Rapid Expansion Will Erode Margins Yet Sustain Value

Key Takeaways

• Aggressive store expansion and tech investments could pressure margins and earnings until operational efficiencies and scale benefits are fully realized.
  
• Exposure to low-income consumers and rising compliance and labor costs create earnings volatility and may limit near-term profit growth despite strong demand trends.
  
• Accelerated expansion, rising costs, wage pressures, store saturation risk, and limited digital presence threaten margins, future growth, and long-term market relevance.

Catalysts

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

• While BBB Foods continues to exploit demand growth from urbanization and a rising middle class in Mexico through accelerated store expansion-demonstrated by increasing the rate of new store openings by approximately 100 stores year-over-year-the company faces rising operating and administrative expenses due to rapid expansion and upfront investments, which may continue to weigh on net margins until new stores mature and operating leverage is fully realized.
  
• Although investment in new technology infrastructure is expected to drive operational efficiency, data analytics, and customer engagement-potentially supporting revenue growth and margin gains-the near-term overlap of legacy and new systems, combined with increased IT and recruitment expenses, could pressure earnings in the interim and delay positive returns from digital adoption.
  
• While private-label growth and supply chain efficiencies should gradually bolster gross margin performance and profitability, persistent low gross margins inherent to the discount retail model, coupled with industry-wide price competition and possible cost inflation from suppliers or labor, may limit the speed at which gross margin improvements flow through to overall earnings.
  
• Despite benefiting from strong secular trends in food security concerns and resilient value-based retail demand (particularly when the consumer environment is strained), BBB Foods' high reliance on low-income customer segments leaves it exposed to macroeconomic shocks or subsidy changes, which could compress same-store sales growth and introduce unpredictable volatility to revenues.
  
• While scale-driven efficiency and consolidation of local grocers should underpin long-term market share and revenue growth, increasing pressure for environmental, social, and governance compliance and potential tightening of labor regulations (e.g., reduced working weeks in Mexico) may raise ongoing operating costs and capital expenditure needs, threatening EBITDA margins and reducing the pace of future earnings growth.

BBB Foods Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on BBB Foods compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BBB Foods's revenue will grow by 25.3% annually over the next 3 years.
• The bearish analysts are assuming BBB Foods's profit margins will remain the same at 0.8% over the next 3 years.
• The bearish analysts expect earnings to reach MX$942.7 million (and earnings per share of MX$5.69) by about July 2028, up from MX$478.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 85.7x on those 2028 earnings, down from 118.2x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

BBB Foods Future Earnings Per Share Growth

Risks

• The company's accelerated store expansion necessitates substantial upfront costs for new locations and distribution centers before corresponding revenues materialize, which, if expansion slows or underperforms, could negatively affect top-line revenue growth and compress operating margins over time.
  
• Persistent increases in administrative and personnel expenses, including a new normal in share-based compensation totaling 1.2% of sales and representing a significant portion of gross profit, threatens to erode long-term profitability and dilute future earnings.
  
• The discount retail model's inherent exposure to low-margin operations and pressure from potential increases in labor costs (such as the gradual reduction of the working week) leaves BBB Foods highly sensitive to wage inflation, which can disproportionately impact net margins if not offset by higher sales or operating leverage.
  
• As market density increases and formerly underpenetrated regions mature, the risk of store saturation could slow future store growth and reduce same-store sales momentum, ultimately limiting future revenue and EBITDA growth.
  
• Heavy dependence on traditional brick-and-mortar footprint and core value-proposition centered on basic goods may expose BBB Foods to evolving consumer trends favoring e-commerce, digital grocery solutions, or premium product categories, which could erode market share and dampen revenue expansion in the long term.

Valuation

• The assumed bearish price target for BBB Foods is $28.16, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of BBB Foods's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.62, and the most bearish reporting a price target of just $28.16.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MX$121.6 billion, earnings will come to MX$942.7 million, and it would be trading on a PE ratio of 85.7x, assuming you use a discount rate of 8.8%.
• Given the current share price of $26.43, the bearish analyst price target of $28.16 is 6.1% 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.