Marcus Hansen (4:45)

Absolutely. And thanks for having me again. I love the KC stuff. They continue to do great and congratulations on their S&P 500 entry. Yeah, look, there's nothing better than a hometown hero story. And I say that in sincere form in the sense that I cover retail consumer. I've looked at the large names here in the us all the names from the Walmarts to the Costcos. But really if you want to go back and understand the novelty of the retail formats we know today in the US There is one name which a lot of people don't realize out there unless you speak to the guys who followed the leagues going back many days. There's a gentleman called Sol Price who was born and raised in the San Diego area and basically created what we know today as the modern club store or wholesale store as they called it originally but now called club store. It's basically a membership retail where you as a consumer pay an annual membership fee for the right to go and shop at this place because it sells you a limited range of products but at great value prices because they use bulk purchasing to get cost savings and Then is very good at honing in on the stuff that you really need, but more importantly giving you interesting discounts and then occasionally adding new product areas but also giving you things like samples and then adding services like vision or dental services which when you think about what you're paying, you're getting a lot of value for money back. But then on top of that there's a social factor which is this idea of giving you great quality value products at a good price while at the same time investing in the employees and the customer area and growing this on a sustainable fashion. The great thing about Sol Price and a lot of people don't realize this, you can trace his impact on some of the major names we know today. Sam Walton in his book talks about the one guy who basically opened his eyes a bit to how he should be running business and that was Sol Price with his then business called well Fedmart. But then he moved on and started Price Club. This is the guy who basically merged later with Costco and created what is today's modern day Costco and also influenced the guys at Home Depot and Targa who bought some of the old Fedmart stores later. So the retail giant names we know. But here's this gentleman and now we're talking about a business which is in its third generation. The grandson is running the business today. So the DNA is in the family except for those who are wondering about this story. So Pricemart is listed in the US based out of San Diego, does all its business in Central America, Caribbean and South America and effectively is replicating the Costco model across those regions and is doing very well and has a Runway of growth I think and those who look at it which is decades in the making. So this we believe is a fantastic compounding growth story for the mid future and is one of these small caps that will become a bigger player over time.

Matt Russell (7:26)

It's really hard to overstate the impact of Salt Price. I think you can even look at Amazon and the prime model and what that represents from membership perspective. It just has extended so far and it's a name that should be known by pretty much every investor out there. On the Pricemart origin story mentioned they were working outside of the US in these emerging markets. Was that a deliberate plan? I'm just curious about the origin story and how it differs from what eventually became Costco with Price Club and the decision to have a dedicated em focused brand.

Marcus Hansen (8:01)

Yeah, so basically the story goes back to the 1950s. He created this company called Fedmart and this was based on walls by the way there's a book out there about sole price, it's no longer in publication, so it's become one of those cult books that's gone up in price. So I'm probably talking my own book here. I own a copy of the book, so it's going to go up in value as. But it's very interesting because a lot of people who are in the industry will say, oh my God, this is one of the ones you have to read along with Sam Walton's own biography. But Fedmart was initially started, and back then it was a $2 annual subscription and mostly geared towards federal employees who generally were on lower salaries to come in and buy products. And here was the other revolution that sold price initiated at the time was this idea of mixing grocery with general merchandise. Generally back in the 50s, you went to a grocery store to get grocery and then you went to a department store or similar type thing to go and buy clothing. And they weren't mixed together. So this idea was also revolutionary, which, if we look today at the big ch, that's what drives things. The company eventually was listed and then there was a German family owner who came in and bought it. Eventually had a bit of a falling out with Sol, who was managing the business, and he left in 1975 and then he went off with his son and started a business called Price Club, which is the origins of today's Price Smart. And this was the idea of this club store which would hone in on about between 2,000 to 3,000 SKUs. So this is individual items you sell. Now, it sounds like a lot of. But if you think about your average Walmart, you're talking about 25,000. And if you go to a general big supermarket, they'll be carrying maybe 30, 40,000 items. Think about all the ranges of ketchups and mayonnaise and snacks you get in a Club store. Generally when you're going in, you'll have two or three national brands, maybe two sizes of the packaging, not the 10 different ones you get anything. And then very often you'll have a private label in there as well, which is their development of a cheaper version. And this is where the club stores focus in on the idea of this. If I buy in bulk and I sell limited amounts of SKUs, I can get those at a cheaper price and then offer that cheaper to my customer coming in. And there starts to sort of flywheel of why you'd want to join and become a member. Coming back to your question about the Costco side price Club, then IPO'd in 1980. And by the way, Solprice was 60 years old at this stage, so he wasn't retiring. This is a guy who wants to work his entire life. He's a retailer at heart. And about this time in the early 1980s, a gentleman called Sam Walton who has Walmart starts noticing this is club store thing where people are paying to go and shop and it keeps growing. Maybe I should go chat to these guys. At the same time Costco is coming into existence. What's interesting about Costco is the main founders behind Costco started their careers at fedmart. Here you're seeing the relationship come amongst the different things. Sam Walton actually was interested in buying Price Club and Solprice said not interested in selling. This is My Baby eventually ends up merging to form what we call today Costco. Though you have some older listeners here from the 80s, they'll remember a company called Price Costco because you used to get your little card and that was the name on it. And then later in about 1984, the Price family, and you got to go back to the 80s, Costco was very big in the US or growing in the US, going into some developed markets outside, but had some individual stores in Central America where they'd gone and tried and see what happens, wasn't really going anywhere. If you think about in terms of revenues, moving the needle was taking up more management time than needed. And so those assets, and at the time, I think there were two or three stores, were spun into a company called Price Enterprises, that then was spun out from Costco and taken private by the Price family, which became the original framework for today's Price Smart. And then Pricemart was then, I think founded in 1996, technically. So this all happened in 93, and the first store was in Panama, the country of Panama, and then would expand further forward. But that was the link. And there is a link today still with Costco. They actually do buy some private label, Kirkland brand. So Kirkland, for those who don't know, is the Costco private label brand very successful? I think at Costco it's about 33% of the products they sell. And again, the whole idea of a private label is you can offer the same quality and taste or feel of a branded label, but obviously at a discount of anywhere between 25 to 30%. So not messing around with the quality, but the attractiveness that you control that product and it's a higher margin business. And so they sell some of that, they do some of their own. But there is this goodwill factor between them, the attraction of the time of setting up and why he realized Price Mark could be interesting is that in the markets they operate, which are Central America, the Caribbean and South America, there are no other club stores, there is no competition. And then going back to the Walmart story, Sam Walton, not to be bitter but said, all right, I can't buy you. I'm going to start my own thing. It's called Sam's Club. And that's why Sam's Club came around being today as well. It's a very interesting story. So this is why the allusion to the idea is this is the Costco of South America has lots of the elements to it. But when we think about today's Costco, it's interesting that Sole Price and the family, the price side really were main contributors to developing that concept and the success of what it is today.

