Executive Summary / Key Takeaways

• BBB Foods operates a proven hard discount grocery model in Mexico that generates 36.7% revenue growth and 17.9% same-store sales growth, yet reports negative EBITDA due to a deliberate strategy of front-loading expansion costs before revenue materializes, creating a temporary profitability mask over strong underlying unit economics.

• The company's 54% private label penetration and negative working capital cycle (10.8% of revenue) provide a self-funding engine for aggressive store expansion, with 3,162 locations as of Q3 2025 and a clear path to 14,000 stores, positioning it to capture Mexico's value-conscious consumer segment during economic uncertainty.

• Management's equity-linked compensation structure, while creating a Ps. 2,934 million non-cash expense in 2025, has been instrumental since inception in aligning talent with shareholder interests and driving the entrepreneurial culture responsible for consistent 30%+ growth with no operational hiccups.

• The critical investment question centers on execution: whether TBBB can maintain its rapid store opening pace while preserving the quality and efficiency that allow older store vintages to achieve margins comparable to global hard discounters, and when the market will recognize value creation through the temporary margin compression.

• Trading at $33.19 with an enterprise value of $4.25 billion (1.07x revenue), the stock reflects a growth premium that will be justified only if the company successfully navigates its profitability inflection point as expansion costs normalize and administrative expenses decline as a percentage of sales.

Setting the Scene: The Hard Discount Pioneer in Mexico's Value Revolution

BBB Foods Inc., operating as Tiendas 3B, was founded in 2004 and established its headquarters in Mexico City, pioneering the hard discount grocery model in Mexico at a time when traditional supermarkets dominated the landscape. The company built its foundation on the Mexican principle of "Bueno, Bonito y Barato" (Good, Nice, and Affordable), targeting low-to-middle income households with a radically simplified offering of approximately 800 SKUs and a heavy emphasis on private label products that reached 54% of sales in 2024. This limited assortment strategy, combined with small-format stores averaging around 3,000 square feet, creates an operational framework that generates inventory turnover rates high enough to sustain a negative working capital cycle, where sales growth effectively funds itself through favorable payment terms with suppliers.

The Mexican grocery retail market remains highly competitive and fragmented, with Walmart de México y Centroamérica (WALMEX) commanding over 50% market share through its Bodega Aurrera discount format that directly overlaps with TBBB's target demographic. Grupo Comercial Chedraui (GCHEDUIO) and Organización Soriana (SORIANAB) hold an estimated 10-15% share each, while La Comer (LACOMERUB) serves the premium segment with approximately 5% share. This competitive landscape means TBBB must execute flawlessly to carve out its niche, yet the company has consistently demonstrated an ability to thrive during economic downturns as consumers trade down to value options. The current environment of economic uncertainty and inflationary pressure plays directly into TBBB's strengths, creating a tailwind that management has leveraged to accelerate store openings from 484 net new stores in 2024 to a projected 500-550 in 2025.

Business Model & Strategic Differentiation: The Power of Simplicity and Speed

Tiendas 3B's hard discount model represents more than just low prices; it embodies a complete rethinking of grocery retail efficiency that begins with its product assortment strategy. The company's 54% private label penetration in 2024, up from 47% in 2023, creates a dual advantage: direct control over product quality and margins while building customer loyalty through exclusive offerings that competitors cannot match. This approach allows TBBB to optimize pricing elasticity across approximately 60 products simultaneously, testing and adjusting to maximize both volume and dollar margin. The result is a value proposition that strengthens during economic stress, as evidenced by the 17.9% same-store sales growth in Q3 2025, which management attributes to both higher transactions per store and more SKUs per transaction.

The store expansion strategy reveals the company's confidence in its unit economics and market opportunity. With 3,162 stores as of September 30, 2025, TBBB maintains a clear path to at least 14,000 locations across Mexico, representing less than 25% of the total addressable market. The company accelerates its opening rate while new store cohorts mature faster than prior generations, with management noting that newer vintages start stronger and achieve higher returns than stores opened a decade ago. This performance improvement stems from brand recognition and trust that compound over time, allowing TBBB to open stores in increasingly dense urban areas like Mexico City without saturating demand. The strategy of "stretching, not leaping" into adjacent geographies ensures that each new region benefits from proximity to existing distribution centers, compacting logistics distances and improving efficiency even as the network expands.

