Capital Allocation Returns (AAP vs. AZO), Family Entertainment Stocks, and Customer Behavior

Summary

Paramount Deal Dynamics: Extensive discussion of competing bids for PARA, control issues via National Amusements, go-shop complications, and implications for minority shareholders.
Auto Parts Retail: Deep dive comparing AAP vs AZO vs ORLY, highlighting superior margins, returns, and buybacks at AZO/ORLY versus AAP’s operational deterioration.
Buyback “Cannibals”: BLDR spotlighted for aggressive repurchases (≈45% in three years) and timing vs cyclical cash flows; capital allocation praised but cyclicality flagged.
Family Entertainment: PLAY analyzed post Main Event merger, with debate on marketing/operations, unit economics, and a value angle around ~5x EBITDA; broader comps include bowling and Topgolf.
Movie Theaters: Review of CNK and MCS with box office splits, windowing, and studio-theater negotiations; demand drivers, PLF/IMAX capacity, and event cinema economics discussed.
Media Cash Flow vs GAAP: WBD assessed on free cash flow strength vs negative earnings, debt load, write-offs, and strategic focus on deleveraging; DIS referenced for premium split terms and content dynamics.
Risks & Outlook: Recession sensitivity for experiential spend (PLAY/theaters), over-expansion risks in leisure formats, and the importance of operational discipline and capital allocation.

Transcript

welcome welcome welcome how's everybody doing hope you are doing well my name is Andrew with Focus compounding on air live with Jeff gon Jeff how's it going today it's going very well Andrew how's it going with you it's going great we hope it's going great with everybody else as well if this is the first time you tuning in with us thank you so much for joining us be sure to check out all of our content that we push out into the investing Universe best way to do that is to follow me on x at at focused compound if you want to get access to investment writeups from Jeff going all the way back to 2005 if you're watching on the screen right now you can go to focus compound.com click that blog spot on the header and you can get access to all those writeups look at this December 2005 if you're interested in learning about our Money Management Services you can reach out to me at andreid Focus compounding doccom and we will start that conversation so today's podast Chef we have a lot of stuff to talk about and you know we talked about Paramount a few podcasts ago right mhm and I made the claim I said I don't think this is the end of the story I think somebody's G to come scoop in and sure enough few days ago this ad it looks like it was updated two days ago August 21st Edgar broth brothman what's his name BR yeah the bromfman family yeah this is uh what serums was their original thing that they made their money in what what's that they've been in entertainment things Canadian um well beverage beverage yeah they're making a run at Paramount says the bid gives non- Redstone non boning Paramount sholders an option to sell shares at a premium okay um that the issue is the go shop was with the special Committee of the Paramount board but Paramount's a Shares are controlled by national amusements and the complexity for these deals are always buying National amusements but also getting the approval of the Paramount board for it right so that was the issue we did did know that there was a go shop period for that and they extended it right when this offer came in yeah yeah they extended and now I think um Ellison's Sky Dan company he's arguing that they violated something with that go shop that it ended or they were supposed to let them know and they didn't and now they're pissed off about it too obviously I believe there's a penalty um if they end up going with a different deal that's meaningful it's in could be hundreds of millions yeah so it says brofman has submitted a revised bid of six billion for National amusements and a minority stake in Paramount according to people familiar with the matter he formerly entered the fry on Monday night with a $4.3 billion offer uh the new bid includes 1.7 billion for a tender offer that would give non Redstone not voting Paramount shareholders an option to cash out at a premium of $16 a share the people said in his initial bid brontman didn't offer Paramount Class B shareholders that option to cash out so it was a new sweetener that went on it Ellison's roughly 8 billion offer involves by national amusements and merging Sky Dan into Paramount the deal would put 1.5 billion on Paramount's balance sheet that could be used to pay down debt additionally it would provide more than 4 billion to buy out about 50% of nonbing Paramount shares at $15 each or allow them to roll into the new company mhm yeah the complexity here has to do with the fact that you have the super voting shares and then also maybe National amusements really needs the money you know MH um so that's the difficulty of being in a completely controlled company where you have no votes I mean in this case the B shares don't vote at all it's a very unusual situation actually normally you get like one vote and the other get 10 or something but here it doesn't have any um so I mean does it I think it says somewhere how much the economic stake of the national amusements is in it versus the voting the economic stake is pretty small at this point um so although they have all the votes and they control it it's you know it's a small company controlling a big company and then there's also debt and all that too so it's a big asset to battle over big trophy asset but this is something that's been done done before in media things where they have the super voting and everything mhm with Allison's offer of merging Sky Dan into Paramount do you think Paramount is still a good asset at this point well Sky Dan is related to the movie studio so I think that maybe their plan might have been to merge that and improve it and sell off the other things but I don't know that that was the plan but that would make the most sense because that's the part that the uh younger Ellison um knows about that business and Sky Dan is a big partner for them well we'll continue to bring this up on the Pod but do you think this is the end of it do you think they'll just take Sky Dan offer or do you think there's more to come here I don't know if you'll get the value for the um for what the assets are really worth that's always been the problem here of whether they could organize in such a way to orderly sell off the assets and get shareholders back their money shareholders of the the non- voting shares um and I've always doubted that here so I think they have kind of non-economic interests in it and this is a way that probably doesn't go for the most that it could go for so it's good for whoever is able to finally buy it possibly depending on how it's structured um but it's not so good for other shareholders potentially although it could be fine because it could continue on depending on how the deals are structur you can continue on and then you could get asset sales later or something that get you your money back um but it would have been better if this had started years ago MH mhm so another piece of news that came up that caught my eye because it was interesting because we've talked about Advanced Auto Parts we probably at the end of last year I think we brought it up on the podcast and the stock was down a good amount if we look at a chart right now I mean let's see so it's down about 20% year-to date but it's off of a high of $239 per share it's currently trading around $50 right so it's come down a ton um and it came out that carile is buying uh World pack for 1.5 billion the deal is expected to close before the end of the year and it says in the 12 months that ended at the close of the second quarter World PEC generated about 2.1 billion in revenue and about 100 million in iida right so what's that about uh you know pretty healthy uh multiple on that business but you know the fascinating thing about autoart or Advanced Auto Part which I was thinking about is they're basically in the same business as AutoZone right mhm and the difference in the performance of the companies over the past you know 10 odd years or something like that so wanted to see if you could give like a snap judgment on Advanced Auto Parts so market cap 3.6 billion Enterprise Value is 5 billion like I said they're going to have 1.2 billion after taxes and fees from selling that company that business does about did about about uh 100 million in iida but what happened here at Advanced Auto Parts it's always so interesting to me when you have same industry sort of the same business two different philosophies on Capital allocation right AutoZone has long been known as a cannibal since like 2008 and the performance of these two Securities and businesses could not be more different you know yeah I think Advanced Auto Parts was doing well until the stock collapsed as a stock it wasn't doing that well as a business if you look the things we look at right it's gross profit higher each year it's operating income higher each year all those things it hasn't been for like 10 years I mean it's been going flat to down for a while so as a business it hasn't necessarily been getting better and return on invested Capital as you can see there is lower almost every year for a decade or more yeah um yeah when did it Peak it let's see 2011 okay and then it which makes sense right in the middle of the recession basically or coming out of the beginning of the very slow growth out of it but it basically was flat to down since before then of 2007 or 6 or whatever let's say to you know a few years after that Peak that lasted three or four years and then it's been flat to down on those measures the whole way um but it traded at pretty impressive multiples I I mean I guess you could see that probably on you know some of the key ratios and things of the MH um yes so I'll just read the uh price to earnings so let's see when it Peak and well we have it going back to 2014 but yeah it always trade north of 20 right so I'll read from 2014 on for the PE and I'll round up or down 24 times 23 times 27 times uh 15 times 27 23 21 so yeah it always trade at uh traded at a pretty high multiple of earnings which is a very high multiple for a company that during much of that time wasn't growing if we look like if we at sales gross profit operating income it wasn't having a lot of growth of the business um over time so that's kind of a high multiple for that to be happening yeah it was like mid single digit growth some years or really you look at it's even easier to see on the overview because if you go a few years at a time you can see that it's not really growing that much especially in the numbers that really matter which like we said are gross profit more so than Revenue especially which if you're retail and then operating profit you know the gross profit is I mean let's see if we take five years at a time or something how much does it grow 2014 versus 2019 2014 we're at about 4.5 billion 2019 4.3 billion and then five years after that what was it at back to basically 4.5 billion yeah so the same that had beened 10 years before and hadn't really grown so you know I mean and there's inflation during that time period right I mean actual car prices used car prices prob of the past past 50 years of inflation at maybe 4% I mean there's adjustments the FED adjusts things because they say there's you know honic um things so like the cars are better but if we just said what's the cost to actually buy for cash a used car for a consumer it's probably gone up at 4% a year for a long period of time I would guess it's it's ahead of actual inflation um so you would think it cost more to repair things over time so you think in real terms that your real gross profit is not going up and that your business in real terms is shrinking a little bit which is fine I mean that's fine but that's unusual to have a 20 25p or whatever on that I guess it's very resilient and people like that that it will do as well or better in a recession than it will in a boom that's true MH um the quality of earnings so look at the operating profit so 2014 operating profit 852 million 2019 677 million um and now I mean 2023 was a horrible year 114 million uh but it's just gone downhill from there now they do they have tended to convert I mean I haven't calculated the cumulative numbers those are median numbers on on Quicks but they have tended to convert free cash flow at a pretty good rate versus pre-tax income like that's not terrible um for a business that has a lot of you know working capital it's actually pretty good so for an actual real physical business it does convert into free cash flow pretty well um but we're still talking about I mean it often has