Conor Maguire sees value in Wickes $WIX.LSE (Podcast #101)

Conor Maguire, founder of Value Sits, discusses his thesis on Wickes (WIX:LSE). You can find my tweet thread on WIX here.

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Transcript begins below

Andrew Walker: Hello and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. With me today I'm excited to have, Conor Maguire. Conor is the founder of, I guess, it's just Values Sits Substack. Conor, how's it going?

Conor Maguire: I'm good, Andrew. Yeah, good to be on the podcast today. How are you?

Andrew: Doing good. Hey, I was just laughing to myself, I think you might have the best accent of anyone who's come on the podcast so far. I'm just loving that accent but, let me start this podcast the way do every podcast.

First, a disclaimer which reminds everyone, nothing on this podcast investing advice, always true but I'll just give a little extra note that we're gonna talk about international stock it is on the smaller cap side. So everybody please, this is probably a little higher risk than normal. Please do your own work, consult a financial advisor, not financial advice. Then a second with a pitch for you, my guess, you and I were catching up beforehand. I remember when you started your Substack about a year ago and you quoted me right back I said, look, your first post was on the-- it was total produce was merging with Dole, if I remember correctly.

Conor: That’s it. Yeah, that’s right.

Andrew: I'll generally like linked to people's first post if they want, but I tried to wait and feel it out but I was like, as soon as already said, the Substack is gonna be fantastic. It's absolutely proven and people are gonna see today, just all sorts of quirky situations all across the globe. So, you've actually got a big following. I had five people reach out when I said it, I was having you on there like, I love the Substack. So, just so excited to have you on and so excited that you've kind of got some traction going a year into substacking.

Conor: No, that's great. Yeah and listen, you were one of the very early people to kind of give me a bit of promotion online and so on in your own newsletter. So yeah, I'm glad I'm still here and so sharing ideas, it's great to be on the podcast. So looking forward to discussion.

Andrew: Great, thanks so much. Well, let's just dive right in. The company we're gonna talk about it's Wix, the ticker is W-I-X but if you'd look up W-I-X domestically in the US you'll find Wix the website company. This is Wix the trades in London. It is a London home goods store, but I probably talked too much already. So I'll turn it over to you. What is Wix and why are we so interested in it?

Conor: Yeah. Thanks, Andrew. So Wix is the second largest home improvement and DIY retailer in the UK. So it was spun out of a larger building materials business listed list a building materials business called Travis Perkins PLC, but last April and the rationale for the spin-off at the time really was Travis Perkins are more focused on the trade or the business to business and material space and so, the decisions made to kind of simplify their business and spin-off what is really essentially kind of a retail-focused business with Wix.

So, I suppose some comparable in the US maybe something like Home Depot or Lowe's but this is a much smaller business and obviously rare to the UK market as well, which is itself a smaller market. So the spin-off is structured as a one for one share distribution to Travis Perkins shareholders and as is often the case with a lot of spin situations like this. A lot of the big holders of Travis Perkins shares immediately sold off their stock or started selling their shares they received into the market over the last 9, 10 months. Really the rationale for that, really is that it's just mandate reasons. I mean, Wix is a kind of a 460 million pound sterling market cap business. Travis Perkins is a 2.8 billion starting market cap, so much larger business. I suppose one of the main reasons why the sell-off was two reasons really I suppose, not wanting to own similar risk twice. In terms of investors, if they already own Travis Perkins, that was the much larger business. There was no reason to hold onto a smaller spin-off once they'd been distributed with the shares. Secondly, retail as well, there's probably a perception around retail, which I think in the case of Wix is misplaced but we can get into that. But, similar again to the US retail apocalypse as the narrative is over there. The death of the high street as they call it in the UK, and or death in the UK reach out, so it's probably suffered a little bit from that type of perceptions of.

Andrew: Great. That's all great and I wanna dive into all of that. Let me ask you a quick simple question. You mentioned it reminds US listeners, Home Depot, and Lowe's. My first simple question, is there any relation to Lowe's? Because when I was reading the Dick, I was looking through the slide, like the color palette, all of it, it’s just it rhymes with Lowe's so much, either there had to be a relationship or one of them stole each other's logos and color fonts and everything.

Conor: I don't know if there was anything stolen. I would say it's purely coincidental, but no, there's no relationship. This is a totally 100% UK-focused business. It's a small cap. It's about 1.5 billion revenue, 460 million or so market cap. So no, there is no business outside of the UK, and it's an independent DIY retailer now listed on the London Stock Exchange.

Andrew: Great. Look, one of the things that I find difficult about investing internationally is, if you're talking US, you talk to me about a retailer company. I can generally picture where they fall into it. Is it a super high end retailer, or is it lower end? I guess probably a step low, certainly step low, or restoration hardware, or something, right? With Wix, it was just tough for me. In my mind, initially I thought, oh, this is the Lowe’s [?] of the UK. But it's not quite that big, it doesn't have the same selection. So where should people kind of think about the value proposition, who's shopping there? Why are they shopping there?

Conor: Yeah. Wix's business model is, our operating model is probably different to its main competitors in the market. So, it kind of straddles three segments of the home improvement or DIY market. So firstly, you've got the local trade businesses just where they supply materials to local tradesmen who are doing DIY projects for consumers. So these aren't large firms, these are usually one or two months bond type tradesmen who will get the materials they need efficiently from Wix and then do whatever jobs for consumers separately to that. Secondly, there's what's called the DIFM or Do It For Me segment, which is really kind of the end to end service offering where the customer, retail customer go into Wix store or onto their websites that speak to a consultant and it's really kind of an end to end kind from concept to final installation of something like a kitchen, bathroom, flooring, tiling, that kind of thing. Then thirdly is the traditional DIY segment, which is you go and you buy whatever, paints, paintbrushes, timber, whatever, whatever you need for your own personal DIY project. So, it's kind of very evenly balanced across those three segments, which is a little different to the competitors in the market. Then the second difference in terms of the mix really then is the operating model itself. So, this is kind of a value for money value retail type offering, where they don't operate a big box model where they try and stock every conceivable DIY item, to meet all consumer needs. So they have a very focused what they call a curated product range where they stock in store about 9,000 SKUs, which compares to about 40,000 for their larger competitor, the market leader, which is B&Q which is owned by Kingfisher, which is another business at PLC business in the UK. So they're much smaller product range, kind of lower price point, more value-oriented, and then smaller store footprint as well. So their average store size is about 20,000 square feet, 22,000 square feet, which compares to about 80,000 square feet, more like the big box type retail model that B&Q operates. That's kind of where it sits, it's kind of more price conscious, and kind of maybe more at our product range. But what they do is they try and stock all the high demands, very reliable in-demand products for home improvements.

