Nice write up but Rob vinall actually bought and sold it before. I extracted a transcript from him explaining on why he sold it:
"Hornbach is owned by the Hornbach family. They’re the major shareholder and it’s Mr. Hornbach who runs the business and he’s been in the business forever. He clearly loves him very much. And he’s basically the kind of guy I like to invest in, and indeed did invest in, but it didn’t work out as well as I hoped. The company has a huge amount of cash on its balance sheet and then even issued debt to have even more cash, so nearly half the market cap was cash or something. And that doesn’t bother me. I know a lot of people say well that seems very, inefficient but I kind of quite like it when companies have reserves. And then when opportunity comes along, then it’s great to have financial strength when others don’t. In the case of Hornbach, they had this cash for 10 plus years and then the financial crisis came along and some of their competitors went bankrupt and you’re like, okay, now is the moment now you can put the cash to work. And he didn’t. And to my knowledge, he still hasn’t.
I think he’s a great guy, but he has a very wide shareholder basis made up of family members and my sense says, and I hope I’m not being unkind to him, but my sense says his biggest fear in life is screwing up. You hear these terrible stories about how businesses can get screwed up in the third generation and stuff. And so what I thought was a positive attribute and his high stake in the business and long-term view, actually in hindsight, I think it was sort of preventing him from making good capital allocation decisions. And that was the reason, that was a company I owned many years, I sold it, 5 plus years ago."
I do think that capital allocation makes a big difference if the company can continue to grow its intrinsic value. Hope the above is helpful for anyone looking to invest. Find the full interview from good investing.
Interesting. So what you're saying is that the critical issue here isn't the cash itself - it's what the cash position revealed about management's psychology.
Is excessive conservatism a problem? Yes, but at today's valuation, I'd say you're getting paid well to bear it - the market has already priced in management's conservatism through a remarkably low multiple.
There is a fine line between a value stock and a value trap. When management hoards cash without reinvesting effectively or returning it to shareholders, the worst-case scenario is not just stagnation but the opportunity cost of missing out on better investment.
Let me quote Munger "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result."
I am not trying to convince you otherwise. Just sharing my 2 cents here and what I learned about investing.
Indeed, sometimes a big pile of cash is less like a fortress and more like a really expensive security blanket. Especially long-term, that is a good point.
Nice write-up! I'm positive on Hornbach as well. The business has been a little conservative. They bought out most of the shareholders in Hornbach Baumarkt which I likes. Not sure I like the additional ownership of the stores. It used to be 50% not that long ago. I hope they find more high return investments. The expansion into do it for me can become interesting.
The increased property ownership raises valid capital allocation questions but isn't a deal-breaker for two reasons: the company maintains strong profitability metrics and the real estate provides valuable inflation protection in uncertain times. Like the ones we are in now.
Would you mind sharing your thoughts on the property ownership strategy? I'm curious about your perspective on the optimal balance between real estate ownership and operational flexibility in retail.
In general I do think holding Hornbach like retail real estate is a decent investment. The sites benefit from the growth of urban centres. A sale and leasebsck construction with a buyback option would free up a lot of capital though.
I thought the 50% ownership made sense and do not understand why it is creeping up. I think it potentially has something to do with the 'new' accounting regulations.
Before this regulation the aim was always to be at least 50% equity. It looks like they want ro get back to 50%.
A stronger capital return program. Potentially some share buybacks or a special dividend would be a way to trim some excess cash.
I think store growth is the more likely way to keep spending cash. At some point Hornbach will have to stop growing the store count. Then free cash flow will pop.
Good point about the accounting regulations potentially driving the ownership increase, and I agree a sale-leaseback could unlock significant value. I wonder though, if they do reach store count saturation in the next few years, would they actually return that cash to shareholders or double down on the "do it for me" services expansion?
Looking at their services expansion, I see three key paths worth considering: they could significantly expand installation services (particularly given aging European demographics), develop a contractor network platform connecting professionals with customers, or acquire specialized renovation firms like they did with Seniovo.
The most likely path forward would be a methodical, step-by-step expansion of services that builds on their existing strengths - probably starting with a careful expansion of installation services in their strongest markets before any broader rollout. The family has shown they prefer steady, controlled growth over dramatic shifts, suggesting they would test and perfect their service model in a few key locations rather than making big acquisitions or attempting rapid transformation.
Agree that do it for me is the most natural way to keep expanding.
I do think that saturation is still quite far away. The pace of growth is not High enough to spend all the cash. I expect them to increase the dividend again this year.
A nice writeup. I would ask if there even exists a durable moat for this type of company. A process advantage can be replicated. A real estate advantage is not durable if a business activity can be done on a computer, and one competitor’s “be everywhere” strategy is apparently working well. Statistically cheap? Yes. Profitable? So far. But the business seems at least as likely to stagnate or deteriorate as it is to grow. Your own bearish thesis ended up being more convincing for me.