traded on multiples equal to or higher than over-the-counter Market maret and it's grown you know a lot less um and its Returns on capital or less right so I I think the stock got ahead of itself when it gets to those sorts of multiples why do you have those multiples as opposed to like average multiples for a business why do you think the businesses deteriorated is that like competition is it what what would you say it's a good question I don't know the answer to that I mean I don't know how much it's deteriorated really like I don't know how inconsistent the results are I think the results are more consistent than inconsistent actually if we look it's almost 20 years of mostly pretty consistent results there was that that blip up that we talked about with the the coming out of the recession but and then there's bad results very very recently but actually that's a pretty consistent like 20 year almost record there 15 20 years there's a long record there let's see if you do you see with the lip where it starts to come up uh or where it tops out there yeah a couple years after that if you go up like there what year are we there let's say one year before that 2005 2004 okay so from 2004 to 20 yeah about 20 years most of that is actually really consistent for business much more consistent than any other business and then it's not economically sensitive or it's counter cyclical so maybe the extreme consistency of the business even though it wasn't growing or getting better is an attraction for people yeah mhm mhm compar it to AutoZone that has consistently grown uh both Revenue gross profit operating profit I mean this looks like a dream if you own this company asset growth of the two businesses is pretty similar actually asset growth and revenue growth is probably not radically different I think it's yeah look at that so for people listening 10year ker in Revenue at Advanced Auto Parts 6% 10-year ker in Revenue at Auto Zone 7% % if you round up 10year ker in assets at Advanced Auto Parts 8% 10year ker in assets at Auto Zone if you round up 9% so it doesn't look that much different yeah no and that could be also even the assets could be a start and end thing because it could be Heavy right now and they could have been light 10 years ago possibly it depends but that's very possible given where we are in the Cycles too so they could actually have asset growth and revenue growth more in line with each other but obviously at AutoZone like you see there the EPS growth is good and free cash flow like we talked about but you could just see that you don't even need to look at the percentage numbers you can always just run your eyes across the 10-year numbers and the numbers we talked about like if we just use gross profit as the Top Line basically and use that do we have kind of incremental growth more often for this company yeah MH so same thing if we look five years ahead or something let's say 2014 to 2019 what was the change in gross profit for AutoZone we'll go we went from 5 billion to 6.3 billion and then 5 years later 6.3 billion to 9 billion so I mean that is like a big growth difference over time and really gross profit is the only thing that you get to use to run all the rest of your business you know anyone if they're willing to sacrifice gross profit can show additional sales in a business that's at all retail oriented or inventory oriented in any way you just cut your price and you can sell more um I mean I think we had some economic data that people were impressed with sales numbers but we we adjust them for certain things so if you cut your prices and sell more which is very possible in a single month um that's actually a sign of bad things about to happen but it causes your retail sales to go shooting up so you need to know both of those numbers what you really want to know is what are the gross profits at a minimum of retailers not really what was the total amount of final sales that you had um but we don't have you know government data on that so it's not just I mean it is capital allocation but it's not even just Financial engineering I guess is what I would say they're just things more basic if you look I think that um would suggest one should have a higher multiple than the other but I don't know does it give you EV to eidon numbers on the two of them um each year it gives it gives you pe but then you have to kind of adjust for the structure of the sure let's see it do not on here but we could actually pull it up on kin uh let's see so I think we go to historical and we do EV to eida okay and then I think we could also do um a and evid so there you go right there yes so it has the two so we can compare we can go back 10 years and you could see they I mean they're obviously very different right now Auto Zones at 14 times EV I and AAP is at five times but for most of the history like go back I mean they kind of traded very close to each other I mean at least from like 2014 to8 no they they really always traded pretty closely I mean I think it looks like they mainly started to diverge in 2019 yeah correct I think that you basically have the Divergence from what I can tell from it the Divergence in the markets realization of the difference between the two companies is since Co but the or a little before Co in this case but um it's only going back about 5 years whereas the results difference easily goes back 10 years and it could go back further than that we don't know um from just looking at the that data um I mean we know some because we have the return on invested Capital getting better even earlier in Auto Zones history so um but some of that is also people look at the stock price and if let's say your earnings per share are going up 15% a year if your stock goes up 15% a year in some climates people get a little nervous about that even if your earnings per share went up that much they think oh I should take a profit I should you know um so some boring businesses that can grow 15 or 20% a year in earnings per share can get where they don't get wildly overpriced you know like a a hot growth stock if you can grow consistently at that kind of number because there are always people who are going well why is it ahead of the market this year and this year and this year because its earnings per share growth is higher you know look at this Jeff from the quality of business just going downhill so Advance Auto Parts will go back to 2011 the return invested Capital looks like is in the 25% area and then AutoZone is the green line but AAP just consistently went down where Auto Zone say the same were got better basically over the time period yeah but you see a lot of writeups of Valley investors club or whatever things you can think about that are comping things against other businesses and so at any static point it might seem well you get a little bit lower multiple I mean it wasn't much lower much at all but occasionally you might say oh you get a little bit lower multiple or oh they're bringing someone in who is going to turn things around more there's more stuff that can improve at this company in the next 18 months than this company and so it creates demand for the other um stock there you know mhm even if it doesn't have as good a long-term result um we could throw O'Reilly in the mix and that traded I mean the business was similar to uh AutoZone where it got better but it looks like it started off at a worse spot and just consistently got better seems like Auto Zone's always been pretty good O'Reilly's gotten better over time and Advance Auto Parts has just gone downhill I love it though wherever you see an Auto Zone you always see an O'Reilly right next to it but it's sort of a mixed bag if you'll see an advanced auto parts right like right by it but I swear wherever there's an Auto Zone couple blocks away or right down the street like 20 yards you'll see a uh o mhm I mean we can I mean we're looking in retrospect so it's easy to see this but this is sometimes the case that highly operational businesses if things don't change with them have good results or have ways of getting better all the time as opposed to ones that don't and that could be organizational things or it could be other things and it sometimes gets overlooked it would be natural for people to look at these three and say Yes their business mods are a little different or whatever but that there there's not a moat around one and not the other you know um you see it in Insurance things banking things a lot of times that you know yeah it could be argued there's not a natural Mo but one is operating better and has a different kind of strategy maybe a different focus on what it's trying to achieve um than another Auto Zona has obviously been a cannibal uh shares outstanding in 2014 34 million and where we sit today it's at 19 million you can look at a AAP compare that um 73 million in 2014 60 million and uh at the present and then we could look at O'Reilly as well just while we're at it O'Reilly Automotive uh wow they're like Autos Z they bought back a huge chunk 106 million in 2014 61 million where we sit here today it's a shrinking business long term I mean it's doesn't grow as fast as the economy grows certainly and it may even not really be growing much in real terms like we said at all we don't have numbers under the hood on that but I'm sure that as a frequency percentage of people who are actually buying from you um for do it yourself and stuff as opposed to what it was before as a percentage you know penetration of the population is or car owners is lower and lower and lower all the time probably we can guess that just by looking at the numbers and saying they're not keeping up in real terms and the companies aren't losing market share to the overall industry so it's pretty clear that that's must be what's happening the beautiful thing is though Jeff is that you could have six or 7% Topline growth control your gross profits control your expenses generate cash keep return invested Capital High buy back a bunch of stock and if you look right here the three-year ker Total return for AutoZone 24% 10 year 19% five year uh I should have said that first move it over uh 5e 24% 10 year 19% uh kager so the results have been incredible abs and I mean there's lots of famous stories of companies that probably their original Market has not grown during much of the time that they were successful stock coffee consumption hasn't grown During the period you know per capita and stuff During the period where Starbucks was successful certainly the kind of retail that Walmart was originally in hasn't grown as fast as the economy over their period of time now they've got into slight all those companies have got into slightly different things over time but not enough that it's not just mostly market share gains and just high profitability on a a per location basis um now you always run into the problem that eventually the per location numbers are a lot worse and so that's why you have to buy back your stock and everything because you saturate yeah yeah O'Reilly right here total return 3year 22 or 23% 5 year 24% 10 year 22% Total return ker it's incredible absolutely incredible so I guess if you're Advanced Auto Parts now what do you do how do you you know get back up to speed here and and turn things around well we have to look at some of the numbers there so I think we probably want to start with balance sheet on that so you can see that on a reported basis their offering profit Dr dropped off a cliff two years ago they were making 800 million now they're making 100 million there's never been a number like that in their history going back a really long time um but then if we look at their balance sheet what do we see in terms of like um their current assets recently and we'd have to look quarterly too but dudes that look fairly normal in terms of what they're carrying in inventory and what they're doing in terms of yeah let's see on an annual basis that looks pretty normal right MH we go over to quarterly see if it looks different but kind of looks very similar well on an income basis how did they lose $700 million of operating income that they had two years ago it went somewhere [Music] mhm so how much a gross profit dropped in the last couple years I'll just read from 2020 on uh 2020 4.5 2021 4.9 2022 4.9 2023 4.5 yeah so it wasn't from gross profit or no more than half of it was from gross profit coming down that's for sure so it had to have come in other forms below that mhm what do we see in terms of the cash flow 2021 1.1 billion then 737 million then 287 million yeah so that is a big negative that you see and it will happen with these companies sometimes depending on the cycle is that their their cash flow from operations is going to vary more because of working capital things so can we see what large working capital items