Andrew: Perfect. I'm just trying to find the slide as you were talking, but I couldn't quite find the slide. What are the things they argue in their decks that they're like, look, a lot of our competitors. As you were alluding to kind of focus on one segment, right? They focus on the consumer, or they focus on serving the pro. Wix argues, “Hey, we focus on everyone,” and that is an advantage, which I can understand that but at the same time, as you said, the stores are about a quarter of the size, a peers, it does seem strange to go and say, "Hey, we focus on everyone with a store size a quarter of our peers." Because of that, it's an advantage. Does that make sense?

Conor: Well, I think it does. Because they're trying to target that end of the market that isn't properly serviced by or isn't sufficiently serviced by a larger peers. You have to remember as well the UK DIY market has gone through quite a bit of change. I mean, there's been a number of kind of bankruptcies or retailers that collapsed. Really there’s only three kind of players, pure play kind of DIY home improvement retailer still standing. B&Q which is the largest. Stanwix which is the set number two, and then home base, which went through its own restructuring and kind of a distressed scenario, which is the third largest. So, I decided actually dealing with general retailers, value discount retailers, Amazon, kind of homeware businesses that might stock some kind of gardening or their kind of furniture type DIY related products.

I think the balance they have, it makes sense. I think that shows through kind of the track record. I mean, they've consistently growing revenues and earnings over the last 15 years. That's through the great financial crisis in '08-'09 through British [?]. That’s through kind of the market in 2018 when a home base went on this aggressive strategy when it was bought by an Australian conglomerate, which fails. Wix actually took advantage of that real market share. Then most recently, obviously COVID, and a pandemic. So they've been through kind of forever [?] turbulence and really, there's only a handful of players left. Wix is kind of, has its own very differentiated model which I think, firstly, makes it interesting and then secondly, obviously the valuation and another number of other attributes as well, which makes it really, I think a really compelling situation.

Andrew: We're gonna talk valuation and the special set setup for one second, but I just wanna wrap up on the competitive landscape. You mentioned Amazon in there. Domestically Amazon is obviously the big scary boogeyman to a lot of retailers. But at the same time, when you think Home Depot, you think Lowe's, those have done a great job of being insulated. A lot of it has to do with, they sell lots of heavy equip, lots of heavy stuff, lots of things that Amazon can't easily pack in a warehouse and ship to your house. So, I just, the Amazon boogeyman in the UK, how much power does Amazon kind of have, and the Do It Yourself segment. A lot of what's Wix is selling is the Home Depot type stuff that isn't easy to ship, but they also sell a lot of stuff that you probably couldn't online ship through Amazon. So, how scary is the Amazon threat there?

Conor: Yeah. Certainly, I mean, it is one of the competitors. But I think maybe pick one of the key criteria, which is on price. I did a quick spot check of kind of two [inaudible] product types on price. Wix were actually slightly cheaper than Amazon's UK platform on a number of things like paints, paintbrushes, that kind of standard DIY items that consumers would love first. So, it competes pretty well against Amazon in that respect. Then with DIY as well, a big element of DIY is getting a bit of in-store advice, or someone's advice on what you're trying to do maybe pick products to pick or not kind of price, obviously don't get any of that with Amazon.

Andrew: Perfect. Let's talk valuation and then I wanna go into the spin-off and it's kind of the remaining special situation here. So, as you and I are talking Wix last traded for about 181. Is that pence, I always forget. I think it's 181 pence. So let's talk valuation real quick here.

Conor: Yeah. So I mean, I look at this on a kind of what's called someone's post IFRS 16 bases. So just maybe just to kind of touch on that for a minute. So that includes lease, lease obligations, or lease as a kind of national debt on the balance sheet after the IFRS 16 standard came in, which is not something I think is reported in the US or in US gap but...

Andrew: It actually is reported in the US as very similar to IFRS. Two or three years ago, they made retailers break all their operating leases onto the balance sheet. I'll let you continue. But it's certainly a big issue when looking at these guys. You'll pull up a retailer on Bloomberg, and I'll say the things 50 times over and you'd be like, "Oh my God." They say, "Oh, no, it's all their net cash." It's all operating leases, which are our financial liability, but I'm sorry, please continue.

Conor: Yeah. So for me personally, I think rent is just a business expense like utilities and so on. But I think it's important to look at it from both ways, because for example, Wix and a lot of its peers, they report, they operate fully leasehold model. So they lease all their stores. So you have to look at the total leverage picture. So they get, it is relevant. On the economy, including the leases and dash, it trades at about five times. Today, it trades at about five times EBITDA. We look at kind of private market transactions in the space that starkly been around six, seven times.

Andrew: Is that six, seven times you just mentioned, is that on the like-for-like operating lease basis?

Conor: That's a mixed. Because a lot of these deals, they don't disclose the kind of in-depth financials, they involve private companies or subsidiaries. So it's not. From the digging that I've done, I believe it's a mix.

Andrew: Let me ask you a nerdy question, just to dive into that. We can talk about this more in a second. They give an adjusted EBITDA a number, right? For the LTM 2021, their adjusted EBITDA number was 219 million pounds. Is that the EBITDA number they give, does that add back rent? Or is that a with rent for rent?

