I’m from UK and cake box isn’t all that. From not looking at any data or statistics, I can imagine market penetration isn’t that strong and it’s nothing to rave about. Don’t overestimate growth
Hi Jordan, could you please tell us more details? I wonder which part of the country are you from. I agree that its market penatration isn't that strong, and therefore I believe there is still a lot of white space for it to grow especially where there isn't a strong Indian community, given the foundation it has built so far. If it's already as dense as Tesco, I wouldn't think it's a growth stock. Love to hear your insights.
Interesting idea, but how do you invest as a non UK investor? They seem to block you from going to their investor relations page if you are not a UK resident.
I've run into the same tech problem. Kinda weird. But that doesn't stop you from buying from your broker or get info from other sources. For their website, you can just choose UK next time...
On revenue per store, you can just divide the total store sales by the number of stores. The kiosks doesn't really contribute much. Stand-alone stores average 350k per year. And management targets to increase that number to 400k, 500k but there's no guarrantee.
Opex/Rev, that's right part of the thesis. They ran into the internal control problems because it was underinvested in certain central functions. It's a must to invest to fix those problems first. To my observations, they have done it right to lay the foundations and we can expect op leverage in the future. They are really delivering on H1 results. On the other hand, smaller peers haven't got it. Those invests only widen their moats.
On Paris, one store doesn't help much. Still long way to go, but that's the start, hopefully a good one. Think about it, if it can open several hundreds of stores in Continental Europe, the stock is going to fly.
Great write-up. My portfolio is very concentrated with only 6 stocks and Cake Box has been my latest purchase. I largely share your views on potential growth and margin expansion, and I do think CBOX is still undervalued.
However, I have a couple of concerns and was hoping you could share your thoughts:
1) Accounting Inconsistencies. I typically stay away from companies with resigning auditors and accounting inconsistencies. What got me comfortable was a lot of the things you mentioned in your article, but particularly the fact that inconsistencies did not make their financials look better, making ill intent unlikely. There are also dividend payments (confirming that cash flows are real), expanding franchisee group and great online reviews. However, the list of inconsistencies was long, demonstrating extreme negligence. I wonder if there is more to it. Are there any other factors that got you comfortable with this issue?
2) Board Resignations. In July of this year, Cake Box announced Adam Batty’s and Alison Green’s resignation from the Board. Could be completely random, but with the accounting issues they had, you start wondering if it’s related. Resignation are somewhat sudden and not much info was provided. Do you have any insights or thoughts into that?
3) Franchisee Economics. They have reported 94k EBITDA on 348k sales at the store level in 2018. They then reported 89k EBITDA at the store level in 2021. First, it’s a little concerning that they don’t consistently provide franchisee profitability. Second, I wonder how franchisees are able to achieve that 27% EBITDA margin. CBOX store level EBITDA looks huge, especially if you consider Domino’s franchisees making 150k EBITDA on over 1mm in sales. Sure, CBOX franchisees don’t pay a franchisee fee, but they pay ~50% of sales to CBOX for supplies. So that’s 174k on 348k of sales. Thus, you only have 80k left (23% of sales) to pay for labor, rent and other expenses to be at 94k EBITDA at the store level. Idk how they manage that. Any thoughts here? Any idea how many people work at the store, salaries and what the rent could be?
The message ended up much longer than I was hoping, but would love to hear your thoughts on these points.
Thank you for the kind comments and great quesitons!
1) The charges have been a while and nothing serious really happened. We've heard from industry people that those were just mistakes. Though it is his/her opinion, but they were closer to it. If I were the former CFO and there was a real scandle exposed, I'd probably have dumped the shares.
2) I'm not too worried. Cake Box has been restructuring the Board since last year. The Board members have been there for 6-7 years, it's more of a normal change IMO. I wouldn't be too annoyed if business partners have disputes and depart from each others, especially when Cake Box is making a lot of changes in the past two years. When I visited their HQ, people there looked quite happy. If the NEDs found something really serious, shouldn't they resign right away? In fact, they are leaving in a quite organized way.
3) On the decline of franchise profitability, I think it's normal that the oldest stores get the best results because they probably have the best locations. It'd be helpful to have in-depth talk with franchisees about their financials, but I have not found the chance yet. But given existing franchisees are opening more stores, they seem to be happy with the results.
Thanks for the response Alex. I agree that NEDs are leaving in an organized way and not resigning right away, which is a good sign.
On franchisee profitability, I am just curious how the are able to have 27% EBITDA margin even when they are paying CBOX 50% for supplies. It means labor, rent and all other operating expenses are 22% of sales combined, which seems very low. It would be great to see a breakdown or an explanation, but unfortunately they don’t provide it.
Thanks for the comment! What I would monitor is how they could accelerate the store opening, more accurately, how they incentize the franchisees to do so. Hopefully their new methods could work out. At the same time, they need to ensure the quality keeps there. From my observation, Sukh is a very careful guy. He doesn't want to dilute the brand. Also going aborad is a big leap, yet unlike UK, it's ok to fail a country or two. If they succeed on these two fronts, it's going to be huge. If not, they'll stay where they are now, just hope the dividend would stay.
I’m from UK and cake box isn’t all that. From not looking at any data or statistics, I can imagine market penetration isn’t that strong and it’s nothing to rave about. Don’t overestimate growth
Hi Jordan, could you please tell us more details? I wonder which part of the country are you from. I agree that its market penatration isn't that strong, and therefore I believe there is still a lot of white space for it to grow especially where there isn't a strong Indian community, given the foundation it has built so far. If it's already as dense as Tesco, I wouldn't think it's a growth stock. Love to hear your insights.