changed much let's look at the ones that are um negative uh a big difference was let's see change in working capital I'm just going to go from okay 2021 on word change to working capital 128 million uh 2022 negative 93 million 2023 51 million uh change in deferred tax 59 million 2021 2022 17 million 2023 negative 48 million um and then stock based Compass jump around a bit but I would say it was the change in working capital and change a deferred tax pretty big amount mhm let's see um um yeah so they their inventories are about 200 million more than it was a couple years ago their um accounts people are similar and their inventory is much more important number than anything else their inventory is like a third of their balance sheet or something probably and that might include Goodwill and things like that yeah so tangible Valance she is even more than that um liabilities stay pretty similar so it was generated by having less net income which means that they had um some amounts of higher sgna basically but how much higher could they have had yeah well total operating expenses went up about 300 million and and sgna went up about 300 yeah okay so those are the same number so that went up about 300 million and then we said gross profit was about the other 300 million so that explains about 600 million which is about what the drop was from 800 something million to 100 something million probably and then it was a little bit worse in terms of cash flow from operations because we said there's a little bit of a build right in in inventory essentially which is not a big percentage build but if a you know a change in inventory for them of 10% would be half or 2third or something of their operating income you know their cash flow from operations could drop by 50% if they had say a 15% increase in in inventory or something you know a company like this if they had a 30% increase in inventory would go even if they were selling at the same rates and everything as before if they just it this never happened but they just decided that they needed to grow inventory by 30% or something that would wipe out all of their cash flow even if they were exactly as profitable as they had been at their Peak so you could imagine so divide that by smaller numbers and say okay even if a little change of five or 10% that you shouldn't have had um so maybe they overestimate what their sales would be and everything it's possible do we have gross margins yeah could pull that up right now gross margins went from 44% average to 40% in 2023 MH which could if they had cut their price to achieve that um then that might be what we're seeing in terms of inventory and all of that or if they just failed to pass along inflation which could also have been happening if the things that they had were inflating but that's kind of the factors that their sales weren't sufficient Rel you know the demand probably wasn't sufficient to what they expected in the last two years I can't really think of what else the issue would have been mhm so how do they turn it around they're shedding assets bringing in capital well I mean what was their gross let's let's just use gross profit as an example what was their gross profit years ago across that line let's just say from 2014 to today what kind of numbers do we have you can you can round them off itn't it was it was always CL it was we'll say 4.4 billion 4.5 billion yeah but what was their their gross margin margin was always 45% is high 44s to 45 it looks like okay all right and then their Returns on Capital were okay right I mean the return that I'm seeing does include intangibles but I think we just saw intangibles are 10 or 15% or something in the balance sheet I we'd have to check but it's not a huge huge number so in terms of tangible returns it's not that much higher so it's really just a question of what the gross profits are what the turns are um their revenue right now we we said what is it is it close to 12 billion what is it now 11.2 okay so on a cost of good sold basis they're turning not even three times they might be turning two and a half times though so you're turning two and a half times and you have say you know like we said 40 or higher percent gross margin yeah I mean the on you're talking about a high you know really high number there of what you could be doing um terms of return on tangible assets probably I mean they have property planning equipment too but even when I add that stuff in it's not a problem I mean those numbers look really good compared to to say a supermarket or something which would aim at its best to be making you know good returns but like the supermarket will do better because they probably have lower sgna as a percentage of what they have that could be a potential problem for them I mean sgna we said is about is it about a third of sales sgna let's see if we look at the income statement it's one turn right so sgna is normally about the amount of inventory they're carrying so what was it recently a she in 2023 4.4 billion before was 4.2 so it's gone up right so I'll just read onward from 2019 uh 3.6 3.7 4.1 4.3 4.4 so pre-co was it was about 3.6 and we're at you know 4.4 so so if you turn your inventory like two and a half times let's say basically the first two turns are to pay for everything and then the last turn that you get is your profit right that's what's actually coming through because the the First turns of the gross profit the first two are being used basically to cover the sgna and that's kind of the the break even that you have to hit and then after that you you get that last number that you have so even if the turns decline by you know um let's say about 10% or something that would feel like a really big change in the business so it's probably due to turn slowing but uh I mean when we looked it wasn't that bad let's see um if we but but wait what did happen to gross profit in the last two years a gross uh margin okay gross margin went down yeah it was out rate across from 2021 44.8 44.2 and the 40.1 so if we look at the balance sheet for those same years did inventory stay the same because if inventory stayed the same and gross margin came down then what happened is you actually basically uh you only maintained inventory went up yeah okay so that's the problem insufficient demand or excess of Supply compared to the Demand right cuz what you were doing I mean they weren't literally cutting their prices because presumbly prices were going up initially in the early parts of that period at least but they weren't passing it on fully and so by not passing it on they actually weren't able to generate even more sales from that to clear inventory if your margin goes down and you don't clear any inventory then that's a sign that you're you have insufficient Demand versus the amount of inventory you have on hand so here it's an interesting question of like why did that happen mhm I was say is that just people going to AutoZone or are O'Reilly more over Advanced Auto Parts is competition well we could look at AutoZone and see what happened with them sure we'll look at their gross margin the last three years now they don't have exactly the same customers they have some of the same customers but some are different so let's look at their gross margin the last three years okay 2021 52.8 52.1 and then 52 okay and then let's look at their balance sheet inventories went up a good amount from 4.6 billion in 2021 2022 5.6 and then 2023 5.8 rounding up okay now the questions that we have there is like how does that relate in terms of turns because if their sales were also going up then that's not necessarily a problem but we could also see that from cash flow if we go to cash flow has their cash flow deteriorated while their incomes gone up cash FL from operations 2021 3.5 billion 2022 3.2 2023 2.9 so it's gone down yeah so that could be a strategic difference too is that um AutoZone has not reduced pricing but has accepted a higher absorption of inventory on hand um so that would mean that their Returns on Capital are going to go down over time their cash flow is already going down and then to clear that they would need to cut prices or to you know order less inventory and to have lower sales in the future too so there's always a mismatch between Gap and the actual cash flow that you see in the business that's more indicative looking at cash flow and balance sheet of what's really happening in the business right now um and then that gets reported later basically I mean in terms of what you'll what you'll see because if you have too much inventory and you're not cutting prices on it you don't have to mark it down in any way now but you know that your gross profit will be lower later and then your earnings and everything will be lower later as that happens um we could also look at income statement to get an idea of what there sgna is what's their sgna so they just have total operating expenses on here some reason quick to break it down but total operating expenses uh 2021 onward 4.7 5.2 5.6 in 2023 okay and then what's their um what does their income statement say in terms of sales 2021 Revenue 4.6 I'm sorry 14.6 2022 16.2 2023 17.4 billion okay so AutoZone has both higher gross margins and it has higher and it has lower sgna as a percent of um sales if we look at the balance sheet then let's see what their turns look like so what's their inventory normally 2021 onward 4.6 billion 5.6 billion 5.7 billion okay so AutoZone has higher turns higher gross profit and lower SG has a percent of sales so it's a better business in all three of those points that's very operational so it just means that its business model is superior to advance by a significant amount like the margins are so big in this industry that one isn't necessarily going to push someone out doing that but if you had that kind of difference in like supermarkets in the same town one would push the other one out because they'd be able to take all their business with those differences in a business like this that's not going to happen for a few reasons one customers are less frequent don't have a good idea of what prices are they're just going to show up because it's the most convenient place there so you'll get some business that way and then two all of them certainly on a gross profit basis at least are so profitable that they don't drive each other out of business but one business model can be better than another one and certainly at least for the last few years we haven't looked at all past years AutoZone has a better business model in all the key respects as compared to advance which doesn't make Advance a bad stock it just makes it a worse business at the same price mhm interesting well that'll be a a fun one to follow speaking of cannibals I wanted to highlight this company tweeted out this yesterday I file companies that announce like large BuyBacks you know and I was reading in the Wall Street Journal and uh Builder First Source oh they recently announced that they are going to buy back another billion dollars worth of stock uh the crazy thing is Jeff is over the past three years as I have highlighted right here they've bought back 45% of their shares 45% okay of their stock over the past three years and majority of that buyback was was done at uh as somebody pointed out done at lower prices I think in the $80 share price but as you can see right now I tweeted out bill bilder for Source has repurchased 45% of his shares over the past three years uh but the returns the stocks kager Total return kager 50% over those three years um and I said that I thought it was a cannibal that would make Munger proud um but yeah look it right there shs outstanding going from looks like under 250 million to 116 million here today okay you know what I'm going to say about this one though right what so okay so these BuyBacks are timed exactly with cash flow things so if you look they've gotten 80 or 90% of all their cash flow for like the last 15 years in like the last three years which is when they did all these BuyBacks they were not cash flow generative until very recently and then they're hugely cash flow generative and that's when they're buying back their stock yeah um yeah okay I mean these are very cyclical businesses right yeah I mean this company let's go to the cash flow statement just cash flow from operations is really really simple uh preco what was it doing preo uh 2019 54 million mhm which now for them is like a couple months of business or something or something right yeah uhhuh MH they also acquired a different business too so they've been like buying other suppliers and whatnot so their Market power has gotten better yeah but I I don't even know that they were yeah I mean I don't even know they were profitable during much of that period right so something has happening where they're