Conor: Correct. Yeah, that adds back rent. So the 219 million is before rent.

Andrew: So it is a like-for-like number ‘cause, again, one of the issues is if you just take a normal adjusted EBITDA. So this would be more an EBITDAR number, EBITDA with rent added back, which is perfect. If you're looking at something on an operating lease basis, that is how you should be looking at. So great. Okay, perfect.

Conor: Yeah. So it's about five times on that basis. Then if you look at it in a kind of the traditional sense, where you net at the rent, you don't include the leases. In the AV calculation, it's about three and a half times. So, either way, it's very cheap. So compared to private market comps, as I said that six to seven times, if you look back at peers and peer group over to say the last 10 years, which together kind of get through the cycle type of perspective, that's been rent at 10-11 times, and so much higher. Now the retail landscape is obviously changed since then. So, in more recent years that multiple has trended downwards. But in terms of kind of against the concept, it started a concept it's well below that start garage [?].

Andrew: Now, you've said a couple of times the retail landscape has obviously changed. Look, I don't disagree with that, right? Macy's, Kohl's, all these guys are really struggling. But at the same time, someone like Wix, my mental model is I quickly think to Do It Yourself that there's some Amazon risk there, but not a ton. The trends are probably in their favor. We can talk about the aging UK housing stock, which is probably similar to the aging US housing stock and all this. I just go to my mental model Home Depot over the past five years, the shares are about a double, right? They pay out a nice little dividend Lowe's, I think the shares have done really well, all this sort of stuff. So, I guess my question is like, you've said death [?] of retail, challenge retail industry, but for Wix, is it?

Conor: No. I mean, my part of my thesis is that no, I mean, that death [?] of the retail narrative doesn't apply to Wix. I mean, there’s couple of basic reasons for that. I mean, again, DIY, if you look at the data historically. DIY has proven to be a very resilient industry through recessionary times, just to give you a few data points. So great financial crisis, '08-'09 UK property prices declined nearly 20%. Over that two-year period from ‘07-'09, Wix grew their revenues compounded about 5% per annum. So they grew through a recessionary period. Obviously, DIY and home improvement is highly correlated to GDP, and to a house prices. So really GDP at that time to kind about a four and a half percent. So again, Wix growing revenues at 5% compounded. It goes against that trend showing its resilience. Then post Brexit, Brexit bought in 2016. It was a big knock to consumer confidence but again, Wix kept growing through that period gaining market share growing earnings. Then obviously most recently COVID, UK GDP declined, I think 9.4%. Obviously, because of the DIY boom that I think all DIY or home improvement retailer is kind of experienced, Wix is obviously grown very strongly through that. So, it's proven to be a very resilient business. It's actually in the last 15 years since it was originally acquired, I think by Travis Perkins. It never has had a down year in terms of revenues year on year. The worst was flashed, I think in 2018. That was because of home base, which was at the time a larger peer was, as I mentioned earlier, was acquired by an Australian conglomerate called Wesfarmers. Wesfarmers bought home base, came into the UK markets, thinking they were gonna disrupt it completely botched [?] the acquisition, ended up selling home base for a pound to a restructuring pay [?] fund and completely disastrous acquisition. Wix managed through that kind of pretty short but intense kind of compared to competition, grew their market share, grew revenues and another number two players, but twice as large as a home basis today.

Andrew: Perfect. Let me ask you on opportunity costs, right? Because I think one of the things we've probably hopefully established at this point is Wix is pretty cheap. IFRS adjusted basis there. I think it's about five times EBITDA is what they're trading at. If you like price-earnings, price-earnings probably six and a half, definitely under seven times earnings. So this is a pretty cheap company. One of the things I've hammered home on the blog, I don't know if you've seen it, but there are a lot of cheap retailers out there. So just a couple of it, I'm just looking at my screens. There's this little company that actually was featured on the pod Quedo, which owns some real estate that's trading for under three times EBITDA. All the sporting goods retailers, which I've mentioned a ton in a bunch of places, academy, Dicks, sportsman warehouse, all of them trade for around three times trailing EBITDA. So, I just have a question. Opportunity costs, why is Wix the kind of cheap retailers play? Now, just to be clear, the EBITDA numbers I mentioned before are on the-- it hasn't done leases. They probably trade for similar multiple as Wix if you do all the lease adjustments everything, but why is Wix the best of the cheap retailers to buy?

Conor: I think firstly given where we are at the moment in terms of macro headwinds, recession, fears, cost of living crisis, and so on, DYI, within the retail space DYI has proven to be very resilient as I mentioned earlier. Number two on a multiple evaluation, five times EBITDA or in coolest pre IFRS 16, three and a half times EBITDA and that's almost like a distressed valuation at that kind of a low multiple. It's below where private market comps have completed that. So, today it's kind of price for the downside but, and you look at the price chart, the share price just comes down about 30 odd percent, 35% I think pretty steadily, because of all this for selling. So, yeah, that's in tandem with successively positive trading updates, while the share price was trending downwards, because of all this mandated selling. So, the combination of those factors, non-fundamental selling, resilient business model, positive trading updates, and what I would argue, given where the UK housing market is that something the home improved market is I think the prospects for it are pretty reasonable but certainly much healthier than the higher end or more discretionary retail. That combination of factors, I think makes Wix very attractive.

Andrew: Perfect. So I think one of the thesis here is, this is a classic spin-off situation, right? This was fun. About a year ago, the smaller piece of the spin as you said over the past year, the shares are down about 30%. A lot of that is probably for selling for people getting the smaller retailer and saying, “I don't really need it, it's too small, and not in my mandate.” Is that about right?

Conor: That's right, yes. So I mean, between when it's been spun off and now about 21% of the share capital has been sold in by the original recipients of the shares in the discharge distribution. So that's been a big ways on the share price in terms of driving that for selling. When you look at the kind of the volume trends, the price action at more recently, that certainly seems to be stabilizing. Now, in terms of to meet the volumes have stabilized, there isn't that same level of selling pressure. The shareholder register its value managers now that hold maybe the top three or four positions in terms of maybe 20% of share capital in that.

