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Body Shop
1992-1993
Industry: Natural Skincare/Cosmetics
Category: Franchise
Context
Body Shop was started by Anita Roddick. She began tinkering potions in her garage. They were so popular that she began selling them in her neighborhood.
Body Shop went public in 1984 for 5p/sh. In 6 years, share price went from 5 pence to 362 pence, a 70x return.
The company relies on natural ingredients and principles, promoting health rather than beauty.
Products included: beeswax mascara, kiwi-fruit lip balm, carrot moisture cream, orchid-oil cleansing milk, honey-and-oatmeal scrub masks, raspberry ripple lotion, seaweed-and-birch shampoo, Rhaossoul mud shampoo.
The company shuns advertising and gives employees a 1 day paid leave per week to do community service activities
The company recycles shopping bags and pays 25 cents for each lotion bottle brought back to the store.
Lynch loved going to the local Burlington mall to learn/study experience retail companies.
His 3 daughters loved the store, it was 1 of the 3 most crowded stores in the mall.
A friend at poker said his wife and daughter loved the store, a Fidelity analyst recommended it in 1990.
Even Fidelity's head librarian left to open a Body Shop franchise (she happened to own the store they visited).
Why the Company is Mispriced
The company was actually quite expensive in 1992, trading at 42x forward 1992 earnings.
Lynch saw that the balance sheet was strong and that the 2 analysts covering the company forecasted 20-30% for the next few years.
Alternative View
Lynch saw that the problem was the 42x forward earnings. The high price left little room for error.
But he saw that since the company had 92 stores in Canada (highest sales/sq ft in Canadian retail) and only 70 in the US.
He reasoned that the US could hold >920 stores (since the US is 10x Canada's population).
Just because a stock is up 10x, 50x, doesn't mean it can't go higher.
Toys R Us and Walmart both up significantly, but they still had room to grow.
5 year post-IPO, 1975 Walmart had 104 stores, the stock was up 4x since it's IPO.
5 years later, 1980 Walmart had 276 stores, the stock was up 20x since it's IPO.
The stock continued to grow many multiples past that.
The important question to ask along the way is not if Walmart would punish greedy shareholders, but has Walmart saturated it's market?
The key question was whether the Body Shop's earnings could eventually catch up to the stock price. Could actually keep the 20-30% growth up?
Easier said than done, but Lynch was impressed with the company's abilities and popularity, and saw that they had barely scratched their international potential.
If the company could achieve it's potential, and he said we could see thousands of Body Shops, and we could see a 70x from the 1992 share price.
Therefore, Lynch said that the strategy is to make a small commitment now and increase it in the next sell off.
Result
Share price was 325p in 1/13/92 and dropped to a low of 108 within the year.
Share price never recovered from it's high of 370p. The share price was 168p in 1997.
In 2006, the Body Shop was acquired in 2006 by L'Oreal for 300p/sh, or £652m.
In 2017, L'Oreal sold the Body Shop for £880m.
It seems like the Body Shop fell out of favour with consumers due to a combination of:
(1) bad press about the founder and their claims,
(2) product quality not keeping up with copycat competitors (Lush, Bath and Body Works, similar products in discount/specialty/department stores).
In the end, I think Lynch was right about the category of natural skincare/cosmetic retailers. Lush and Bath and Body Works are still popular today.
But management just couldn't keep up the pace, and the Body Shop didn't end up to be the next McDonalds/Walmart.
This is not to say that Lynch was completely wrong. He did say to make a small commitment and increase it in the next sell off. He rerecommended it in 1993 at 140p.
Notably
Anita Roddick wrote in the last line of her autobiography in bold, "Make no mistake, I'm doing this for me."