generating a lot of cash flow from operations recently um and it probably has to do with pricing because unless they went into totally different businesses their gross profits also jumped from like 25% to 35% or something incredible so um which depending if you're in a more commodity type business generally means that there's just scarcity in the business and that that's what happens so it could be fine it's certain I mean it's it's better for the industry than if they invested it back in the industry in some way if you have unusually high prices what you don't want to do is invest in growing inventories and everything so that's saying return that Capital to shareholders they are returning the capital shareholders but they're basically buying it back so that you get more and more inventory and more and more everything over time you know so it's different from a dividend now they could buy it back and you could sell it mhm the question is should a company like this pay out maybe special dividends or something like that or go into a different business line or whatever at a time when this happens um look at that asset growth over the past 10 years 500 million in 2013 to 10.5 billion yeah so it was like a Serial acquirer you know before right yeah MH yeah thought that was and maybe the improvements are from other things happening there that that caused that um you know with scale you could say that your gross profit went up for reasons because of that but mhhm yeah interesting so this week Jeff what what I want to start doing going forward is talk about like a stock of the week or an industry of the week something to bring keep bringing people back and US profiling different things right so not necessarily giving stock ideas because if we're going to record one podcast a week 52 ideas a year good luck but just things that weer can do it I think Kramer can do it so you know Everyone likes to dunk on Kramer to like give I couldn't even name as many stocks is he can somehow say that he know has heard of these stocks he's awesome dude he he's a great I mean people like to dunk on him and it is kind of funny but like he's a commentator as a hedro manager he was very successful I mean people forget about that but um he's a commentator right do your own research do your own due diligence I don't think we've ever purchased a stock based on you know a recommendation on TV or anything like that and we never will but um so I wanted to talk about family entertainment uh company so explain what that is yeah yeah it's in our wheelhouse of like circle of Competency things that we like to focus on you like the business uh I mean you look at like gross margins high gross margin business uh theme parks stuff like that uh David Busters then we could talk about uh you know I want to talk about maybe uh Bull bwl and then um uh Top Golf as well and get get your opinion on like just this industry uh how it came up for me was I was reading a value investors club right up on uh David Busters which I thought actually was interesting and I like the business David Busters recently merged with main event and uh they have new management in place and their goal is to do different things change their marketing up a bit and try to like improve iida um I don't know if I've ever gotten your opinion on the podcast about what you think about like Main Event uh oh the merger was amazing yeah yeah what this is the kind of thing that's amazing that gets allowed you know talk about anti-competitive things this is a horizontal merger where they're all the same thing I was thinking the same thing it's great I mean even if they just took over the main events and closed them all down um it would be something yeah I think the last time we talked about Dam Busters was 2020 when the stock was like single digits yeah they needed to raise capital and everything because of Co right yeah yeah and then of course when it opened back up and people had nothing you know they weren't spending as much time working and doing other things and there was not a there weren't movies for years and there was lots of you know they actually then sort of benefited much faster than people might have thought whereas like Cruise Lines or something it took much longer for them to get back so it was one of these interesting stories that way but temporarily it was like oh we could go out of business immediately you know when it they were shut down for a month or something right if if landlord said you got to keep paying your leases CU it's all leas stuff with these companies mhm mhm uh so I'll give a background on what he says the business is we could go from there he says uh David Busters operates in the family entertainment center space it's large 15,000 55,000 foot locations feature arcade style gaming food and beverage offerings including alcohol and lots of TVs for watching sports lots of TVs I think they actually put that in their uh in their investor presentation they highlight that uh the arcades feature both traditional games as well as virtual reality type offerings the food is typical bar food burgers fries Pizza wings fried appetizers salads Etc there's a full bar with a large variety of specialty cocktails uh so if you're not reasonbly priced compared to competing yeah and these things are usually attached to malls right like good large Mall basically yeah that's why I think of it if you see a Cheesecake Factory or something you should see a dve Busters right there they've come in more they want that kind of thing more malls than ever before I mean especially since Co and all that but even the last 10 years more non-shopping things right so they've been attracted to things that especially things that also have doors to the outside and inside um the mall both most people going to dve and Busters are probably not going from the mall side of it even if there is an entrance from there but so yeah they like to add movie theaters uh restaurants for you know sit down dining stuff and entertainment things like this all the time to malls now try to fix them up mhmh yeah when I was reading this I was thinking about I was like you know I like DAV and Busters as a child and I like DAV Busters as an adult whenever you find a business that's like that you should probably pay attention to it that's like a good model I think if you liked it as a child or you enjoy it as an adult pay attention to that you know yeah I mean because it's kind of DAV Busters is the poster tra for family entertainment but it's also kind of a lie that isn't their business it's not family entertainment uh their business is that we're both catering to kids and to you know adults um single adults and people like that not so so much that it actually is family but that it's what you want to call it all ages or whatever and at different parts of the day yeah mhm it's basically like you're in a casino there's like no windows or anything like that you hear you know all the games playing and whatnot sure so I mean that is that's the actual business model of a family entertainment center is to make it like a casino like a Vegas casino where you don't necessarily make a lot of money on some of the things that you have in fact you don't make any money on some of them but it's there to drive traffic and to keep people as a captive audience to spend money on high gross margin things um the highest of which are the games themselves um but then also on that you have things like alcoholic drinks you have you know and then down the list you have the food and down you know as we said I mean you're you're not trying to make a ton of money on on your Entre and things but you are maybe keeping people there longer doing that and then anything that you have to have staff for and they don't have much of D Busters that would require that but that stuff probably doesn't make any money but it's there to lure you in and keep you busy and everything to play the game and all of that umh and because they are connected to malls almost every single time um that probably added to the selling pressure in 2020 like with malls closing down and sort of the depth of the malls and the pandemic and all that sort of stuff too I remember we were talking I guess but it's somewhat a benefit to them because they're basically buying the from landlords you know what I mean you're leasing so the weaker the bargaining position of the landlord the stronger your position especially if you're bringing traffic to the mall but I remember that was that was the narrative in 20 like when the St basically crashed I don't think that as many people enter from a mall entrance that are also Shoppers as people might think but I don't have good data on that so you think they're going to Deon Busters because they want to go to Busters knows that and that that's why they want them that's the same thing why do you think Barns and Nobles in some malls and stuff because they I mean it doesn't even have to be that successful a store I mean they the landlord wants them like look you know they want those kinds of things on the outside that are bringing people in there I don't know how much it helps them but it helps them some what I mean what's there you know I mean these are huge we're talking about what we say 15,000 or something whereas that's 10 times the size of maybe some small store that you might put in but you know would they rather have a Dave Busters or 10 Buckle type stores or something yeah I mean they have enough of those kind of stores they would rather this are the kinds of things they want to bring there yeah I think so yeah I agree that's the same thing with Cheesecake Factory that always gets brought up right like are people going to the mall to go to Cheesecake are they going to Cheesecake because they're walking the mall and shopping at Buckle and now they're hungry right yeah it used to be helpful before when there was many more people at some impressive malls and certain times of the year it did help yeah people went to a mall and also went to the movies went to a mall and also went to the the um uh restaurants and for teens for some things that still happens but not to Cheesecake Factory teens can't afford that kind of thing MH in 2022 David Busters acquired privately held competitor main event which operates similar facilities although main event locations also feature bowling there are 165 David Busters and 59 main events with plans to open more so you've been to both yes which do you like more personally I think I like Main Event more okay yeah how about you probably D Busters okay we're just different that's okay uh competition in the family entertainment center space is fragmented with with two prominent competitors that are publicly traded Bolero B WL which operates bowling alleys that also have arcades laser tag and food and beverage offerings and top golf M odg which operates upscale driving ranges with food and beverage offerings formerly public Chuck-E-Cheese operates arcades with FNB offerings that are targeted at families with young children there are also a variety of regional operators that compete with Dave and Busters but there are no competitors other than the three just mentioned that approach having National scale um yeah and I don't know how much I would call those competitors they're they're comps for parts of the business but if we're calling those competitors then everything that you otherwise could spend is also a competitor depending on who we're talking about if we're talking about a group of single people we're talking about a couple if we're talking about young kids whatever there's tons of other competition that are just in different categories um the same people are not going to watch those big screen TVs that are going to Chuck-E-Cheese I don't even think they're allowed in Chuck cheese right they they you can't just have adults go to Chuck-E-Cheese without children right isn't that their policy oh is that right I think that's been their policy for a long time I think so but I don't know um so yeah so Chuck-E-Cheese is competing with one part of their segment which is part of their day part and stuff but it's kind of like saying there's we have face competition during our daytime part with this kind of company yeah but there's not I mean most towns that have a um well yeah I would say most towns that have I'd have to check but most towns that have a d ERS would also have a Chuck-E-Cheese there's there's many times more Chuck-E-Cheeses originally I mean the footb has been reduced I think but Chuck-E-Cheese is a much smaller format what's it the size yeah maybe probably even smaller than that honestly yeah okay so he talks about the business the company does 65% of its revenues in entertainment games which carried the very high gross margin of 91% the other 35% of the business is done in food and beverage