Interesting idea, but how do you invest as a non UK investor? They seem to block you from going to their investor relations page if you are not a UK resident.
I've run into the same tech problem. Kinda weird. But that doesn't stop you from buying from your broker or get info from other sources. For their website, you can just choose UK next time...
Thanks for your review, loved reading it ! You got a subscriber extra
Did a deep dive in the company a while back, happy shareholder since
Although OPEX creep is existent ... If you look at OPEX / revenue, percentage goes up
Launching a store in Paris will not help i'm afraid
Nice extra touch in really visiting the stores, and a good observation on the Indian community
Where did you find the revenue per store though?
On revenue per store, you can just divide the total store sales by the number of stores. The kiosks doesn't really contribute much. Stand-alone stores average 350k per year. And management targets to increase that number to 400k, 500k but there's no guarrantee.
Opex/Rev, that's right part of the thesis. They ran into the internal control problems because it was underinvested in certain central functions. It's a must to invest to fix those problems first. To my observations, they have done it right to lay the foundations and we can expect op leverage in the future. They are really delivering on H1 results. On the other hand, smaller peers haven't got it. Those invests only widen their moats.
On Paris, one store doesn't help much. Still long way to go, but that's the start, hopefully a good one. Think about it, if it can open several hundreds of stores in Continental Europe, the stock is going to fly.
Hi Katapult - why dont you think Paris would be successful? Thanks!
Great write-up. My portfolio is very concentrated with only 6 stocks and Cake Box has been my latest purchase. I largely share your views on potential growth and margin expansion, and I do think CBOX is still undervalued.
However, I have a couple of concerns and was hoping you could share your thoughts:
1) Accounting Inconsistencies. I typically stay away from companies with resigning auditors and accounting inconsistencies. What got me comfortable was a lot of the things you mentioned in your article, but particularly the fact that inconsistencies did not make their financials look better, making ill intent unlikely. There are also dividend payments (confirming that cash flows are real), expanding franchisee group and great online reviews. However, the list of inconsistencies was long, demonstrating extreme negligence. I wonder if there is more to it. Are there any other factors that got you comfortable with this issue?
2) Board Resignations. In July of this year, Cake Box announced Adam Batty’s and Alison Green’s resignation from the Board. Could be completely random, but with the accounting issues they had, you start wondering if it’s related. Resignation are somewhat sudden and not much info was provided. Do you have any insights or thoughts into that?
3) Franchisee Economics. They have reported 94k EBITDA on 348k sales at the store level in 2018. They then reported 89k EBITDA at the store level in 2021. First, it’s a little concerning that they don’t consistently provide franchisee profitability. Second, I wonder how franchisees are able to achieve that 27% EBITDA margin. CBOX store level EBITDA looks huge, especially if you consider Domino’s franchisees making 150k EBITDA on over 1mm in sales. Sure, CBOX franchisees don’t pay a franchisee fee, but they pay ~50% of sales to CBOX for supplies. So that’s 174k on 348k of sales. Thus, you only have 80k left (23% of sales) to pay for labor, rent and other expenses to be at 94k EBITDA at the store level. Idk how they manage that. Any thoughts here? Any idea how many people work at the store, salaries and what the rent could be?
The message ended up much longer than I was hoping, but would love to hear your thoughts on these points.
Thank you for the kind comments and great quesitons!
1) The charges have been a while and nothing serious really happened. We've heard from industry people that those were just mistakes. Though it is his/her opinion, but they were closer to it. If I were the former CFO and there was a real scandle exposed, I'd probably have dumped the shares.
2) I'm not too worried. Cake Box has been restructuring the Board since last year. The Board members have been there for 6-7 years, it's more of a normal change IMO. I wouldn't be too annoyed if business partners have disputes and depart from each others, especially when Cake Box is making a lot of changes in the past two years. When I visited their HQ, people there looked quite happy. If the NEDs found something really serious, shouldn't they resign right away? In fact, they are leaving in a quite organized way.
3) On the decline of franchise profitability, I think it's normal that the oldest stores get the best results because they probably have the best locations. It'd be helpful to have in-depth talk with franchisees about their financials, but I have not found the chance yet. But given existing franchisees are opening more stores, they seem to be happy with the results.
Hope that helps,
Alex
Thanks for the response Alex. I agree that NEDs are leaving in an organized way and not resigning right away, which is a good sign.
On franchisee profitability, I am just curious how the are able to have 27% EBITDA margin even when they are paying CBOX 50% for supplies. It means labor, rent and all other operating expenses are 22% of sales combined, which seems very low. It would be great to see a breakdown or an explanation, but unfortunately they don’t provide it.
Thanks for this writeup. What are the risks factors this thesis not playing out?
Thanks for the comment! What I would monitor is how they could accelerate the store opening, more accurately, how they incentize the franchisees to do so. Hopefully their new methods could work out. At the same time, they need to ensure the quality keeps there. From my observation, Sukh is a very careful guy. He doesn't want to dilute the brand. Also going aborad is a big leap, yet unlike UK, it's ok to fail a country or two. If they succeed on these two fronts, it's going to be huge. If not, they'll stay where they are now, just hope the dividend would stay.