Matt Russell (13:03)

Absolutely. And I know Jim Sinegal, the popular Costco CEO for a very long time, credits Sol Price with a lot of things and mentorship. And you mentioned one of the questions that I had there around private label and just some of the approach that Price Smart takes and how it might compare to a Costco or a Sam's Club. When you think about memberships versus merchandise, is there anything that looks drastically different from a revenue perspective or operational perspective versus what the club model in the US looks like?

Marcus Hansen (13:36)

Yeah. So first and foremost the markets they operate in, whereas Costco is predominantly a North American business, these guys are operating in about 12 odd markets across a region which has a bit more volatility to it in terms of both differentiation of per capita income, population, political volatility and then also in terms of foreign exchange volatility. So what's interesting here is in a lot of the Caribbean islands where they originally really started out, and some of the Central American countries there are dollar based economies. So about 50% of their end revenues are in dollar based economies. The rest are with some more volatile local and they don't really do much hedging. They really take a product which is priced in US dollars and then sell it in the local currency. Interestingly enough, and this tells you the strength of the reputation and the brand, very often when you have some sort of wild move in a local currency, so to give you an example, Today there's about 60, 61 stores, 11 of those are in Colombia. And the Colombia local currency has been a bit wild for political reasons, oil price related and so forth. When there is crazy inflation, the local moves there is a near term impact. But Very often they keep the pricing as is and the customer keeps coming back and buying. And so the smoothness on the numbers of the others and sometimes they'll raise prices for certain moves in FX if needed. But it has almost based on the numbers, we're seeing de minimis impact in terms of revenue. And this is maybe coming back to giving you an idea of the size of this company. We're talking about a company right now which has a market capitalization of just over $5 billion. They do just over $5 billion of total revenue. And so this is not the biggest thing around. We're talking about a couple of hundred billion of revenue at the Costcos of the world. But they have a customer base. So these are paying customers, members. That's the same thing. You can only shop here if you're a member. They have two tiers of membership. It varies by country, but the average price is $45. The higher one is $90. That's lower than what we say here in the US when you're buying a Sam's Club or even a Costco. But for local emerging market, that's a high number relative. Really what you're appealing here to is, and this was part of his thinking and going back to the origin is this growing middle class that you're seeing emerge in these emerging markets which really you're thinking about the top 10, 15% of the population which is growing over time. But that population base is the ones which are seeking very similar shopping experiences to what they've seen. And these are the people who come and travel to the US I've spoken to customers of this company and actually spoken to the management. A lot of people who send their kids from South America to school in the U.S. experience us they come back, they get corporate jobs, they want exposure to US products that they saw in the US Come for vacation, visiting family who are over here and very often people who've come and worked in the US to make some money and go back, love the experience of going to their Walmart, going to their Costco, going to BJ's and all this stuff. And they love the benefit of the product and they're getting good US style quality products. Again, most of the competition tends to be local SMEs, local supermarkets, where the quality can be different, the cost can be different and so forth. You're paying what you're getting. You're getting access to stuff from the US that you may not find locally. The nature of how you're shopping as well, in terms of the Big box. The style of the box is air conditioned with parking. It's safe. You're getting good value for money. And as you mentioned, one of the attractions of, and this is what they use here as well, of the club store is if you're paying the premium rate, you're getting some added services, whether that be two or three checkups on vision. Maybe I need to get to my club store and get my eyes fixed as well. But you get two or three free visions a year, maybe some dental checks. In some of their markets they're offering a basic doctor checkup in some regions of the world that is both expensive and hard to come by. And this allows the cost of doing that locally. It more than pays for the actual membership. So that's seen as an added benefit. And then on top of that you have some added things that they're seasonal products they come up with and they're always constantly innovating and bringing new things in. So that equates to a similar story. If you pop off in a Costco today, why are you going to Costco? Firstly, it's going to do your regular shop. Secondly, they always have stuff you're trying, which is always cool. I mean, you could do a whole meal if you walk around the place. I remember my first visit to a Costco in America. I was like, I love this place, it's great. And then on top of that, maybe you get your eyes checked, get your dental check and it's all in one quick trip. A bit similar actually to what we talked about, the KCU stories. The power of convenience at the right price is probably one of the single most biggest drivers of retail demand and particularly that recurring customer that's going to come back.

Matt Russell (17:59)

I just had a visit to the tire center because I needed new tires and went to Costco. You see the gas lines there, particularly when gas prices are where they are. A good club membership pays for itself many times over. And it certainly seems like that's the approach that they take in terms of the footprint today. And maybe tracing it back in some way you mentioned it started maybe more Caribbean focused.

