“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that the second question is actually the more important of the two – because you can build a business strategy around the things that are stable in time. ― Jeff Bezos, Chairman of Amazon, 2007 Amazon Annual Letter
At Avenue we routinely discuss our investment approach and the desired goal to invest in businesses that are more stable over time. We believe this is a desirable goal because it is our belief that stable businesses are the best way to achieve successful long-term investment outcomes.
But what does stable investing mean and what does it look like in practice? That is going to be the topic of this quarter’s letter.
Our discussion will highlight why stable investing is important, and the types of businesses we want to invest in based on these principles. We will further explore these ideas by looking at two specific examples in the Avenue equity portfolio, one of which has been a successful investment and the other which did not work as expected and has since been sold.
To set the stage for this letter we used a quote from Amazon’s 2007 annual letter. Jeff Bezos is a visionary entrepreneur who built Amazon starting from his garage in Seattle to become the company that it is today. Despite the evolution of Amazon’s business over the years, the core philosophy that guided the mission of the company was rooted in the idea that consumers will continue to desire a consistent and reliable retail shopping experience with items sold at the best value prices. This is what Jeff Bezos believed is ‘stable over time’, and what he obsessively focused on when building the business. Because he recognized this consumer desire to be incredibly stable, he was comfortable making large investments within Amazon to fulfill this consumer desire.
Although at Avenue we have never owned shares of Amazon, we very much associate with this principal idea of stability.
As investors we take the concept of things rooted in stability and apply it to the businesses we invest in. The important principle to highlight is that stable businesses possess a superior quality in that they tend to be more consistently profitable over time.
Investing in companies which are consistently profitable is desirable because it means we can have greater confidence in the underlying profitability of what we own. Ultimately, we believe that the value of any investment is in the underlying cash flows that the business will generate over its lifetime. This is why consistent profitability is so important. Most public companies do not have this characteristic. We prefer to focus on companies that do.
At Avenue we believe we can have the most success investing in businesses that are likely to be doing the same activity 10 years from now. We favour industries that are unlikely to be displaced by significant change or competition. This simple concept is powerful because it means that as shareholders, we are likely to earn consistent profits on our investments long into the future. We look for companies that have this underlying stability but also have a strong competitive advantage within their industry, which gives us added confidence that profits are stable.
Once we have established that a business has characteristics that make it consistently profitable, we move to the next phase of our investment analysis process.
The next question we ask is what do these consistently profitable companies do with their profits? Can they reinvest their profits back into the business at good rates of return? Or are they better suited to paying us these profits in dividends? As part of a diversified strategy, we own companies which fit into both categories.
It is our experience that finding companies which are consistently profitable, earn high returns on their capital, and can reinvest back in their business at high rates of return, are very rare. Let alone it can be challenging to find companies in this category that are trading at an acceptable valuation. But they do exist.
Sometimes they are hiding in plain site, and sometimes we must do a lot of digging to find them. That is what we spend our time doing with our investment research process. We aim to make money on all our investments, although we know that this will not always occur. In our experience it is always better to correct investment mistakes quickly, while simultaneously allowing our successful investments to grow and compound.
That is a brief summary of what we call Quality Investing at Avenue. We try to own high quality companies, while also making high quality decisions. Our goal is to have a stable and consistent portfolio of investments that we can own for the long term.
Now let us turn to applying these principles to the businesses we invest in.
BJ’s Wholesale Club
The first business to highlight in this category of quality companies is called BJ’s Wholesale Club.
Here is a description of the business from the company website:
BJ’s Wholesale Club (NYSE: BJ) (“BJ’s”) is a leading operator of membership warehouse clubs focused on delivering significant value to our members and serving a shared purpose: “We take care of the families who depend on us.” The company offers up to 25% savings on a representative basket of manufacturer-branded groceries compared to traditional supermarket competitors. BJ’s provides a wide assortment of fresh foods, produce, a full-service deli, fresh bakery, household essentials and gas. In addition, BJ’s offers the latest technology, home decor, small appliances, apparel, seasonal items and more.
