube video just look up like 7-eleven in japan um because they are much nicer but i'll give some history pretty interesting history actually so 7-eleven first started in dallas texas in 1927 uh johnny jefferson green ran an ice store or an ice company where he'd sell frozen blocks of ice because at the time it wasn't super easy to get. But then he began to add on other grocery types. So like milk, eggs, cigarettes aren't really a grocery, but stuff you could get kind of, he was really building a convenience store. And it was originally called the Ice Company. Then it was called Totem Stores. And then finally it became 7-Eleven because of the

company's long hours of availability. And they expanded throughout the US in the 1950s. Around that time they also started selling fuel and this was a big turning point for them because the suburbs were starting to grow and so people would drive kind of from place to place and they'd stop there pick up stuff and they had basically signature beverages like the big gulp the what are they called slurpees is that that's 7-eleven right yes yeah yeah um slurpee day they had like self-serve coffee uh which i guess was signature to them but in the 1990s the parent company from dallas texas and by the by this time they were already really big filed for bankruptcy and sold the controlling interest to their japanese part partners ito yokota that's where you get the seven

and i the ito but now that they are a part of 7-eleven japan they have basically continued to expand all out all throughout the world and they are the largest convenience store company in the world um however because of the mix-up and the mergers i couldn't really find the date they ipo'd um it was a long time ago it's traded on the otc markets the tickers what svndf yeah so unless you i'm assuming if you're listening you don't have access to the japanese markets um if you do well that's great uh but i don't think there's many people listening to an english podcast uh but yeah, if you're in the US, if you have access to the US markets, it's SDNDF. For the ticker, it is on the OTC markets, but it's not a penny stock. Don't get confused about that. But yeah,

that kicks off the valuation. Enterprise value is about $29 billion for my calculation before adjusting for any subsidiary debt with the Speedway acquisition, which is going to come on. They are adding about $8 million in net debt with the Speedway acquisition. It's a bit complicated. a lot of additions with cash and minuses. It's not just a strict market cap company. You got to really look at the enterprise value and all the debt they have. EV to sales is about 0.51. So if you're thinking, don't think software, really low margin business. So that's not crazy low. Don't think it's a buy just because of that. However, EV to operating income is about 7.8. Now, when they add this debt, they're going to add $8 billion in debt, which will raise

that enterprise value to a higher rate. However, I think they're acquiring, gosh, what is it, like $1 billion in 2019 operating income from Speedway. So they should be adding some more, I don't know, just more profits from this acquisition. Yeah, it might not move that much, but it's going to mess with the enterprise value either way. That's pretty cheap.

Yeah, yeah, it's pretty cheap. Dividend yield is about 2.4% from what I calculated. share count very steady. If we use fiscal year 2020, which is their pre-COVID year, so their fiscal year 2021 is mainly the calendar year 2020. If we use that year's free cash flow, EV to free cash flow is about 11.1. They have $2.8 billion in short-term debt currently, $6.1 billion in long-term debt, $12.6 billion in cash, and $1.9 billion in investment securities. So when they're adding this $8 billion in net debt from Speedway, you can see that they have the cash.

They're not going to just overload a balance sheet here with no, it's not as risky as you might think adding all this debt. You also have to note, though, when looking at the balance sheet, it can get a bit gloomy because they have a finance subsidiary that can cloud their assets and liabilities, similar to maybe an auto company with a financing subsidiary where it's like, whoa, whoa, what are all those liabilities? And it's like, all right, those are just, you know, payables on some deposits and loans and stuff like that. But financial services is about, gosh, it's not the majority of the business at all.

The majority is the convenience stores, but it isn't immaterial. It's more than 10% of their profits. So if you're really looking into the company, something to look at. But, yeah, why don't you hit off earnings? Okay, so they had – I'm doing the last nine months, so this is not their typical – and it is also affected by COVID. it. So it's not their typical year, but they did $40.4 billion in revenue over the last nine months. That's down 14% year over year. Once again, you're starting to see that COVID effect there. They did $2.7 billion in operating income over the last nine months, down 10.5% year over

