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Peter Lynch

Supercuts
1992-1995
Industry: Discount Haircuts
Category: Franchise

Context
Supercuts IPOed at $11/sh in 1991
Idea is the haircut market is 15-40b, dominated by independent barbers
The Supercut idea is fast cheap haircuts
650 stores, stylists are paid $5-7/hr but make double in tips
Each stylist makes $30/hr in revenue for the franchise owner. It costs franchise owners $100k to startup (franchise fee, sinks, chairs, decor, shampoo)
In 2 years, expected to earn a 50% pretax ROI.
Supercut shareholders get 5% of revenue, 4% of product revenue.
Minimal administration costs, biggest cost is training.
It costs $40,000/year to hire a trainer for 10 stores. But 10 stores will bring shareholders $300,000 in revenue.
The founder got bought out and the new management brought in former CEO of Computerland to run the company.
Competition is Regis, Fantastic Sams, JC Penney, and the independent barbers.

Why the Company is Mispriced
Unclear

Alternative View
Lynch went to Supercuts to try out the experience and ended up with a pretty bad cut.
He realized that the hedgemanship was pretty bad.
But the company was growing at 20% for 16x earnings.
In 1992, Lynch recommended it at $11/sh.

Result
In 1992, the CEO from Computerland left the company (bad sign).
However, over the 2 years the book Beating the Street was written, this had a 31% return for a 15% CAGR.

Notably
Notably, Lynch was worried about the company's craftmanship and that management was forcing the company to grow too fast.
Lynch told Supercuts' CEO, "If you have a choice between reaching your goal in fifteen years or in five years, fifteen is better".
Supercuts was bought out by Regis for $10.54/sh (in Regis stock) in 1996. That's a -5% return over 5 years.
Likely the reason for Supercuts' weak share price was over-aggressive expansion plans and poor management.