which has a high gross margin for a restaurant operation at of 74% presumably because of the higher mix the beverage Revenue both alcoholic and nonalcoholic I should it's really a bar it's not a restaurant I mean it's tall as a restaurant but even how the seating works and everything there is seating that you can have but it's the kind of seating that a sports bar or something would have it's not a it's not uh it's just like a bar with an expanded restaurant business just like many successful bars would have like a uh some food things like that too but the main things they focus on are the kinds of things that are in a bar MH uh the reason I wanted to bring up D Busters too I mean it looks like the stock peaked recently at $66 per share and we're at $32 per share so it it has sold off a huge amount and honestly if there's actual talks of a recession or whatnot uh this is the type of stock not necessarily the business but the stock that I could see just from flows and momentum and stuff like that to get sold off so that's why I was like okay this is could be an interesting because it looks cheap already and if we actually do go into res five times iida yeah that's my point yeah I was like it's pretty cheap that's remarkable and that's not that shocking because it's only had 10 times like pre-co IID or something because it's not like iida went shooting up and they own a lot more things now mhm cuz that hasn't been re estated to reflect that I don't believe for quick aass doesn't have restate financials from previous periods so uh let's see so it says after the closing of the main event deal most of the SE Suite of David Busters turned over with Main Event CEO Chris Morris assuming the role of David Buster CEO um and then it says this Sky rights or this change of management is an important piece of the David Buster story because the company has historically been undermanaged under prior leadership David Buster simply had not been following many of the best practices of retail and restaurant management as an example they only recently began building a customer list that they can directly Market to another example Also regarding marketing best practices until recently almost all their advertising was being done on linear TV and they spent almost nothing on digital so he's making the case for a change in thek marketing a little bit right um it says at its June 2023 investor day the new management team outlined a series of six operational initiatives that they believe have the potential to grow iida by 430 million to 600 plus million given the company did 556 million in iida last year executing against only a fraction of the opportunity to find last year would be a GameChanger to iida so that's a part that kind of caught my interest event people coming in doing all this yeah I don't know that I agree with any of that and they might run it right into a ditch yeah how could they that's what I would be scared uh well because I why should Dave and Busters be run more like businesses that are inferior you know like all the examples that they're giving to copy the marketing that they're doing and the other things that they're doing at the other ones none of those businesses make as good returns and stuff on the underlying store economics um I don't think so and Dav Buster's record was actually okay considering you know going and everything before then um so yeah um I also just as someone who went to D Busters and stuff I think that their marketing was perfectly good and actually probably pretty cost effective and everything of how they were doing it but yeah he said so this is the six levers for organic Revenue growth from marketing marketing optimization strategic gaming pricing improved FMB remodels special events technology enablement yeah I mean look they have play cards and stuff in it and then you carry those over and everything so they have data and all that that's the part that's important to know who your whales are and stuff that way and what they're playing and and how much and um you know what that drives in terms of the gross profit and everything um there's a lot of operational complexity added by increasing the food and the food part is certainly but even food and beverage just in general um cleanliness concerns all sorts of things when you go down that road um and so I I I don't know about that um having a very good idea of what they're doing when they're on premises I think is some of the most important and targeting them for reactivation that way is is somewhat important um but basically having the right mix of people playing the right mix of things in terms of how high it drives your gross profit is something I would focus on more and I would like I said it's a casino really it's not a restaurant so I think to be completely honest people from a casino SL Resort Hotel type thing I would be more knowledgeable about that kind of thing people who are um from uh the other side of things and I think bowling is actually quite different and and it it's combined with family entertainment things but I think it's the least similar part of it um it it brings people in and uses it during other periods of time but it's interesting how completely 100% dedicated bowling things are different from things that combine it with other stuff um I put it in a different category definitely but what do you like about this industry well look I I like any industry certainly where you have a audience that's kind of captive on premises and then you can be maximized what you're doing for their enjoyment and your profits throughout the the premises you know I mean I like a supermarket type thing that way I like a um a family entertainment that way um or theme park or you could say that or Casino or whatever things um you have a lot of information about people and what they're do doing you can see it right there and you can design things to drive the profits that way you also have a wider selection of things that can keep them coming back and enjoying it through synergies that you have um like a cruise ship right a bigger and bigger cruise ship in general they've made the cabin smaller and smaller that's not what they're competing on they're competing on the idea that there'll be more experiences more different things more whatever that you can do for everybody and you have more choice that way than you would on a small one um and a very large premises allows for that now one thing that is interesting is that in general in this industry an odd aspect of it is that the larger and larger the place is the lower the returns are on like a per square foot basis tends to be yeah which is unusual in most Industries that's not what would happen and so you wouldn't build ones as big as what they have um but that's not necessarily bad it it it you know your operating expenses and stuff can be lower and there can be other benefits to it too like we talked about with rent and all of that but it isn't necessarily the case that like if you had a highly trafficked arcade only thing that was 3,000 sare ft like we were at some place that was a boardwalk right in New Jersey yeah that's a more profitable business model it depends on what the rent is and everything but no you can't compete with all these other things that you offer on a bigger area as you can with a really packed in arcade in a hight trffic area that's going to make a lot more money obviously on the gross profit things that we've talked about yeah so stripping all that out offering no food offering no any of that stuff and just focusing on that yeah it's more profitable but you can't do that in town after town around the country you could only do that in vacation type uh already like destination locations right that you could put something like that in and make it make money these you have to make your place a destination and then get them to play the arcade games MH so what do you think about Dam Busters on that five times IAH is there some potential here is there enough of a margin of safety for you to be interested I that's pretty cheap for a company like that [Music] um yeah I guess then I would have to know more about the management that's taken over and what their plans are okay so it's a great example so okay so plans management take us through that thought process people are always asking what are the right questions to ask what would you be focused on so well so the marketing thing is one problem so I I think customer acquisition cost is going to be very very high if your idea is that you're going to go out and get new customers who aren't already coming to your place right um so I think that's tough you know there's not a huge number of people who regularly play arcade games for instance and account for a large amount of your spend but there are some people who come in and buy a $100 card and start spending it there and that's going to be very valuable to you as you can imagine versus other things I mean let's you could certainly draw people in to do the food and food things but if we do the math on that the food things they'll spend you know the versus the person who you're not going to get a lot of people who are coming back all the time right so your your margins are going to be lower and also the difference between your worst customer and your best customer in restaurants is not going to be the same I mean some restaurants are if they have like lunch business for business people and stuff they can do incredible numbers where someone goes there every day basically but um for this kind of thing you're not so you're going to go out all the time trying to get people to come in to watch a football game and eat wings versus trying to find people who want to play Arcade games I don't know I mean that's probably the thing that marketing is easier to find those people there's this bigger pool and to drive them there but is that really the best part of the business I mean we looked at some arcade some Casino things where in Co they realized oh maybe we should just like have half our people not come to our casino and make more money because we didn't have good data on the fact that we're making all our profit off of half of the people who come here and guess what it's a better experience for everyone else if we understand our players and if we cater to them and get everyone else out of here yeah yeah so understanding the marketing understanding management you've said before I don't know if it was on the podcast or maybe in person at event that you know everyone always wants to talk to co about like different things but you know if you could talk to like the head of marketing that's somebody that you'd be so interested in speaking to at these companies yeah I mean I think the most interesting thing here would be okay let's not worry about getting people in the door the first time whatever we're in the Place it'll show up on things that can people can do people have friends they have whatever they'll go there one time let's not worry about that let's worry about once they're in there what does it look like for people who repeat what does it look like for people who spend a lot whatever and then let's try to see how we could focus our marketing dollars on that to actually drive gross profit to be better over time that way you know um but it's just a question of what you think it is if you think that it's mainly like a food and beverage type thing or if you're saying it's more like a casino or team park or something well those things are run incredibly differently and of course it depends within a category that way Six Flags has run completely differently from Disney they have completely different economics in terms of how you how you do it I mean in Disney you're trying to get people to repeat and spend a lot of money and everything and at Six Flags you're trying to kind of you're running like a seasonal business and you're trying to to drive a certain amount of attendance basically at lower prices there um yeah what do you think about Bolero or Callaway golf company which owns Top Golf my biggest concern for all of these Dave and Busters on all the way down is that it's very easy to expand these businesses and to compete and so that scares me it's what scares me with restaurants I mean um if you have a one unit that makes money then you can just go to a landlord and Lease another one and Lease another one lease another one and you can expand quickly and cut into the margins and everything and so that's my biggest concern with any of these is over competition I think that's always the big problem they could do other things wrong but I don't think there's much likelihood other than they or their competitors expand too much um so you just kind of have to do the math on a Town and say doesn't make sense to put in here given the population and then if