500 New Stores And Four Regions Will Expand Retail Reach

Key Takeaways

• Aggressive store expansion and new regional operations in 2025 will drive significant revenue growth and operational efficiency.
  
• Increased private label penetration and efficient cost management will enhance profit margins despite short-term rise in SG&A expenses.
  
• Rising SG&A and expansion challenges may strain BBB Foods' financials, while macroeconomic factors and strategic shifts present risks to margins and profitability.

Catalysts

Through its subsidiaries, operates a chain of grocery retail stores in Mexico.

• Tiendas 3B is expanding aggressively with plans to open 500 to 550 new stores in 2025, which will likely drive significant revenue growth.
  
• The company is introducing 4 new regional operations in 2025, which will enhance distribution efficiency and store density, further bolstering revenue and operational leverage.
  
• Same-store sales are anticipated to grow by 11% to 14% in 2025 despite economic uncertainty, driven by enhanced value propositions and an increase in private label products, positively impacting both revenue and profit margins.
  
• Private label penetration has increased to 54% from 47% in the previous year, offering higher margin opportunities and driving improved earnings.
  
• Despite higher SG&A due to expansion and compliance costs, Tiendas 3B expects these to decrease as a percentage of sales over time, contributing to improved net margins and overall profitability.

BBB Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BBB Foods's revenue will grow by 25.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 1.4% in 3 years time.
• Analysts expect earnings to reach MX$1.6 billion (and earnings per share of MX$9.13) by about May 2028, up from MX$334.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$2.4 billion in earnings, and the most bearish expecting MX$964 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 65.3x on those 2028 earnings, down from 202.3x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

BBB Foods Future Earnings Per Share Growth

Risks

• The increase in SG&A as a percentage of revenue, particularly due to higher administrative costs for hiring and compliance, could negatively impact net margins if not offset by sufficient revenue growth.
  
• Expansion into new geographies and increasing store density require significant capital and management resources, which could strain financials and affect earnings if returns are slower than anticipated.
  
• The expected slowdown in Mexican economic activity could dampen consumer spending, which might impact same-store sales growth, thus affecting overall revenue.
  
• The reliance on growing private label penetration while managing price gaps could put pressure on gross margins if input costs rise or competition intensifies.
  
• Planned investment in new product categories like fresh produce could pose execution risks and affect operating efficiency and profitability if not successfully implemented.

Valuation

• The analysts have a consensus price target of $34.255 for BBB Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $41.85, and the most bearish reporting a price target of just $28.26.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$114.7 billion, earnings will come to MX$1.6 billion, and it would be trading on a PE ratio of 65.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $30.28, the analyst price target of $34.25 is 11.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.