$DRVN Cruising through the Driven Brands thesis | Kyle Mowery GrizzlyRock Capital

Summary

Driven Brands ($DRVN) puked on a February accounting restatement. Kyle Mowery (GrizzlyRock Capital) walks through why …

Transcript

You're about to listen to yet another value podcast with your host me, Andrew Walker. Today I have one of my favorite people in the industry, Kyle Mowy from Grizzly Rock Capital on. We're going to be talking about driven brands. The ticker there is DRVN. Disclosure, as I'll talk about on the podcast, I'm long, but you can see the disclaimer about everything not being investing advice in the show notes at the back end of this podcast. Uh, look, we're talking about it because Kyle came on. We did a podcast on Driven about two years ago. A lot as we are going to talk about a lot has happened since then. I think it is a fantastic combination of event driven, valuedriven, lots of fundamental research to be done, lots of game theory to be applied. Hence why I'm long. Again, disclaimer, disclaimer, disclaimer. But uh yeah, look, it's an awesome podcast. I think you're really going to enjoy it. Kyle's one of my favorite people in industry. So, we're going to get there in one second. But first, a word from our sponsors. Today's podcast is sponsored by fiscal.ai. Fiscal.ai AI is a modern financial data provider for global equities. In addition to their web-based terminal, fiscal is one of the leading data connectors for claude and chat GPT. With their self-s serve API, you can connect in real time fundamental data directly to your LLM. And look, I said it in podcast before and I'll say it again. I am they're not just an advertiser. I've been doing lots of cool stuff with Claude and Co-work in particular, building all sorts of awesome tools and I need a API. So, guess what? I signed up with my own money, tossed my own credit card down and said, "Hey, fiscal.ai, I I need you guys to plug into my uh cloud co-work for me so I can keep building these cool tools and have access to real-time fundamental data and stock prices, everything. And that includes more than 20 years of financial statements, ratios, filing, segments, KPIs, and all sorts of other things. Unlike other providers, their data updates within minutes of earnings reports, not days. So whether you want powerful out-of-the-box terminal or the real-time AI connector with API, you can use my link at fiscll.aiyav. That's fiscal.aiyav to get 15% off. And there'll be a link in the show notes, too. All right. Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. With me today, I'm happy to have on from Grizzly Rock, my buddy Kyle Mauy. Kyle, how's it going? >> Good. Thank you for the time. >> I I'm really excited today. Uh before we get there, quick disclaimer. Nothing on this podcast is investing advice. That's always true. But two things to remember about today's podcast. A, I have a a pretty decent sized long position in it. So, I'm very much talking my own book. That's my disclosure. I'll let Kyle give his own if he wants to in a second. And then B, this company is going through, as we're going to address, a big accounting risk statement, which increases all sorts of risks and everything. So, just remember, not investing advice. Full disclaimer at the end of the podcast and in the show notes. Uh, Kyle, the company we're going to talk about today is Driven Brands. The ticker there is DRVN. We did a podcast on it. It must have been two and a half years ago at this point. I was relisting to parts of it to prep uh for this pod and I I think it holds up well. I'll include a link to that in the show notes if you want to listen to it. But I'll just toss it over to you. What is driven brands? What has happened in the past two and a half years that have made us kind of want to do a new podcast on them? And then we can go from there. Well, the question on the podcast is reasonable because I thought we're only allowed to talk about AI related things these days, Andrew, but [laughter] you know, you joke and I I saw you last week, as you know, every day I look at the memory stocks, I'm like, what am I doing with my life? And every day I do something with AI and I'm like, how long am I'm a very handsome man, but how long am I going to be able to make a living with my brain? So, existential. The jokes aside, Driven Brands is a very simple business in terms of the products that they offer. It's automotive aftermarket. Uh the crown jewel is Take Five. Take Five is a wonderful business. It's a quick loop business. It's it was the underpinning of our original thesis and it underpins the thesis today. There's been a lot of noise and we'll get to that. But just a level set for anyone to listen to the pod fall of 04 2024. Um the the stock was in the 14s and the thesis was hey look they're going to exit car wash. car wash was this uh capital allocation disaster frankly and and that that actually occurred. The catalyst has occurred in that both US car wash and international car wash were not only divested but those sales have closed as well. And so that was a main catalyst that we were looking at and a reason that we were long then and and candidly we're long now um based on take five. But those those catalysts actually didn't materialize uh and and the large reason was low low purchase price for sure or low sales price on those businesses but also this this accounting issue. So, but I I do find driven very interesting here in terms of catalytic and I know we'll get to that in a little bit, but it's it's cheap. It's growing and it has cash flow and it it's catalytic. So, I think even in a world for uh you know event valueoriented folks, it it's worth a look in in my opinion. >> You use catalytic twice and I think you're going to have to start saying pun intended if you use catalytic when you talk about a car wash business. So let's uh maybe ignore the elephant in the room, the accounting restatement for a second and we will talk about that and I'm happy to wax poetic on that. I want to ask a historical question and and then I want to dive into the uh I want to dive into the take five business because I do think unless you think everything is you know out and out I rarely use the f term but in an accounting statement unless you think this is out andout fraud there are no take fives in existence all this sort of stuff I I think we can bucket the the accounting restatement and focus on take five as a whole to start >> let me ask you this the historical question which I probably have less uh information on >> the car wash rush sales looked to When I look at those 2025 car wash sales, they looked at like a very low multiple to me. And I I just want to ask that because again, take five is the whole ballgame to me. And we'll get there in a second. But yeah, when I look at those multiples, I say, "Hey, man, >> these car wash multiples, even though it wasn't a great business. It was stuff, especially the European one, it came in pretty low." And it makes me wonder, hey, am I wrong that RORO, who owns 65% of this, that they're like gonna realize reasonable value for this? Or was I just so wrong on the business? Is does that mean I'm wrong on other businesses here? So, I'd love to just set start with that past thing that we were kind of alluding to in the last podcast. >> Yeah. Well, I keep a couple books on my my literal desk, my main desk, and one of them is capital returns. And I think anyone who focuses on capital return style investing understands supply and demand. Very simply, the car wash business in the United States became overs supplied in a dramatic way. And that was the initial foray that that allowed this share price to rerate to a level that I personally found it attractive a couple years ago. But yes, this over supply was persistent. The quality of of Driven's car wash uh individual locations was not great. And ultimately in an overs supplied market, the price was low. The