Hi Reader,

Welcome to the 7th edition of the Stockstartr newsletter. In today's edition, you'll learn why chain stores are a success for both the customer and investor. Further, the business life cycle is helpful to know how companies in various stages would behave.

Fundamental

The Business Life Cycle

A company needs a viable product to solve a problem to attract customers. Yet a quickly saturated market will result in declining sales. Investors look for companies that have proven to have a viable product but with enough sales ahead of them.

To solve these investing problems, you must know the business life cycle. There are 5 stages: the launch, growth, shake-out, maturity & decline.

A publicly traded company listed on the S&P 500 lasts around 21 years in 2020. Knowing what stage the company is in helps you understand what to expect as an investor and what to expect from the company's management. A company behaves in each stage differently. We will look at each stage through several characteristics: sales, profit, cash flow, and debt.

During the launch stage, each company starts by usually offering a new product or service. At first, the sales are low and (hopefully) will slowly grow. The revenue is low, and initial start-up costs are high, which results in a loss and even lower cash flows. Raising debt is out of the question as there is no proven way of paying off the outstanding debt.

The growth stage signifies the company's ability to increase revenue growth rapidly. Regardless of reaching more customers, the profits are small. Management decides to reinvest every cent of the profit into the growth of the business.

In this stage, they don't want to return money to the shareholder as management believes that $1 now is worth 5 or 10 times more in the future. Thus, growth is more effective for the shareholders in the long term.

The cash flow becomes positive due to the reinvestment. Now, banks and other loan providers consider the profits to be the company's validity and allow loans and debt raising.

The shake-out stage is marked by a declining increase in sales. The market is saturated at this stage, or competitors are trying to win market share. The profit margins typically shrink due to competitors trying to undercut the company. Luckily for the company, raising debt is more straightforward now. This allows for more investments in fine-tuning the business operations.

The company enters the maturity stage when sales start to decline, and profit margins get even thinner. On the other hand, cash flow is stagnant as the company spends a lot of capital to stay relevant. A mature company has no problem raising debt and likely has a good credit rating.

Often, management decides to return money to the shareholders through dividends, share buybacks, or both. With flat earnings, the price of a stock goes up during share buybacks.

It is typical for management to develop new products or more mergers to 'reinvent' themselves during this stage. If successful, the company extents its business cycle.

The decline is unavoidable for most companies. Sales, cash flow, and profit all decline. The inability to adapt to the ever-changing market environment resulted in the end of an era.

Glossary

Comparable Store Sales

Comparable store sales, or same-store sales, is a metric for security analysts to gain insight into stores improving their sales. It is a helpful metric for analyzing companies that operate a chain.

In a report, you see the revenue increasing year-over-year. Is this attributed to new store openings, or do the same stores sell more than last year? The comparable store sales will tell you. If it is higher compared to the previous year, then yes. Sales revenue per store went up.

Practical

Growth Strategy in the Annual Report

Our previous edition discussed the business overview in Floor & Decor's (FND) annual report. This week, we continue with their growth strategy.

Some companies shy away from sharing a sound growth strategy, while others, like FND, are more transparent. Since FND is in the growth stage and a chain store, it is easier for us to figure out what they plan to do to earn more money in the future.

An easy guess is opening more stores and increasing the sales per store, just like the strategy reports. Let's start with store opening increase.

Management, which operates a chain, typically reports an estimate of planned store openings for the following year. Ideally, it plans to have more store openings for investors than last year. Besides, management often discloses how many potential stores are possible throughout the United States.

In FND's case, an estimated 500 stores won't saturate the market. This number may change as the population grows and moves around.

Item 2 (Properties) in the annual report shows how many stores are currently opened. 221 stores are in operation, but likely 10 or 20 more at the time of writing. When you look at previous annual reports, you can quickly figure out how many stores open yearly. When the store openings accelerate year-over-year, it is an ideal growth from the investor's perspective.

Looking further at the growth strategy, they inform investors that they will focus on comparable store sales. Another strategy that every chain will attempt. A combination of psychology, product range, and customer experience must do the job. From the annual report, it is hard to determine how well management will execute store sales. When you read about behavioral psychology, you can determine how effective marketing and buyer intent in the stores is.

Thirdly, FND's growth strategy contains more plans and targets. However, these are more unique to the customers and not applicable to general company growth strategies.

Restaurant and hotel chains and chain store strategies are easier to understand for investors. It is just a couple of numbers for expansion, really. You don't need a degree or economic simulations to get the gist. The information technology sector, for example, makes it harder for investors to estimate growth success. Companies in the sector spend a lot on R&D and hope for new products to grow as a company. How do we know which products will catch on with the public?

Principle

Like the Store? Love the Company

Companies with a chain format are very powerful for both shoppers and investors. Chain stores and restaurants are all around you. Wendy's and McDonald's, Walmart, TJ Maxx and Dicks Sporting Goods, or hotels like the Holiday Inn.

When you look for a quick bite in an unknown city, the McDonalds sign jumps out of the sea of signs. You know what they serve you because it is the same as at home. You don't need to explore unfamiliar restaurants and decide where to eat. You go for what you know, the golden arches.

The same works with stores. Wherever you go, you likely will end up at the same store because you know what to expect. You like the product range, the store's layout, the employees, and the background music. When you do, more customers will likely do.

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If the chain is a favorite of yours, then the chances are that you will like the company. Such companies figured out a format that works in many places. As a result, management only has to copy the format and deploy it in other areas with similar foot traffic.

As an investor, it is an easy company to follow. When the chain is only available in a few states, then there are likely more than 40 to go. After that, the company can expand overseas. That is a huge growth potential.

Investors should look out for 2 things. First, the debt on the balance sheet. Opening too many stores at once might be too fast. Any economic shift might overextend the company, and it will, in that case, not survive.

Second, the format must be copied at all times. You don't want them to open in new places and do something very different from the format that works. It would be a waste of money.

Thanks for reading Stockstartr. For questions, suggestions, or feedback, please reply to this email. We will gladly take the time to listen to you. Please ask your friends and colleagues to sign up.

No investing advice is given at any moment. The newsletter is purely for informative purposes only.​
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