Marcus Hansen (18:23)

Other than the Caribbean. Yeah.

Matt Russell (18:24)

What has that looked like in terms of build out to the 61 today? Have there been periods of material expansion or even thinking about where they've been over the past couple of years and their interest in increasing the footprint or exposure to different geographies? How would you frame that?

Marcus Hansen (18:41)

Yeah, so most of the early stage of the expansion really so in the 90s was really the Caribbean. And this was interesting from A combination of. You have three types of customer base in the Caribbean. One is you've got the expat community which is growing and I don't have the exact number to hand, but the number of Americans who are retiring outside of the US particularly to Central America and the Caribbean for a lifestyle that's both a luxury lifestyle but even a cost of living lifestyle. The weather's nicer, the facilities that are available. And you're seeing this with the growth in terms of medical stuff which is being moved. Panama is a great example. It might be the largest percentage of American community along with Costa Rica living outside of the U.S. in Central America, easy to get back and forth. There's airports if you have to come and visit and people like it because family come and visit. So that customer base is looking for American style shopping. And then on top of that you have a tourism industry which is looking for good quality product at a scale that they may not be able to find just from local providers. So the Caribbean plays very nicely that think about all the high end hotels or even mid level hotels which are driven primarily by American tourists. So it was an easy symbiotic thing to do. And then finally the Caribbean, most of the countries will have some sort of dollar based economy. So from an ethics perspective, very easy to manage and set forth. And then really the next thing was moving into South America and the biggest single move they did there was going into Colombia, which I'm going to double check my numbers here, but the Columbia story is about I think 10 years old now. Colombia for those who don't realize is a pretty sizable economy. It's overtaken Argentina. I think it's the second or third largest economy now in South America. In terms GDP, pretty large population, we're talking about 45, 50 million people, young, dynamic, growing. It has a went through turmoil with civil war. There was obviously the drug side of things, but along the way has really emerged as this go to place, developing technology, becoming an important consumer market as well. And there the idea was moving into this idea of the growing middle class in South America who a have had experience with the U.S. like I mentioned, these are people who've come and studied in the US to get their degrees, have gone back to form businesses or work there, send their kids who come back and tell everyone about it and or have come here as tourists and spent some time and realize there's this opportunity. But the club store idea doesn't really exist and it's the right pricing, so 45 bucks, you get this like I Mentioned if you move up to the platinum, which is the high end one, that's $90, that gives you some actually cash back as well. The ability for a system to run that had to come from outside because internally that concept wasn't there. And like I mentioned, the actual nature of the store, the big box, how it's set up, if you go to a price model, it's a very similar layout to a Costco. Nothing too fancy, but good lighting, big wide aisles, everything is clear, you can be in and out very quickly because you can find what you're looking for. You don't have to sit there and figure of the 10 ketchups, which one do I want? There's one or two. And by the way, have you tried our private label one, which is on average 25, 30% cheaper, generally has the same attributes and that drives that interest as well. And you can only find that there as well. So once you're hooked on the private label, you go back for it and then a good mix, like I said of if you include staples, food and fresh food. They're doing very good on the fresh food side, by the way, expanding very nicely. Chicken is a big one as well. They were commenting on that. In the recent numbers you're talking about, 45% of the sales are related to food and the other 55% is general merchandise, which is a combination of clothing. And then you get seasonal products. So around gardening or you have the different holiday seasons, particularly around Easter, Christmas and various other things where you bring those things in and you bring a lot of American stuff down there, Halloween products, spreading the word of all the famous for holidays we do here, that is resonating well in South America. And then I'll give you a little teaser here, the next step in South America. To give you an idea of the 61 stores today, the biggest single market right now is Colombia. They have about 11 stores there. The nature of the footprint, if you look at the average consumption versus the population potential and the targeted market, Colombia itself, and they don't give you a guidance on this, but very much fits with their algo, could easily be about 25 stores. So even if they don't grow in the other markets, you can see the growth, but they're obviously growing in the other markets as well. But the next one is Chile. Chile further south is from a GDP perspective, the second largest economy, but a slightly smaller population. If you haven't been to Chile, it's very developed. It actually should be up there with diem has a fantastic solid Banking system, pension system, saving system per average capital, which is one of the highest across. And again there what they go in. And this is the other thing with Pricemart reminds me of these family companies that grow at a sustained but manageable pace is they like to own the real estate or where they can't own the real estate, enter into long term agreements because they go and build the store format very much to the same standard as you everywhere else, which is at a US type level in terms of safety, in terms of solid, of build with its own distribution back up behind. And then once they get to about four or five stores, they actually go and set up their own dc Very much controlling the logistics here. And I think we talked about this in the Casey Corp. But also if you look at Sam Walton's history, the one thing he realized is control your logistics and you control your future. Because inflation comes and goes, oil prices go up and down, supply chains, truckers go on struggling. So you control your logistics. And some have argued and actually look at another great company like Coca Cola, these are effectively logistic platforms that have something on top of it. In the case of Walmart, it's Walmart. Coke is a beverage company. I can't remember if it was these guys or someone else. It may be the guys at Casey's, but for the history buffs, General Pershing, he led the U.S. expeditionary Force during World War I, but learned his lesson in the Mexican incursion in the 1960s. But here's a famous quote which is soldiers win battles, but logistics wins wars. Controlling your supply chain, particularly when you're stressed out, is the single most key important factor to determining your margins and your costs. And there was a buddy of mine actually at private equity who told me that story. It's very important because this is the nature of why it's maybe at a slower rate than some people would like. Lord knows they've had consultants come in and tell them you could grow so much faster, but a very controlled manner. And one area where this comes back and is very important is in the area like the Caribbean, which is subject to some pretty heavy weather conditions sometimes. In Jamaica they have two stores right now. When the hurricanes hit Jamaica, they were very bad this last season, pretty much wiped out everything else. Their level of construction is to such a level of important sustainability that their store survived and remained opened. They're opening another two. So again, I mentioned this in the sense that they're very focused on the longevity of the products, the store and the ability to service their customers through any Ups and downs. And when you're a customer, you're paying to be that member, you suddenly understand how important that is going forward. So these are the less tangible benefits of this offer, but also explains you why the credibility of the brand and the products and the store to the local customer is very important.

