Is This Fast-Growing Chain the Next Costco?

You might not be familiar with BBB Foods (NYSE: TBBB). And that's OK. Most stateside investors aren't familiar with the rapidly expanding chain providing deeply discounted groceries and other household essentials to a widening audience with 2,772 locations at the start of this year. It's North America's fastest growing player in its space, but you have to travel to Mexico to see it in action.

BBB is the parent company of Tiendas 3B, a small-box supermarket concept with big-time aspirations. The three Bs stand for Bueno, Bonito, and Barato in Spanish, translating to "good, pretty, and cheap." The concept is a cross between Aldi and Costco, wedged into a smaller convenience store frame.

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It's not a household name, but that's more an opportunity than a problem. With a business model far removed from the intersection of headwinds holding back most retail concepts, it's a good time to look at BBB before it begins pinging on more growth investors' radars. Let's travel south to see why this stock could be headed north.

A rare Mexican IPO

When BBB went public 14 months ago, it became the first Mexican company to go public on a U.S. exchange in six years. It's fair to say that it's been a hit. Underwriters priced the offering at $17.50, and the hard discounter is currently trading nearly 50% higher. It's no broken IPO.

BBB is earnings its upticks. Revenue soared 30% last year to reach the U.S. equivalent of nearly $2.8 billion, accelerating in its latest quarter with a 33% jump. Expansion is a big part of the growth story. BBB opened 484 net new stores last year. However, momentum is building at the store level. Comps climbed 13.3% last year, and that's stacked on top of a 17.6% same-store sales surge in 2023.

It just turned profitable last year, breaking through with operating free cash the year before that. It's still cranking out negative working capital given the current opportunity for rapid expansion, but that deficit narrowed substantially last year.

Image source: Getty Images.

The future could be even brighter

Supermarket chains historically crank out low net margins. They're in the business of providing modest markups to their goods, making that back by turning over its inventory as much as possible. Costco is a rock star in this realm, but its net margin has failed to break the 3% ceiling in any single year in more than three decades of public trading. Its annual membership fees account for 2% of the revenue mix, and -- like most grocers -- Tiendas 3B does not require paid memberships. BBB pales in comparison with its 0.6% net margin last year, but give it time. It just became profitable last year, and the benefits of scalability should fine the bottom line outpacing the still impressive forecast for top-line jumps.

If you think Costco's selling a lot of its own Kirkland products, consider that private label sales account for just a little more than a third of its business. Meanwhile, Tiendas 3B just saw its share of private label products grow from 46.5% to 53.6%. This is a far cry from Aldi at roughly 80%, but it gives BBB the wiggle room to negotiate with its suppliers. It's also a good sign that shoppers are trusting BBB more with every passing year.

Costco stands out for its ability to give customers great deals on products in bulk prices. Its trailing gross margin clocks in at a mere 12.9%. Kroger -- a more traditional supermarket chain -- delivered a 23.5% gross margin in its latest fiscal year. BBB's stores check in at a 16.3% gross margin, and that's without following Costco into offering bulk packaging or charging customers at least $65 a year for access.

BBB is profitable while giving its shoppers more bang for their buck because it doesn't take a lot of overhead to run and staff its small stores. Store-level expenses eat up less than 11% of sales, opening the door to the concept's newfound profitability after corporate and administration costs are also carved out on the way down the income statement.

Is the stock a buy?

BBB stock isn't exactly cheap. Even with profitability expected to grow faster than sales in the coming years, the shares are trading for 79 times forward earnings and 55 times next year's target. If you thought Costco was expensive at more than 50 times trailing earnings, BBB will make you even more squeamish. However, BBB's market cap is roughly equivalent to its trailing sales. This is a higher valuation than traditional supermarket operators, but Costco is higher with its 1.6 multiple.

Investors paying a premium for a discounter like BBB may seem contradictory, but it has obviously paid off nicely so far. Costco is also living proof that sometimes the best investments are the ones that do right by their customers. If you didn't know BBB Foods before, it may be time to upgrade your radar.

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Rick Munarriz has positions in Costco Wholesale. The Motley Fool has positions in and recommends Bbb Foods and Costco Wholesale. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.