Puuilo Oyj is a Finnish discount retailer. The company originally began when a carpenter traded in his tools for a fleet of tour buses to run a sight-seeing business, only later to realize opening a hardware store was a little more practical. As the early 2000s went by, a vision to develop a larger local cost DIY retailer took shape. After opening several more stores around the 2010s, the business built legitimate traction and was purchased by a private owner. Only recently did the company reemerge through an IPO in which their shares began traded publicly. Today, Puuilo has about 42 stores with a company goal of hitting 72 stores by 2028. A total of 4-5 stores are scheduled to open this year.
Puulio is a company combination of Home Depot and Dollar General. Retail products include building supplies, power tools, and electrical switches in addition to household and gardening supplies and pet food. 65% of the company’s sales come from items marked $20 or less. One of their advantages over other retailers is their expanding number of private label products. Currently, this accounts for 20% of sales but is projected to steadily grow over time. Some retailers tend to overlook the approach of private labeling; however, it is a strategy often used by the dominant market players like Home Depot, Lowe’s, Dollar General that enables them to manufacture products in-house which they can sell at higher profit margins.
Another aspect to Puuilo’s story is their emphasis on store standardization. By having a uniform layout, retailers can streamline operations such as restocking and customer service training while driving brand identity. Walmart and Trader’s Joes often credit store foot printing as part of their success
An area I’m still unsure about is Puuilo’s SKU count. Currently, they offer nearly 30,000 SKUs which is similar to Home Depot and Lowe’s. If you look at the most successful retailers, you will find that the ones with fewest SKUs typically have better odds of succeeding. Think Trader Joes or Costco – they each have about 4-4500 SKUs, whereas most other grocery stores and supermarkets carry closer to 10-15,000. Naturally, fewer items allow management to concentrate their energies on operation efficiencies and supply chain management which help minimize unnecessary expenses and stocking delays. Conversely, an expanded product lineup (with more SKUs) requires larger and more complex fulfillment centers to accommodate the increased inventory. So, with such a big number of products, it would be reassuring to see management demonstrate that they have a strong handle on inventory processes and distribution.
Moving to the financials, the company is clearly growing as it continues to open store upon store. Since 2020 the company has opened about 3-5 stores per year and is targeting a total of 72 stores by 2028. The exceptional part of this growth story is the quick payback period for each store. Put another way, whenever Puuilo decides to open a new store, it takes the business approximately 19 months to recoup their original investment. That’s an impressive rate by comparison. While data on new store payback periods is hard to track and not public, particularly for major corporations like Home Depot, we can draw comparisons from similar businesses in the retail sector. For instance, Dollarama, a fast-growing discount retailer in Canada, reports a payback period of approximately 2 years for its new stores. Given this benchmark, a 19-month payback period is worth noting and very encouraging.
Furthermore, it’s important to highlight how the company monitors its sales. It’s worth noting this distinction because not all companies use the same methods which can lead to double counting or omission of crucial figures. What I appreciate about Puuilo is that they use like-for-like (LFL) sales. LFL sales measures sales performance on a same store comparable basis – apples to apples. It tracks the real growth of a retail company by netting out the impact of new store openings & acquisitions. Just because I buy the lemonade stand next-door doesn’t mean I shouldn’t tell you how the first stand is doing. LFL offers a clearer picture of a company’s organic growth – focusing on existing stores rather than total revenue – since total revenue can be inflated by new store openings. One of the issues that you often see with rapidly expanding retailers is that their reported growth comes in the form of new stores or acquisitions (inorganic) which can mask underlying operational issues. Abused, it can lead to issues with brand quality, culture problems, and debt accumulation. It seems like Puuilo has a nice balance of organic and inorganic growth which makes me comfortable investing in a retailer, especially since they provide clear reporting on same store sales growth.
Getting to the P&L, the company uses an adjusted EBITDA figure to highlight what they claim are pre-tax margins of between 34-36%. Generally, when a company emphasized adjusted EBITDA over net profit under generally accepted accounting principals (GAAP), it is usually cause for concern as it is more prone to manipulation under the wrong management. This stems from a lack of standardized accounting. However, considering they are upfront about how and why they use this measure, and moreover, 100%+ of these adjusted EBITDA earnings are converted into cash, I’m ok with it. To clarify things, the company does tend to earn about a 10% net profit margin on its revenues under GAAP. They expect to hit $410 million in revenue for 2024, which should translate to approx. $40 million in net profits after tax. All, if not more of this, will be converted into free cash flow which can be directed towards opening new stores –and taking advantage of their quick 19-month payback period.
Turnover rate is the name of the game in retail. From Starbucks to Aldi, it is all about how quickly a retail business can move product. You measure this by looking at how much the company spent purchasing goods compared how much is in inventory. If I spend $100,000 buying supplies from wholesalers and have $20,000 in inventory (on average) I’m turning inventory over 5x times fast. You can come to expect how Starbucks would have very high turns churning out coffees all day long, whereas a company like Restoration Hardware selling high-end furniture & decor have much lower turn rates. When looking at Puuilo, it is reasonable to use Lowe’s and Home Depot for comparison. Seeing that this is the best barometer, it’s clear Home Depot and Lowe’s averaged together turn their inventory about 3.5-to-4.0x. (Home Depot is always higher than Lowe’s). And when we look at Puuilo’s balance sheet and inventory levels, we see their number is closer to 2.5x. It’s just short or slightly behind the leading bellwethers. While it would make any investor more comfortable seeing this number closer to its (distant) peers, you might be able to argue the case that unusually high inventory levels counteract a higher turn rate as they need robust inventory levels for store openings and new store stocking purposes. If you look at the costs associated with new store openings, of the $1.8m in total costs it takes to open a new location, $1.5m is used for inventory purposes. I got excited thinking that if you went back to when Home Depot first opened in the early 90s that I would find similar turn rates, but looking back at the numbers it surprised me to find their turnover rates were actually higher than their 4x today – implying just how much of a high-quality business they are. In short, monitoring Puuilo’s inventory turns in the following years will be crucial as it will be a sign of whether the company is of high quality - or just another slightly above average retailer.
