Briscoes is a diversified NZ retailer with a long history.

I covered Briscoes briefly in my breakdown of the NZ retail sector.

If you read that post, you might remember I pegged Briscoes as having the best retail business of all the listed retailers in NZ.

What let down the investment case then was the high price. It was trading at valuation of around $1.4b, which was simply too expensive.

Since then, the share price has come down by around 30%, while revenues and profits are up handsomely.

Let’s take another look at Briscoes today. Could it be the right time to pick up this retailer?

Who Is Briscoes?

Briscoes was founded as a hardware retailer in Dunedin over 150 years ago, in 1862.

Its original business was supplying prospectors with shovels, lanterns and tents during the 1860’s gold rush.

However, the modern Briscoes you know today really began in 1988.

Australian retail big-shot Rod Duke took over the company and aimed to turn it into New Zealand’s top homeware retailer.

By most measures he succeeded, and with a 77% stake in the company, he’s now worth around $800 million.

Today, Briscoes is diversified with four distinct brands/businesses:

• Briscoes (homewares)
• Living and Giving (homewares and gifts)
• Rebel Sport (sporting goods)
• A 6.77% stake in NZ clothing retailer Kathmandu (KMD.NZ), which owns Kathmandu, Rip Curl and Oboz.

Today, Briscoes is a cornerstone New Zealand brand – every New Zealander knows the “Briscoes you’ll never buy better” jingle, and the “Nobody’s got more sports gear than Rebel Sport!”

My Experience With Briscoes

One of the great things with investing in NZ stocks is you can get a real hands-on look at the business.

Unlike Walmart or Best Buy, I can actually go into a Briscoes store and look around, experience what the service is like, look at the decor, check out the prices, buy something and try to return it, see how I feel inside a store.

I’ll be honest – I haven’t done this. Other than a few “research” visits last year, I have very little experience with Briscoes and don’t think I’ve ever bought anything there. Maybe it’s because I’m not a homeowner.

However, I am extremely experienced with Rebel Sport.

I play multiple sports – running, triathlon, martial arts, badminton, spinning, and many others over the years.

There’s a Rebel about five minutes from my family home in Auckland, and I’ve probably shopped there over 100 times in my life.

One thing I’ve noticed – I buy something almost every time.

They are fantastic at running sales, and the store layout is superb.

Even when they mix up the layout, everything is intuitive and the shop is very pleasant to browse. I can stay up to an hour in there.

What’s more – the shop is never empty.

Even at 11 a.m. on a Tuesday, there are customers about.

Their email marketing team is also pretty good, because I get sales emails regularly, and very often that leads me to heading to their website and ordering stuff.

What I’m trying to say is – Rebel is very good at getting money from you.

Compare this to other sports stores in NZ, such as Torpedo 7 (owned by The Warehouse) or Stirling Sport. When I was heavily into triathlon, I visited Torpedo 7 quite often to buy race nutrition, but they were often out of the stuff that I wanted. More often than not, I would leave Torpedo 7 without buying anything, and the store (Sylvia Park is my local) was usually empty.

Part of this might be due to the location of that store, which is not great, but also part of it is due to the layout. It’s huge, but it’s very dark, and stuff is kind of just crammed together. When you go into a Torpedo7 store and a Rebel store one after the other, the difference is stark.

While I find the Warehouse a reasonably comfortable place to shop, that same design doesn’t translate to Torpedo 7. However, Briscoes and Rebel have a more friendly design that seems to work for both of them.

The point is – Briscoes directly competes with The Warehouse, and Rebel Sport directly competes with Torpedo7, and if I were to pick a winner, my money goes on the Briscoes-owned businesses every time.

Finally, let’s talk about Kathmandu, known formally as KMD brands.

Briscoes only owns a small 6.7% stake in KMD (they tried to buy the whole company many years ago, but it fell through) so the success of KMD is less consequential to Briscoes’ success, though still a meaningful factor.

Coincidentally, I’m also a long-time customer of Kathmandu – even to this day I use multiple of their products while travelling, and as a casual surfer I’m loyal to Rip Curl wetsuits. However, while I’m a big fan of the products, I’m less of a fan of the business. KMD Brands was free cash flow negative in 2022, and while things are looking slightly better in 2023, it’s hardly the cash-generating machine that Briscoes is. They’ve also been highly dilutive over the past ten years, mostly due to their acquisitions.