Matt Russell (25:26)

It certainly makes sense in terms of also being very thoughtful and calculated about how they approach the growth on the logistics point in terms of having this international presence. It requires the import logistics as well. How much do they control in terms of that and import logistics? I'm thinking 5 billion in terms of size. I'm not sure how much they can do in that regard. So how far does it extend?

Marcus Hansen (25:53)

When they started out with this, basically they had one big distribution cargo base out of Miami and they've since moved in recent times. They're opening actually. So San Diego has as well. But Miami was the main center primarily for their Caribbean expansion at the time. And then locally they'll have distribution for bringing stuff in. So they ship it using someone else's shipping. They're a major customer for that shipping. So they tend to get good pricing and then they send it down. It's interesting actually, they were asked recently about tariffs. They actually are effectively an exporter from the US So they don't bring anything into the us they don't sell. So no real impact there. And generally in a lot of the markets they're operating, there are some local. It's funny when the tariff tantrum happened, it's interesting when you speak to international companies in a lot of parts of the world, there are tariffs. They've been around for a while. It was just, it was new to the US coming in. So a lot of these companies have a playbook of how they manage tariffs and pass it through. But for these guys, it's really setting up and they're now setting up on the western seaboard of Central America down as they expand their ability. And what's interesting in terms of the product they sell on average in most of the stores, close to half of the fresh will be sourced local. So let's say fresh is about 25% overall. And then the other stuff, which tends to be things like the staples, so they sell private label peanuts. So the mixed peanut big thing. There are things called members club, but it's very similar to the one you find at Kirkland. Those things are shipped from the US Non perishable kind of foods. They do bring stuff in from Asia, particularly related to lower cost but good quality clothing and toys. And so forth and then the seasonal products on the gardening side. But for more often than not, particularly in a place like Colombia, for instance of the larger economies they're going into or Costa Rica, where there is a farming base, they're able to work with local partners to get scale and bring local product in. And you're seeing a mix of local combined with US stuff. The other thing they're learning is they're actually taking stuff that they're finding sells, say in Costa Rica and Panama and bringing it to Colombia. We think of Latin America as one entity, but if you go to each economy there's a different taste vibe and they're finding stuff which is working well. Which again, not to go back to our previous one, but the example of Cayce's are discovering is the interest in spicy foods. They're learning from their Texas and southern states and bringing it further up north closer to the colder borders where people are discovering. And so really smart retailers are very good at finding the SKUs that can differentiate and keep that cost within their system. And every little bit they're doing on that side is margin accretive.

Matt Russell (28:09)

Yeah, tell an Argentinian and a Chilean that they're similar and they'll argue with you for a long time. But yes, I think it makes sense in terms of what does translate across geographical lines. And on the point about expansion, the impression that I'm getting is that yes, there is an opportunity. There are markets that over time they can enter into, but it is very much about them being thoughtful and calculated and not over expanding too quickly before they have the logistical thing figured out.

Marcus Hansen (28:41)

One of the key things we talk about is if they can own the land and the property. And we've seen this before. Going back to logistics, if you're in control of that operation, yes, it's slightly asset heavier. But once you can do that, the fact is your retail operation will evolve over time in terms of how that's set up. So example right now is they are still doing more on the omnichannel side which they have an E commerce platform most of the time. We've seen the success outside the U.S. here in the U.S. we're used to getting a lot of stuff delivered. Actually if you go outside of the main city areas, we're seeing this interesting thing like we saw in Europe, which is the idea of ordering them pick it up on your way home as you drive home, pick and collect. That's the same thing we're seeing in Central America. They're doing some of that, but they're using Part of the store which they now can remodel because they own it and they run it as a distribution where they set that up separately without impacting for leasing that you then have to speak to the owner. Can I do this? Can I? Do not. So that controlling of the logistic backdrop is actually a key moat going forward. And it gives them lots of optionality in store as to how they do layout and control of that. Coupled with the fact that you as a customer, there are certain markets where there's parking, it's safe, there's a security perimeter around it. You're more than willing to bring your family then to go shopping. If you bring family, guess what? The kids are going to want to go buy this. So making it convenient, safe, tidy, clean, air conditioned environment can be a big driver in markets where a lot of that is actually harder to come by. We take it for norm here. And then access the locations are important. You tend to be near major roadways so people can go home, head off. But it also plays into your distribution that you can get that in from the port coming in. So a country like Columbia, if you ever travel there, is very mountainous. The geography is very much harder. So being particularly picky around that makes a lot of sense. They're also very much aware of things like property rights. So there would be certain economies that naturally right now they're stepping back from. Because once you invest money, particularly if you're going in ownership of hard assets, you want to make sure that if there is any legal issues, there is some sort of right to coming back again. But one interesting economy I mentioned is Venezuela. Venezuela, with all the political action that's going on right now, is sparking a lot of interest. It's a large population country which if you include the people who've left and would eventually maybe come back, used to be a very dynamic and rich economy right next to the border with Colombia. That would be the kind of economy with the right political backdrop that they maybe would look out for. They're not saying anything right now, but makes a natural kind of fit with what they're doing. And there is no club store system there either. Chile they were looking at for a while and they never give you the exact details, but I think they've been working on the Chile thing for the last five years. And really it's getting to know. They'll send people down, learn, they'll get to know the regulator. And what they're looking for is a regulatory environment where there's someone they can actually speak to and Understand the rules, that it is a rules based economy. The ability to find the right locations and then do work on get me to the first five, 10 stores, put a DC in and once I'm there, hire and teach local management. This comes back to Sol's Price original. One of the things he was a big fan of is this idea of retaining and training a lot of employees and bringing them up through management as well. And it's very strong at these club stores in terms of the relationship between the employees and the ownership is extremely strong. Keep in mind in these markets these are good jobs, very stable and bring many benefits with them, including things like pensions, healthcare coverage and so forth and driving that to bring management up and through. And then there is a symbiotic effect which is the families, a lot of the employees become customers because there is this loyalty factor as well. So it works very well In Central America, they've done very well. The only other thing you go back to the difference as well is dealing on the FX side. There are some economies they're in where they actually have some inability to get their cash. They're doing so well they like to bring the cash back in dollars back to the headquarters. So a place like Trinidad has some FX gates in the sense that you can't find enough dollars to convert the local currency. So again, a bit of savviness here, which is keep what you need to there, run it from there and then try not to put too many dollars in. But your business is very profitable and doing very well. So for the company of its size, it does seem a lot complex. The fact that they're being able to do this in this type of environment with that added volatility and be successful does give me even more confidence that this is going to be a good success story going over time as they get larger.

