Savers Value Village S-1

The Belle of the ESG Ball

1/ TLDR: Savers Value Village, the thrift store we bought vintages tees from in high school, is now worth $5.4 billion. It’s a wonderful business with a great ESG story, but has to grow a lot faster going forward to justify its soaring valuation.

2/ From a macro standpoint, the secondhand goods market has massive tailwinds. The global secondhand goods market is expected to grow by 24% in 2022. The U.S. secondhand market will more than double by 2026, reaching $82 billion (CAGR of 18%).

3/ But as an investor, there has been no scaled public market means to bet on this market. The only two public names are TheRealReal and ThredUp, both of which are hugely unprofitable and have structural business model challenges. 

4/ Savers Value Village is that scaled public market bet on the secondhand trend - it has $1.4B in revenue and is highly cash generative, Even with high levels of investment, it generated $135M in free cash flow in 2021 and $60M in 2022. 

5/ Its business model has unfathomable operational complexity. With an average unit price under $5, Savers sells 279 million items weighing almost 1 billion pounds. Items are sourced from donation bins and non-profits, and then items are processed, selected, priced and distributed to retail stores.

6/ The business is very circular, with 80% of its customers also donating clothing within the past 12 months. This is a sustainability feel good story.

7/ 50% of items Value Village receives go to stores and 50% of these sell through. The 75% of supply ultimately not sold at retail is sold to global wholesale customers. Most sourcing happens locally, with product then sold locally. 

8/ Value Village’s operational intensiveness leads to a largely impenetrable competitive moat. Processing items at low cost is hard and their average unit price is 70% lower than their competitors.

9/ Value Village is building on its moat through a strategy of transitioning to offsite, semi-automated processing facilities that mechanizes the flow of clothing, accessories and shoes through an integrated series of conveyor belts, robotics, sensors and other technology.

10/ The company is investing heavily in Capex to build their operating moat. PPE investments in 2022 were $110M, up from $40M the year before.

11/ Even before this new investment, Value Village was a very solid business. The trend toward thrifting led to 10 years of strong comp sales growth (averaging >4%, excluding COVID). 

12/ The company claims it sees potential to grow from its current 317 stores to >2,500 stores, in addition to growth via M&A.

13/ Until now, PE sponsors have held back on accelerating growth and run Value Village to grow steadily and generate a ton of cash. Value Village has $783M in long term debt on their balance sheet. Hopefully, the public markets gives them the capital and courage to accelerate growth.

14/ Key to justifying a high valuation is Value Village proving they can build a new store opening machine. They opened eight stores in ’22 and target 12 in ’23. They target 20+ new stores annually thereafter. At this pace, it would take them decades to get to their store count potential. 

15/ My gut is the business also has a lot of power to grow earnings. Value Village does not split out new stores separately or report on store-level economics. That said, it’s fundamentally a great business. Last year, it had a 14.3% operating margin and 18.2% EBITDA margin, while growing revenue 19.3% 

16/ The company is valued at a rich $5.4B in enterprise value today (24x EBITDA). Let’s say the business can grow 15% a year for the next five years, roughly doubling. Assume they grow EBITDA margin through efficiency to >20%. Even then, it still trades at 10x EBITDA 5 years out. 

17/ I’ll conclude by postulating it’s difficult to justify the current valuation here unless you consider an important wild card - the oodles of ESG funds globally that need to invest somewhere. There are a lack of companies to deploy ESG capital into - this one is the ESG belle of the ball and will always be valued at a big premium as a result.