there's a few in here is there too much you know um you can do it for anything I mean with with movies we've talked about that it's pretty easy to calculate you can say okay there should be 40,000 screens or something in the country here's the population what are the differences in the population but basically is this place unders screened or overc screened or something same kind of thinking here it does depend on the demography but you still want to you know I mean I literally say a Chuck-E-Cheese I think they look at the ZIP code say how many kids between these ages are here and there should be X number of Chuck-E-Cheeses per this many thousand kids in an area within a driving distance and I think that that you know is a concern sometimes with some of these companies especially es really especially when they're public so cuz you can sell this on okay we can grow and here's our unit economics and whatever and and each unit might be worse than unit before as you grow too much and it's just like it'll scale up and it'll get better you know mhm why do you think and yeah why do you think it's trading at such a different Val valuation than these other companies I would have to know more about the situation of what's been happening recently I mean have they been disappointing on their guidance and everything and I do people have doubts about this management company I mean when we talked about Six Flags I think that that is kind of what happened is that there was some interest in the management when they first came in and there was like oh it's not going as well as we thought and then you know it was there's going to be an acquisition you know so uh you know merger to close that out so I mean the writeup certainly made it sound like that like there's going to be a pivot into better things and that's a recent write up uh this was from June 30th 2024 yeah okay so that's not that bad MH so I mean what so was the price on it at that time not that different was it like 40 or something instead of today's okay but this is a stock that peaked at I guess twice today's price it's back to the same levels that it was at recovery from Co actually it's not that far from levels that it was at before Co right yeah is that true cuz it used to be a very popular stock before Co so that's remarkable but it is also interesting how did this happen that main event took them over cuz like when I look at the headquarters now it also does not give me the headquarters that I thought from living near it was DAV Buster's headquarters it gives me the headquarters that's I assume Main Events headquarters they're only a couple Towns over in Texas but I think that that um it literally is like main event took it over mhm yeah now they're all running it yeah it's weird huh it's interesting yeah so you don't know though like if it's Let's see we could see on the chart if it drops on days where they reported earnings or something no it's been pretty consistently down since I it could it be recession type fears that's what I'm wondering I don't know I'll try let's see if I could put something else that should be recession next to it let's see I feel like this is the thing that people would sell off or be worried about right or wrong or just it is something that would naturally [Music] happen yeah what would be okay wow I mean it is look it's cons the other thing is indexes and things like that what is this I'm assuming it's listed as just consumer discretionary is that what category they put in do you know like quick fs and stuff probably says what it thinks it's being categorized as what's it in no hotels restaurants and Leisure it says yeah oh consumer discretionary right there to the left sector yeah okay so it could be being affected by that it has insane share turnover no one wants to own this business for the long term even though I think on a unit basis I've always thought that it has good economics so I don't know why that is but same thing with Marcus and cinear right when we talked about those it has the same sort of thing insane share turnover and violent movements based on assumptions about the economy now I have to say this is more economically sensitive potentially DAV Buster is way more economically sensitive potentially than either cinar or Marcus and Marcus is somewhat more sensitive because of hotels but even more than Marcus because the spend potential is heavily uncapped at a dve and Busters so which makes it like a casino that way the thing about a movie theater one big reason why it's not very economically sensitive is you just can't you may think a movie theater is expensive because you want to spend a very low amount but you can't find ways to spend an incredibly high amount I mean you could have eight kids uh but there's I mean there's just a limit I mean you're going to have you only have two free hands what can you can buy $8 in each hand for concessions and you can buy a $12 ticket or something you eat so much chocolate right I mean you have to physically move it yourself I mean some have food and beverage that they bring to you but you are limited at some place like a Cino or dve Busters oh you can stay there for many more hours and it's all done digitally with a card and everything and you can open a tab at the bar yeah you can spend a lot more so that can definitely get cut back on a lot more the same way that you'll see a difference with like Swatch or something you know Swatch the most of the brands are not the Swatch brand so a high-end watches versus you know a a Mado or go even further down like a fossil or something like there could be a much more of a drop off in a recession because in some parts of the world you know people are feeling less Rich they're not going to buy really expensive watches they're also not going to go to places like Dave and Busters as much um they're instead going to go to other places they're going to say kids you have to go to you know a movie instead of DAV Busters you have to go to uh Chuck-E-Cheese instead instead of DAV Busters or whatever you know you have to go to Six Flags instead of Disney some place where you can't possibly spend as much money you know yeah I mean if you're going to David Busters versus movie theater I feel like going to David Busters would probably be more of a better more fun more expensive day out than a movie theater right oh of course no doubt and the frequency is much much lower obviously if we took all the family entertainment centers and compared it to the frequency of movies and things is much lower that's why I'm saying though that from a recession perspective a lot of times people try to replace the experience they have at a lower potential top spend especially cuz what people will start to realize like a lot of people don't know how much they are spending at dve and Busters right that's part of the thing about it the same as a casino or other things too where you can split the bill across different things and so you don't see it all at one time what it is you know mhm um yeah it's a casino for kids Jeff and adults that's what makes dve and Busters a lot more successful is their ability to fill up so much of the times of the day and everything with different groups of people different specials use the space so well yeah cool so we have a couple emails that were sent in thank you to the people that sent them uh if you want to email us a question to have a PLL for the podcast email it to me at Andre at Focus compounding tocom uh let's see and one of these was a follow-up question from a podcast we did uh two podcasts ago where we talked about Marcus and it says when evaluate Marcus as a perspective investment how much if at all does the key supplier to its theater business concern you for its concentration rough percentages of box office revenue greater than 25% from Disney 18% Universal 16% Warner 15% Sony 10% Paramount and 15% other yeah it doesn't concern me at all so there's a few reasons one if you flip it the other way from the movie theaters perspectives in the United States it looks very similar it's AMC Regal cinemar Etc they're getting 50% I mean the top three theaters or something could be accounting for 40% of their box office or something top seven could be closer to 60% I mean I don't know the exact numbers for each company because depending on what they release it would be a little bit different um but yeah so in the United States they on the flip side look very similar the other things is that both of the these groups basically uh although they don't negotiate as groups with each other they have trade groups and things and so they basically have like model deals like trial balloons that are how they work out what relationship they're going to have with each other for the most part so like when you had something with the window and it was like there was a deal that let's say was done by I forget but let's say Universal and and Cinemark agree that movies under this amount of box office will at no longer be put on our you know peacock or whatever within 60 days or something that's actually like a test to be for all movie theaters um you know what I mean even though it's negotiated by one so it's similar to like when unions negotiate with uh um car companies or when they negotiate with an airline or something you can tell that that will probably be the template for the other deals there too so they deal with each other as groups that way there are not the same restrictions that there were before which so it could change you know with the Paramount decision um you know there were things that were illegal in the states that aren't illegal anymore but it it wouldn't concern me and then honestly like historically there's stuff that I don't even know it's disclosed like um if you look at say a network TV thing they would have said that our you know years ago when they weren't allowed to to do production on their own they would have had a huge number of of a huge percentage of their shows coming from a few production companies but that's not a serious problem because you just find another production company um you know it you are creating the demand there by doing that there there's a limited number of the screens that they need to be on and so they have to put it all everywhere and you're basically going to get it on like a commodi type fashion there are some slight differences to things um and they do cord each other a little bit on stuff you know I knew people worked at Cinemark I lived in the HQ that they had uh they did have a dress code for uh when Disney was on premise that was not enforced for any other studio so that gives you an idea of care about the other Studios look busy and for and their beverage partner yeah your most important one is going to be the B the beverage partner for any of these theaters so like cinear I believe is a Coke partner and was at the time so of course all over their HQ and stuff everyone gets free Coke and every flavor you want and every whatever CU Coke is courting Cinemark like they Court Airlines or McDonald's or whatever so of course these are really really big items and you can do the math on that and say oh wow every weekend the you know this one customer is you know millions and millions of dollars of syrup is being sold through cinar AMC whatever and if Pepsi takes this account from us oh boy but so it works both ways yeahh look at that price Divergence did a podcast on it but crazy Cinemark cinar just keeps going up Jee it's up 97% year-to date and Marcus is still down 3% year to date crazy now I do have to say there were some there have been deals struck and Disney struck them I guess just preco just before covid um that were slightly different from normal deals with box office split so like what different percentages there's no set percentage in the United States it's easy to estimate that it's a 50/50 but that's not really how the deals are structured the deals could be structured differently because they require usually minimum commitments so like if you hear limited engagements or something like that that means that they weren't able to get theaters to agree to the two month uh two month two week minimum so normally you can't book any screens unless you agree to take the movie for two weeks right because that you're not showing sufficient support for it that way so when you have something that says that there's limited um engagements that means that they could take it out in one week um the other way to do it is like to say that it's in certain cities first as a test and then you can show them that it worked in LA and New York so we want to expand it um so that would be like committing to only certain theaters having it as opposed to committing to only certain screens having it um and then for some movies you'll make more as the movie goes on um or less depending on