You ask, We Answer: A deeper look at value pick Organic Garage (OG.V)

You Ask, We Answer is a new investigative series in which Equity.Guru staff writers explore new companies at our readers’ behest. To submit a company which you feel warrants more looking into, send your suggestions to www.twitter.com/equitydotguru with the hashtag #EGAnswers.

To kick this series off, we’ve chosen a request about company a little out of Equity.Guru’s usual periphery of cannabis, resource and blockchain. Here’s the pitch:

So this is a stock I’ve been trying to get someone smart to talk about for a while; not surprising it’s my biggest holding. Organic Garage. They’re a low cost organic grocery chain out of the GTA. They have strong financials and a very clear runway for growth. They’re even playing around with the idea of entering the cannabis space. With Ontario retail coming up soon don’t be surprised if they make some noise about it.

Equity.Guru reader

Thanks for the suggest, EGR. We set a couple of Equity.Guru staffers on the case of learning more.

To summarize, Organic Garage is a newly established Canadian competitor to Whole Foods. It currently has four stores in the Greater Toronto Area and its management has expressed their desire to keep expanding at a rate of one to two locations each year.

Why challenge an organic grocery giant like Whole Foods? It makes more sense than you might think.

It’s the business model which drives one of our clients, The Green Organic Dutchman (TGOD.T). Unlike a discount supermarket chain like No Frills, grocery stores which sell premium product earn premium margins.

To quote Jesse McConnell, CEO and director of Rubicon Organics (ROMJ.C), “Did Amazon recently buy No Frills or Whole Foods? I think it was Whole Foods.”

Much like in cannabis where the majority of players are fighting it out in the mid-range, premium produce is a lucrative market and Amazon is one of the few public companies in the space. Even if the company never gets into cannabis, as previously hinted, Organic Garage is in a wide-open market.

The fundamentals

OG has a modest $9.2 million valuation and a low share count with 37 million shares in circulation, implying a committed investor base. The company has seen 326% growth in revenue year-over-year and just finished its first cash-flow-positive quarter.

Courtesy of Stockwatch.com.

OG says it prides itself on offering wholesome food at a fraction of the cost its competitors charge. On average, the company says they’re 18% to 25% cheaper than Whole Foods and as much as 15% less expensive than a conventional grocer.

In an interview with The Globe and Mail, the company’s founder, Matt Lurie, said OG was taking advantage of dense population centres in Toronto in which full-fledged 30,000 square feet grocery stores can’t fit.

With rising populations and increasing density, most major cities like Toronto are battling the ever-shrinking availability of space. Lurie says his company’s stores has adapted to smaller locations by having purposeful product selection. Aisles are small and stocked with fewer items, but Organic Garage makes the space count by weeding out low-quality products from their shelves.

Besides appealing to the increasing interest towards minimalism, OG also taps into another sentiment on the rise: Consumers want to eat healthily, locally and ethically.

And Whole Foods’ parent company, tech and delivery titan Amazon.com (AMZN.Q), has been losing the public relations war as of late.

Canadians often bemoan their lack of Canadian-owned companies to choose from (See: Canada Goose, Hudson’s Bay Company). OG offers an alternative to a mega-corp which ferries money out of the country and doesn’t give its employees less than two minutes for ‘personal breaks’ like using the bathroom.

Besides OG’s lack of indefensible employee policies, the company is in a market which is getting the attention of industry leaders.

in September 2018, Empire Company (EMP.A.T), the owner of Sobeys, bought the Farm Boy grocery chain for $800 million, a 14.1x multiple of forward 2020 EBITDA.

With 26 locations in southeastern Ontario, Empire paid roughly $31 million per Farm Boy store. Organic Garage has four locations and, as previously mentioned, a valuation below $10 million.

It’s a rough comparison, Farm Boy stores have square footage to spare unlike OG’s minimalist setups, but one that’s useful for determining where a company might be someday.

From what we can tell, Organic Garage is a sound company targeting an underserved Canadian market. In short: we think they’ve got the goods.

Full disclosure: Organic Garage is not an Equity.Guru marketing client.

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

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