You raise some excellent points. Personally, I'm leaning more bullish. The bearish thesis has valid points (you can say I'm biased), but I focus on the fact that this is an undervalued company primarily due to German market sentiment rather than fundamental business issues - they're still growing market share in other European countries with higher margins, which is impressive and underlines my thinking.
Your question on moats is definitely valid. But, BUT, I'll have to disagree. Why? Look at Costco or Home Depot. Their competitive advantages come from systems that took decades to build: supplier relationships, logistics networks, and location portfolios that create real barriers to entry. In Hornbach's case, this shows in their 34% gross margins while maintaining market leadership positions (37.7% in Czechia, 27.8% in Netherlands).
And that is happening while Hornbach has only 98 stores in Germany versus OBI's 351. This suggests their model of larger stores targeting serious DIYers and professionals works alongside OBI's convenience-focused approach. That's how I read it at least, without having a deep expertise in what those DIYers prefer and why.
Regarding online, I have been going through a renovation with my wife for the past 5 months. The number of times we drove to the nearest Hornbach/OBI-equivalent store, is in high double-digits. So I can relate to the convenience of "big store that has everything, drive there and buy it now". Convenience matters. Especially with inflation, real-estate is an asset at least, if not a moat.
Unfortunately the competitors (OBI, Bauhaus) are private, so I cannot research at all their numbers.
In essence, you make great points about replication, but I'd argue it's the combination of advantages that's hard to copy, not each piece in isolation. We have unknowns on competition though.
Costco... Not sure if it's the process or scale that's giving them the edge now. Maybe both.
But yes. I work at a distribution company and supplier relationships are a bear to create from scratch and maintain. It is possible to gain them and lose them (I've seen a beverage company lose a Coke distributorship due to operational missteps - akin to throwing away a gold brick), and one's business as a distributor could suffer or grow tremendously just based on that. So indeed, they are a kind of moat, perhaps as an asset, or cornered resource - especially in case of exclusive agreements.
And a combination of moats can definitely be more effective than just one moat. As in storming castles, moats are crossed all the time; some more easily than others. I believe that switching costs is perhaps a bit underappreciated - having it as a tailwind is a true blessing.
Nice write up but Rob vinall actually bought and sold it before. I extracted a transcript from him explaining on why he sold it:
"Hornbach is owned by the Hornbach family. They’re the major shareholder and it’s Mr. Hornbach who runs the business and he’s been in the business forever. He clearly loves him very much. And he’s basically the kind of guy I like to invest in, and indeed did invest in, but it didn’t work out as well as I hoped. The company has a huge amount of cash on its balance sheet and then even issued debt to have even more cash, so nearly half the market cap was cash or something. And that doesn’t bother me. I know a lot of people say well that seems very, inefficient but I kind of quite like it when companies have reserves. And then when opportunity comes along, then it’s great to have financial strength when others don’t. In the case of Hornbach, they had this cash for 10 plus years and then the financial crisis came along and some of their competitors went bankrupt and you’re like, okay, now is the moment now you can put the cash to work. And he didn’t. And to my knowledge, he still hasn’t.
I think he’s a great guy, but he has a very wide shareholder basis made up of family members and my sense says, and I hope I’m not being unkind to him, but my sense says his biggest fear in life is screwing up. You hear these terrible stories about how businesses can get screwed up in the third generation and stuff. And so what I thought was a positive attribute and his high stake in the business and long-term view, actually in hindsight, I think it was sort of preventing him from making good capital allocation decisions. And that was the reason, that was a company I owned many years, I sold it, 5 plus years ago."
I do think that capital allocation makes a big difference if the company can continue to grow its intrinsic value. Hope the above is helpful for anyone looking to invest. Find the full interview from good investing.
Interesting. So what you're saying is that the critical issue here isn't the cash itself - it's what the cash position revealed about management's psychology.
Is excessive conservatism a problem? Yes, but at today's valuation, I'd say you're getting paid well to bear it - the market has already priced in management's conservatism through a remarkably low multiple.
There is a fine line between a value stock and a value trap. When management hoards cash without reinvesting effectively or returning it to shareholders, the worst-case scenario is not just stagnation but the opportunity cost of missing out on better investment.
Let me quote Munger "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result."
I am not trying to convince you otherwise. Just sharing my 2 cents here and what I learned about investing.
Indeed, sometimes a big pile of cash is less like a fortress and more like a really expensive security blanket. Especially long-term, that is a good point.
Thank you.
Keep posting. I am always intrigued with underfollowed companies especially in the Europe
It's challenging while having a full-time job, but I most definitely intend to keep up.
I enjoy it as well, figuring out companies I know nothing of. Especially trying to argue both sides. I learn a ton.
Thank you for adding more value with your comments, I appreciate it.