a sliding scale which would be decided to encourage them maybe to play for longer because what will happen is from the theater's perspective I mean there's a variety of different interests involved but right from a theater's perspective historically you would want to play the movies that have the highest per theater average also because remember half of your money is coming from concessions as opposed to just Revenue at some theaters so it is much more in your interest to not play things that would play well because they need require more showtimes more screens whatever as opposed to playing things that are fairly full it's in the theater's interest to be fairly full and so not to play Things indefinitely it's in the Studio's interest to play things as long as possible before streaming because we're still making money on it so why not make money on it this gets into an issue with support of the theaters and the studios for things that are released but might not make enough money so okay so like for instance there's a movie out now Coraline it's a re-release um it it was out last week it'll be out this week in a limited fashion if it's released the same way as say Phantom was where it made like 8 million or something I think Coraline made similar amounts in a single weekend that's fine um but there's actually other movies we'll see what the crow does um we'll see you know I don't think it'll end up making much more money than a Coraline or a re-release of some other film would be and it might require them to play it for a few weeks um so I think like apple did um the wait I might be mixing up who it is but I think it was Apple it could be Amazon MGM I think it was Apple did um Fly Me to the Moon earlier this year and they were going to do wolves and I think they're not going to do wolves now in theaters so something like that is complicated because it may be that if it was a limited amount of time it would be fine in a per theater average but if they want to say oh let's run it for a month and it'll make some money over that full time from the Studio's interest that helps it makes money but then like on per screen average is not very good so that's more the concern that they might have if you agree to show it for a really short period of time like the uh concert event for Taylor Swift or something is very attractive to movies and they'll take a lower cut so if you had that and especially if you agree to put in a time when they're not going to play other things they you could probably negotiate a deal where they they just take it because they want the concessions and everything say if you're saying it'll only play for a few weekends it only play at certain times I only have to show it at 700 p.m. and you're guaranteeing me an audience sure if it's a dead month let's put it there and I'll make money and everything but getting me to commit to it what they don't want is like a major Studio Movie that flops so I mean Borderlands was Lion's gate but that has to play for a few weeks no matter what and then it's going to be playing to pretty empty screens I mean I saw it at the smallest screen they could put it on so they knew what was coming but that's still a problem you know mhm do you think those concert films are more likely to generate more um food and beverage Revenue alcohol revenue and stuff like that for movie theaters too than the standard movie uh it might it's also it's a long movie um and they couldn't play anything after probably anyway so I mean it's good they would like doing it but there that one was also complicated because I believe the basically Taylor Swift or whoever the her company is or whatever probably was taking a huge cut and then it was being distributed by a movie the theater chain that was taking the other part of the cut and so there was probably less left over for others but then there's also pricing differential and things like that um so I I mean they they're kind of like Airlines from the the simplest thing is movie theaters like butts in the seats and that's the most important thing for them they can figure out how to make money if they have that they don't like a lot of empty seats that don't have people in them and so that's more what the relationship is about with a studio or something like that but it is true that there was a time where there was like oh we should get a little more on a Marvel movie you should keep a little less of it than we do or something but even then that might be okay if if um there's other factors because this the the theater is only taking the theater also is getting concessions either way so from the Studio's perspective it's 100% that you're negotiating over from their perspective is like 50% of the pie that we're talking about because the other 50% you're not affecting our concessions you know and then the other thing is like some of these have upsell things that are fine for theaters too that they like um but that limits the capacity sometimes so they like movies that can play on IMAX and these these premium large format things and everything but that sometimes hurts like Mission Impossible or would have had higher attendance if so many people didn't want to see it on a big enough screen because it probably sold out in some towns for desirable seats at desirable times the first couple weeks you know so it is a trade-off that way but basically they want a hit movie at a time where they don't have other hit movies and you can supply it to them and that's really what they want I mean the industry is set up so that both the theaters and the studios and even competing with each other all want every in it they they would like as much as legally allowed to work together to make each release as highly attended as possible they intentionally don't release things against each other that they know that the same person wants to see you know so it's not a very it is not the kind of relationship of am I worried about Costco would I be worried about a company that's selling too many batteries through Costco yes I'm worried about that am I worried if Disney's selling too much through AMC or Cinemark or vice versa no not worried at all in large part because there's rarely much negotiation about price the the price of the ticket is what the ticket is which is the same as basically all other tickets and the cuts are very similar and so the terms are pretty similar so it's just do you want it or not you know what are the new economics of those new deals with Disney that you spoke about well so that would so in that case I mean I think this is all public stuff and whatever but I mean they would have gotten a slightly higher percentage of opening weekend stuff on certain highly desirable titles is what I would say and then like scale down over time on that right um and then even on that stuff like that's dangerous because it depends but you can structure deals all sorts of different ways to make everyone happy which is what you want to do they will do that no matter what because they're not going to screw you on a deal then they're going to have to come and negotiate you with the next one um I mean like as an example I can tell you that some there I've seen movies where um the studio doesn't particularly want to make the movie they they made it but they don't really want to make it theater definitely doesn't want to take it but it's playing in the theater because the studio wants the actor or director or whatever to do another picture for them that they really want and so this is to keep them happy but the relationship is good enough with the theater that they can say look we'll make it up to you we'll figure something out but you've you know this is a Matt Damon vanity project you've got to play it for 2 weeks and your you can be in your smallest screen and your most Indie Centric things but we want that because he was going to be Jason Bourne for us next year okay and this is how we do that and so that's like the relationship which is different than other things it's a cozy relationship I would say in general um than some of the other things we're talking about um so that something like retail supp when we're talking about supermarkets and Costco and online things and um all of that when I talked about Nike and the things they sell into that's where I worry about it more and about companies pushing that too far and not being smart about that because they they tend to try to think oh I'm the brand I have all of this power and the distributor really doesn't count for any of that or vice versa sometimes and not realize the value that the other one is adding and that the entire profit pool of the whole ecosystems needs to be high enough um I think that in general theaters and studios are smarter about that than say supermarkets and brands that they sell or something and definitely you know there's always things we probably Target or Walmart or Costco or whatever push things too far that way or vice versa when others have a have the ability to push them on it you know instead of working together to do something more intelligent for the long term yeah next question that somebody emailed in do you think it's a coincidence that most of Buffett's Investments were in companies who customers were individual consumers not other businesses deposit heavy Banks Insurance newspapers consumer Brands like and Coca-Cola or is it not a coincidence I.E consumer focused businesses generally have more pricing power do you favor companies whose customers are people not other companies so not necessarily they're completely different what I focus what I like is companies that don't have bargaining power uh your customers don't have bargaining power so there's a few ways that can happen for the general public that is to serve the highest number of people with the least amount of bargaining power so it is to sell to the general public here's a candy bar and you each buy it or whatever you know that's great for businesses businesses work the opposite way businesses you need a non-price competition thing and then you can have them forever if it's just too complex so if you make it where it's too difficult for them to switch away your product because it creates some headache for them it's not their money ultimately I mean small businesses the owner operator they're there may be caring about it but in business people are very free with wasting money if it avoids a Heche for them which consumers are not so you need to have a product you know so um an accounting system uh you know a customer um what they call customer relationship management you know things that keep track of that sort of stuff database things in the background that no one knows about but core processors even some Point of Sales Systems I mean like just anything that they're like oh this would cause me a little bit of pain for a while that's great to sell to a business yeah so information system that you sell to businesses anything you can integrate into a business that stuff's really really great um but in general yeah you want to be a very large um you want it to be a huge relationship from their perspective and to have thousands and thousands of them and everything you know so I mean that's why when I talked about the theme park think something Disney right so Disney has millions of people who for them The Big Spenders Disney is their most important entertainment relationship and the customer it's the thing they know them that resonates the most with them and then to Disney it's millions and millions of people so there's no negotiating power on one side and there's all on the other and everything you know um so yeah I think that Buffett's very very good about product economics about the the understanding the customer things that way um do you think customer behavior is more predictable as well oh yeah I mean he's like Jeff basos that way right Jeff Bezos was like why don't we focus on the things that aren't going to change in the long run rather than the things that are going to change all the time about the internet and everything and that's Buffett's approach this stuff isn't going to change um how you deposit at a bank and insurance and all I mean some of things did change unfortunately for him with newspapers and all that but it often changes in that unfortunately what you owned no longer is the it it there's a similar thing replacing it but it's not developed by the same company unfortunately right so they can't make that transition um but yeah it's consumer focused businesses are very good to have because you have a very low amount of bargaining power on their side I mean that that is the really key thing is the value of the two sides that you have your costs and what bargaining power there is there and then on the profit side um on the revenue side which gives you the profit spread between