Matt Russell (32:46)

Absolutely. In terms of the revenue, earnings, volatility as you deal with countries, that there's just more underlying macro volatility sometimes and different dynamics than just pure US exposure. How has that trended historically? Are there major stories, swings in cycles and how much macro sensitivity exists? Obviously taking into account there's some diversification just in terms of regional exposure.

Marcus Hansen (33:13)

Exactly. Yeah. I think you hit the nail on the head there. Right now, the scale of the company, given that it's in these 12 odd markets, 5 billion of revenues, most of it. If you have one market go through a bit of volatility, it's more than managed by all the others. Colombia is interesting because it is the largest in terms of single Footprint, like I mentioned, this is a market where I think based on the analysis I've done of gdp, the addressable market in terms of middle class and upper spending and the ability to broaden across a large economy could easily be by itself 25 stores. So that could more than double. Then within the group it gets bigger. That one actually then could be a bit more volatile, but a place like Chile, which actually is less volatile relative, could offset that, which I think is how they're thinking about it. So far they've generally managed it. There'll be maybe one or two quarters where you see a bit of a wobble, but over the course of the year the actual compounding is pretty relatively stable. Part of that I think is that they are targeting a less volatile part of the consumer complex who generally has a wealth that is going to go and shop anyway. Remember we're talking about this isn't the only place they'll shop for a lot of other things. They're going to go to other supermarkets, but this is going to be their core go to. And then the beauty of this is the single biggest driver of operating earnings right now, about 40% of their operating earnings come from the upfront payment of the membership. So already at the beginning of the year, as you subscribe, you already have locked in about 40% of your earnings. That's a great visibility to have as you're negotiating the rest of the year. The real driver, I think Raoul, of the earnings continues to be this idea of not just recruiting new members which is growing quite nicely, but getting members to move up to the higher tier. Right now, to give you a mix, just under 20% of their membership base is the higher paying $90, what they call the Platinum card. And then the rest is the 45, but that has grown from 12% just like five years ago. And what they're doing there is more and more explaining the benefits of this. That itself pays for itself. With the cashback. There's about a 2 or 3% cashback you get on top of the added benefits you get. Where this is really resonating though is they're becoming a go to supplier for small and medium enterprises. Think little restaurants, small hotel chains who are looking for that quality, really targeting American tourists or people who like a western style standard. They're bringing stuff in from Europe, but mostly American type snacks or food products as part of that offer they're getting. And that's driving another area where they're leaning into more as well. So right now 5 billion revenues I think is Very manageable across the diverse space. Hopefully we're having this conversation five years from now there'll be 10, 15 billion plus then I think once we get to that scale it could be. But right now it is manageable and they've done very well on this. The only thing has been this cash issue. It's a high cost problem to have. You're producing way too much cash in the market you want to get out. But they're managing it in a good fashion.

Matt Russell (36:01)

Is it a similar story in terms of the gross margin stability in general approach or sensitivity on margins? You mentioned some of the FX dynamics and how they approach these things, but how would you compare it to just the US price clubs?

Marcus Hansen (36:17)

So they're trying to put in as best they can. So the idea of only the logistics in terms of distribution center all the way down to delivering to your local actual store, the more they control of that, the more they can a, as a bulk buyer get the benefits of that, coupled with the fact that they start to become a sizable local customer for a lot of their suppliers who generally are dealing with a lot of SMEs, which probably gives them some. I mean they do emphasize they're not out there to get the lowest price possible. They really want to work with the local farmers, they want to work with the local fishermen, get you to scale. And so this is a company which I think actually if you were to be a full on capitalist, probably under earns specifically to ensure that its supply chain is a sustainable long term that can grow with them over time to bring a good quality product where they're not looking to get the best margin possible just to deliver a product for good value for money for their customer relative to what they see obviously in terms of the market out there. But understanding that is a more long term sustainable as opposed to just going for a hit and run, let's make as much money as we can. And that again comes back to this DNA. If you get the chance to read the book or the reviews of the book. Sole Price is also very much driven by being a good member of the community. And that ties in with the philanthropy they do outside of this, but not just in dealing with charities, but developing local areas. So those people who live in San Diego probably know him better because he actually has been instrumental in redeveloping the downtown area of San Diego, which had been up and down through industrial and the spending on the Department of Defense to make that a nicer place to live, but also open to the community and the social side. And they do a lot with kids. It's a very sad story. His grandson died young. It affected him in the sense that he felt that there was a part of society which didn't have access to the right kind of healthcare. But on top of that just embracing if you do well for your community, community will do well for you as well. And again, these are the stories which I think we often forget about. Got a guy down in Hershey, Pennsylvania, I think there's a movie coming out actually who talks about that story. These are the do good capitalists who realized in times of crisis or when times are tough, invest with your local community and they'll stick with you through thick and thin. And again, this comes back to the kind of nature of what's going on in a more modern society.