Andrew: I don't necessarily disagree, but I just wanna push back on that thought a little bit. Because that’s the type of thing that got me really excited but I also worry like, oh, am I just falling prey to a nice story, and I wanna get into an event the situation. So, I guess my two pushbacks would be number one, I think the typical spin dynamics are, A) somebody spins off something completely different. AT&T spinning off discovery, that's gonna happen in the next two weeks or so. That kind is typical because the typical AT&T shareholder is there for the dividend. They're there for the old sleepy telecom company and now they're getting this growth, the kind of levered media company that wasn't even a part of AT&T five years ago, and they probably look at that and say, doesn't pay a dividend, completely different business, and they just sell and ask questions later. So that would be part A of the pushback. Then part B, most of the selling has happened over the past, let's say, six months. The typical spin situation is mostly selling happens in the first 30 to 45 days of the spin, right? I would say over the past six months, one of the things that happened is the macro looks gotten worse, and stocks like Home Depot has gone from over 400 to 300 right now. So, I know you're saying spin dynamics, so I don't necessarily disagree but at the same time I look at and say, maybe we're seeing spin dynamics where it's just actually like, that looks gotten worse and it wasn't as badly sold as the typical spin. Does that make sense?

Conor: It makes sense. But what I would say in terms of the actual kind of selling pressure in the first six months post the spin, that's when the heaviest selling and most of the dumping of shares took place. Since then, it has kind of eased off, and most recently in the last quarter is when it really is stabilized. So I think in terms of that kind of selling dynamic, it certainly it's taken that amount of time to kind of wash through yet, okay, the macro does look worse but again, I go back to a-- when you look at the UK housing market, 80% of the UK housing stock is 30 years plus older. So there is a kind of a structural ongoing kind, if not, total renovation at least preparing maintenance requirements across the UK housing stock. There's no getting around that. Then in addition to that, where Wix sits in terms of the retail segment, that kind of value for money, curated product range offering I think, any kind of required or necessary DIY expenditure, they should see a fairly meaningful chunk of action in terms of where their market share's at. Again, they've invested a lot of digital channels, which is kind of really helps drive incremental growth as well.

Andrew: Perfect. Now, the other thing with spin dynamics is, a lot of times, some of the opportunity presents itself because of the for selling, which we've kind of talked about. But the other way opportunity often presents itself is, you've got this smaller subsidiary that trapped in a larger piece. They're kind of used as the cash cow, right? Where the larger subsidiary says, "Oh, that little piece, it's 10% of our value. We just take the cash flow, we bring it upstream, and we invested in our bigger businesses." I wanna talk about that aspect for Wix because I was really interested, I'm looking at a quote from their Q4 call, they said, "Hey, it's been several years since we announced the comprehensive new store reopening program. We're excited to announce, we're planning to open 22 new stores over the next couple years.” Which their store base is about, if I'm remembering correctly about 250 stores. So there's a big increase, right? When I saw that, I was like, "Oh, this is typical spin stuff." So I do wanna talk about, like the new store opening program. Why is now the time because one way to look at it is, oh, this was a company that had a lot of white space and they couldn't attack it underneath the bigger model. But the other way to look at it would be, oh, this is the Peloton issue. Your sales have ballooned over the last two years because of COVID. Everyone was stick at home. Everyone was doing story modeling, and you're using those last two years of really good trends to go justify opening a bunch of new stores. Then two years from now you say, "Oh, actually the environment wasn't as good as we thought and we opened a bunch of stores that are kind of unprofitable."

Conor: Yeah. Well, I think this is different to the obviously something like Peloton because firstly, Wix has been consistently profitable. It's not growing exponentially because COVID it's growing steadily at 5%. [crosstalk/inaudible].

Andrew: Peloton probably wasn't the right. I more use it as the, hey, the environment is so good right now and you go on a big grocery. Then a year later you say, "Oh, the environment wasn't-- it was really boost by COVID. It wasn't that the environment got permanently better and you accidentally over expanded. Peloton was just a casual slip.

Conor: No, understood but I think, yeah. So on that plan. So the plan is charging new stores over the next five years. So that's less than 10% of their existing storage stage. It's not like they're going rushing out to kind of sign up new leases, and try and expand rapidly. That's a fairly measured modest expansion. It's probably opportunistic in nature. In that, the smaller footprints, more efficient footprints offer, more efficient footprints to operate. Also, given their scaling where the rush, they're probably secure fairly reasonable lease terms, in terms of price per square foot. So, I think that doesn't really concern me in terms of an aggressive over expansion at the wrong point in the cycle. I think that's gonna be measured. I mean, they were clear on the call that that was, I think over a five-year period. Their first priority is refitting the existing stores, which I think there's another 30 or so to go. Today, they achieved 25% higher sales performance relative to the older format stores on their refitted store. So I think their approach makes sense.

Andrew: The refit stores actually was the next thing I wanna talk about. Obviously, this is mainly done, there are still sources to do, but they've mainly done it. I think it's 170 of the stores have been refitted on this point.

Conor: Yes, it's about that.

Andrew: You just mentioned the set, 25% sales performance from refitting stores, which that is mind-blowing. I've seen quick service restaurants who do a big update and their sales go up 8% or something. But 25% of for a Do It Yourself store getting remodeled, that is a huge sales bump. So, what are they doing at these refitted stores that are driving such huge improvements sales?

Conor: So part of that is relates to their digital offering. So, you can do click and collect or online orders and what they'll do is they'll use their store stage as a distribution network for online orders. So if someone ordered something online, they'll get sent to the nearest store. So what they're doing a lot of the time is they're reconfiguring their store formats, freeing up maybe dead spaces additional storage space to fulfill online, as well as servicing the footfall that comes in into the store, and as well with the kind of being an increase in Do It For Me, and revenue segment as well. You've got people coming into the store to get advice on what they wanna do on a remodeling project or renovation project. That in turn that additional footfall from offering that which a lot of their competitors don't offer. They're picking driving additional revenues out of that as well.