price was lower than we had put in our original deck, which I I believe I I put into the public domain concurrent with the the pod in late 2024. So you can go back and check the numbers there. But yeah, the price was lower. I think in the end they just wanted out of any business tied to weather. They they just wanted to simplify the business and and narrow the business to high margin recurring franchise revenue and take five which is the crown jewel. So the simplicity I think they just said look we really we really screwed up in terms of capital allocation a couple years ago. Let's just let's just start over from car wash perspective. Let's just take it off the board. Let's simplify and get back to focusing on cash flow and growth. >> I I completely agree. But again, I I I don't I'm trying to flip through my notes. I didn't put the car wash multiple, but I think they sold these things for like mids singledigit EBID multiples. >> Yeah. It was like eight times on US and let's call it sevenish on international. I thought it was a little lower than that. But yeah, and especially international I thought was like a fine business. And you looked at those multiples and you were just like, h, you know, if I was a turn or two off here on the lower quality business that were lower multiple, what if I'm more than a turn or two off on the crown jewel? So, let's go to take five. Again, I think people are going to look at this and they're going to see the accounting statement and the accounting statement is scary and it's near-term headline and we'll talk about that at the end, but I continue to believe Take Five is the whole ball game. You know, I I think it's a crown jewel. I think you think it's a crown jewel. Uh I I'm happy to lob in a lot of thoughts and as you know, I've done a lot of diligence here, but let's just start high level. Why do we think Take Five is a crown jewel? And let's start kind of trying to build out the value of Take Five. >> Sure. So Take Five is a typically a two bay stay in your car quick lube service. It's cheap, it's friendly, it's efficient. You get in, you get out, and the locations are good. Okay. So, the four-wall unit economics are very, very strong. Uh, this started down in the south in an area that you're near and dear. >> Started in Louisiana. Me, Louisiana. That's where I'm from. >> That's right. Louisiana. So, from there, it grew quickly in the southeast and now it is national. Right. So, they have almost,300 locations across the United States. They're they're going to 2500. So there's significant embedded growth uh of units and of each unit each box whether it's corporate owned or franchiseeowned and that tends to be state byst state which if it's franchise or corporate but the but the point is that the returns are very very good on capital whether it's driven capital or a franchisees capital and the reason is it's a simple service and it it is very very quick to get people in and out and and and the the customers are happy and so you have a situation where win-winwin and to make things very simple Valvoline which is albeit a more known brand a little larger as well but Valvaline has very similar returns on capital and that business trades at 11 times and they're al you know 11 times this this year's eBay dot and what you see is the returns for Valvoline are strong the returns for take five are strong but what What what public markets investors can't see past is all the noise associated with driven as it relates to take five. But the reason I bring up valvalene returns on capital and and you know multiple is it speaks to the quality of that very simple straightforward business. >> Perfect. You hit on a lot of the points I wanted to make but let me go through a few. you know, when we did this podcast in 2024, and just fast forward today, I think there were a few questions that even if if someone's listening the first time, the first question they're going to have is, hey, what about at the rise of electric vehicles, right? What happens as electric vehicles rise? And I think there was an answer then, and I think there's an answer now. I think they're similar, but I I I'd love to just ask you, you know, if electric vehicles are coming and slowly displacing part of the car park, wh why is this a I I was kind of surprised when I heard this three years ago. Why is this an 11 times evido business? Doesn't this feel like it should be a you know, kind of it's a sunset business? So why why can you put a growth business crown jewel multiple on this? Well, in the United States, over 90% of the cars sold are ice powered, and that's for even 2025, right? So, the costs of an electric car are significant. There's still range issues. I think those problems will be solved down the road, but the reality is that the the US car park is over a decade old on average, and that car park is mostly ICE cars. I think we as investors uh tend investors on average probably skew a little bit higher socioeconomic and more of our friends probably have EVs but for when you just look at the data when we did our original cohort analysis in 2024 we projected that the the US car park in terms of ice powered vehicles was going to peak in 2032 2033 and we're not seeing any data that would that would consider that to be changed. And when you think about the franchises and the cash on cash returns here, you know, that really where the car park is now and where it's going, that speaks to a 20-year life cycle for each unit. And I mean, maybe let me flip the script and ask you, I know you've spoken u with some franchises in the quick loop industry. You know, what are you hearing from from these guys? >> No, you hit the nail on the head. you know what what and the franchises range from kind of I don't want to say mom and pop because you do need a little bit of money to get started here but it ranges from people who I think are more in this for a real estate or hobbyist play to serious sophisticated small private equity shops who are looking to open 20 30 40 boxes when I talk to the more mom and pops to say hey I get the real estate uh I that's a problem for 10 years down the road and I'll have taken all of my cash out multiple times over by then and when I talk to the private equity firm terms. A lot of it is exactly what you're saying. Hey, you know, I I think two years ago they would have said peaking in 2032, 2033. I think now they're saying, hey, the ICE car is going to peak in 2035 to 2037, maybe later. And you know, we're all dead in the long run. And by the way, after if it peaks 2035, there's another 15 years of servicing behind it. And the the other side of that coin is hey we get great cash on cash returns and we also think we get a big tailwind from uh both premization higher uh more synthetic more synthetic oil changes and we continue we're going to continue to take share from maybe not dealerships as much but just kind of legacy oil changes because I do think there is an interesting push and pull with dealerships putting people in warranty and stuff but definitely legacy auto mechanics they they just think this is where the puck is going there's there's going to be a lot more shares. So that's what I'm hearing from franchises and you know one of the reasons we'll probably talk about this in accounting. One of the reasons I kind of liked this was when I talked to the the franchises they are confirming what you and I are saying they like this business. They want to open more stores that business is good now. So I've been you know I've missed the mark on franchises before but it's pretty broad base who I'm hearing it from. I I'll pause there if you've got anything. >> No I mean just you know don't take our word for it. Look at the units. The units are growing double digits franchises and corporate [clears throat] and driven and and valine very similar in terms of growth profile. So you're seeing multiple multiple different types