Headquartered in Marlborough, Massachusetts, the company pioneered the warehouse club model in New England in 1984 and has grown its footprint to large-format, high volume warehouse clubs spanning 21 states. In its core New England market, the company operates more than three times the number of clubs compared to the next largest warehouse club competitor.
We purchased our initial investment in July 2023 at a price of roughly $67 per share. At the time the company earned profits per share of $3.80 over the previous twelve months, which means we purchased our investment at approximately 17 times earnings. This was a valuation we deemed to be a fair price given the underlying quality characteristics of the business.
During the spring of 2023 the share price had declined because of concerns about a U.S. consumer recession. The company also had a challenging few quarters with regards to their merchandising initiatives and the product selection in their general merchandise section of their stores. For those familiar with Costco Wholesale – BJ’s Wholesale operates a very similar business. The general merchandise is in the centre of the store and is an important contributor to both store traffic and business profitability.
We liked the business because it had returns on capital of above 30%, and the capital investment needed to maintain the stores was small relative to their overall profitability. We also believed that consumers would continue to be cost conscious and value oriented, and the Club Wholesale business in the United States and Canada provides an excellent value for consumers in an inflation plagued era.
To shop at BJ’s Wholesale, members pay an annual fee of between $60-$100 per year, and in general, prices are around 25% lower than you would see at the grocery store or other retailers. In short, this business thrives on providing high quality value to its loyal and repeat customer base. The business originated in Massachusetts but has since grown to 21 different states. Membership retention is over 90% per year. Everywhere we looked this business exemplified both quality and stability.
BJ’s Wholesale also fits into the rare category of business that, in addition to the above stable qualities, can also reinvest in their business at high rates of return.
The company has grown its store base over the past several years as demand for their service has grown. They now have 254 club locations, and 190 gas stations located up and down the eastern seaboard.
They plan to continue expanding in the years to come because of the growing market opportunity. Their capital spending has been funded with internally generated cash flow, making these growth investments highly attractive on a per share basis.
In 2024 the company also announced a $1-billion share buyback program. In addition to reinvesting in their business it means that excess profits will return to shareholders through share buybacks.
When evaluating a businesses capital allocation strategy, it is very important to speak with management and listen closely to how they answer questions as to how their capital spending plan is pursued and explained.
With that regard the below excerpt from BJ’s Q2 2024 Conference Call last year jumped out as an important indicator about how BJ’s management thinks about capital allocation. The below exchange comes from an analyst at Morgan Stanley asking questions to the CEO of BJ’s – Robert Eddy.
Senior Analyst, Morgan Stanley Research
Bob, I wanted to ask you first, the top line environment has been constrained, and we’ve seen that across retail. You’re talking a lot about your investments and thinking about where the business could be in a couple of years from now. Is there any degree to which you’re holding back investments to manage short-term profitability?
Robert W. Eddy, BJ’s Wholesale Club Holdings, Inc. – President, CEO & Chairman
It’s a really good question. We talk a lot about here investing for the long term. It’s where we’re going to be in 2 years, 3 years, 5 years. And that’s really the point of the membership business. We want to create a franchise for the next 5 or 10 years. The more important investments to us are other long-term ones. And those tend to fall in the membership arena. So, we’re really proud of what we’ve been able to do. It’s certainly one of the things that has really transformed the business over time. Every time we know we have a good quarter going, we ramp up the investment a little bit, not necessarily for this particular quarter but for the next year, the next 2 years, the next 5 years. And that won’t change.
BJ’s Wholesale Excerpts from Q2 2024 Conference Call
Here is a CEO being asked directly if he favours short term profitability versus making long term investments in the business. And he answered in as clear a manner as we would like to see. This type of clarity and execution is rare. As shareholders this is the kind of communication from management that we believe is crucial to look for when evaluating our investments.