Equity-linked compensation serves as the cultural backbone that enables this aggressive expansion without sacrificing execution quality. Since its inception, TBBB has used equity awards to attract and retain entrepreneurial talent aligned with long-term shareholder value. The Liquidity Event Plan granted in June 2025, covering 7.5 million Class C shares vesting over three years, represents a Ps. 2,934 million non-cash expense in 2025 that depresses reported earnings but reflects a deliberate investment in human capital. Management frames this not as a cost but as a return-generating investment, arguing that the benefits outweigh equivalent cash compensation by creating an ownership mentality that protects against talent poaching and drives the can-do attitude responsible for 30%+ growth with no operational hiccups.

Financial Performance: Growth Masked by Expansion Investment

TBBB's financial results tell a story of deliberate trade-offs between near-term profitability and long-term market dominance. Total revenue reached Ps. 20,279 million in Q3 2025, a 36.7% increase year-over-year, while nine-month revenue of Ps. 56,180 million grew 36.7% compared to the prior year. This growth acceleration, up from 30.3% in FY2024, reflects both the 528 net new stores opened over the trailing twelve months and the 17.9% same-store sales growth that significantly outpaces industry association ANTAD's low single-digit performance. The composition of this growth matters: older store vintages continue delivering same-store sales growth well above inflation, while newer cohorts mature faster than historical precedents, indicating that the value proposition strengthens as the brand scales.

The profitability picture appears troubling at first glance but reveals underlying strength when properly adjusted. Reported EBITDA showed a loss of Ps. 404 million in Q3 2025, compared to a Ps. 688 million gain in Q3 2024, entirely due to the non-cash share-based payment expense. Excluding this item, adjusted EBITDA reached Ps. 1,170 million, a 43.6% increase with a 5.8% margin that expanded 28 basis points year-over-year. This margin expansion occurred despite higher logistics costs from opening two new distribution centers in Q3 and preparing for two more in Q4, as commercial margin improvements more than offset the operational investments. The nine-month adjusted EBITDA of Ps. 1,140 million represents a 42.8% decrease, but this reflects the front-loaded nature of expansion costs that management insists create "tremendous value for the shareholder" even as they temporarily depress consolidated metrics.

Cash flow generation demonstrates the model's self-funding capability and validates the expansion strategy. Net cash from operating activities reached Ps. 3,095 million in the first nine months of 2025, a 30% increase year-over-year, driven by the favorable ratio of inventory days to payable days that defines the negative working capital cycle. This robust cash generation funded Ps. 2,228 million in investing activities, primarily store and logistics network expansion, while the company maintained a net cash position of approximately MXN 1.1 billion plus $150 million in short-term deposits. The ability to fund aggressive growth internally, without relying on external capital, provides strategic flexibility and validates management's claim that "our accelerated growth continues to be self-funded."

The balance sheet reflects a company in heavy investment mode but with sufficient liquidity to execute its plans. Negative working capital of Ps. 7.8 billion as of September 2025, representing 10.8% of total revenue, provides an interest-free financing mechanism that competitors cannot replicate. Debt-to-equity of 2.78x appears elevated but reflects lease liabilities from the rapidly expanding store base rather than traditional borrowing. With no significant debt maturities and strong operating cash flow, TBBB maintains adequate financial flexibility to continue its expansion trajectory while absorbing the temporary margin compression from new store openings and regional infrastructure investments.