of investor put their capital to work in the industry. The other Valvaline also one of the reasons I I taken a lot of comfort here you mentioned Valvaline is you've got a public peer who is saying everything we're saying and there's a public multiple on them. Right. So if you don't believe take five is worth low double digit multiples right Valvaline's got a low double digit multiples like one of them can't be correct so I I think there is that let me just on the Valvaline I think both you and I anchor on Valvaline and it's funny you said 11 times IBIDA because I have the same number when I fear value take five I've kind of got something similar in there but I do think a person could look at take five and even setting aside the restatement stuff you know Valvolene just reported I think last week >> and they did 8.2% same store sales and twothirds of that from memory was uh price and a third of that was increased transaction volume. Right. >> Take five did they they came out with a prelim report because they're in the accounting statement but they did 4% and this is off a high threes in the in the last quarter of last year. So I think a skeptic might look at this and say hey you guys are comping to Valvaline. Forget the accounting. forget all this. You guys are comping to a better system with uh you know they they do have differences in how the boxes are run. You're comping to a better brand that's better run and it's a better system. So if Valvaline's worth 11, maybe take five is worth nine or something. So what would you kind of say to that on the multiple discrepancy? >> I don't disagree, but but Driven's trading at eight, not nine. So I don't believe that we're taking quote unquote multiple risk, right? It's already trading at eight. That's on this year's numbers. It's going to keep growing. So that number goes down out into the out years. I think there's a chance for take five to improve. uh but if they don't [clears throat] I think you know I I think the reasons that driven trades at eight and val trades at 11 speak to leverage and just all the chaos that's been driven since it became public right I mean that that that is you know I think I've said to a few friends three strikes and you're out here right you had car wash strike one CFO now this is a couple years ago even but CFO strike two and now is this strike three the accounting restatement strike three for driven in the public markets uh I know we'll get to the event part later but I do think there's a significant possibility that things begin to happen and and value begins to unlock here >> you know just let's start transitioning to you know kind of the elephant in the room the restatement but just one other thing I would add there you said the strikes you know when I talked to a lot of friends especially before I mean maybe after the restatement too but before the restatement I know a lot of people who looked at this and said hey I think take five is a good business I think the other business are fine but you know they're if they're going to do 500 million in ibida next year 180 of that is going to be adbacks and they were looking at that adbacks and saying that is that is not a clean number you know and this relates to their statement because I think they were saying I don't know if I can trust the accounting I don't know if I can trust the numbers And that's an issue I think as we start talking restatements and we'll go there in one second. I I think it will shine through. I don't know if you want to say anything on the adbacks or if you want to go into the restatement. >> It's a valid point. Our thesis when I did the first pod on driven with you was that the numbers were going to get cleaner. The the the you know the ERP was going in. Car wash was you know sort of like is it in a process? Is it not in a process? It was but the point is you know um corporate costs were 20% of revenue now they're 25 right that the numbers are extremely noisy today and I had anticipated that they got less noisy so that was just something that my base case did not occur on that on the noise but I still think with I think there is an opportunity for those to get less noisy. I think this ERP and I guess this will probably take us into the accounting particular you know this ERP is one of the reasons in my personal opinion that this this accounting restatement even happened right but it's done it's in it's about it's about getting things clean and and getting simplicity right debt down getting uh resegment this is the second time they've resegmented and they resegmented two weeks right right before this happened and that tells me, let's just I guess get into it since I kind of >> Yeah. Yep. >> stepped on it. You know, if you're putting out data for the first three quarters of 2025, two weeks before you have to kind of pull the plug on the 10K, that tells me that the magnitude of the accounting statement is not as large because if it was huge, they would have known about it two year two weeks before they pulled the plug, right? So, you have this this issue where they're working to get to that cleaner, clearer number, and that is certainly the goal in in what they were saying to the street throughout 2025. >> Let's go to the accounting statement then. So, this is anybody who wants to you can go pull up. It's February 25th of this year. They file an 8K that says, "Hey, we're not going to be able to file our 10K." They have a it's a short 8K, but for a restatement 8K, there's a lot of stuff that they're restating. And look, the market pukes all over this, right? This is an accounting restatement. People say, "I can't trust this." This is a business with leverage. So, if you've got a restatement, you can't trust it. You know, uh, even a small change in the EV is going to drive a big change in the stock price. I, you know, when it came out, I know you and I were talking, I think, that day, but to me, I looked at this and I said, "Hey, this looks like a scary headline." And I think you and I came out different ways. You said, "Hey, look at the uh the resegmenting there and all that sort of stuff." I just kind of I looked at the 8K and I said to me, again, people go read it. All of the stuff they're talking about happened in fiscal 2024. Like basically all of the things that they talked about relate to not fiscal 2025, the numbers that we're really caring about, not the current business. It was way in the past. So I I believe it was an Oracle ERP that got implemented of July 2024. A new C CFO comes in uh October 2024 or something if I remember correctly. So to me, I looked at it and said, "Hey, I think they implement an ERP, new CFO comes in, they sell both car wash, US and international, and then when they're getting ready to close the books on 2025, there are all these old issues from the old ERP that are getting surfaced or that might have been immaterial when they filed 2024, but now they are material because they've disposed of assets." So that's kind of how I looked at it. I mean, I'll an accounting statement is hard to talk about on a podcast. We can talk about it any which way. I've got notes on every single line of the AK, but however you want to talk about, wherever you want to go on the economy statement, let's do it. >> Yeah. Not to get too wonky. The There was four line items. Three were innocuous, one was spicy. >> Wait, wait, wait. Let me get So, there's four. There was lease adjustments, cash adjustments, expense classification, and other errors. You said one was spicy. The the one that always jumps out to me is cash adjustments was the spicy one. But were you referring to a different one? >> No, cash. >> Yeah, that that's the one. >> Cash should be the one thing that's readily accountable. >> We are on the same page. The cash adjustments one's the one that gave me a little heartburn when I was thinking through this. Yeah. >> Yeah. But again, I just to double click on