year. So that's about a 7% operating margin. Keep in mind, it's a convenience store, so low margin business. But $1.2 billion in net income for the last nine months. I'm not sure what the big reduction was there. I think a lot of it had to do, they categorized it as COVID-related losses. Probably write-downs. Yeah, probably. And then for the year, they're expecting revenue to stay down 14% year over year, so they still have the fourth quarter coming up to report. And they're expecting operating income to be down 19%. They do pay a dividend, as you mentioned. I think I had a hard time calculating the yield, but yeah. It's the currency adjustments, and then you look at what

they're paying on their shares based in japan which have a different share price uh would you did you have 2.4 percent or no did it look it looked i don't know because i didn't have the japanese share price and it said it gave the dividend number in the ship in uh japanese per shares so um i mean yahoo finance had like 2.4 percent i guess i think i want to invest solely on that thesis no yeah make sure you confirm what we have here but i think i went and did it like from the base, like the whatever, doing that, see what they pay out versus the market cap, you know, kind of deal. And you got 2.4?

Yeah. So I think they're right. All right. That's all I really had for earnings. It's largely affected by COVID, but this is a company that generates a ton in sales. I mean, the largest convenience store provider worldwide. So as Brett said, this is not a penny stock.

It is a big business. Big business, yeah. Look at those 2019 numbers, too. You know, COVID hurt them a bit some places, especially Japan. Yeah, and you're going to have to sort out how much of that is here to stay, how much of the commute will be reduced, because they are a company that benefits a lot from commutes. Obviously, you know, you're stopping at convenience stores to fuel up on gas or something like that. So I guess that's up to each investor to make their own judgments on it. But normalized revenue and operating income is a little higher.

Yeah, yeah. And then one note, when you're looking at the earnings, the Japanese convenience store revenues are more meaningful because they have higher operating margins. I think they don't make up the majority of sales, but they actually make up the majority of profits. So that could change with the Speedway acquisition, which we've mentioned a few times because it's so big. But just think that, you know, the Japanese market is the most important for their profitability currently. All right. We'll take a quick break after this and then get back to the second half of the show. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real time alerts. Oh, like this one.

So you don't have to worry about malware or when your kid downloads a song from a shady link. and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply welcome back uh first up is digging trenches so this is the moat rating what do you think zero one two or three four seven eleven yeah Yeah, that's hard to distinguish because it looks like they're kind of becoming this roll-up of convenience stores. So as far as market share goes, they're pretty prominent and they probably benefit from economies of scale. But at the same time, there isn't that much brand power, I don't think, at least here in the U.S., but deciding between convenience stores.

It's a small amount. It's not huge. Small amount for 7-Eleven because you know about the Slurpees and stuff. People do like that, but it's not like a giant thing. Yeah. Yeah, I'd agree. Maybe it's bigger in Japan where you are going to 7-Eleven for the actual brand because of the difference in sort of store quality. Yeah, I think it's pretty strong though because like with convenience stores, it's all about the locations.

Gas, it's all about the locations. So when you look at that, I think it's pretty strong. There's a lot of economies of scale here. Yeah, agreed. Probably two, two and a half. Yeah, and like it's not much of a pricing power or anything. It's more of a no one is going to disrupt them. Mom and pop is not disrupting those.

Yeah, not at all. I mean maybe it's too global. It's too big. It's really hard to create a global convenience store. I mean, this took almost 100 years to build this kind of enterprise. So what about further reading? What are you looking at? I mean, there's a lot with this one.

There's a ton. Probably the financial services have a bit of anecdotal stuff that we're seeing from Kermit Capital giving us some information on that. But understanding how those businesses work because they got like five or six finance subsidiaries. So I don't know if this is generating that much profits for the business. It is meaningful. and you got to understand how steady those are over the long term yeah i'm looking at the they have a premium brand kind of like their own you're talking about fresh food 7-eleven i think it's called seven premium or something like that um so i'm curious how much people are really looking at

that how much people care about that um if it's like the kirkland brand for costco um and then the other one would be the e-commerce part. So they've had a lot of delivery. They've seen a huge boost in delivery from COVID. And I'm curious if that is just stealing market from people who would have been shopping in person, or if that's like a big switch and kind of a catalyst for growth moving forward. Yeah, that is interesting. Luckily, they are powered by DoorDash. So they're not incurring those costs. I think that's a great partnership. But yeah, those are definitely, I mean, I don't know that it seems like if they can replicate the 7-Eleven brand, you're going to get with this in the future growth opportunities and bring some of that to the United States. Get that because when we think about 7-Eleven, we kind of think dirt, grime, get some beer.