Andrew: Perfect. I wanna talk about capital allocation here. So, I think when they initially spun, they were talking about paying out like it was either 18% sticking in my mind, but it might have been 30% of kind of free cash flow would go to shareholders as a dividend. Their new dividend policy is 40% of free cash flow to shareholders as an event, which is nice. As we mentioned, this is a company trading very cheaply. So if they're gonna pay out 40% of cash flow as a dividend, the yield is gonna get pretty juicy, pretty quickly. But at the same time, I look at that and I say, "Hey, this is a company that six or six and a half times fee.” Probably three-ish times EBITDA depending on how you're cutting metrics, and I look at it and say, "Why isn't this a share buyback program?" Longtime listeners will know, I love me some share buybacks, but it was a curious choice. So I wanna talk about that and then, I might transition into management after we talk about the comp allocation.

Conor: Yeah, so on the dividends. Yeah, it's running currently at about a 6% dividend yield. So, in terms of buybacks, they did mention in the latest results that is on the radar, that is something consider returning circles cash to shareholders. Now cash has kind of come down since the half-year point because they've done an inventory rebuild. So probably the intelligent thing to do in terms of kind of ensuring supply coming into the spring kind of trading season, which is kind of very important for the DIY space. So, I think share buybacks will come if they continue to generate cash as they have today, which I think they will. So they've got, they wanna finish the refit program. So that's probably the first use of cash reinvesting it for that, which makes complete sense. The dividend as opposed to a kind of return some capital to shareholders. Then after that, I think, yeah, the buybacks, if the stock price is still is price is currently is, I think that's the next logical use of the cash.

Andrew: Perfect. Let's talk management incentives here because this is, it’s UK company. So they give good data but I didn't find it there-- maybe just ‘cause I'm used to US companies, I didn't find their management comp quite as easy to do. But there were some tables that jumped out to me where one of the things was spin dynamics is, a lot of times we talked about how you have this subsidiary that's kind of forgotten and they're used as a cash cow. But a lot of times what happens is the spin-off and a lot of entrepreneurial spirits are unlocked because the CEO who used to get paid in the top company's stock. So his division barely managed them, all of a sudden, he gets a bunch of stock options struck in just his company. He says, "Oh, it is time to go, it is time to create value." They start growing as it seems Wix is gonna start but the shares come to press from the selling, the management team gets a bunch of stock options, and they just go create value. They grow the company, they buyback shares aggressively. I guess what jumped out to me what for Wix, I think there was a table that said, the CEO, he owns, his share ownership is equal to 8% of his annual salary. If I remember that table, I can do that off the top of my head. Which you know I was struck by that and it kind of bled back to capital allocation where I said, "Well, maybe if instead of 8% of his salary was in stock, maybe he was eight times salary in stock. Maybe you'd be looking to buy back shares right now." Or I was just worried about the misalignment of incentives. So am I missing anything? Are you worried about that at all?

Conor: Yeah, you're right. I mean, in terms of spin dynamics, this is the one skin in the game piece is the one element of the story that I would like to see more. So yes, you're correct in kind of what you've outlined there. So managements, at the time the spin, they don't own a lot of stock in the company. There is a kind of an incentive program, I think the CEO and the CFO now have about 1.2 million pounds worth of shares, the options that don't vest for a number of years. But I think one thing that jumped out to me was, I think two or three days ago, the CEO started buying shares in the market sold at 180 shares. So it's a small amount. I think it's about 100 pounds [?] with shares but that was the first sign. It's a relatively new management team and they've been with Wix, I think the CEOs Wix since 2019. So kind of prior to the spin, kind of the last, second last year full ownership under Travis Perkins. Obviously, he's managed business to COVID and done quite well, in that respect. So, yeah, I would like to see management dealing more stock in the business. I think we're seeing maybe the first signs of that [?] there.

Andrew: Perfect. We have covered a lot here. There are a couple of other things I wanted to dive into but I wanna pause for a second here. We've covered a lot, but is there anything you think we glossed over that we should hit harder? Anything we haven't hit that you think we should have hit at this point?

Conor: No, I think I did touch all the key points. I mean the other thing I think that's interesting in terms of back to kind of you mentioned earlier, the macro has gotten worse, and also there's a lot of cash in the business. I think it's worth pointing out that the cash bonds today are about 26% of the market cap. So I think that in terms of the kind of thinking about the downside, and I always think about the downside as much as I do upside in these types of situations. I think that cash position combined with the kind of resilience of the business I think, makes me think there's a lot of downside protection in this setup as well.

Andrew: No disagreement there. A couple of other things. So you mentioned there are three different segments of Wix. There's the Do It Yourself where somebody is gonna go into Wix or gonna buy paint, they're gonna buy tools, whatever, they're gonna go home and use it themselves. Then there's the Do It For Me, which you go to the store and Wix actually they have-- I think it's a Wix installer, right? They've got a handyman who's gonna go and you say, "Hey, I want to get my plumbing redone or something." Plumbing might be too advanced, but I don't know. They're gonna send out a guy, Wix is gonna manage it end to end, right? Then there's the trade five-piece where, if you're a serviceman, I'll just stick with you’re a painter. You're gonna go to Wix, you're gonna buy paint from them. Then you're gonna go do the job yourself. So you found the job on your own. You're just using Wix for supply. I wanna talk about two of those different pieces.