the magnitude. Right. So CFO didn't resign. the auditor didn't resign. [clears throat] You have a combination of ERP and magnitude and there's just a lot of things moving in the shuffle. Uh real estate that was purchased for car wash, leases that were um entered into for car wash, etc. Now that's all leaving the system, right? So you're I think there I think there's a materiality argument if one wants to make that argument um for this being nasty for sure. Look at the stock look at the reaction. Yeah. If you get under the hood and you just think okay first principles you know is this business you know does it exist? Yes. Do these locations exist? Yes. Is the cash flowing through these uh businesses? Yes. And so when you go and look, you know, operationally, it gives you a sense that the accounting issues were probably overblown when the stock I mean the stock went from 16 to 10, right? And that was at 19 last year and now it's at 13 and change. So at 10, I would argue that that was uh overly punitive for what it probably is. and we'll find out in in June about in about a month they're going to file their their K and a guide for 26. >> Look, [clears throat] it and I would say it was and is scary. We we can talk about some of the filings since this has came out, which I think takes a lot of the left tail risk off, but you can disagree, but yeah, I I just kept looking at this and saying a lot of this looks pretty innocuous. As we talked about, you can talk to the franchises. This is not, you know, the worst restatements are percentage of completion buildings for uh engineering companies and stuff because then you're like, oh, the this might be a complete bag of goods. Here you could talk to the franchises and not just at take five. I mean, I there's a take five two minutes from my house in Ker, Louisiana. You know that there's something there. You can talk to the franchise. You can see the FDD. Doesn't mean that there's not fraud, but it was just hard to marry that with uh this. Let's go quickly line by line and I'll tell you and you can tell me if I'm wrong. We mentioned there were four. The first thing was lease adjustments which is errors related to right of use assets and right of use liabilities. I mean I saw that and I was pretty much like no big deal. You can agree or disagree with me. >> I agree. >> Okay. Uh the next thing was expense classifications. Now expense classifications I'm not saying it's great that uh I'm not saying it's great but it was during fiscal years 2003 and 2024. Notably to me when I was reading it, it did not have anything in fiscal 2025 and I think it said that uh it caused overstatement of company operating stores expenses. So maybe they were more profitable, but I read that and said, "Oh, if I'm thinking of this as a business on a go go go forward basis, I don't think this is a huge deal." You can agree or disagree. >> I agree. And really what that was was back in the day when they were trying to be this giant it was a you know 2021 IPO and they were they were building out this wonderful platform right they had this platform um segment even of >> people it was a crazy time 2021 we all wanted platforms man. >> Yeah. Yeah. So I think a lot of that was related to you know are we building this supplier within the business that also supplies other businesses and sort of this >> um >> so that accounting is like okay was it platform was it at the store was it you know where does it go and account honestly if you got three accountants in a room you might get two or three different answers and so that to me was also less quote unquote Scary other we mentioned the cash adjustments. I mean that's the scary one. It says certain errors relating to cash accounts. You say oh my god like the one thing you should be able to account is you just pull up a here's December 31st the cash statement in the bank. Like you feel like that should be pretty good. >> But when I read it I I really noted I've got this highlighted cash amounts primarily originating in fiscal years 2023 and earlier. So I looked at that and I said, "Hey, even if there were stuff missing, I think I can trust fiscal 2024 and definitely fiscal 2025 year to date on the cash balances." So maybe there was Is there any fraud going on here, Mike? Maybe there was some light cash issues years and years ago, but I don't think I'm missing anything there. That was the one, as you said, that gave me heartburn, but you could tell me if I'm, you know, justifying it to myself or if it was too crazy. >> No, I think I think the question is magnitude, right? If it's >> $5 million, that's a lot of money in the real world, but for something like driven, that would be a wonderful sigh of relief. If it's a giant number, then we I guess we'll be wrong. >> But even if it was a giant number, again, now if they filed, and this is why I think some of the left tail risk has come out because they filed subsequent things. But if they filed and said, "Hey, our 2023 cash balance was 100 million short, but no changes to 2024, 2025." I don't even know how that'd be possible. But the thing that just kept jumping out to me was it didn't say anything about the cash statement in the the present day. >> I I agreed. >> Yeah. And then the last thing was other errors. And there's a lot of things in here. Again, when I looked at this, many of them are fiscal 2023 or 2024. the this has the only thing that's really in fiscal 2025. It says inappropriately recognized revenue for our ATI business in fiscal 2025. >> I mean that's where you start getting into the spicier accounting things. But the way I justified it to myself is I looked through everything and ATI is like their absolute smallest business. So I was like even if this gets written off and there's nothing there uh you know it's so small they never even mention it anymore. I it's not going to impact the value. It's a training. It's a training bis business if you will. It's a training program might be a better word for franchises of which they have many right they have them not only at take five but also they have my niki they have makeo. >> Yep. >> Number of automotive auto body repair etc. So >> yeah, and I should note they just put out an AK saying that, you know, in Q1 of 25, you know, the revenue is going to go down$1 to5 million. So let's just pick the midpoint, call it three, pick a margin on that. You're talking a gross profit of probably less than a million dollars for that quarter. Well, I'm glad you mentioned Q1 of the recent 8K because I think we can go we can fast forward a little bit. You know, we've we kind of froze for that discussion at our Feb at the February 25th AK. We have had subsequent developments and the the two big ones I would say is April 21st they file an 8K that's preliminary unodituded results for 2025 and Q126. And just last Friday, you and I are recording May 11th. May 8th, they file a uh NT10Q for the Q126 quarter that says uh as you said, one to five million in restatement impacts for 2025. So I said, hey, I think between the two of them, I think a lot of the left tail risks that were really scary when that February 8k came out, I think they're off the table, you know, because they started giving you information. But I I don't want to put words in your mouth or if you've got different feelings, I'd love to hear kind of how you're looking at that. No, I don't think so. I mean, I was telling another um friend of ours, I said, "Look, the lawyers are in charge here. The lawyers are signing most of these documents. The lawyers are not going to let numbers leave that aren't buttoned up at this point, right?" Uh, pretty embarrassing for the company that it got to this point, but we are where we are. And now they're going to be they're going to be buttoned up three different ways. And so when you start talking about ma numbers of these magnitudes, it's a it is a a small side of relief for for driven