Yeah, it's not great over here in the U.S. Yeah, and maybe that's just our geographical location in the Pacific Northwest. Other parts of the country could be better. But if they can change that over a decade, that could, I don't know, that could be very impactful to the business. But next up is going to be future growth opportunities. What do you have? I would say revamp U.S. convenience stores. So it does have that stigma of being dirty, kind of gross.

It's the place on the corner where you don't want to go, but if you have to get something, you will. It's convenience. Yeah, right. But if they could sort of revamp that into something that's cleaner where maybe they have electric vehicle charging and it kind of – They are doing – that's not a hypothetical. They are doing that. OK. Yeah.

So EV charging and then you couple that with like fresh food, fresh beverages. They are doing that as well. Like just – I don't know. Revamping the brand over here in the US and that – almost like a Target-like turnaround. If they can go for that, that would be huge. I was thinking the same thing. The Target-like turnaround could be big. that's a decade long process. So you got to be patient with it. But I think the thing is called

evolution. They opened a few in like New York, DC and one in maybe San Diego. These are only a few locations and it has to really scale to a thousand or so or more if it's actually going to be meaningful. But the comp sales that they showed were really strong. You can look up the concept on youtube it looks pretty good but in reality like just getting a remodel is you know just making it look a little bit nicer will be better yeah you know what i mean it's not necessarily long ways like you target the one that comes to mind every time and mcdonald's too mcdonald's really helped with that right yeah mcdonald's had a lot of store turnarounds as well what about you what's your future okay so the big one is the acquisition of speedway so speedway is one of

was one of their biggest competitors in the US convenience store. So the way that works is that market is highly fragmented. Majority of operators are actually sole proprietors, I believe, or smaller operators. So 7-Eleven before this was the number one, had the most stores in the United States, but they only had 6% or 7% of the market. Speedway had about 3% or 4%. So they're adding a lot of stores here. Huge purchase of $21 billion at face value, but $12 billion pro forma, which I'll explain when you account for they're claiming they're going to have tax benefits of $3 billion and they're going to do sale leasebacks, which is a little bit confusing to hear about in audio form. But basically a sale leaseback is when, okay, they're acquiring Speedway and then they

lease back the assets for like $5 billion, which means that, you know, it helps them with all the land that Speedway owns and stuff like that. They're able to take advantage of that, lease it out for a long time period and reduce the cost they have to pay for that $21 billion. Speedway owns about 3,900 convenience stores in the US. Again, they own 70% of its real estate, which is, I believe, again, sale leasebacks are, I don't know why I can't understand it very well, but the owning the real estate will help them just with the acquisition here. It gives them close to now 10% market share of convenience stores in the U.S., which will help them with their delivery, you know, rewards, membership push,

which is something we're probably not going to hit on too much on the show, but it is part of their thing with that revamp of the U.S. stores. They do like a membership for fuel rewards programs, probably, you know, with Slurpees and stuff like that. And then I would note that only 10% market share means that there's still a lot of room to roll up the market. They've been rolling it up for a decade or two, but they're not even close to saturation.

Yeah, and that's kind of my highlight, which I'll dive into, is that COVID hurt them pretty bad, but it sounds like it hurt their competitors more if you're judging that off the Speedway acquisition. Convenience stores were damaged by lower commutes, but 7-Eleven had the balance sheet to endure that. And so we talked about it.

In these industries that were damaged by COVID, it there's going to be consolidation coming out of it and they could benefit from that and get roll-ups basically at a lower cost uh and kind of steal market share that way um i guess being the survivor in this case might be a huge advantage for them yep yep yep and what about your low lights low lights for me sometimes i do this like sometimes i look at certain parts of the business like under the hood i'm like okay that's really good if that can kind of become a bigger part, that'd be great. But then I ended up missing the forest for the trees and realized this is still a convenience store company, very low margin. The roll-ups are possible. They could