It’s clear to me that despite owning great brands (most Kiwis would agree Rip Curl and Kathmandu are household names in NZ) KMD lacks the disciplined management that Briscoes has.

As a minority shareholder, Briscoes is not involved in the day-to-day running of Kathmandu. They simply hold a small shareholding and receive about $2 million in dividends annually.

Now let’s look at some numbers!

Cash flow

Cash flow is always my first stop.

A business that has a lot of cash will never go bankrupt.

A business that generates a lot of cash will never go bankrupt.

And a business that does both will definitely never go bankrupt.

As the saying goes, cash is king.

So before I look at growth, before I look at profit, before I look at share price, I always want to know; does this business generate cash?

Briscoes had a mammoth 2023.

Profit was flat, up ~1% from $87.9m to $88.4m.

However, their free cash flow almost doubled, jumping from $59m to $110m.

This means at the end of the year, after paying all its financial obligations, the company had generated $110 million in surplus cash to play with.

After studying the cash flow statement, it’s clear this is simply due to basic good business fundamentals; their cash takings from customers are up (usually to higher sales, and better pricing), and costs to suppliers are down:

This picture is rosy, but looks rosier than it really is – they have a big chunk of payables that will likely dampen cashflow next year, but it’s still a testament to just how strong of a cash-generator their business is.

What happens to this cash?

The balance sheet holds the answers.

Balance Sheet

Once I know a business is a cash machine, I need to see how healthy they are financially.

The balance sheet tells you how good the company is at managing this cash.

They generally have five options when they make a bundle of cash:

1. Pay a dividend
2. Share buyback
3. Reinvest it in the business (open new stores etc)
4. Acquire an existing business (takeovers)
5. Leave it in the bank and wait for opportunties

My least favourite is number four, because the reality is, most listed companies have a terrible track record of good takeovers. They usually overpay, and the new business is never as good as expected. There are a few exceptions (like Facebook’s takeover of Instagram), but mostly, takeovers end up being duds.

Any of the other four options I’m usually happy with, so long as it’s done sensibly.

Briscoes does a combination of 1, 3 and 5 – they pay a big dividend, refurbish stores, and then leave a big chunk in the bank as a safety net.

Let’s look at the numbers:

A few noticeable things here.

First, they’re sitting on $150m in cash.

This is a fantastic position to be in during the current high-interest rate environment.

Cash is usually not easy to come by in times like this, and Briscoes is sitting on a treasure chest of it.

Just leaving that in a call account at 4% would generate $6m a year in interest.

If you refer back to the cashflow statement I posted earlier, they only earned $1.8m in interest, so it’s not clear exactly where the cash is parked, but it’s a good position to be in nonetheless.

This is doubled by the fact they have no debt – also a great position to be in during high-interest times. Their only liabilities are payables and leases, none of which are interest-bearing.

Once again – a sign of great management.

Finally, look at the receivables number.

This is part of the reason their cash dynamics are so strong. Almost all sales through Rebel and Briscoes are cash sales as they deal in smaller goods, like vases and rugby balls, meaning cash hits their bank account immediately when you buy something (versus when you buy a car or house, or commodities like oil, where you can wait months or years to get paid in full).

When businesses need to wait to get paid, it’s evidenced by high “receivables” on their balance sheets. Briscoes doesn’t have this problem. After almost $800m in sales, only $6m remains as receivables at year-end. Their cashflow picture is very robust.

Management

Your business is only as good as the people running it.

Firstly – the CEO.

Rod Duke is the current CEO and has been for 30 years. He’s one of the legends of New Zealand business and is the mastermind responsible for the Briscoes empire.

The biggest green flag about Rod Duke is his skin in the game. It’s always a good sign when a CEO has a big ownership stake in the company. It means your incentives are perfectly aligned. The way for him to get rich is to ensure the company does well, so his shares do well, which also means your shares do well.

Elon Musk owns 13% of Tesla. Zuckerberg owns 13% of Facebook. But Rod Duke owns 77% of Briscoes. The last thing he wants is for the share price to tumble, because 77% of the shares are his! The flow-on effect is, he’s incentivised to ensure everything the company does is best for the shareholder. Any missteps – the man at the top gets hurt the most. Compare this to a CEO who doesn’t own any shares, but is getting paid a $10 million salary. He doesn’t care whether the company grows or not. He won’t take any calculated risks or make an effort to take the company to the next level. All he cares about is the company ticks along safely and doesn’t go bankrupt, and he safely collects his $10 million every year. A CEO with skin in the game (especially 77% skin in the game) is a different story. He wants the company to flourish. This is how it should be.