investors. >> Let let me flip to uh you know when I talk to people are skeptical or bearish on driven right now. I think the main things I'm hearing now are, hey, look at what they file on the April 21 update, right? The first thing they'd point to is they'd say driven gives you, they say, hey, here's what our 2025 like looks like, but they did not give an adjusted EBO number for Q1 of 26 or any guidance. And they say the reason they can't do that is because of the accounting restatements. And both them and I'll be honest, me, I think I'm the one who coined this line. You know, as I said earlier, about 500 million in IBIDA and like 120 million is a adbacks. This company has never had any issue with uh doing adbacks. Why can't they just say, "Hey, here's our adjusted Ibida and by the way, we're going to be adding back 20 million of counting your statement." So, I think a lot of the bears look at that >> it's the dog that didn't bark, right? These guys won't give an adjusted IBIDA number and they're worried that the fundamentals here are really bad. And I think there's counters to that, but I'll pause on that. I I think the counters are fairly weak until we get the numbers. We're speculating about what numbers they're going to file and what adbacks they're going to include. I mean, my sense is with the ERP and the and the finance function built out here that this should not this accounting restatement is probably going to be one time in terms of accountants and lawyers primarily, but their finance systems should be okay to run a simpler business xus and international car wash, right? I mean, I don't know why if they have to add $30 million of cost to the balance uh to the income statement structurally, then maybe the Bears have the argument. But in the absence of real numbers, it's very convincing for the Bears to make that argument. >> This this other bare point will come up when we talk. I'm I'll walk you through my some of the parts or we can do a some of the parts together, whatever it is. But I want people to know kind of what we're playing for. The other bear point is there's a huge corporate expense burden here, right? Uh it's approaching, it's not quite, but let's just use round numbers. It's approaching 200 million per year. Uh uh is the corporate expense burden. >> And the reason I mentioned now is because you mentioned, hey, tacking on another 30 million of ongoing finance costs. >> I think another bear point is Andrew, you are using a take five number. You cannot use that number. it is not fully loaded. They're putting there's tons of stuff that you know any standalone business would do that they're pulling out into the corporate number. And I will be honest with anyone uh you know there's an activist here who's published stuff. We can talk about it. The corporate expenses here have ballooned. >> Yeah. >> And I kind of look at this and I don't know what they're spending so much money on. And we can talk about the controlling shareholder, but I look at I'm like, am I missing something because the corporate expense is so high? So, this ties into the fundamentals. It ties into the restatement, but I'll I'll just toss it over to you. Like, what do you think about that corporate expense load historically going forward as it relates to this investment? Well, the corporate the growth in corporate expenses is probably my biggest question for when they did come back into the public markets in terms of speaking with investors having their crawl guiding because if you just if you look at and the timing can be odd but if you just look at straight up 10K SGNA is about 20% of revenue for Valene and it for many years it was about 20% for driven, right? But that number over the last couple years for driven kind of drifted towards 24 25. So you're talking about 4 to 500 basis points of of SGNA that is quote unquote unexplained. And I think in my mind, like when I read that 10K for 24, I said, "Okay, well look, they got car wash and they got all this noise and they're still trying to grow Take Five and there's just a lot of it. It's chaotic." And so they needed people um or there's some other costs that are rolling through. Now this is clearly a roar controlled company. They own over 60%. Right? They they're making those decisions and the disclosures are not they have more information than we do, right? So they know exactly what it is at the line item level and we don't and we may or may not ever know the grand uh you know with granularity but but we have the advantage of liquidity. So that that's the offset um and and price right to get in and get out. So but just to kind of focus on that does it answer the question? >> I think I think it did. I I mean the answer is hey we we aren't 100% sure because as you said 20% of sales you know this is a $2 billion revenue company so if if it goes from 20 to 25% you're you're talking 100 million of add-on expenses if I'm doing that my head right like that it's a lot of money let me ask the work question we'll come back to work in a second but >> again maybe this is just me being maybe you you know that meme with the the bell curve and the guy in the middle is the dumbest and the guy who's drooling actually says something really smart and the guy who's like the Jedi agrees with Maybe this is me being on the far left of the curve, but when this came out, one of the reasons I got so interested, I was like, "Look, there might be issues, but I feel like I can cut off the far left tail where this is a complete and outright fraud. A because I've talked to franchises, b because I've seen take fives, and c because work owns 65% of this and they IPOed it." And I don't think there's ever been a private equity bats company like this, right? Where the private equity firm work literally built this. I'm sure private equity's invested in frauds. I know that for sure, but I don't think there's like a ROORC built this and IPOed it and it's like kind of consumer brands where it was fraud and I don't even know how that would have been possible. So, one of the ways I got comfortable was I was like ROR might not be the best controlling shareholder. We'll talk about that later, but I don't think they could have like been part of a fraud here. Was that too dumb? Was that right? How would you feel about that statement? Uh yeah, it's I I don't believe there's a reasonable possibility that it's an out-and-out fraud. There's too many people, there's too many channel checks that have been done. There's too many uh reinvestment of growth, etc. that it I I don't think that's even on the table. >> Yeah. And again, another reason I got comfortable here was this is not percentage of completion accounting. There's not a I mean at its core the main business is take five. Somebody drives in, they swipe a credit card, they pay you 50 bucks for changing your oil and then they drive out. It's done in 10 minutes, you know, like it just it shouldn't be that hard to account and unless you think somebody ran off with the cash, uh it's tough to see. Last beer point I I'll throw out there and then we can maybe talk some of the parts and anything else you want to hit. uh you know we we already talked about hey maybe you can't comp take five to Valvaline because Valvaline just seems to be executing better even though returns on invested capital all sorts of other stuff but we already talked about that I think the other bear point people would make is there are other brands beyond take five you know there's mine key there's the auto glass business there's some other smaller franchise business in here they don't seem to be doing that well right and the performance seems to be deteriorating if you look at the Q1 guide it basically implies that the the non-take buy business is probably flat on same store sales and you know this is an inflationary consumer environment flat on same store source sales is not great uh net unit growth at the