Jumbo 2002-2012

The Company

Jumbo is the largest toy store chain in Greece.  It manufactures (mostly imports – 70% of its stock from China) and sells toys, prams, baby/children’s clothes and other accessories.  The company has 51 stores in Greece, 3 in Cyprus, and 8 in Bulgaria.  As a toys retailer, Jumbo’s business is seasonal with strongest sales during Christmas (28%), Easter (10%), and the beginning of the school year (10%).

Although in Greece the company claims to offer competitive prices, in Bulgaria its products are at the high end of the spectrum relative to purchasing power.  This, together with the newness (first store opened in 2007) and foreign-ness of the company, gives its product a premium status.  Kids go crazy when they see the logo.  Parents are terrified.  Now that Greece is in quite a mess, the stores in Bulgaria are the source of growth.  But, it barely moves the needle as Bulgaria is only 6% of sales.

Two new stores are planned for June 2013 in Greece and one in Cyprus.  Jumbo is also working on opening its first two stores in Romania during fiscal 2013/2014.  To spur growth, apart from building new stores, the company is also going to start an online store later this year.  The plan is to sell not only toys but also “products for organizing parties, outdoor games and specialty games online.”

Jumbo’s performance depends mostly on:

  • Spending on toys – contracting in the conditions of an ongoing crisis
  • Demographics – birthrates in the region are on a declining trend

These factors don’t bode well for business.  The birthrate is very slow-moving and hard-to-influence.  However, the good news is that the crisis will eventually subside and spending will increase as people start going back to work.  Also, the company is still growing.  Bulgaria is not yet saturated.  Romania is just going to see its first store.  Then, there are the other Balkan countries.

The Record

The company publishes its annual reports, press releases, presentations, and analyst coverage in English on its website.

On a side note, it’s amazing how upward-sloping charts are a staple in company presentations during up years and how they are nowhere to be found when the tide turns.  Jumbo makes no exception.  Company presentations up until 2009 show, in full color, the steep slopes of Sales, EBITDA, and Net Income.  Then, they disappear.

Here are the last 11 years at a glance.

Jumbo 2002-2012 Sales, EBITDA, Net Income, Free Cash Flow, Return on Assets, Return on Equity

Growth has slowed to a crawl over the past 4 years, especially when put next to the 23% compound growth rate of the previous 7 years.  The reasons for this are obvious.  Greece hasn’t done too well lately.

Despite the grim macro, Jumbo has maintained very stable margins – on average 53% gross and 18% net.  The company manages to make 12% on assets and adds €30-40m to assets, annually.  Capital spending reached €60m when the times were better.  Some part of this goes towards maintaining existing assets.  However, it’s an insignificant part as most of the company’s stores and warehouses are new.  Due to this investment for growth, free cash flow for the past 11 years totals €160m while earnings are €500m higher.

These investments have helped book value grow 28% annually.  For the most part, the money has come from operations.  But, as is normal for a growing company, occasionally Jumbo had to raise money.  Currently, there is €152m of long-term debt on the books.  Roughly, €1m remains of the €42m convertible bonds issued in 2006.  The rest is mostly a €145m bank loan due May 24, 2014.  The effective weighted average borrowing rate of the company is 3.4-4.0%.

Net debt is negative €30m because the company managed to pile up €185m cash in the past 4 years.  However, there is another €130m of operating leases.  Still, debt is only half of equity and the ratio has come down every year since 2002, when it stood at the whopping 3.7 times equity.  Another minor, for now, issue is the pension liability.  It stands at €4m on the latest balance sheet.  But, its 20% rate of growth is disconcerting.  A big reason for Greece’s problems are precisely entitlements.  Maybe, at some point, management will freeze the defined benefit pension plan, but in any case, it is something to keep an eye on.

Ownership

The main shareholder (26.76%) is Tanosirian S.A., which is 99% owned by Tanocerian Maritime – an offshore company.  Somewhere I read that probably the CEO stands behind this company.  He, the Vice Chairman, and an independent director are also on the board of Tanosirian.

Funds from the Franklin Templeton and Fidelity families owned 10% and 13%, respectively, until recently.  Fidelity has cut its position to 8.6%.  Templeton has reduced their position below 5% or liquidated it.  First Eagle Overseas Fund has 8.25%.  On June 22, 2012 Fairfax came out with an announcement that it owns 5.4%.

Valuation

Over the past 11 years, Jumbo has grown considerably.  Sales used to be €100m.  Now, they are approaching €500m.  Common shareholders keep nearly 20% of this, or €100m.  Out of the €660m of earnings generated between 2002-2012, €170m have been paid out, roughly 1/4.  Also, Jumbo has authorization to repurchase up to 5% of its outstanding shares in the next two years at prices between €2.0-6.5.  This hasn’t happened so far and shouldn’t happen while the company can grow profitably.  But, it is an option that management is considering.

The stock traded down to €2.5 in June 2012, when there was talk (once again) of Greece leaving the Eurozone.  With 129,962,537 shares outstanding, the market cap was €325m.  Now, the price is €7.25 and the decision is no no-brainer.

Was it a no-brainer in mid-2012?  This is the question I am asking myself regarding all three Greek companies that I’ve written up here.  Was the economic and political chaos a good enough reason to pass on companies selling at low single-digit multiples?

The question is mostly about Jumbo though, because the other two had company issues next to the macro issues.  OPAP is restructuring itself and METKA’s projects are very difficult, if not impossible, to value.  At Jumbo, however, I don’t see any company issues.  It was selling at 3.5 times earnings just because of the situation in Greece.

Now, with hindsight, it is easy to look at the situation as a missed opportunity.  However, there was, and still is, a good chance that Greece will continue to be dysfunctional indefinitely.  Hypothetically, it can still default, leave the Eurozone, go back to the drachma, and devalue.  Tight credit and decreasing Greek purchasing power can be disastrous for the company.

Are these risks to be ignored?  Should value investors never look at the macro as long as the price is right?

My aversion to risk didn’t let me do it.

Would you have invested?

If there is anyone reading this who actually bought Jumbo last year, I’d love to hear their reasoning.


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