Matt Russell (38:28)

Yeah, become staples of that community and represent something inside of it. You've touched on some of the decision making around real estate and capex and just high level what would factor into capital allocation decisions. But what has been their historical track record of doing anything as it relates to dividends and buybacks reinvesting in the business? Obviously they have some cash that might be trapped in certain spots. But a good problem as you mentioned, what's been the historical track record around capital allocation?

Marcus Hansen (39:00)

When they go into scale in the market, they initially the returns on capital tend to be at the lower end of the range. Generally the store paybacks are pretty quick so the store can become profitable within two or three years. So to give you an idea of the size of the store, if you think of a traditional Costco you go into today, they're about one fifth the size the larger ones. So a lot smaller box but big for where they are locally. Those stores, if they add in a distribution center around it very often will take maybe an extra couple of years to bring back the returns. But once they get to five stores there's a densification effect in a local market. You then start to see operating leverage improvement. And they designed the distribution center with the ability to expand it fairly quickly. Again, I've seen this playbook with whether it be Casey's or certainly Walmart or Costco as well. This is where the key ownership of the store land or the actual store box is important because they build in redundant flexibility which can allow them. This is why they've confirmed they're working on Chile. But Chile will be interesting for your viewers if they want to follow this going in the next couple of years. Once they announce a location in the start of that the discussion in the first two years will be how quickly they get the DC open and so forth. Generally you're looking at a business though where the top line growth through this control period of time and on average they're adding between three to four stores per annum across the network. If that store is in a more densified area, it probably kicks in a lot quicker. But on average they're spreading these around. So there'll be one store in one market, one store in another. This is of a base of 61, so that gives you some underlying growth. Then on top of that they're growing the core same store customer as a mid single digit growth rate coming in. That customer, one in five of them is converting right now to the increased platinum spending. So you got these drivers in terms of the mix is improving while it's growing and the actual store size is growing as well. And and then the operating leverage once they get above a certain level in each market from the D.C. side. So this is a business right now which is doing 5.5 billion of revenues, forecast about 350 million of EBITDA and about 250 million of EBIT. Pretty consistent. Like I mentioned, close to 40% of that on the EBIT side is money paid up front in terms of the membership. So good visibility, the ability to turn cash flow generation is fairly decent. Cash conversion is running at close to 90 plus percent. Keep in mind this is mostly food. Yes, there's John on merchandise, but it's pretty quick turnover merchandise. So the cash conversion rate is very attractive like any retailer would want to be. And again their supplier terms tend to be very good as well. As they get bigger, they don't lean into that. I like that. Like I said, these guys could print more money if they wanted to. They deliberately decide not to because they see the long term benefit of growing their business with their suppliers. They to get bigger you need a supplier that you can rely on and they grow together. The alignment here is very, and we've done some work speaking to some suppliers, speak extremely highly of this. It's very powerful and this is why the Runway. If we look at both the population, so the population areas. So right now I mentioned about 2 1/2 million core paying subscribers. This is our corporate population area which is about 70 million. So if you think about the tangible size of the middle and upper class in those markets, particularly if we get a place like Chile coming on board, the number of customers they could get to is a multiple of that over time. Coupled with the fact that's more likely a higher paying one as well. So that mix of that customer, if we go from two and a half to five, six million, half of those could be the higher end paying within a decade or so. And that's going to give you very nice earnings growth over time. We're looking at double digit here. Right now about 11 12%. Dividends are a bit smaller right now. The yield is not big, it's about 1/1 something percent. The balance sheet is pretty much undelivered. They virtually carry little if any debt. And it's really more about investing in the business going forward. And this is why I think this is a company again you have a very nice path to sustainable growth. Assuming none of the bigger countries hit any sort of large macro dislocation, which is why I think they're being very careful in terms of the larger markets they're going to. They've been very good in terms of diversification. You never want to go through a tough time. The good news is if you navigate it well, it reinforces the model. Hurricanes impact a lot of the Caribbean. They've designed their stalls to be hurricane proofed. Each time it gives them actually more share because people come to recognize that guy's still open 24 7. I can go there. They help out with the local emergencies but they really garner a lot of goodwill. The same I think we'll see in places in South America where they will start to deliver this idea of a great everyday low price type offer through this idea of the club membership. And when you go into an economy and saying to someone $45, that's a lot of money, look what you get for it. By the way, you get healthcare, basic healthcare, but healthcare checks for your kids and family in that price you would pay that already. And by the way, you also get to come in and shop at a discount. That's pretty powerful. And getting the word out there is pretty good. One thing I would add, people have asked about what about the impact from E commerce? There are some very smart E commerce operators in the markets. They are. Amazon is in a couple of these markets. Your listeners don't know the Amazon of South America called MercadoLibre doing a very good job. Keep in mind that they're predominantly geared towards merchandise, very much around electronics and fast moving stuff. So they are a competitor but again very different in terms of if we look at the food side of things and then think about the heavier, bigger stuff that you can pick up like garden furniture stuff that's still harder to do but they're aware of this they are looking at the idea of some sort of E Commerce down the road using their stores as the pickup side of things. But that still is an area where. And I'll come back to you mentioned. So there was a change in management in the last two years. It was interesting. The grandson who'd been working his way through took over officially as CEO and they brought in a new CFO who comes with a strong track record of management in South America. Which again adds to this understanding that South America is where we may see them lean into places like Chile's new markets. And he has some experience on that side, particularly a place like Chile where E Commerce is a bit more developed. So I think two, three years from now we'll hear a bit more of that Capex going into that side of things. But right now Capex really is just as building more of these stores. Bring the DC along and just leaning into this operating leverage over time.