The board

Unsurprisingly, Rod Duke keeps a very small board of directors, which is 5, including himself:

I love seeing a small board almost as much as I hate seeing a big board.

I’m always repelled by companies with big boards, especially in New Zealand. Unfortunately, directorships in New Zealand feel like an “old boys club” where you see the same faces over and over again, and half of them you wonder why they need to be there.

What does a director do?

Think of them like consultants and strategists, who are valuable for their experience and contacts. They get paid about $100k per year to attend 8-10 board meetings annually, and help make big-picture decisions for the company.

I don’t dispute the value of a good board, but I do dispute the need to have 9 or 10 directors for a small NZ company. For example, Synlait Milk (SML.NZ) has nine directors on its board, despite only making about $15m in profit and being worth $350m – less than half the size of Briscoes.

As a comparison, Apple – literally the largest company on earth – only has nine directors! How does a small milk company making $15m a year need the same size board as the planet’s biggest company? Beats me.

Briscoes, however, is in good shape. Five solid directors, and they’ve been doing a great job.

Share dilution

Another major thing I look at is dilution.

Generally, a little dilution is expected, as employees or executives get paid in shares. However, you don’t want a ridiculous amount of new shares being issued every year, as that dilutes the ownership of regular shareholders like you and me.

Briscoes has not had to raise capital and its share count has risen from 213m to 222m since 2013, dilution of about 0.4% per year. That’s very reasonable by anyone’s standards.

Cost management

One of the things that stands out to me in Briscoes’ accounts is their margins.

Compared to other retailers in NZ, their gross margins are barely average, at around 45%.

Hallensteins, Kathmandu and Michael Hill all manage to maintain gross margins closer to 60%.

Yet Briscoes’ net profit margin is best-in-class, several percentage points ahead of everyone else at 11.2%.

This is a direct result of their superior cost management.

Their staff costs are only 12% of sales.

As a comparison, Warehouse staff costs are 17% of sales, and net margins are only 2.7%.

This is a great example of how a simple business can flourish if costs are kept under control and the basics are adhered to – no fancy offices, no Range Rovers for every executive, no lavish bonuses. Just a small dedicated team, well-run stores and low prices.

A further testament to this is the Covid period. During lockdowns, Briscoes experienced a 35% drop in sales, but made no staff redundant, paid everyone full salary, shut down zero stores, and did not need to raise capital or leverage their balance sheet unlike many other companies, all while paying back their wage subsidy in full. New Zealand had the strictest Covid policies in the world, so there was no better time to see how hard companies could get their balance sheets battle-tested and survive. Briscoes passed with a fat A+.

This is probably the number one factor that makes Briscoes investable for me. It’s their ability to manage costs with laser-focus, as this flows through to everything else – higher dividends, no debt, and its ability to weather setbacks with ease. I have no doubt that having a seasoned CEO with 30 years experience, who knows the business inside out and is constantly tweaking for 1% improvements is the reason.

Strategy

What does the business look like going forward?

The reality is, Briscoes has mostly saturated its market in New Zealand.

There aren’t many areas where they haven’t already opened a Rebel or a Briscoes (usually they’re opened side by side).

Take a look at these numbers:

While they’ve opened and closed a store here or there, the store count for Briscoes has remained flat since 2018.

Rebel is slightly different:

You can see the Rebel store count is slowly increasing, and I suspect it will increase to about 47 to match Briscoes eventually.

But what I like most is how controlled the expansion has been.

NZ retailers inevitably saturate the country eventually, and their first reaction is to look overseas to expand. However, the retail scene in New Zealand and overseas is extremely different. Overseas is far more competitive, dealing in larger volumes, which means overseas chains have higher economies of scale and cost advantages. It’s well known that almost every NZ retailer struggles when it goes overseas, and many fail completely. For example, The Warehouse failed miserably in Australia. Pumpkin Patch failed in Australia, US, UK, and eventually went bankrupt. Michael Hill did great in Australia, but flopped in the US and quickly closed its US operation, and barely makes a profit in Canada. Glassons does well in Australia, but has never ventured further than that, and kept Hallensteins exclusively in NZ.