non-take five businesses has basically stalled out so I think the last bear point would be hey you guys are talking about this and take five might be good but if you took a one turn multiple away from take five versus then you said all the rest of these businesses are x growth and maybe shrinking and I know you and I've looked at franchises that are shrinking and the multiples get challenged real uh if you kind of do that math, hey, you're buying an accounting restatement without that much upside, I think is what a bear might say to us. >> Yeah. Kind of two parts there. So on the what they now call franchise brands, it has mini which is general automotive repair and then then auto body uh which is mostly an insurance pay customer and then there's you know we talk about the K-shaped economy right is auto paint and their core customer is on the lower part of that K. So, it's a more discretionary older car. I want to fix my paint or paint a different color or whatnot. And so, what you saw was they had a they had a pretty good hiccup actually Q2 of 2025. And a lot of that was related to tariffs, economic questions, uh low low end of the Kay kind of pressure. And I would just say that uh yes, that occurred. Um but in terms of can that business over time be flat? Yeah, I think it will. Right. And they're not trying they driven are not trying to grow the franchise brand units. Okay. They're trying to maintain them. And what is that worth in today's mo market, right? So Jippy Lube just sold. The sale was private. But depending on what source you read, you'll hear multiples between eight times and nine times. And that is not for a franchise system, right? Franchise is very very low capital intensity for driven. There is some operational uh intensity and maybe you're seeing that as part of the corporate costs, but you are seeing good free cash flow conversion. They also fund the debt which while the debt is in the threes right now at at driven it's coming down over time clearly and it's very very low cost. So I would say that you know pick a multiple on that. I think in my original deck I used a double digit multiple on that on that line item if you will. uh I don't think that that multiple can be compressed much below 10 just because of the capital light uh nature of that of that revenue stream. >> You know it is interesting like one of the reasons I was able to get comfortable with take five is because I could talk to franchises but the funny thing is if I'm just looking uh I think take five is 780 corporate stores and 500 franchise stores if I'm just looking very fast at at some notes. So 6040. The funny thing is franchise business as you said capital light you know recurring somebody else puts it everybody loves it but it's worth a higher multiple but the funny thing is a corporate one corporate store is worth probably 10 franchise stores just in terms of value to the company. And even if you think it's split 50/50, right? That means uh you know 50 times 500 of the value 500 of the value is from the corporate stores, 50 is from the franchise stores, maybe 70 because it's a bigger thing. So the corporate source is where all the value is. And that's just one of the interesting things about this that I've uh thought that I've thought about you. I I'll pause there. I want to switch over to some of the parts, but I'm just going to pause there. you can comment on anything on my Eureka moment on corporate verse franchise or anything else in the bare points anything you think we haven't hit on the fundamentals anything >> no I I there's a lot that I want to get to in terms of go forward what do I expect happen after the pod but let's do some of the parts first why don't >> again flip the script on you how are you thinking about >> I know this concept seems trit these days but you know intrinsic value or value to uh a private purchaser. >> So I, as I've said, I think all of the value, not all the value, but the vast majority of the value is in take five. And I I started investing, buying this again, disclosure, I'm long, like right when the uh right when the accounting issues cropped up. And because of that, I stress tested the take five valuation. I mean, I've got like 15 different ways I stress tested it. But it's so funny. You mentioned Valvaline trades at 11x. All of them kind of centered on about all of the values that I did and I mean I did unit by unit franch like everything all the values ended up centering around you know if you think Valvaline's worth 11x driven's probably worth about 11x so if I just say hey I think the take five business uh you know it does about 400 million in IBIDA slap an 11x multiple on that that covers all of the debt and that covers the share price up to $17 per share and then I get the franchise business the autoglass business for free now franchise does I think it's 180 million in trailing Ibida autoglass does 20 million trailing Ibida corporate is negative uh it does about 150 to 170 in corporate costs there are a lot of adbacks there but what I basically thought is hey I think auto plus franchise is worth more than corporate plus adbacks but just call it a wash and I've got take five up to 17 and you know now we're at 13 it is kind of 11 to 12 when I was doing this math, but I think that's a pretty large margin of safety for the other reason I like this is I think Take Five, everyone knows I love a shitty company that will not grow in value and that's just got a bunch of cash and I just need manager to unlock it. I think take five will grow in value. So, you know, if I sat here and for some reason things hadn't revolved evolved a year from now, I think Tape Five would be worth $20 per share. And I I kind of like that combo. So, we can dive into any piece of that. What did you think of that? just very quick highle SOTP. >> I don't disagree with it. Um it it was you you came at it with fresh eyes, right? You were able to kind of take a a newer look at the at the system and take five has the majority of the value here. But I would say that on franchise brands, I think people are overlooking the sustainability of the cash flow. And I think uh a lot of people I think people in the public markets would be shocked at the private market value specifically to a distinct private equity purchaser from RORO of that line because the cash light nature of the of the of the operation excuse me cash you know there's no capex >> and I think the multiple would be a lot higher than people in the public markets. are using. And I think because there's no growth and we're in a market that focuses on growth and momentum more than free cash flow today, I think that many in the public markets are underestimating the multiple that that would trade at if it traded. Um secondly, autoglass. I was overly bullish autoglass in my original writeup, but I don't think that business is dead. I think it's delayed. Okay. What autoglass is is they built a national number two to safe flight based on compiling together 13 different geog geographical regional players and it's all on one operating system. It's it's it has the chance to grow tremendously. So I don't know what multiple that should trade at because the disclosure on on autoglass has been very very limited and that may in fact be a large part of the corporate cost. I don't know. That's my number two question uh when they come back to speaking public is you know kind of what's going on with autoglass. Where do you think the business will be in three to four years? But I do think those businesses have latent value that is very hard to see in your some of the parts. I don't disagree with it, but I think that there if those businesses sold in the private markets this summer or this fall, I think there's a lot higher numbers than you had in your sum of the parts. You know, the only thing I wanted to add there is you and I are familiar with some franchisee streams that uh might have a