🔑 Obituary - a store that brought fought inflation
Welcome to The Business Academy with Sieva Kozinsky. Here's what we have in store for you today:
- What can you buy for 99 cents?
- A billionaire's take on what makes a great investment
- A $5 million plumbing & HVAC business
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My mother-in-law loves 99 cents stores...(and so do I)
Anytime I'm thinking of going into a 99-cent store, I can call her, and she will tell me if it's a good one, or worth avoiding.
But over the last couple of years, our favorite store has started to disappear. So I dug into its fascinating history to findout why...
Dave Gold was the son of Russian immigrants who operated a general store in Cleveland before moving to Los Angeles in 1945, when Dave was 13.
In LA, Dave worked in his father's liquor store through high school. But when his dad suddenly died of a heart attack, Dave had to leave college to take over the store.
Over the next couple of decades, Dave became a master of merchandising, buying, and discounting.
He discovered that discount bottles of liquor priced at exactly $0.99 sold better than any other price point - even $0.98 or $0.95.
With that insight, an idea was born.
In 1982, Dave started a retail chain you've probably heard of: 99 Cents Only Stores, later branded as The 99 Store.
The story of the business is one of triumph and pain.
A kid who came from nothing built a retail empire: Hundreds of locations, a couple billion in revenue, and a personal fortune worth several hundred million dollars.
The company went public in 1996.Dave made sure that the initial stock price was $0.99.
But it's also a story of competition, decline, and collapse.
You won't find a 99 Store anymore - all 371 locations closed last year after the company filed for bankruptcy.
On April 7, 2024, 99 Cents Only Stores LLC filed for Chapter 11 bankruptcy protection and announced it planned to liquidate and close all its 371 stores in California, Arizona, Nevada, and Texas and let go over 10,800 part-time and full-time employees as a result of declining sales, increased expenses and combined debts of $456.9 million.
Was the demise inevitable?
I write about building companies to last forever.
If you're reading this newsletter, you're probably a long-term thinker like me.
And I can't help but wonder: Did the name of the 99 Cent Only stores make failure inevitable?
The 99 Cents stores thrived in the 80s, 90s, and first few years of the 2000s.
But the decline began right around when it became economically infeasible to sell good products for 99 cents. You can't buy a pack of gum for $0.99 anymore.
Maybe the marketing schtick that led to its boom also ended up in its demise.
The rebrand to "The 99 Store" happened as the company was forced to start selling the bulk of their products for $1.99, $2.99, $3.99 - or other higher dollar amounts ending in .99.
Naturally, customers were upset that the "99 Cent Store" no longer sold most of its products for 99 cents.
But larger dollar store chains like Dollar General and Dollar Tree were still doing fine, so the name doesn't account for the entirety of the failure.
Other factors that led to the downfall were a lack of care for the operations of the stores after Dave Gold stepped down as CEO, stores that were much larger than Dollar General, and a lack of quality inventory.
99 Cents Only stores had a wonderful run for 25 years (1982-2007).
But the next 17 years were painful and mostly unprofitable.
Retail businesses are ruthless.Since 2001 over 100 multi-location retailers have gone bankrupt, including names we all know and love like ToysRUs, RadioShack, Borders, and more.
It's a difficult business. With high cost of lease expenses, and consumer taste that is always changing. Very few retailers have been able to change with the times and survive (like Target, and Walmart)
As you're thinking of investing or buying a retail or consumer business keep this in mind...there's a reason there's a graveyard of them out there.
🔑 What Makes a Great Investment?
Bill Ackman is one the greatest investors of our time. I look up to him and devour anything he writes about investing.
I found an interview Bill did in 2013 where he describes what makes a great investment.
We might think that billionaire investors like Ackman have some complicated strategy that the rest of us couldn't possibly understand.
But in reality, he likes investments "simple" businesses with "predictable free-cash-flow".
🔑 One interesting deal
Let's look at a classic blue collar business (I bet small private equity shops are already making offers on this one).
This plumbing & HVAC company in New York state does $5.1m in revenue and is asking for just under $5 million. Let's take a look.
What I like
First off, I love looking at plumbing and HVAC businesses. This one has 20 employees, and is just the right size for a private equity type buyer to come in and scale it.
I like the reasonable multiple and the numbers look ok, maybe $800k too high (though there is one issue, which I'm about to go over).
What I don't like
I've mentioned this a couple of times before, but a red flag goes up when cash flow & EBITDA are the exact same figure. That's an error in the listing, and makes it hard to know which one is correct (they can't be the same).
You'll see this a lot with small business listings: The financials can be disorganized, so one of the key skills of business buyers is extracting the correct information from the existing owner and the business broker.
Oftentimes, the owner is selling because the business has grown too large for their management skills, making it a perfect opportunity for PE buyers. I'd want to clarify the numbers and figure out the correct cash flow and EBITDA figures before considering this deal any further.
I have mixed feelings about companies that do both plumbing and have. These seem like similar offerings but are very different I prefer a business that focuses, and therefore has a specialty around one of these.
Also, i would want to make sure this business does zero construction type work. Service only.
Have a great week,
Sieva
P.S. I've been publishing more shorts on YouTube with some of the most interesting moments from my interviews. subscribe on YouTube if you haven't already to check it out.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