be the big beneficiary from COVID, but it's a fragmented market and it's also very saturated and it is still hurting from COVID. You don't know how long that's going to last. If there is this big work from home trend what happens to volume without commutes so i don't know you could you get unlimited pitches and investing i this just isn't something that i'm eager to swing at yeah all right i'll hit my highlights uh you know again we think that the misunderstanding by western investors that 7-eleven is kind of the same in japan it has a better brand over there um that can be helpful i think that is a highlight um it's not a company i i could be wrong but it's a company i don't think many people even know exists yeah no i mean that's pretty much reflected in the

multiple that's true that's true uh financial services part looks interesting especially bringing that over to the united states where they're doing the digital wallet stuff not sure how much that can help or work but it hopefully will increase their margins if they can get a few rewards program that's interesting um i think they have a few million members already which is good uh you know getting that that's always good to have a rewards program if you're kind of a convenience store something like that i mean everyone really has to do it um they have the balance sheet really the only one in the industry with the balance sheet to scale up and absorb speedway in a healthy manner um with the consistency of the industry again the covet thing could be a

you know a red herring but they're going to be able to absorb speedway fine they have the cash to do it um kermit source though in japan said uh and i won't reveal who it is because you know we don't need to say he says i don't withdraw cash at banks i withdraw at 7-eleven that's interesting yeah that you know the financial stuff is really actually important in japan uh it's a little bit of a black box to us because we haven't been there but i think it's interesting that they're investing in ev charging stations that's smart revamping the scores accounts the u.s is also smart a lot of good things to like here uh low lights though convenience stores again they're not high margin they can be affected by fuel prices and oil prices they have a lever balance

sheet um and it's low margin and capital intensive which makes you nervous it's you know those three combinations i get this business is steady but that always makes me a bit nervous um it's hard to find much optimism for a huge share price appreciation like agreed you know that's kind of the big thing where the low light here you know unless they pull an auto zone or something and meaningfully reduce share count over the next decade that could be a way uh but we'd have to see you know maybe we're underwriting the roll-up maybe they could get to the 20 market share in the u.s um i don't know all right let's get to the ending more or less interested anything else close i'm gonna say less uh i don't think there's a whole lot of operating leverage in this business

I mean, margins are still – they're going to be low at every convenience store. I mean, just a little bit. It's not going to be like doubling margins. Yeah. I guess it's just not something that gets me excited. I'll just leave it at that. I'd say I'm more interested just because of the multiple and the – it's tough. If you're going for like a multi-bagger strategy, if you're going for a 100-bagger strategy, probably not for you.

but similar to Charles Schwab I think this is something that you look at it and you think is this going to be here in 50 years and you're like well the moves are making probably and it's really hard I think it's pretty hard to disrupt so and with the speed of acquisition they say they have a clear path to get to like five billion dollars in operating income if they continue to do that things could work out they continue to roll up the story sounds great but the capital like that gets me more interested but i don't know i just it's i think there's maybe better opportunities out there for someone that wants to take on more risk but again if you're someone that loves charles schwab i think you would love this i don't think

it's going away for 50 years but that doesn't mean it's a great investing thesis yeah not i don't though it's permanent but that doesn't mean you're gonna get a that's not gonna get better than index performance necessarily not necessarily not necessarily but i don't know yeah but kermit sorry if we uh weren't super bullish on it because uh but i mean there's definitely there's a lot to like i just maybe maybe too hard pile because a lot of the business is done internationally and I don't quite understand the brand around there. I think it's understandable, though. You know what I mean?

It's different than like Sony. When we were looking at Sony, we were like, hey, I have a semiconductor business, not up a rally. But I think we could, I mean, outside of the financial services stuff, not getting a peek at it. I don't know. But it's just not exciting. Maybe that'll make it a good investment,

because as we said the same thing about Schwab, and it's done fantastic from a low multiple. But, yeah, not too exciting. Well, that's going to do it. We good? Anything else? No, I think that's it. Okay.

Remember, as always, use our promo code CCM at checkout to get $10 off your first month at 7investing. Remember, Ryan and I are general partners at Arch Capital. Anything that we say, or excuse me, clients in Arch Capital may hold securities in, well, may hold positions. We're still working on this. May hold positions in securities discussed on this podcast. We are not financial advisors.

Anything we say on this show is not formal advice or recommendation. Thank you all for listening. Stay tuned for next week for the exciting revamp of the Sunday episode.