Competitive Context: Outgrowing Giants While Building Moats

TBBB's competitive positioning reveals a classic David versus Goliath dynamic, where agility and focus offset scale disadvantages. Walmart de México, with over 2,800 stores and 50%+ market share, generates steady 6-8% revenue growth and maintains strong profitability through massive purchasing power and integrated e-commerce capabilities. However, TBBB's 36.7% growth rate and 17.9% same-store sales performance demonstrate that it is taking share in the value segment, attracting budget-conscious consumers that Walmart's Bodega Aurrera format also targets. The key difference lies in focus: while Walmart offers one-stop shopping across formats, TBBB's exclusive dedication to hard discount creates a purer value proposition that resonates more strongly with price-sensitive shoppers during economic stress.

Grupo Comercial Chedraui and Organización Soriana represent more direct format competitors, each holding 10-15% market share through traditional supermarkets and discount stores. Chedraui's 6.3% EBITDA margin in Q2 2025 and Soriana's steady cash flows reflect mature, profitable operations that TBBB cannot yet match at the consolidated level. However, TBBB's newer store vintages already achieve margins comparable to these established players at the unit level, while growing same-store sales faster than inflation. This suggests that TBBB's operational model is structurally superior for the value segment, but the company chooses to reinvest these efficiencies into market share capture rather than harvesting profits.

The competitive moat deepens through continuous innovation in product quality and assortment. Management emphasizes that "the portfolio of products that you find today in our stores is significantly better than what you would have found in our stores five years ago," with ongoing tests across 60 products for pricing elasticity and successful pilots in categories like ice cream bars. The potential introduction of fresh fruits, vegetables, and meats represents additional upside not factored into any projections, providing a free option on future growth. This innovation pipeline, combined with the 54% private label penetration, creates switching costs for customers who cannot find equivalent value elsewhere, making the 17.9% same-store sales growth more sustainable than promotional-driven comps.

Outlook, Guidance, and Execution Risk: The Path to Profitability

Management's 2025 guidance frames a year of continued acceleration tempered by realistic execution planning. The company projects same-store sales growth of 11-14%, total revenue growth of 26-29%, and 500-550 net new store openings, all while maintaining its self-funded expansion strategy. This guidance appears conservative given Q3's 17.9% same-store sales and 36.7% total revenue growth, suggesting management prefers to under-promise and over-deliver rather than risk missing targets. The commentary around administrative expenses decreasing as a percentage of sales over time provides a clear margin trajectory, contingent on scaling the existing cost base across a larger store footprint.

The execution risk centers on three factors: real estate availability, human capital quality, and permit timing. Management identifies human resources as the historical "gating item" but addresses this through long-term planning, working backward from multi-year store targets to determine current hiring needs. The company mitigates permit delays by increasing the pipeline of potential sites, ensuring that bureaucratic slowdowns do not derail the opening schedule. Capital is explicitly "not an issue," thanks to the self-funding model and strong cash position, leaving execution as the primary variable between guidance and outperformance.

Technology investments support the scalability thesis, with management highlighting that "the new generation of tech is significantly more efficient than the generation on which we built our current tech." The ability to leverage big data and AI on modern platforms creates order-of-magnitude improvements in operational efficiency compared to legacy systems. This technological upgrade, combined with stores designed to absorb more SKUs without physical expansion, provides capacity for future growth without proportional cost increases. The question is whether these efficiency gains can outpace the margin dilution from opening four new regions and 18 distribution centers by year-end.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to the investment thesis is execution failure at scale. While TBBB has grown at 30%+ for many years "with no hiccups," the acceleration to 500+ annual store openings tests the limits of organizational capacity. If newer store cohorts fail to maintain the faster ramp-up and margin progression demonstrated by recent vintages, the entire value creation model collapses. Management's admission that "the faster we accelerate the more we have these expenses" creates a perverse dynamic where success in opening stores temporarily depresses profitability, making it difficult for investors to distinguish between productive investment and value destruction until the stores mature.

Competitive response from Walmart and other incumbents represents a persistent threat. While TBBB currently outperforms ANTAD same-store sales by nearly 15 percentage points, a targeted pricing campaign from WALMEX could compress margins in TBBB's core markets. The hard discount model's reliance on extreme price sensitivity makes it vulnerable to predatory pricing from better-capitalized competitors willing to sacrifice margin for share defense. TBBB's moat of private labels and operational efficiency provides some protection, but a prolonged price war could delay the path to consolidated profitability and strain the self-funding model.