Nice write-up! I'm positive on Hornbach as well. The business has been a little conservative. They bought out most of the shareholders in Hornbach Baumarkt which I likes. Not sure I like the additional ownership of the stores. It used to be 50% not that long ago. I hope they find more high return investments. The expansion into do it for me can become interesting.
Wrote about Hornbach a year ago. Stock now is roughly at the same level. Recently increase my exposure: https://bosinvest.substack.com/p/hornbach-holding-why-i-like-the-stock?utm_campaign=post&utm_medium=web
The increased property ownership raises valid capital allocation questions but isn't a deal-breaker for two reasons: the company maintains strong profitability metrics and the real estate provides valuable inflation protection in uncertain times. Like the ones we are in now.
Would you mind sharing your thoughts on the property ownership strategy? I'm curious about your perspective on the optimal balance between real estate ownership and operational flexibility in retail.
In general I do think holding Hornbach like retail real estate is a decent investment. The sites benefit from the growth of urban centres. A sale and leasebsck construction with a buyback option would free up a lot of capital though.
I thought the 50% ownership made sense and do not understand why it is creeping up. I think it potentially has something to do with the 'new' accounting regulations.
Before this regulation the aim was always to be at least 50% equity. It looks like they want ro get back to 50%.
A stronger capital return program. Potentially some share buybacks or a special dividend would be a way to trim some excess cash.
I think store growth is the more likely way to keep spending cash. At some point Hornbach will have to stop growing the store count. Then free cash flow will pop.
Good point about the accounting regulations potentially driving the ownership increase, and I agree a sale-leaseback could unlock significant value. I wonder though, if they do reach store count saturation in the next few years, would they actually return that cash to shareholders or double down on the "do it for me" services expansion?
Looking at their services expansion, I see three key paths worth considering: they could significantly expand installation services (particularly given aging European demographics), develop a contractor network platform connecting professionals with customers, or acquire specialized renovation firms like they did with Seniovo.
The most likely path forward would be a methodical, step-by-step expansion of services that builds on their existing strengths - probably starting with a careful expansion of installation services in their strongest markets before any broader rollout. The family has shown they prefer steady, controlled growth over dramatic shifts, suggesting they would test and perfect their service model in a few key locations rather than making big acquisitions or attempting rapid transformation.
Agree that do it for me is the most natural way to keep expanding.
I do think that saturation is still quite far away. The pace of growth is not High enough to spend all the cash. I expect them to increase the dividend again this year.
A nice writeup. I would ask if there even exists a durable moat for this type of company. A process advantage can be replicated. A real estate advantage is not durable if a business activity can be done on a computer, and one competitor’s “be everywhere” strategy is apparently working well. Statistically cheap? Yes. Profitable? So far. But the business seems at least as likely to stagnate or deteriorate as it is to grow. Your own bearish thesis ended up being more convincing for me.
Thanks for the thoughtful comment!
You raise some excellent points. Personally, I'm leaning more bullish. The bearish thesis has valid points (you can say I'm biased), but I focus on the fact that this is an undervalued company primarily due to German market sentiment rather than fundamental business issues - they're still growing market share in other European countries with higher margins, which is impressive and underlines my thinking.
Your question on moats is definitely valid. But, BUT, I'll have to disagree. Why? Look at Costco or Home Depot. Their competitive advantages come from systems that took decades to build: supplier relationships, logistics networks, and location portfolios that create real barriers to entry. In Hornbach's case, this shows in their 34% gross margins while maintaining market leadership positions (37.7% in Czechia, 27.8% in Netherlands).
And that is happening while Hornbach has only 98 stores in Germany versus OBI's 351. This suggests their model of larger stores targeting serious DIYers and professionals works alongside OBI's convenience-focused approach. That's how I read it at least, without having a deep expertise in what those DIYers prefer and why.
Regarding online, I have been going through a renovation with my wife for the past 5 months. The number of times we drove to the nearest Hornbach/OBI-equivalent store, is in high double-digits. So I can relate to the convenience of "big store that has everything, drive there and buy it now". Convenience matters. Especially with inflation, real-estate is an asset at least, if not a moat.
Unfortunately the competitors (OBI, Bauhaus) are private, so I cannot research at all their numbers.
In essence, you make great points about replication, but I'd argue it's the combination of advantages that's hard to copy, not each piece in isolation. We have unknowns on competition though.
Costco... Not sure if it's the process or scale that's giving them the edge now. Maybe both.
But yes. I work at a distribution company and supplier relationships are a bear to create from scratch and maintain. It is possible to gain them and lose them (I've seen a beverage company lose a Coke distributorship due to operational missteps - akin to throwing away a gold brick), and one's business as a distributor could suffer or grow tremendously just based on that. So indeed, they are a kind of moat, perhaps as an asset, or cornered resource - especially in case of exclusive agreements.
And a combination of moats can definitely be more effective than just one moat. As in storming castles, moats are crossed all the time; some more easily than others. I believe that switching costs is perhaps a bit underappreciated - having it as a tailwind is a true blessing.