The first is the Wix installer piece. One of the things I think three people pinged me on Twitter when I said we were looking at Wix, and they said, "Hey, I've looked at it, or I was a customer there." One of the things that stopped me was the Wix installers had awful reviews, or my experience with a Wix installer was awful. I'll let you talk about that in a second. But that there is something to that, right? Like, one of the stocks I've looked at a lot is Angie's List, and one of the constant bear pushbacks is, if you're a good plumber, you're good electrician, you don't need Angie, or you don't need handy to give you business. You've got more business than you can ever do. The only people who go on Angie are the really bad plumbers or the really bad electricians, who can't get repeat business. So is there something to like Wix installers are actually the installers, the handyman, whatever it is, who actually can't make it on their own, so the Wix installer service is a lot worse than a normal installer, which kind of has broad implications for the brand?

Conor: Yeah. I think I've seen a lot of those reviews. I've done a lot of taking on those reviews as well I've looked on Reddit and some of the threads are there as well. There is a mix. I suppose review, pool of reviews there for Wix. But what I would say as well is that when you look at some of the peers as well, and look at me being used well in terms of customer service and customer satisfaction, their feedback has been pretty mixed as well. So I don't think there's a huge [inaudible] between them. But what I would say is that I suppose this is the kind of one of the newer segments for Wix. It takes time to build it up and kind of sort out your installer base, your installer network. COVID and the pandemic certainly wouldn't have helped that when there’s shortages in labor, and you're trying to source by people to fulfill orders because Wix has order book is twice what it was for me to start last year. So it has a huge pipeline of work there and I think that also gives them an advantage in terms of recruiting installers in that. With increased uncertainty in UK, kind of UK macro uncertainty, you've gotta-- installers are gonna see this kind of a clear reliable pipeline of work, that will take them through this year at least and into next year. So I think that's actually what supports, the order book what support says out. So I think, that it will attract kind of installers as well in terms of ensuring that Wix can actually deliver on then on the pipeline.

Andrew: Yeah. Now, I do like you. One of the other things about home reviews is, it's really tough because if you have a great plumber or a great electrician, you're probably it's one of those things that cases [?] the background a little bit, right? You're probably not gonna go online and sing their praises. But if you're a plumber and you do 100 jobs, and 99 of them are great, and one of them for whatever reason is awful. Guess what? You're gonna have two reviews online. One of them is gonna be great, and one of them is gonna be awful. So it's just like such a negative sample bias there on their views. So at the same time, I googled Wix installer, the results four or five and six are one and a half star ratings on 1,500 views. So, it's both sides of the coin.

Conor: Yeah, no. I think at least I've done the same thing. I've looked at a number of different review platforms and it isn't mix. I think it does apply to their competitors as well. But I think this is something that they'll improve on overtime. It's a core part of their business now. It's a growth area for them. So I think that's obviously an area real focus for them.

Andrew: Perfect. The other piece of their business. So we mentioned there's Do It For Me, that's the Wix's are, we just talked about that. Do It For Yourself which I don't think we need to talk about like your-- but the other pieces the trade pro business, right? The trade pro businesses, I believe what it is, is if you're a handyman, whatever it is, you sign up for the Wix trade pro program and Wix gives you 10% off everything in their store. Wix is talked about, we've got this great base. I think they said, "Hey, we signed up." I'm trying to find the thing as we talk. They signed tons of people, and I'll get the numbers in a second. But, yeah, it’s...

Conor: It's 630,000 members on the trade pro program. So that's Coronavirus, that's grown from 550 this time last year. So that's growing nicely as well.

Andrew: Yeah. So they added 80,000 people in 2021. So more than 10% growth in 2021. Then they said, "Hey, in the first 10 weeks of the year, we added another 26,000." So this things growing very quickly. They've got all sorts of plans for what they're gonna to do with it. They wanna increase the value and everything. I just wanna talk about the trade pro app, the Do It For Me. How valuable is that really? Do you believe that there's any like, as they get all these people, can they add incremental or is it the grocery store around my corner, they do, "Hey, we give you 10% off of your member, but guess what, their prices are just 10% higher than everywhere else." They're just trying to get your phone number and stuff. So how much value does this really as does this make customers sticky? Can they create more value from this?

Conor: I think it does not re-value, ‘cause when you go online kind of price compare at certain products, again, Wix can be slightly cheaper. I mean, a lot of the retailers never trying to price much. But on the Wix App, it does from bit sizing, certainly does seem to be that kind of 10% cheaper. I think, again, it kind of builds customer loyalty, Wix reliably stocks kind of a selected range, kinds of essential, kinds of DIY items. So, the members know what they're getting, they're gonna come back to it again. Wix, when they need to get something and they know what they're getting. Again, that app is gonna be expanded in terms of targeted offerings, and so depending on the type of jobs that they've got, they have to keep track type of products people are bought, they have to discern, then what type of project products. Did they do bathrooms, or kitchens, or tiling, or whatever? So they can kind of build-up and customize customer profiles and again, kind of just optimize what they offer those customers.

Andrew: Yep. Two-thirds of their sales, if I remember correctly from the annual report, two-thirds of their sales are digital. That kind of surprised me for a Do It Yourself story hard to absorb that people are gonna go to. Is there anything going on with that number? Is that just COVID boosted? Or is this really an online business that's it's online, and she's got the physical storefront to drive the online site?

Conor: What they mean when they say that is the two-thirds of total sales are involved some kind of part of their digital ecosystem that they use. So it's not 66% of sales being ordered off their website. It may click and collect will be included in that, for example.

Andrew: Well, click and collect's huge, right? Because that omnichannel thing, one thing said had and one thing that's been dancing around the back of my mind, which I didn't say but this is 250 stores, they have an online presence. If there is a mom and pop store that is in one of their markets, right? The mom and pop store does not have the scale to do the online omnichannel, the buy now pick up in-store, they don't have the scale. So one thing I have thought about recently, and this applies to all retailers is sporting goods stores. Academy and Dicks, there's a lot of stuff going on with Nike cutting off a lot of smaller sporting goods stores. But if you're the mom and pop sporting goods store, competing with an Academy and Dicks, you don't have that buy online pick-up in-store capability. I think it's probably the same with Wix where their scale gives them capabilities that no one has, and that should let them be a consistent scale gainer over time.