little bit more cyclicality or questionleness of terminal value. And I I won't disclose them here, but you know, think about something like CrossFit. If you were looking at a CrossFit franchisee stream and you say, "Hey, it grew like crazy from 2016 to 2019." Well, now you've got to start saying, "Well, I don't know how sustainable this is. Fitness es and flows. Will there be new My Nikki and Mako were started in 1972." Uh, you look at the past 10 years of financials and it is just rock solid stem. So, you know, people who are familiar with some of these smaller franchises might say, "Oh, I know franchises that trade for 8x in the public markets." And I'd say a they're probably worth more in the private markets, but b mino do not have that same people are going to be getting their cars repaired and their cars painted for the next I I guess until AI takes over and never has an accident again. But I I just think the quality of that to add on to what you were saying might be lost in the public markets. And Autoglass, I'm with you. If you talk to the company, they'll say, "Hey, it's a matter of when, not if, we will get a big national contract that will take this that will make this investment like really work and turn it into Take Five 2.0. Now, >> let's Okay, so it sounds like uh we're kind of aligned on roughly some of the parts and everything. Let's go do I I want to do two more things before we wrap this up. How we think the accounting plays out and then Ror's motivations. And let's do accounting plays out because Ror can't do anything till the accounting plays out. So, I think the other bear point I didn't mention is >> uh they the company has come out and said we will file our 10K by the middle of June. I can't remember the exact date. A lot of the bears I've talked to, and I I will admit I I've got some suspicions. We'll say, "Hey, if you look at the history of restatements like this, they're saying they're going to get this done in four months. You can't find an example of getting done. You know, this is going to be an eight-month restatement. This is going to be a year-long reate." So, they think the company's underelling how long the reatement takes. And extra months introduces extra uncertainty. It introduces extra costs and everything. So, I I'll pause there. What do you think kind of will this get resolved in the middle of June or do you think this is going to drag on longer? >> The simple answer is I don't know and you cannot prove disprove the counterfactual. When when this all hit, my estimation was late May and and I had a lot of uh people who I highly respect disagreed with me on that both shorter and longer. Uh now it looks it looks like it's going to be early June. My my thinking is no CFO resignation, no auditor resignation. They put out new information two weeks before they pulled the numbers. My my sense is that this just barely it's a toe fault to use a different sports you know analogy. It's a toe fault. It's not they're not driving right over the line and just you know kind of leaving bodies in the wake. It's that is accounting and it's particular on you know lease holds and where does the expenses go. That's fine. The lawyers and the accountants can figure that out. I look I don't know and I hate to you know say oh it's June for sure and then it's September. It could be anything but the probability and the magnitude here I think is manageable and certainly manageable in the context of the event path which I do which I do want to get to once we finish the accounting section. >> No, look I I talked to these uh I I talked to the bears there and my overarching thing would be I kind of agree with you again. I was a little skeptical of June. I think they've kind of put themselves on the line with it. But I kept being like, I've talked to the Take Five people. I see the Take Five value. If I'm buying this whole company for less than Take F for less than the value of Take Five and getting to other brands for free, like why do I care if it's June or September? Now, maybe that's too cavalier because everybody says they don't care about marktomarket, but at some point everybody cares about marktomarket, and I don't think the the market's going to be too happy if this isn't done in June, but >> I you know, I I kind of I at this point, I think they're going to do June, but if it comes in September, I I think they'll be fine. Let's talk about what RO does. Again, ROR is, for those who aren't familiar, Ror is the private equity company. They own, let's just call it twothirds of the company here. They've owned this for a long time. They obviously took it private, sold a little bit after this went uh took it public, sold a little bit after they went public. You know, I think their motivations and what they do on the back end of this are really interesting and I I will turn it over to you for what they do, but I will just mention one thing that I know you and I have talked about. We're recording this May 11th. May 8th, there's actually a news report that goes out. Inspire Brands, which work owns, it is their, it has to be their largest investment by far. This is the company that owns Duncan, Jimmy John's, Arby's, Sonic, Buffalo Wild Wings. Inspired Brands is going to IPO in the back half of the year. I I I just can't help but think of does RO really want this? Inspired Brands is a big franchise retail focus. Does RO really want this dog of an accounting restatement out there while they're going to pitch Inspire Brands? So, I I have kind of softball and teed up, but I I'd love to just turn over to you like what do you think Work does once the accounting's resigned? What what happens here? >> Yeah. And the the caveat to here is I've never spoken to Roric about Inspire or Driven. I've never tried to speak with Ror about Inspire or Driven. So, it's pure pure speculation, one man's opinion. Um I I'm conflicted because that point that Bulls made to me over the last couple years like, oh, they're going to clean it up before they they IPO and Spire. Maybe, maybe not. Right? Like it's a >> it's a different segment of investor. It's large cap simple growth. Like that story is different than look there's only $800 million of market public market cap on driven right and a lot of that's held by folks that have held it for a long time firms that it's all public that are well respected in the fundamental investing community such as North Peak and others. Right. And is that the same segment that's buy, you know, is someone looking at driven, looking at inspire? Maybe, maybe not, right? And I don't know. I don't know if they if I I don't know what RA's going to do. Um I I wrote to my investors a couple months ago and I said, "Look, here's what I think's going to happen. There's two paths forward. Uh there's one, no, we sold car wash. We're going to just simplify with what we have. Yeah, we had this toe fault with the accounting blah blah blah. Explain it away, get the revenue, continue growing, get the debt down, and you remain in the public markets. And in that scenario, you probably never get the multiple you deserve because investors have long memories and nobody wants to get burned by buying driven because, you know, all these three strikes that I talked about earlier. And in that scenario, it probably takes a couple years for the stock to kind of wander into the low 20s, right? Take five growth, delever, etc. That's a fine return. But I think for event driven or catalytic, pun intended, per year. Uh >> there you go. There you go. >> Pun intended. Uh I think the catalytic angle is ROR runs a process either for the entire business or for the franchise brands and or you know and that may or may not have car wash stapled to it. And I think in that scenario they ROR probably won't disclose if they're running that or not. Same thing they did with car wash. They never disclosed it till the day it was sold. Right. So I think this