Matt Russell (45:04)

Yeah, it's interesting. When you have a proxy in the US I'm going to beat it to death. But the Costco and their ability to thrive throughout the E Commerce revolution is an interesting case study too. Relative to this. Everything you mentioned there has some added credibility when you look at how things have managed here in terms of looking forward and the risks that do exist. You've referenced many risks that theoretically exist. But what would stand out, if anything the most to you in terms of what's most important to get right to fulfill what's possible in the future?

Marcus Hansen (45:39)

Yeah, really keep doing what they're doing, not rushing anything, changing anything dramatically. I think certainly private label continues to be an area if you look at so best in class US Costco about 33%. Sam's clubs I think is just above 30%. From the disclosure I saw, they're right now at 19%. The ability to maybe do more of that going forward. That tends to be more if we think on the fresh side, the ability. So one area right now they'll talk about on the call is developing private label chicken offer. And this is going out and finding some large farmers they can deal with locally a lot of that source. So it's building goodwill with the local guys. But getting the type of quality which is consistent rather than just being one little store where you can come in getting this across 10 stores. So in the bigger markets I think that's feasible. We'll see more of that. That's margin improving because generally you enter a private label transaction because it's margin improving for the same type of thing. You're Offering it also builds your reputation. Once someone is buying something for you on the fresh side for the first time and is really good quality, you're more likely to go and try their other stuff. And as we know, Costco is renowned for its famous shrimps. Obviously then you do the things like the chickens, the hot dogs and all this stuff. Most of the time when it goes to something fresh, we really wanted a brand at first. We're going to go try something which is local but of really good quality. So I think there's more they can do there. The other part I think is some of the other services they can do. So right now it's pretty straight. You talked about how you're going to the auto to get your tires. They don't do that. Right now that is an area where auto is an interesting one given how they're located. They have the parking area might be something they might do in some of these larger economies as well. It's an added service. And most of the times what they're looking at is areas where there is fragmented competition. But we're coming back to this idea of convenience. If you can go and get all this done and say, remember we talked about cases, we sell you time, the most valuable commodity you just cannot get enough of, make sure they're even better. And that's very powerful. Also getting the benefit of then these are the kind of things where you can think about bulk supply, whether it's tyres or auto parts. That could be something down there. They haven't talked about that, but it's interesting. That's an area where from both the dollar point of view, the ability to offer discounts and the type of customer they're going for, that would make a lot of sense. These are still avenues of growth. So I think this is more once we get to a certain scale, but really it's bringing this great, consistent, good quality, solid reputation to these local markets. And it's working very well. And then it's really leaning into this. There is this long term structural growth of US citizens moving to these markets to live sometimes for work and then staying there. But also people from a lot of these countries who come to the US worked and gone back to. And that experience immediately kicks in and the more and more communication they're doing on that side is working very well. But the final part was really this ability to lift up the membership number. People at first thought that maybe that moved from the average. When they started it was like 30 going to 60. It's now $45 to $90. It's a big number. Going locally, it's working very well because I think they're emphasizing, yes, that's a big number. But look at all the benefits you're getting. When you do the math, it makes a lot of sense. And this is why we're seeing very low churn. You've almost got like a 90, 91% renewal rate. It's higher at the higher end. It's almost close to 100. But granted that's a smaller base, but that's telling you that those who are doing it really are seeing the benefits. And it's working because this is just general spending. Anyway. People do maybe have another option, but this is really bringing them in.

Matt Russell (49:02)

Fascinating. I'm curious, do you have a valuation framework for this business? What is the market? How do they approach this where there's a growth story? It's broad, but yeah, I would just love to hear you talk on that.

Marcus Hansen (49:17)

Tougher in the sense of valuation is always a tough one, right?

Matt Russell (49:20)

Absolutely.

Marcus Hansen (49:21)

This used to be a lot cheaper. This used to trade in the teens. It's now trading. I'm looking at forward numbers like in the low 20s. The US peers, which are peers to a certain extent in terms of the business model, are trading at much higher multiples, one would argue maybe full of multiples now, to be fair, having followed the US retail market for a while, the market pays for sustained consistent growth. Maybe a bit too much. It tends to pan you very harsh when your growth hits a speed bump. So look at the differentiation between some of the department store companies versus the Walmarts and the Costcos of the world. There's a bit of tech in there as well. That's true. This shouldn't trade up there with the US peers because there are three fundamental differences. One is with a US player, you're looking at one homogenous market. There's benefits of scale, there's deep size. There are much larger things. This one does have some added volatile of the markets it operates in where there will be some volatility. However, that hasn't shown up just yet. But they continue to execute. This is a mid cap name as well. Let's be clear. Mid caps tend to theory trade more volatile. This one around earnings, you notice with mid capsule can trade up or down 6, 7% and then goes back to. It's like normal consistent growth and then it tends to make news flow. I think this is still being discovered as a stock though, and this is a weird one because it's a US company which sells all its business outside of the us. So this is one where we have an our emerging market fund but we're also able to as it gets bigger, put in some of the other funds. There's a liquidity I mentioned about 25, 30% of the company pretty much is controlled so that 5 billion becomes less in terms of what you can trade. So this is really much more of a longer term story. Not too different to Casey's by the way, when we first started talking about it, but a great story. Once you get it and see it perform, do well. Therefore, from a valuation perspective, this is not something you should be saying could get to a Costco type multiple in the midterm. However, the nature of the visibility of the sustainable top line growth combined through the ability to manage through volatile times and still execute on earnings is very strong for a company which has exposure to a more volatile region. So as an EM manager, this actually looks as one of the more interesting dynamic names I'd want to have in the portfolio on the retail side. And then finally there's definitely worthiness for a premium here of the DNA of the management. It doesn't get better when you have these guys who've proven it, know it, it's a family business. Generally you find some great long run family businesses taking the long term approach and view to where they're going to be because those tend to be the ones that also through the volatile times are less driven by the ups and downs of sentiment and really actually more often than not take advantage of the opportunities of volatility to improve the business and their exposure going forward. So that gives me a feel that this can trade up to the mid-20s and it's still fairly valued then we have to see obviously the execution keep coming through. But like I mentioned, if I'm looking at store count, revenue, potential earnings, upside, all of these things are moving up and to the right. And in retail, retail generally is a tough business. I know we talk about the success stories but speak to anyone. This is why I always come back to Sam Walton hit it on the head when he said the more you can control within your margin that logistics coming back to general pershing logistics is what wins retail wars. It's very important. They get a lot of consultants coming in saying go asset light you can generate comes back to buy you in the tough times. You've got to have that consistency. So I think they're right up there.