It is our job as investors to determine whether we think BJ’s Wholesale is a good business. The management of the company must still execute and perform by doing what they say they are going to do for the business to reach its full potential. So far, they have exceeded our expectations, and we believe the company has a long path of consistent profits and growth ahead of it.
When a company makes investments in its business there will always be some uncertainty about the rate of return that will be earned on these investments. For businesses which have a strong value proposition with their customers, have a strong market position, and are in an industry unlikely to face major changes, the probability is higher that those businesses will earn good returns on their reinvestment. This reinforces the stable quality we are looking for in our investments.
Despite the challenging market environment so far in 2025, shares of BJ’s Wholesale have performed well. We think the underlying trends in the business remain strong and the business possesses both quality and stable underlying characteristics.
TFI International
The second investment we are going to talk about is TFI International. This is a business we first purchased in December 2023, and we subsequently sold our investment in February 2025 after they reported disappointing earnings.
TransForce International (TFI) is a Montreal based transportation company focused on the truckload, less-than-truckload, and logistics business throughout North America. Despite the perceived cyclicality of the trucking business, there is a long-term underlying stability in the growing demand for trucking services. This demand has grown substantially over the past decade as e-commerce growth has propelled the demand for short term overnight delivery. The trucking industry has also experienced consolidation which means the dominant competitors have a growing favourable market position.
TFI under the leadership of long time CEO Alain Bedard has demonstrated a strong track record of making acquisitions. During 2021 TFI made its largest acquisition ever, acquiring United Parcel Services Less-than-Truckload business in the U.S. The pandemic accelerated the demand for overnight trucking services as the government fiscal support led to a sustained period of excess consumer demand in the economy. The segment of the trucking industry that benefited the most is the Less-than-Truckload segment which focuses on smaller loads being shipped as part of a larger truck. This segment offers the best value for trucking customers as they do not need to purchase a full truckload of space.
An important aspect of the trucking industry is that dominant positions in the industry accrue to the companies with the best scale and distribution network. There is a straightforward reason for this, and that is because when you have a better located network of trucking terminals it means you can both manage your costs and provide a better service for your customers. A superior network gives a trucking company greater pricing power, where it can raise its prices at a higher rate because customers have a strong demand for quality reliable service. The North American economy cannot function without the trucking industry.
The ability to raise prices on customers both defends profitability and generates additional cash flows to be reinvested back into the network and terminals, which further reinforces the dominant position. It is an industry where the strong get stronger.
TFI was a business that had all the favourable characteristics we look for in a business along with the ability to reinvest in the business and a demonstrated ability of achieving strong returns on their reinvestment. Although we have previously discussed our view that the economy was slowing in 2024, we felt there still existed an underlying stability to the trucking market dynamics.
We purchased our initial investment in December 2023 at a price of $172. We owned the shares for 14 months and sold our investment in February 2025 for a price of $137 for a total return including dividends of -18%.
What changed our mind about the business is that they reported first quarter 2025 earnings that were far below our expectations, specifically for their Less-Than-Truckload trucking segment in the United States. Although the trucking industry has been in a slowdown for the past few years, capacity in the market had held tight meaning that overall profitability was still okay. At the end of 2024 and into the new year, the Less-Than-Truckload business experienced a significant slowdown while at the same time the business faces rising costs. With this change of events, the business started to experience negative operating leverage which puts profits at risk for the next year or two.
This scenario in a slowing economy made us uncomfortable because the underlying profitability of the business did not meet our expectations for stability. Upon recognizing this we made the decision to correct our investment by selling the shares. Perhaps there will be another time to come back to TFI or another trucking competitor as an investment in the future but now is not the time.
We continue to spend our energy looking for new investments that meet our criteria of quality and stability. We expect the market to provide us with some excellent opportunities throughout 2025.