summer or this fall we could see a scenario in which part of the business or all of the business is is off the you know is off the board publicly speaking. I think you know if you look at the history of auto body that is >> classic private equity owned and built that industry. So there's a lot of people on private equity teams that understand these businesses and we can talk about uh you know some of the safety improvements, reduction of collisions, etc. And we did I think we hit that on the last pod. But but the reality is I I think we will know by Labor Day or at least Halloween where this is going. And you know we shall see activists or other private equity whether that becomes public or private I I you know I don't know towards ROAR but yeah ROAR doesn't want to deal with this. I mean, they own this in fun vintages that are 10 years old and 14 years old. So, you know, the question like if it was a newer vintage fund, you might see them kind of reach into their pocket and take minority shareholders out and fix it in the private markets away from scrutiny and podcasts and the like. But, when you're in a 14-year-old fund, like what's your time frame? you're probably already into your sort of extended, you know, couple years here. So, I don't think it's uh ROR probably wants out more than they want back in is my >> I I think that's right. I mean, to me, obviously, the ideal would be they clean this up and they say, "Hey, we're done with this. We're running a full process. We we're selling everything and this goes off the board for I know some bulls who say you won't pry a hand out of my you won't pry a share out of my hands before we get 25." I know some bulls who say you want probably a share out of my hand before we get 35. I'll I'll take either. Thank you very much. But your dream case is uh restatement done into a full sales process, but I will tell you restatement done into selling franchise brands as you said and maybe turning this into just take five and autoglass. I think you said maybe they staple franchise with autoglass, but if you had take five plus the growth upside of autoglass and a very uh you know the corporate expenses were either way cut down or maintained like I think this would be a very attractive public market kind of compounder you know hey we run similar to Valvaline we run this at 3x maybe we can find valine just bought breeze for I think that's going to be a pretty good acquisition despite the FDC making them devest maybe we can find a bolt on or two to the take five system. If not, you know, we're going to run this at 3x leverage, grow autoglass, and return all the capital to shareholders. Like, I think that'd get a pretty strong multiple in the market. And either one of those, I think the stock would respond very well to the path A and B I laid out there. >> Yeah, I think there's a pretty straightforward way to making 50% plus over the next, let's just call it 12 to 18 months. >> You know, when you're dealing with memory stocks that go up 50%, I mean, is it a week? Is it a day? It sounds trit. And maybe it is right, but I I would be very happy with that return. And like this again, I long it. That's kind of my basish case to be honest with you. So I think we are pros because it's been about an hour. We've hit just about everything on my pod on my question list. I think we did a really nice job discussing anything, but I'll pause here. Anything else you want to talk about or anything else we should be thinking about mentioning? >> No, I don't think so. I appreciate the time. Um, I know this one's sort of it's always sorted, if you will, or come back uh year and a half later and say, "Oh, all I did was lose a dollar on a $14 stock and all the noise associated with that." So, I appreciate the platform and and and the uh intellectual uh back and forth, sir. >> Well, I I appreciate it. Uh, you know, the one of the reasons I could ramp up so quickly is because I I studied this so hard and look, it went 14 to 19 and then they had accounting issues. Last one and then I'll let you go. You mentioned capital cycles, which I've been uh thinking about a lot more. You know, I think in my younger dumber days, I was like, capital cycles, who cares? We studied the fundamentals, but I've been thinking about a lot more. I know the one you've been looking at is not to disclose too much. I think you've been looking at housing related a lot. I've been looking at a little bit um senior living. How are you feeling about capital cycles? What are the most interesting capital cycle stories these days? >> We started working on housing on the back last summer. We haven't made many investments. It's publicly disclosed in our 13F that we're along Olan. Bolan actually chloralki and its downstream products is actually wildly interesting as it relates to housing and and other general industrial production. Um the rest of the housing work that we have done we haven't put as much capital there because the correlation to the tenure right if the tenure is at four the housing stocks will do well 10 year at 4.4 four roughly where it is today, they're not going to do as well and it's it's the correlation to rates is very very high. So, it's functionally a macro play. Um there there are some very interesting things. We've been studying brokerage um and some of the uh building products, but there's very little capital that we've actually deployed out out the door. But I mean, senior living, senior living is a home run because the demographics are so strong, uh, especially on the private pay side. Again, they're it's it's management quality and what they're going to do because the multiples are all are typically high. So, you know, I think Cenita is a wonderful I'm not long. I should be long but it's a wonderful business run by a exemplary capital allocator who's well known in the fundamental investing world. So >> we are talking May 11th at it is 3 p.m. Eastern right now. There will be a Cenita writeup going out in the next 24 hours on yet another valueblog.com. So, Sita is the reason I was I was thinking about it for this, but you know, there there are others out there. But, yeah, just as I've gotten more grays on my head, you know, the the capital cycle stories and it it does kind of speak to being a value investor. You wait until something is >> so shelled out that nobody will put capital in it and that's where you can get spikes in. Look at memory, right? Like memory, this is a capital cycle story right now. Now, the question is when is somebody gonna say, "Hey, all the memory stocks are trading like they'll make 50% ROE's forever. Why don't we just go b the fourth memory player like the stocks keep doing this somebody's going to do it but it's uh it's all capital cycles I suppose in the spaceman shooting the meme always has been but yeah >> yeah no and again probably a little bit downstream but people are still with us I mean there's just there's headlines today about Chinese ramping supply the Chinese ramping supply has destroyed so much value in industrial production western industrial Western in industrial production businesses, there's either in AI and they're doing great or they're not in AI and they're doing poorly. And the ones that are not in AI and doing poorly is almost all of that pressure is due to increased Chinese supply in the last 5 to eight years. >> And so anyone in memory, and I'm not involved long or short, anyone involved in memory needs to study what's, you know, being produced in China or what could be produced in China very, very closely. But as of now, shortages and price up. >> Well, uh, I'm gonna have to wrap it up here, but Kyle, this has been great. As as Kyle knows, Kyle's one of my favorite people in the industry, so I appreciate you coming on and, uh, we will chat soon, whether it's on the podcast or offline. Talk to you soon by >> Yes, sir. >> A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.