Briscoes has a different strategy. They’ve never looked overseas (that I know of). Instead, they focus mostly on optimising their existing NZ stores. Other than the Kathmandu deal many years ago, I haven’t heard of them looking to expand or deploy cash for takeovers. Their last big “expansion” was the purchase of the Rebel NZ franchise in 1995, which has been a roaring success. Under Duke’s management, I’m certain Kathmandu would have thrived as well. Instead of trying to “grow grow grow”, they are constantly refurbishing, rebranding and redesigning, and nowadays developing their online offering.

Just like buy-and-hold investing is superior to day trading, I am always of the opinion that controlled, organic growth is best, and Briscoes seems to be a master at it. Just like compound interest, the changes they make are small and incremental, but the results are indisputable. Since 2013, profit is up from $30m to $88m, and it continues to grow with zero debt and zero takeovers. A stable, predictable, growing, perfectly managed business? I love it.

Valuation

Is it an investable business?

I think so.

Now we need to figure out how much to pay for it.

Let’s do a basic DCF valuation, with some conservative estimates.

In 2023, Briscoes did $109m in free cash flow.

If they experience zero growth over the next 10 years, meaning they continue to generate $109m in free cash each year, here’s how they’d look:

With a valuation of $5.52, they’d currently be 18% undervalued.

Let’s be a bit more optimistic. Say they manage to grow FCF 5% every year for the next 10 years:

This gives us a valuation of $7.52, with a solid margin of safety of 40%.

I think we’re probably in between. At their latest guidance, Briscoes said sales are slightly up, with one new Rebel store opening, however profit will likely be down on the year due to political uncertainty (election year), crime rates (multiple ram raids) and the economy.

Plus with the significant increase in payables owing last year, I’d expect FCF to be closer to the $70m to $80m range in 2024, but I do expect them to continue to grow consistently.

I’d guesstimate we’re looking at something closer to this:

Risks?

Every business has risks.

Thankfully, since Briscoes has a local, streamlined operation, many risks are not applicable here.

For example, since they don’t sell many goods on credit, credit risk is low. With no debt, all debt-related risks, such as repayment risk and interest-rate risk are close to non-existent here too.

With their mammoth cash pile (almost 20% of market cap), liquidity risk is also small.

The two big risks I see are foreign exchange risk, related to their supply chain, and competition risk.

Briscoes essentially sells a commodity. Homewares, sports gear – these things are not exclusive to Briscoes and can be bought at any store. For example, if you buy a Nike shirt at Rebel or at Foot Locker, it’s still the same shirt. Therefore, Briscoes competes on trust of brand (both Rebel and Briscoes has significant goodwill amongst Kiwis) and more importantly, price. The strength of the business relies on them continuing to execute and maintain market share in these two markets. Consumers are fickle, and if homewares are cheaper or more accessible elsewhere, they will go elsewhere. This is not just locally, such as Harvey Norman, Warehouse or Farmers, but online as well, such as Amazon Australia or Mighty Ape.

The second risk relates to their supply chain. Many of goods Briscoes sells are sourced overseas, and paid for with foreign currency. As we saw with Covid, supply chains can be shut down overnight. As a small island country that relies on specific shipping lanes, almost all business in NZ is susceptible to supply chain disruption.

The goal is not to avoid risk, but to stay in a position to manage risk. Briscoes, with its strong balance sheet, healthy margins and bulletproof management, appears to be in a strong position, but you cannot discount how quickly a curveball can completely change the picture.

Verdict

While I wouldn’t say it’s at “bargain price”, I like Briscoes at this price point.

A business of this quality doesn’t go on discount often, and their track record is almost impeccable over the last decade. They’ve recorded no losses, sales has never fallen year-on-year, and they have only reported a fall in profit once – 1.5% decrease during Covid in 2020 – which was only due to them (voluntarily) paying back the wage subsidies.

The reason for this, and also the thing I like most about the company, is having Rod Duke at the helm.

One of the legends of NZ business running your company is priceless, and his track record speaks for itself.

The company has grown its share price from 60 cents in 2009 to $4.49 today, reaching a peak of $7 in 2022, which I expect it to return to eventually, all while paying a 5% to 7% dividend every year along the way.

As an added bonus, you have the 7% Kathmandu stake as well. I don’t attribute much value to that, but it does provide a couple million in dividends per year, and if Kathmandu shares happen to perform well in the future, it’s a nice bonus. It doesn’t factor into my valuation, but I think of it as a lottery ticket, included free of charge.

What’s my verdict?

When it comes to retailers in NZ, Briscoes gets my vote as the best among them, and at the current price I’d consider it a reasonably valued buy.

Disclosure: Long BGP.