This Under-the-Radar Grocer Just Posted 38% Revenue Growth on an 18% Pop in Comps

Key Points

• BBB Foods is a fast-growing chain offering deep discounts on supermarket essentials in Mexico.

• This should be at least the fourth consecutive year of growth north of 30% for the chain, and revenue is accelerating.

• The stock has risen 60% since going public last year, even though it's not a household name.

• 10 stocks we like better than BBB Foods ›

Sometimes the most exceptional growth stock ideas can be found in unexpected places. BBB Foods (NYSE: TBBB) isn't a name that most investors are familiar with, and that's not necessarily a bad thing. Toiling away in obscurity can often be a ground floor opportunity, as long as the floor doesn't buckle and dump you into the basement.

BBB Foods operates in a sleepy and low-margin industry. It's also based in a North American country that isn't exactly a hotbed for investors. BBB Foods is the parent company of Tiendas 3B, a chain of discount grocery stores that is expanding its small-box empire across Mexico.

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You might not expect your next potential growth stock to be a retailer in Mexico trying to drive prices in an industry with already razor-thin markups even lower. BBB Foods went public with little fanfare last year. However, then you start seeing the accelerating growth, the market share gains, and the upside.

Grab a cart. Let's go shopping.

It checks out

If you're familiar with Aldi or Trader Joe's, you can start to picture what one of the 3,031 Tiendas 3B locations looks like. However, you would have to shrink it down to the size of a large convenience store. There are sometimes as few as three employees working at a time.

Resist the urge to compare this to a bodega. There are a lot more products stocked at a BBB Foods location, and at rock-bottom prices with a heavy flow of shopper traffic. Unlike a bodega, where customers pay a premium for convenience and to cover the stiff overhead relative to the store's modest sales, BBB Foods has volume turnover and scalability on its side. All of an average store's operating costs was just 10.5% of the revenue it generated in its latest quarter.

The three Bs don't stand for the company's credit rating. The moniker is short for Bueno, Bonito, and Barato, Spanish for "nice, attractive, and affordable." It's not just a catchy mantra. Private-label sales accounted for 54% of its sales last year. Aldi and Trader Joe's shoppers know that game, as private labels account for an even larger percentage of those businesses. The beauty of private-label sales is that a growing chain can leverage that strength to negotiate lower prices from different suppliers. In many cases, a Tiendas 3B store will also carry a popular brand-name alternative. Its own label will sell for a 20% to 30% discount.

BBB Foods went public early last year, the first Mexican company to hit a U.S. exchange in six years. If this is your first time hearing about it, you're in for a surprise. The hard discounter hit the market at $17.50. It closed just above $28 on Tuesday after another blowout quarter, beating the market with a 60% gain since its IPO.

Image source: Getty Images.

Price check

Revenue rose 38% to the U.S. equivalent of $995 million in the second quarter that it reported this week. It's the strongest growth of BBB Foods' five quarters as a public company. Expansion is a big part of that story. It opened 142 new stores during the quarter, and 528 over the past year. However, the store-level performance is even more impressive.

Comparable-store sales soared 17.7% in the second quarter. This isn't a fluke. It's not coming off of depressed results a year earlier. Comps shot 10.7% higher for the same period last year. This is a concept that is resonating with the hyperlocal communities it serves.

It wasn't a perfect quarter as you work your way down the income statement. Margins narrowed slightly, partly on a boost in logistics overhead related to four new regions that it will hit in the second half of this year. History shows that these bumps in administrative costs can be temporary, but for now it ends a streak of four consecutive quarters of positive adjusted earnings.

This isn't a bottom-line story right now. Working capital remains negative, as there is an empire to build out here. A chain that topped 3,000 locations during the quarter may seem like a lot, but analysts see room for as many as 15,000 Tiendas 3B stores. With a long runway for top-line growth and analysts targeting reported and adjusted profitability for next year, this is a stock story still early in the telling.

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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.