The equity compensation structure, while culturally essential, creates a significant overhang through 2028. With projected share-based payment expenses of Ps. 2,934 million in 2025, Ps. 1,774 million in 2026, and Ps. 669 million in 2027, reported earnings will remain depressed even as cash generation improves. Management argues this is "an excellent return on investment" for talent retention, but the dilution impact and persistent losses may limit the stock's institutional appeal until the expense normalizes. The Board's decision not to make additional reserves for 2026 suggests the program is front-loaded, but investors must endure several more quarters of significant non-cash charges.

Economic sensitivity cuts both ways for TBBB. While the model historically benefits from downturns as consumers trade down, an extreme recession could test the limits of this resilience. If unemployment rises sharply in TBBB's core low-to-middle income demographic, absolute spending power could decline faster than market share gains offset it. Additionally, the gradual reduction of the working week in Mexico could increase labor costs, though management believes this will stabilize and eventually decrease as a percentage of sales through continued revenue growth.

Valuation Context: Growth Premium Meets Profitability Discount

At $33.19 per share, BBB Foods trades at an enterprise value of $4.25 billion, representing 1.07 times trailing twelve-month revenue of approximately $3.14 billion. This revenue multiple sits well below traditional growth retail multiples, reflecting the market's skepticism about the company's path to profitability. The price-to-operating cash flow ratio of 15.58x appears more reasonable, given the strong cash generation of $205 million over the past year, but the price-to-free cash flow ratio of 52.97x highlights the heavy investment burden from store expansion.

The company's negative operating margin of -4.34% and net margin of -2.51% make traditional earnings multiples meaningless, forcing investors to focus on unit economics and the trajectory toward profitability. Gross margin of 16.22% provides a solid foundation, but sales, general, and administrative expenses consume 20.56% of revenue, driven by the non-cash share-based compensation and upfront costs for new regions. The return on equity of -44.36% reflects both the net losses and the equity dilution from compensation plans, creating a headwind for valuation until the company achieves sustainable profitability.

Comparing TBBB to mature competitors illustrates the valuation tension. Walmart de México trades at higher revenue multiples with mid-single-digit growth and strong profitability, while TBBB's multiple reflects a bet on future margin expansion. Grupo Comercial Chedraui's 8.9% EBITDA margin and steady cash flows represent the profitability potential that TBBB's older store vintages already achieve at the unit level, suggesting that consolidated margins could reach similar levels once the expansion pace moderates. The key valuation question is whether investors should pay a growth premium for a company that is deliberately suppressing near-term profits to capture a 14,000-store opportunity that could generate substantially higher earnings power in the future.

Conclusion: The Waiting Game for Value Recognition

BBB Foods represents a classic growth investment where the company's strategic choices create a temporary disconnect between reported financials and underlying business quality. The hard discount model's resilience, demonstrated by 17.9% same-store sales growth and a self-funding expansion engine, provides a durable competitive moat in Mexico's value-oriented grocery segment. Management's deliberate decision to accelerate store openings, accepting near-term margin compression for long-term market dominance, follows a proven playbook that has created tremendous value in other retail contexts.

The investment thesis hinges on two variables: execution velocity and profitability inflection. If TBBB can maintain its current store opening pace while preserving the faster ramp-up and margin progression of newer vintages, the company will reach a scale where administrative expenses and equity compensation normalize as a percentage of sales, revealing the true earnings power of the model. The market's current valuation at 1.07x revenue suggests skepticism about this transition, creating potential upside for investors who believe in the underlying unit economics.

Conversely, if execution falters or competitive pressure intensifies, the heavy upfront investments could persist longer than expected, delaying the path to sustainable profitability and testing investor patience. The next 12-18 months will prove critical as the company laps its IPO-related expenses and the equity compensation burden begins its scheduled decline. For long-term investors, the question is not whether the hard discount model works—TBBB's older vintages and global peers have proven that—but whether management can scale it to 14,000 stores before the market loses faith in the growth story.