Conor: Yeah, exactly. I mean, they have a wide range of suppliers, so that 270 different suppliers, so that their buying power, their sourcing power for the product range that they have, and local stores can't really match stocks [?]. Then, when you're looking at say the competitor like B&Q which is the much larger competitor, that's a different offering. So again, it's kind of focused on itself and kind of targets segment of the market, which I think kind of differentiates it. So it kind of hits that really need in between, kind of the very small local independent operator and then the mass, the big-box retailer.

Andrew: Perfect. There is a line in there in your report and I also think they were asked about this on the last call. They still have 30 million in spin-off, I think it's like this synergy costs that are costs. Thirty million, that is a big number, right? This is a less than 500 million market cap company, adjusted EBITDA for 2021, as I mentioned earlier, it was 220. So that 30 million is a big costs. So I guess, I had two questions. A) what are they have left to kind of pay these 30 million costs, what is left to be done? Because anybody hears spin-off costs and their worries, right? I've seen cases of really bad Europei spin-off thing. So their worries about costs escalating, the company just getting run out of control because they can't handle it. So that's number one. Then number two, which is probably a little simpler. The 30 million, are these one-time costs that they need to pay? So I could kind of just deduct that 30 million from their cash balance if I wanted, or is this 30 million of kind of ongoing annual costs? So their 220 million EBITDA is actually gonna be 190 million if they're run rating the same thing in a year.

Conor: No, it's once off in nature. So it's about 30 million of demerger costs that they'll have to pay down are kind of clear over the next year and into next year. So it's kind of over 18 months. [crosstalk/inaudible].

Andrew: So I could probably just pull it from the cash number if I really wanted to.

Conor: Yeah, exactly. That's how I think about it.

Andrew: What are the remaining costs? One of the great things about a merger is you have a CFO, I have a CFO, guess what, your CFO is probably gone if I'm buying you. Is this hiring like obviously, they've got a CFO and CEO, but is this hiring a full accounting team? Is it investing in ERP? Or are there other costs, I'm kind of not thinking about?

Conor: No. The types of costs involved I think, as part of the state that would lead to kind of a transition agreement with Travis Perkins in terms of they [?] integrating themselves out of Travis Perkins systems and so on. So I think a chunk of it is related to IT costs and other things just in terms of pulling them just totally extracting themselves out of Travis Perkins and kind of standing on their own two feet.

Andrew: Perfect. Anything else we should be talking about with Wix? I think we've gone through everything I wanna talk about?

Conor: No. I think, I mean, the thesis in mining [?] is pretty simple. I mean, it’s very cheap. It's a pretty resilient business, got good growth prospects, relative to other retailers. I think that the share price just reflects really non-fundamental selling. Again, you look at private market assets, which I think give an indication as to what maybe the real value of this business would be, and it kind of suggests should be much and should be much higher than the current share price.

Andrew: No, look, I will tell you, I read this when you wrote it off. But as I was prepping for this podcast, again, one of my big themes recently has been I think, a lot of retailers across the border are too cheap. But I've got to get comfortable with accounting, and I've got to do a lot more work. But as I was reading, I was like, look, this is probably-- if I talked about something like Foot Locker, right? Foot Locker is treating it three times EBITDA-ish, but guess what, that is a lot more discretionary. They've got a lot of issues, we don't have to talk about here. I've said it a few times. But they've got a lot of issues with Nikes pulling back on their supply and Nikes like 70% of their sales. So Nike pulling back on their supplies and issue. A lot more discretionary, probably a lot more exposed to online trends. A lot of mall retail, whereas Wix is like, "Hey, a lot of the stuffs are in their favor." Like, you can see home, the multiple Home Depot and Lowe's trade at, yes, there are some risks here. Yes, maybe they got a little COVID bump. But the UK housing stocks and US housing stocks, it's aging. I don't think those trends are going anywhere. They've got a lot of online advantages. I think they're gonna continue taking mom and pop. So super fascinating situation. We've almost had an hour but I'm looking at your Q1 situation review. I'm looking at your weekly bulletin. I'll include a link to both Conor's blog and his Wix write-up in the show notes. So everybody should check that out. But, what else is on top of your mind right now? What other situations do you kind of find following? I'll put you on the spot.

Conor: Yeah. Well, there's a few other kinds of a pipeline of kind of maybe four or five ideas I'm working on at the moment, which I'd probably publish over the course the next couple of months in the newsletter. I mean, I kind of just that you mentioned, the Q1 review. So I think, the names I've kind of focused on so far. I've kind of done reasonably well on balance. I think Dole [?] which is around the first one which I have a lot of conviction around that's really hasn't worked out just yet.

Andrew: Been done, yeah.

Conor: But I think, I'm constantly asked about that one. But I think that the piece is my thesis that hasn't really changed. I think that's more a case of familiarity. There’s still the perception that it's David Murdoch's company and so on. It's really not, it's very different business. So that I find still very interesting and I think some of the...

Andrew: Can I ask few question on Dole? Look, I haven't been super up to date on the situation since last summer but, inflation is top of everyone's mind, supply issues, inflation, all this sort of stuff. Is Dole really benefiting from the supply chain tightness? You see a lot of companies supply chains get tight, and their profits go way up because they get pricing power. Or are they really hurt because, just all the issues supply chain playing a bunch for freight, having trouble getting products to market, all that type of stuff?

Conor: Yeah. I think, I mean, that's obviously one of the big kind of concerns with Dole from number of people I've spoke. But I think Dole is the largest fresh farm [?] business in the world by in fact, it's two times greater than the next largest peer [?]. It owns its own global supply chain infrastructure. So it owns some ships, it owns farms, it owns all its distribution warehousing centers. It has control over its supply chain. So that obviously gives them an advantage. I think that in addition to that, they've actually agreed price increases with other customers across the business for 2022. So, that should protect margins, that should offset any price increases that they suffer on the empires, cost increases that they sell for the input side. So I think they should be able to hedge that out on the inflation side. I think, again, second market they sell fresh produce is about as stable as it gets. That over 700 fruit or vegetable categories, so that's not something that's going to suddenly not be in demand.

