Meet a Discount Retailer Stacking Monster Comps on Top of Monster Comps

Grocery store chains aren't supposed to be posting year-over-year growth of more than 30%. A retailer of foodstuffs doesn't typically post double-digit comps on top of double-digit comps. However, this is exactly what BBB Foods (NYSE: TBBB) did this week, just as it has done for a couple of years now.

The fast-growing Mexican chain specializing in groceries sold at a hard discount posted another quarter of strong financial results on Thursday morning. Investors weren't rewarded. BBB Foods stock slipped 7%. It comes with the territory when a volatile growth stock has the misfortune of making news on a down market day.

Like coming back from the grocery store, there's a lot to unpack here. Let's take a closer look at the quarter, the pressure points, and, ultimately, the investment opportunity.

Image source: Getty Images.

Si, mas

It's fair to say that "grocery hard discount" doesn't exactly roll off the tongue. It's not that complicated if it's a new concept to you. If you live near an Aldi, you already know the business model. Unlike traditional supermarkets, where it's a battle of the brands, Aldi leans largely on its own private labels. The German grocer with more than 2,600 stateside locations still stocks some recognized names in its no-frills setting, but the model is resonating with thrifty consumers.

BBB Foods' founder saw this happening more than 20 years ago. K. Anthony Hatoum was an investment banker, following Turkish hard discounter BIM. He admired the business model, but knew he couldn't open a rival concept in Turkey or Germany with an established leader in the niche. His global market research settled on Mexico as the ideal place to give it a go, given the absence of an established player in the hard discounting approach. He opened 3B Foods. Two decades later, the empire is up to 3,346 locations across the country.

Yes, there are more Tiendas 3B in Mexico than there are Aldi in the U.S. market. It also bears pointing out that the typical Tiendas 3B location is a lot smaller than an Aldi. It's about the size of a convenience store and requires minimal staffing. Selection is also typically limited to a private-label option and a single brand-name alternative. Now let's dig into Thursday's financial update.

Canned laughter all the way to the bank

There aren't many low-margin grocery store companies one would consider a growth stock, but BBB Foods makes the cut. Revenue rose 34% through the final three months of last year. This is a slight deceleration from the 38% and 37% year-over-year growth it posted in the two previous quarters, but it's hard to complain when you're a supermarket operator routinely topping 30% top-line jumps.

BBB Foods is expanding quickly. You can't afford to take a break when you're trying to carve out a country before a viable rival emerges. However, its store count is only 21% higher than it was a year ago. Store-level productivity continues to improve each quarter. Same-store sales rose 16.6% in the fourth quarter. This means that if the average store generated $100,000 in sales a year ago, it's now ringing up $116,600.

Stacking is the secret sauce here. Double-digit comps growth, combined with double-digit net new additions, leads to spectacular results. Then there's another type of stacking. BBB Foods saw its comps rise 11.8% in the prior year's fourth quarter, and 14.9% the year before that. Stretch out the timeline, and the average Tiendas 3B location is selling 50% more than it was three years earlier.

The stores aren't suddenly getting a lot more crowded. Folks are just leaning harder on the concept, spending more per visit. The average transaction has risen 11% over the past year.

Checking out

The BBB Foods story gets a bit more underwhelming as we work our way down the income statement. The good news is that scalability is paying off, as margins on store-level expenses are improving. Unfortunately, administrative expenses and stock-based compensation costs have spiked over the past year.

BBB Foods still isn't a bottom-line growth story. It's too busy aggressively expanding the concept, and that involves adding new distribution centers as it enters new territories. There's a lot of runway left, as it recently raised its eventual footprint goal to 14,000 locations from its earlier target of 10,000 stores. It's not even a quarter of the way into the build-out process, and that's just in Mexico.

The report wasn't perfect. The bottom line didn't impress. The year-over-year revenue increase for the quarter was also its weakest showing in a year. However, customers are clearly flocking to the concept. Betting on rising consumer trends often pays off for investors in the long run. With BBB Foods stock almost doubling since its IPO two years ago, the bullish thesis continues to -- pardon the pun -- check out.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BBB Foods. The Motley Fool has a disclosure policy.