the two is you know their bargaining power with you now I think he's even said you know buy a commodity sell a brand the the ideal thing is for both sides of that relationship to be heavily in your favor so you go out and you sell to Consumers millions and millions of them for Coke but then what are you buying sugar aluminum whatever you know at each you know I mean in Coke's actual example is just syrup and stuff so they don't even need the things that we that I'm talking about with needing the bottling and all that but throughout the whole system we're talking about commodity type things and then you turn it into Coke that way um it's obviously not as good if you're you know a if you're just buying it and then marking it up and then selling to someone where there's a dependence on the other side of it so you want to have be able to bargain with your cost side being the stronger bargaining position and you also want to be able to bargain on your sales side and be in the better position and those two negotiations will tend to get you better results now the thing is and this is why Buffett like Waits until buying them at the right time that only gives you the potential you then need a good operator to actually make it work so there's lots of banks that probably have the kinds of consumer um kind of product economics that would naturally be in terms of negotiating factors what Buffett wants but they're not Penny Pinchers and they're not smart about everything else and so if they then are making sure that they don't have the loan losses they're making sure that they have the lowest possible cost to operating that Branch you know so you have an Illinois National or you know the Rockford Bank that's something special um but lots of banks would have had some sort of Economics like that given the laws and everything but then you had a guy running it who was a real penny pincher that way and so you get the full benefit to the owner there are other brands that probably are like CES or Coke but they don't quite make as much money as they should because they're not careful about that I mean Buffalo Evening News when he took it over they were buying their their newsprint in a way that was a lot more expensive then he took it over and immediately changed how they did that they always had the same bargaining power they just didn't use it until he came you know so it's the potential and then it's whether you grasp that potential or not and that's the operator part of it so some of the numbers we see with like AutoZone and stuff you know it could just be that they're also good operators like there could be other companies that have some of the same economics that they have and haven't fully you know throughout what they do taking advantage of all that so the difference between the business models inherently may not be as great as what we're seeing it could also be that autoone may be a better operator than others it can't be all of it some of it is there's got to be other stuff there that probably it's inherently a better business but some of it can change if management changes and if the culture changes [Music] mhm well said final question again Andrew at Focus compound.com email us how do you guys think about companies with high-f free cash flow per share but negative net income so we kind of talked a little bit about that earlier right for example wbd has been free cash positive for several quarters in a row and looks cheap on a free cash flow basis but still has negative to no earnings right well they're so wbd I believe is Warner Brothers Discovery are we talking about the same company or what is wbd let's see let's see I believe so yes correct yep okay yeah so look in the business that they're in earnings don't mean nothing so you know they can write off whatever they want and now why do they H here's the issue why do they have free cash flow and everything what's really going on here they got a lot of debt and so they're not running this business for you the shareholder right now they're running this business to not you know be not not able to pay off their debts right so 19 billion market cap 52 or 53 billion Enterprise Value so yes a ton of Deb so this company's famous for this because like on Max they pulled things uh like they're now not available anywhere this is the problem with digital things right so there used to be there would be DVDs or whatever in the time of books and all that but now companies if they own it could pull it and they have pulled it from their service so they sometimes own the rights to something and have taken off their service probably to be able to expense some things now and get some tax benefit from that and then but that means you'll never see it it will never be seen by the anyone ever again you know and if you have some things where that was never put on hard copies of things that just that content's gone now it's content that probably isn't very popular they also killed a couple movies we know Warner Brothers for probably similar reasons right so they're very very focused on this um it's you know you can write off a lot of stuff I don't know how much of their things have been writeoffs recently they've been huge um and some of those are write- offs of different division things entirely because there was a merger so they could do that with the Goodwill and then also you just have write offs of things in film inventory where they've been aggressive with and everything um it's a very complicated company so there's not a breakdown of enough things that we could really judge what they're doing but um in the long run you know it's cash flow that matters not the income stuff at all so I mean John Malone built a a very valuable company without paying basically any tax right all about cash flow look it's worrying they have as much debt as they do for the kind of business that it is and also people are a lot more optimistic on them as a mix of Brands and everything than than I am I've talked about that where I was like eh I mean Paramount done terribly but I think War Brothers stock has also not done well during that same time and everyone was very not everyone but value investor type people were very were more bullish on on Warner than than I am um as a business I think I think they're kind of yeah it's just gone downhill I mean fiveyear return down 72% when was the merger closed do you remember that we can find the I can find the exact date and it was kind of a I don't say a minnow swalling wh okay it complete April 8th 2022 so let's go back to that let's check that date so we can check like from May or something on of 2022 to clean up the numbers April 2022 yeah I mean look at this yeah I mean it was it was way higher it's down a good amount since then yeah so it was basically like a way of for Discovery to go into Warner um Warner had a lot more value long-term probably you know like more durability Warner Brothers than um here you go looks like it was around Discovery yeah um but they all I mean both sides had cable properties that probably don't have a lot of value in the long run I mean cable streaming cable that's a big problem that they are the same sort of thing and the economics of moving to streaming aren't as good as what they were with cable before and there's not going to be as many cable channels stream channels in the future probably that are successful as there was with cable where we talked about that you know so that side of the business I think is it's hard but I mean the question was specifically about the difference between the cash flow and the income statement it's the cash flow that matters so being free cash flow positive is what matters I would just warn that this company is doing that I think because of serious questions about the debt and everything I don't know if there's is there any information news about that um let's see what specifically like what they're doing with that um yeah I was just curious where there was information about the um if there had been news and stuff about where the bonds trade or anything like that but I don't see a lot of like news story specifically about that side of it it's just the write offs and stuff that I can see but I would guess that that's overwhelmingly why they're doing it they've said their focus on free Cas FL but I think that the reason is probably related to the debt that they have mhm how much debt do they have officially we go to quarterly to get a updated snapshot uh let's see short-term debt 3.7 billion and then long-term debt uh 37 billion so a lot yeah yeah over if we look at the overview of the most recent time period how what have they been doing in sort of like cash flow from operations that sort of thing if we go to the annual cash flow from operations looks like 7.5 billion TTM is 7.9 billion okay and so before that they were not merged together basically um that we're seeing you know not for the full year um so I mean that obviously is going to take out just for the United States things that's taking out your taxes and things like that so it's different than if we're looking at an international company but that is ultimately what's really available to service the debt and to pay it down if they want to pay it down over time you don't have more than that and their capex is significant we include things you know we're talking about intangible Capital expenditures but um that's heavy right I mean I don't think you want to be five six times your cash flow from operations um what your debt is especially if you're you know lacking durability for some of your businesses but like them writing off say a cable channel or something no it doesn't matter it makes absolutely no difference and so in the long run if a company had didn't wasn't reporting net income but was reporting cash flow yeah that's what you want as opposed to the opposite it's all about the cash flow and the balance sheet that you have not about the income statement I'm just saying in this particular case the reason that they're probably doing it has to do with the amount of debt they have in their awareness of that and how they're going to deal with that cuz what do we right now we have the market cap at what 18.8 billion okay so we're talking about um let's see I mean at face is it 2third or something their capitalization uh more than that is debt basically if we take that that's 40 I mean the there's 40 billion of debt that they have and you're being told that the equity portion of that is only worth you know in the market is only worth 18 billion or something then they're kind of saying that this is a capital structure that's very very heavily debt MH um now on a leverage basis that's not that bad if we look at cash flow again just to see this is what kind of what the question was so what do we have in terms of free cash flow for the recent years 6.1 billion and 6.7 billion on a TTM basis yeah right so it's trading at say three times right so but even on a leverage basis it's trading at what 10 times right if it has six billion in free cashow and yet the entire Enterprise Value is only 60 billion or something then it's only trading at 10 times free cash which isn't bad either now is the cash flow exaggerated though because they're intentionally doing this because of their awareness of the debt um what is the operating profit there's none in recent It's like because of that it's including right offs and stuff yeah yep so it's probably very confusing to people to be able to analyze that and figure it out um you know obviously there's lots of things that you could sell off and pay down your debt as a way of doing it instead of having getting it from your cash flow so I don't care about I would care about cash flow not reported earnings but I just warning that they may be generating the cash what they're generating right now because there's a focus on their debt situation got it cool well I want to thank everybody so much for tuning in with you both of us on the focus compounding podcast if you have a question that you would like us to go over uh email to me at Andrew at Focus compound.com if this is the first time you are tuning in with us be sure to hit the Subscribe button wherever you're listening or watching us that helps spread the word and hack the algorithm uh with Focus compounding and it also notifies you every time we upload a podcast if you're interested in learning about our Money Management Services reach out to me at Andrea Focus compound.com thank you so much for tuning in with the both of us and we will see you in the next podcast take care

Capital Allocation Returns (AAP vs. AZO), Family Entertainment Stocks, and Customer Behavior

Summary

Transcript

Join for free and get access to the buyside

Get insights from the world's most influential hedge fund investors direct to your inbox

Follow Us On: