Fairfax 2024

[Parsad]

8 minutes ago, cwericb said:

 

Really? Does anyone really think that the team at Fairfax just woke up really stupid the other day and decided to invest in some awful company?

 

Might one suspect the team at Fairfax just might know a whole lot more than I (and probably every other person on this board) about the companies in which they decide to invest and their future plans for that investment?

 

Remember that stupid pet insurance investment? And any idiot could see that getting involved in the terrible steel industry was going to be a disaster.

 

Perhaps this seems a bit odd on the surface, but these guys just didn't suddenly get stupid.

So personally, I just kinda trust Fairfax to know what they are doing.

 

+1!  But it seems like after almost every other decision, the COBF board questions the sanity and decisions of Hamblin-Watsa! 

 

I think it's the Buffett comparison syndrome.  We want to see Prem acquire all of Jack in the Box or Lululemon, not a mattress company...unless it's comparable to Nebraska Furniture Mart!

 

Cheers!

[maxthetrade]

14 minutes ago, Munger_Disciple said:

 

I don't think people have an issue with Fairfax acquiring good companies at fair prices like Berkshire does. Just seems (at least on the surface) this is a so so business. And that's causing some understandable "heartburn". All the more so when the stock is trading what seems like at least a decent discount to intrinsic value so they could just do a decent buyback with the capital as an alternative. 

 

Exactly! I don't mind aquiring a good business at a fair price but this looks like a mediocre business at full price. I hope I'm wrong (as I was with Stelco!). We'll see.

 

[Gamma78]

I don't think the issue here is that people think Sleep Country is a terrible business. It isn't. It's grown reasonably well for a very consistent period of time. 

Mainly it's hard to immediately see it as a "great" opportunity. But I'll keep an open mind and willing to learn more as the investment unfolds. The recent spate of investments are all "in partnership" with a great founder / owner / entrepreneur. I imagine here the quality of the existing ownership played a role too. 

[Munger_Disciple]

Is there a non-insurance/finance related operating business 100% owned by Fairfax that has worked out well?

[Junior R]

just need to wait until next week or week after for earrings call and we will get all the info on why they think  sleep country is a good buy

[Haryana]

This looks like a Tim Horton's type of company for Canadians. When Tim Horton's was a public company, I used to think that this was the type of business that Buffett would be interested in for how much it gets brand loyalty from Canadians. Canadians love their own brands and whatever is uniquely Canadian. Not having a Sleep Country USA is an advantage. Eventually, Buffett invested a part in Tim Horton's through 3G Capital.

 

"Since its 2010 acquisition of Burger King Holdings, 3G Capital has been the company's largest shareholder supporting the company's global growth transformation including the creation of RBI and acquisitions of Tim Hortons, Popeyes Louisiana Kitchen, and Firehouse Subs, generating approximately 21x in total shareholder returns"
https://www.rbi.com/English/news/news-details/2022/Restaurant-Brands-International-Inc.-Appoints-Patrick-Doyle-as-Executive-Chairman-to-Accelerate-Growth/default.aspx

 

Really impressed by how in the middle of all the greed, insanity, FOMO, crypto, AI, ... they still have the discipline to buy a boring business that is about the most basic of human needs, even more basic than food.

 

Mattress is one thing that would be the biggest hassle to order online and then keep returning back and forth until you found right fit.
You go to a store and you test for the firmness by lying on it to get feel to your body. Regardless, they also have online brands for direct delivery to less sensitive sleepers.

 

Mattress is more necessary than furniture. Sleep is the best medicine, especially for an aging population. There might be scope for medical innovation as already discussed here.

 

Also, worth re-repeating, they have 35-40% market share in Canada, making a no-brainer. Found a good report here including great details:
https://www.fairwayresearch.com/p/sleep-country-deep-dive-tsx-zzz
"While the mattress industry has been in turmoil, Sleep Country has delivered strong financial performance along with an increasing market share in Canada from 23% in 2015 to 37% in 2022."

 

[dartmonkey]

17 hours ago, Viking said:

@glider3834 That is great info. Canada had a housing bubble. And because of how our mortgage market is structured, much higher interest rates have had a big impact on those with a mortgage, especially those with a large mortgage. But only about 20% of mortgages ‘reset’ / are affected each year… so it has taken time for higher rates to bite. My guess is for mortgage holders things will get worse over the next 12-18 months. Our mortgage market looks like it was structured like the US back in 2004-2006 with all those adjustable rate mortgages… the shit didn't hit the fan in the US until enough of the resets happened - and that took much longer than people thought (the ponzi scheme was up at that point). Canada won’t be hit as hard as the US because you can’t walk away from your mortgage here - and we don’t have a bankruptcy culture. People will do anything they can yo hang on to their property here - including stopping spending on pretty much everything else. 
 

The Canadian economy has been driven by the housing bubble over the past 7 years or so. New building starts have cratered. But lots of existing projects have to be completed - so the impact of higher rates has been slow to hit construction (but it is coming - if rates remain at current levels).
 

Immigration / international students / temporary foreign workers has been adding 1 million new Canadians each year for the past couple of years - that should be a tailwind to GDP growth. But GDP per capital is the same today as it was back in 2017. And there is growing demands for the government to return to historical levels of new Canadians (total of about 400,000 per year). If they do that it will be contractionary as the numbers of some groups could go negative year over year - as people get kicked out of the country.
 

My read is the economy in Canada is sick. We just might remain at stall speed for a few years. I really have no idea. 

 The Bank of Canada has an inflation target of 2 to 3% and i think they want to run it as close to 3% as possible. Canada has too much consumer debt and the elegant way to solve that is to run elevated inflation for 5+ years (we are 3 years in). The problem with this approach is if inflation runs too hot again - gets back north of 4% or more - well people will see what they are doing and their credibility would be shot.
 

Bottom line, I am not optimistic or pessimistic. My guess is Canada muddles through. 

 

Small correction: BoC target is not 2-3%, it’s 1-3%:

 

The Bank of Canada aims to keep inflation at the 2 per cent midpoint of an inflation-control range of 1 to 3 per cent. The inflation target is expressed in terms of total CPI inflation. The Bank of Canada uses measures of core inflation as an operational guide to help achieve the total CPI inflation target.

[Thrifty3000]

VERY BIG clues about the investment opportunities at Sleep Country in ZZZ’s Q1 conference call transcript.

 

Key Points:

 

- They have 305 stores

 

- They are opening at least 6 new stores this year

 

- they have a long list of locations they want to open new stores in as soon as space is available. They said the constraint isn’t on their side, that the constraint is finding landlords with space in their desired locations. (Curious if Kennedy Wilson might have any helpful connections here.)

 

- they historically renovate 20 legacy stores annually

 

- over the last 7 ish years the renovated stores experienced average revenue increase from $1.8 mil CAD to $2.4 mil, which is 30% growth (HINT: what happens after renovating the 170 ish stores that haven’t been renovated yet?? What if they renovate immediately instead of waiting 7 more years?? Why would you wait 7 years to increase sales (market share) by 30%?!)

 

- they are testing several concepts that show even better prospects than the existing renovation!

 

- First, they have rolled out a “store in a store concept” that sells higher margin cash and carry items. In their pilot stores the new concept takes up 25% of the floor space, but has generated 35% of the revenue (so it’s not only more revenue, but more importantly, it’s higher margin revenue!). I’m going to make an educated guess that this concept can generate closer to $3 mil revenue per store.

 

- Second, they are rolling out 2 pilot stores this year that they are calling their version 4.0 stores. Obviously, they hope the pilots will generate even higher volume than the version 3.0 concept they’ve been migrating to for years. Hopefully these prove capable of generating at least $3 mil revenue with higher margins.

 

- another nugget… on the call they said the reason they pay out 40% of income as a dividend is because their North American competitors have an average dividend payout ratio of 35%. Well, what do you think happens when ZZZ no longer has to follow the institutional imperative with their divvy policy? #growth

 

Now, if three or so years from now every one of Sleep Country’s stores have been upgraded, all the while Sleep Country has been able to increase marketing spend, then what’s going to happen to their Canadian competition? They get squeezed! Next thing you know, FFH will be buying out the competition for a song, converting those stores to version 5.0 or 6.0, extracting even greater margin, and enjoying even better than 15% growth, until a private equity buyer comes along and begs FFH to sell Sleep Country for $10+ bil!

 

 

Edited July 25, 2024 by Thrifty3000

[Junior R]

3 hours ago, Hoodlum said:

I see that Scotiabank increased their target from $1950 to $2000 cdn yesterday.  Does anyone have access to that report as they may have commented on this acquisition.

 

[Junior R]

12 minutes ago, Thrifty3000 said:

VERY BIG clues about the investment opportunities at Sleep Country in ZZZ’s Q1 conference call transcript.

 

Key Points:

 

- They have 305 stores

 

- They are opening at least 6 new stores this year

 

- they have a long list of locations they want to open new stores in as soon as space is available. They said the constraint isn’t on their side, that the constrain is finding landlords with space in their desired locations. (Curious if Kennedy Wilson might have any helpful connections here.)

 

- they historically renovate 20 legacy stores annually

 

- over the last 7 ish years the renovated stores’ experienced average revenue increase from $1.8 mil CAD to $2.4 mil, which is 30% growth (HINT: what happens after renovating the 170 ish stores that haven’t been renovated yet?? What if they renovate immediately instead of waiting 7 more years?? Why would you wait 7 years to increase sales (market share) by 30%?!)

 

- they are testing several concepts that show even better prospects than the existing renovation!

 

- First, they have rolled out a “store in a store concept” that sells higher margin cash and carry items. In their pilot stores the new concept takes up 25% of the floor space, but has generated 35% of the revenue (so it’s not only more revenue, but more importantly, it’s higher margin revenue!). I’m going to make an educated guess that this concept can generate closer to $3 mil revenue per store.

 

- Second, they are rolling out 2 pilot stores this year that they are calling their version 4.0 stores. Obviously, they hope the pilots will generate even higher volume than the version 3.0 concept they’ve been migrating to for years. Hopefully these prove capable of generating at least $3 mil revenue with higher margins.

 

- another nugget… on the call they said the reason they pay out 40% of income as a dividend is because their North American competitors have an average dividend payout ratio of 35%. Well, what do you think happens when ZZZ no longer has to follow the institutional imperative with their divvy policy? #growth

 

Now, if three or so years from now every one of Sleep Country’s stores have been upgraded, all the while Sleep Country has been able to increase marketing spend, then what’s going to happen to their Canadian competition? They get squeezed! Next thing you know, FFH will be buying out the competition for a song, converting those stores to version 5.0 or 6.0, extracting even greater margin, and enjoying even better than 15% growth, until a private equity buyer comes along and begs FFH to sell Sleep Country for $10+ bil!

 

 

Thanks good information...From 10 feet up without no facts acquisition is questionable ...They must have a reason why they bought this ..It would have had to go through full assessment 

[hardcorevalue]

Not my favorite deal here, would love to be wrong but I wish they could have bought back their own stock instead or just kept increasing the balance sheet of the subsidiaries. The whole sales model of massive ad spend and we cut you a deal in store seems weak to me in 2024, although that is personal bias. Sleep Country feels like a share loser to Ikea, Costco and speciality stores over time. Hopefully we don’t go into a recession I guess. 

[Junior R]

First Storefront for Upscale Sleep Country Canada Concept ‘the rest’ Launches in Toronto [Photos/Interview]

 

https://retail-insider.com/retail-insider/2023/11/first-storefront-for-upscale-sleep-country-canada-concept-the-rest-launches-in-toronto-photos-interview/

[cwericb]

 

For those who question Fairfax dabbling in the Canadian furniture industry, FFH has some experience in this space. Several years back Fairfax picked up a major Canadian furniture chain called The Brick, a name familiar to nearly every Canadian.

 

 

Fairfax put Bill Gregson in to run the ship. Gregson shined the company up, turned it around and within 2 or 3 years Fairfax successfully flipped The Brick for a nice profit. I was following this closely at the time not only because I had shares in both companies but one of my kids was running The Brick's largest store at the time.

 

 

So it is not like Fairfax doesn't experience in the field. These guys know what they are doing.

 

[Hoodlum]

1 hour ago, Junior R said:

 

thanks, but that report is from May when the target was updated to $1950. 

[Junior R]

Just now, Hoodlum said:

thanks, but that report is from May when the target was updated to $1950. 

Look at the top it's from July with $2000 target

[Hoodlum]

2 minutes ago, Junior R said:

Look at the top it's from July with $2000 target

I see.  Although it looks like the report hasn’t changed 

[MMM20]

8 hours ago, Junior R said:

any reason why this is down today?

The answer is probably “volatility” but I also own HIFS which was up 6% today (and 30% over a few weeks) seemingly because the yield curve is finally coming close to de-inverting. I wonder if it’s as simple as the marginal buyer/seller thinking Fairfax loses as short term rates come down, combined with the fact that they’re in the quiet period so not buying back stock?

 

Edited July 26, 2024 by MMM20

[nwoodman]

@Thrifty3000 @Junior R thanks for the posts above.  Looking at this purchase through a health and wellness lens is a helpful take.   Having just been through this exercise we ended up spending 5k+ (The Rest territory) on a mattress and don’t regret it at all .  Something that you use for 6-8 hours over 7-10 years makes nickel and diming pointless IMHO.   We ended up going through a Sleep Country equivalent here in Oz, service and range were a factor in our choice of retailer.  The cheaper providers just felt shonky by comparison.  

 

I also wonder if Fairfax might be able to support the debt component at a more competitive rate too. Those credit rating upgrades are a beautiful thing. It becomes a bit of virtuous circle as they start adding relatively stable cashflow generators too.  

 

This purchase is growing on me, thanks for all the commentary. Hopefully we can look back and distinguish this from their other crappy retail investments.

[SafetyinNumbers]

I like the investment. Analysts aren’t modeling income from non-fixed income sources very well but they are growing and are becoming less cyclical. If that eventually translates to expected increases in annual earnings then it will allow more quants to buy the shares which will help with multiple expansion. 
 

Every investment deal where the expected returns are > 5% increases the odds of the company as a whole earning a 15% return given the leverage.

[dartmonkey]

1 hour ago, MMM20 said:

The answer is probably “volatility” but I also own HIFS which was up 6% today (and 30% over a few weeks) seemingly because the yield curve is finally coming close to de-inverting. I wonder if it’s as simple as the marginal buyer/seller thinking Fairfax loses as short term rates come down, combined with the fact that they’re in the quiet period so not buying back stock?

 

Or maybe fires taking out half of Jasper? Parks Canada self-insures but the rest of the town might be a substantial exposure for a Canadian P&C insurer or reinsurer. https://www.canadianunderwriter.ca/insurance/jasper-wildfires-industry-braces-for-huge-losses-1004248763/

[SafetyinNumbers]

Looks like the stock got hit yesterday because an analyst cut estimates bigly.

 

 

[TwoCitiesCapital]

16 hours ago, Thrifty3000 said:

VERY BIG clues about the investment opportunities at Sleep Country in ZZZ’s Q1 conference call transcript.

 

....

 

- they historically renovate 20 legacy stores annually

 

- over the last 7 ish years the renovated stores experienced average revenue increase from $1.8 mil CAD to $2.4 mil, which is 30% growth (HINT: what happens after renovating the 170 ish stores that haven’t been renovated yet?? What if they renovate immediately instead of waiting 7 more years?? Why would you wait 7 years to increase sales (market share) by 30%?!)

 

- they are testing several concepts that show even better prospects than the existing renovation!

 

...

 

 

 

 

 

Why wait? Perhaps either the capital constraints OR the desire to skip the 3.0 renovation and go straight to 4.0 on the remainder of the stores. 

 

Either way - it's something have a partner with deep pockets and a willingness to forego immediate dividends helps and having to publicly report results that would get thrashed by the upfront investment/depreciation accounting. We could very well see all of the stores renovated in the next 3-5 years instead of waiting at the current pace of ~20 per year and then Fairfax re-IPO....

[TwoCitiesCapital]

29 minutes ago, SafetyinNumbers said:

Looks like the stock got hit yesterday because an analyst cut estimates bigly.

 

People still listening to these guys when they've been way behind the ball on this name for the last 3 years?!?!?!

[SafetyinNumbers]

59 minutes ago, TwoCitiesCapital said:

 

People still listening to these guys when they've been way behind the ball on this name for the last 3 years?!?!?!

Quants gonna quant.

[Parsad]

4 hours ago, TwoCitiesCapital said:

 

People still listening to these guys when they've been way behind the ball on this name for the last 3 years?!?!?!

 

+1!  It's just the nature of the beast.  Cheers!