Matt Russell (52:49)

Absolutely. And I like the very holistic breakdown of that valuation approach too. That was extremely helpful to hear this has been very interesting. You're, I think, instructing a lot of us again on a business that probably many weren't familiar with. We close these out with the lessons that you can take away, potentially apply elsewhere. Seems like there's a lot that could be applicable elsewhere from this one. But what would you say stands out the most?

Marcus Hansen (53:15)

First and foremost, I love history. I'm a bit of a history buff. My son, who's 19 now, he's heading off to college, recommending some books to read. Firstly, the Sam Walton one's a great one. I just want to read about the ups and downs of retail, the business model, how he got there. Sol Price this book, if you can't get it, you can find some online reviews. It's definitely one worth reading because. And it speaks to anyone from an older generation and ask them about Fed Mart. And if you go online, you see the older club members who have the original card and they talk about and laugh about it. But it is very interesting, this idea of the dynamic of a club. If someone had told you, starting out fresh, you didn't know anything, you have to pay to shop here. You're like, I'll just go shop next door. But you understand if you pay what you're getting on the other side, the whole concept is an interesting one, but a very interesting dynamic. So again, it's a reminder there are people who are able to come in and change industries in the way they look at it and set something up for others going forward. And like I said, Sol Price arguably influenced the likes of Home Depot and these other giants we know. So his impact or the impact of their ideas are very prevalent across the board. It ties in also with this idea, I think of the Europeans call it esg, but very often some of the greatest companies have also thought about their customer base in terms of their image, but also what they're bringing and adding to the community. And that's in a good way in terms of jobs, local jobs, in terms of supply chains coming in. I think more and more, if you look at the younger generation, customer base, I know we keep saying they love their stories and stuff, but these are fantastic stories to follow. And very often capitalism gets a bad name. This is good capitalism. And I think that's important in an era where I'm not being political here, but it gets thrown around. Good or bad. America is a capitalist society. At the end of the day, this is important to understand how these things can combine and work very well. The final part is it's fun when you talk about these things. I have a bunch of friends who are from South America and actually anyone you mention for the Caribbean, you know, anyone from. And there's a lot of people. I'm in New York. I mentioned the price, smile, big smiles. Oh, my mother shops there. One thing I love about research is the anecdotal side. And with retail it's great to do. I mentioned how when I first went to Casey's, I went out, checked it out, took my son along. I changed my test bed, was out there playing hockey with his hockey buddies. Try the pizza. Tell me what you think. Loved it. So feedback. Yeah, good. Now they're doing chicken wings. He talks about it too. So you understand that particularly with something like retail, which is consumer touching, that core mouth of word, word of mouth marketing can be the most important thing above and beyond you actually the product. And that still is very important. This is an area which until we have robots going and doing the shopping for us, I know we have E commerce at the end of. Most of us still like to go shopping to the supermarket. It's an event we do with families. This continues to be a key area where product good quality of value and yeah, look, supermarkets will still be around for a long time. Club stores are amazing. These are the kind of things I think you can tie in with just your daily life as well. So this is. Who's the. I forget the name of the guy at Fidelity.

Matt Russell (56:01)

Peter Lynch.

Marcus Hansen (56:02)

Yes, Peter Lynch. It doesn't always work with everything, but this is one way you can experience the product, understand it and start to see how it works. I think this falls in that remit. And like I said, this is an interesting one because I love learning about new countries, all the countries they're in. There's a lot we know the names. I think a lot of people, for instance, after our conversation will maybe go and check out Colombia. Colombia is a very dynamic economy come a long way. Argentina used to be the big guy in Venezuela. These guys are really developing. It's pretty amazing. And so learning that. And if you go as a tourist, you'll see these things. It is interesting to see there is another part of the world. So we're big fans of global investing, international investing looking for great opportunities that are similar to the great US peers. The US market's great, but there's other opportunities out there which mimic what we see in the US and sometimes you can find them at valuations which are even more appealing. So adding that to your diversified portfolio is a great long term compounder as well.

Matt Russell (56:51)

I love it. This has been a pleasure. Again, Marcus, I appreciate it and enjoy these conversations quite a bit. So thank you very much for your time and coming on.

Marcus Hansen (57:02)

Thank you for having me. Me and it's always great. Thank you, Matt.

Podcast Host / Narrator (57:04)

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Marcus Hansen (57:12)

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Podcast Host / Narrator (57:13)

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