Andrew: Anything else? I mean, I know you've got yellowcake uranium, Willis Tower Watson, which probably jumps out ‘cause you've got all these quirky international situations and then you've got Willis Tower Watson, this large cap US broker, which I know the story merger break and all that, but anything else you'd jump out that our listeners if they're looking to cheat off, you should kind of ramp-up to speed quickly?

Conor: Yeah. I think one of the names I've covered is Kenmare Resources, which is a mineral sand miner. I think that's a really interesting situation. I think that is a very unique assets. I think that’s works. I think people having a look at if they're-- ‘cause I actually did a podcast with T-Labs on that previously.

Andrew: How dare you? How dare you, good sir?

Conor: So that's a good one. That's an interesting one. Yeah, yellowcake, you mentioned. I think uranium I think probably evolved with modernity themes, and that's possibly the most interesting in terms of-- you know, the asymmetry there, I think is really competitive.

Andrew: I will be honest, I have not read the Kenmare piece yet. What resources does Kenmare mine?

Conor: So its main product is Ilmenite, which is mineral sand, that's used in titanium oxides, which is used in pigments, titanium metal, and all kinds of industrial applications. So, again, similar to a lot of the other commodity setups, very tight constraints supply, strong demands, probably getting stronger now with increasing defense spending and get a titanium metal as a key commodity is that part of that theme. So, that's an interesting one and can varies [?] a very unique assets, some very unique kind of play within that theme.

Andrew: That's really interesting. I see they've got share buybacks, which you know I love. Kenmare, just all across the board with commodity plays. It's where I've been spending a lot of time recently ‘cause I keep looking at these and I've said this before. So if people read the blog, I'm probably just repeating myself but, I look at these things and there’s companies with US domestic net gas people, right? The long term net gas has gone from-- 2020 pricing has gone from three to probably 450 over the past six months, and you're seeing these stocks, and yes, some of them have gone up 10, 20, 30%, some of them have gone up more. But if your key input has gone up by 50%, like your overall value has gone up actually more than 50% because it basically follows so. But it just seems that the stocks have priced it as the long term trend has gone from three to 325. It's like, no, these guys who go hedge six years out at 450 right now. I'm seeing this diversion across the board and sounds like Kenmare's same thing where it's like, their price is going sky high and the stock just doesn't seem to believe it and I'm not sure what I'm missing.

Conor: In the case of Kenmare, it's a pretty obscure stock. In terms of mining, mineral sands is very obscure. Kenmare is an Irish company that owns a mine in Mozambique. It's got a single 100-year what mine. [crosstalk/inaudible].

Andrew: Well, yeah, that explains a lot of fries lagging there. That's [crosstalk/inaudible] for 99% of people.

Conor: Yeah, exactly. It's got about two or three, I think two or maybe three on this covering it. So it's very underfollowed. But it's a kind of globally important commodity that it produces. So, it's just under the radar.

Andrew: Yeah. It's under the radar, but I'm just stealing from your write-up. But 100 million in capital return to shareholders in fiscal 2021, 215 million of EBITDA, 160 million at free cash flow. Yeah, it's under the radar but this is a real company, right? They're being run professionally, they're returning capital to shareholders up. Where was their mine?

Conor: It's in Mozambique.

Andrew: Other than the normal geopolitical risks, any other geopolitical risk with that mine?

Conor: So I mean, there's two things I supposed to think about it. Firstly this, I suppose in some African countries this question marks over governance and relationship with the government and the kind of risk there that something could be seized. So, on that front Kenmare have been in Mozambique since I think 1987. So they have very long history of working in the country, they've invested a lot in the local community, their schools, they builds medical clinics and so on. So they do a lot, they invest a lot around the area around the mine, and the government makes, gets royalties off the mine. It also gets top tax revenues from the mine to big employers in the region it's in. So I think, from that kind of just general political risk perspective, I think it's okay. I think it's reasonably comfortable with it. The second one is there's a kind of a, I think an insurgency, medicines insurgency, elsewhere, Mozambique, getting about 700 miles away from where Kenmare is located. So again, it's pretty far away. I think that insurgency has been kind of quelled by peacekeeping forces and government forces on. So I think that's not as big a risk as maybe some people might have that fact.

Andrew: Perfect. Well, Conor, this has been so great. Anyone who's not following your Values Sits should. It's one of the best Substack out there. I'm gonna invite you back on the podcast. I'd love to have you on next time, you have a great idea. But my biggest fear is somebody is gonna hire you away and the value Substack is gonna get closed because, that does seem to be a trend among many of my favorite Substack people, which I'm very happy for them but selfishly, I'm a little sad to see them go ‘cause I lost podcast guests and I lost a great source of idea flow. So that is a hint. I don't know what you do, actually. But that is a hint. If anybody's looking for a great global analyst, Conor, you should at least follow Value Sits. So anyway, any last words from you?

Conor: No. Thanks for that, Andrew. Thanks for the kind words there. I'm really enjoying writing a newsletter getting good traction, get in touch with a lot of interesting people like yourself, so no, it's definitely something I intend to continue to do so. It's all about coming up with the next idea.

Andrew: It's the best thing about writing it. People asked all the time, why do you do the podcast? Why do you do a blog? It's like the best thing about it, A) I really enjoy it. But you meet so many cool people who you never would have met. This job, a lot of it is just sitting at my apartment pennies behind me. But it's just you by yourself looking at screens and the people you meet from the podcast and the blog, it's the best part. You're one of them. So Conor, thank you so much for coming on. Looking forward to having you in the future and we'll chat soon.

Conor: That's great. Great speaking with you, Andrew. Thanks for your time.

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