Fickle Pickle Bar is a neighborhood bar next to the residence hall that I lived in Seoul for 4 months. Tuesday nights, the rooftops right sit was reserved for my roommates and I.

I looked at this spot in HBC, Seoul, that I liked and thought of as an excellent investment to explore further. Fickle Pickle is a multipurpose complex located in the trendy and “hip” neighborhood of Seoul. Due to the massive influx of youth in the area, the owners – 2 Korean ex-NYU students – decided to found a space that could attain the ever more so “fickly” youth of Seoul. Space tries to incorporate a café, bar, rooftop, and art studio in one space. The studio features new, independent, up and coming artists to be featured every month. Due to the alternative, grunge, and industrial feel of the place, plus the artist featured, Fickle Pickle, is growing within this international district.

Post discussions with one of the managers, Jen, I constructed financial statements with justified assumptions set in place. The café, located on the ground floor, is open every day. While the studio, bar, and rooftop are open 4 days from Thursday-Sunday. Sales from the café, drinks from the bar and rooftop, entrance fee for the studio, and Fickle merchandise (including T-Shirts, pouches, stickers, key chains, and caps) are the primary sources of revenue for the complex. An hour-long observation suggested close to KRW 819,570,000,000 to be made in sales per year.1 Exhibit 1 below shows how that revenue is stripped to result in an 11.8% profit margin.

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                   Exhibit 1: Income Statement for Fickle Pickle ‘19

COGS included fixed and variable costs, of which higher percentages were salaries and cost of the product/service offered. As Fickle Pickle’s customers are mostly people within the HBC community and featured artists get the utility of exposure from the venue, SG&A costs are relatively minimal. Overall profit margin is 11.83% which is quite high in relation to the concentration and margins of coffee shops and similar service businesses in South Korea.

Marketing, R&D, and Human Capital used here are expensed, which might not necessarily be the sole truth. As Fickle Pickle has additional intangible assets on the “vibe,” they create and the brand image they maintain that creates a feedback loop of attracting more customers and increasing the value of the business. So be aware of the distortion this might induce in underestimating the intangible assets.

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                    Exhibit 2: Cash Flow Statement for Fickle Pickle ’19.

The positive cash flow in 2019 entails that the business owns easily liquidated cash for operations and fulfilling short-term obligations and shows working capital’s health. This cash shows of sustaining cases of emergency expenses, demand for higher inventory, and ability to stabilize supplier power. Fickle Pickle is gradually trying to cut down on inventory at hand for better turnover rates. Having positive cash flow shows they have the necessary funds to get inventory in case of a higher demand to negotiate with supplier power to keep up with demands while minimizing surplus. As there is no debt financing cash flow and new equity isn’t issued, the total for financial activities is 0. Capital Expenditure increases as the complex get new material like a new beer tap and renovation expenses for the bathrooms.

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                     Exhibit 3: Balance Sheet for Fickle Pickle for ’18, ‘19

Considering Fickle Pickle is a well-established venue in the community with strong customer relationships, I used a moderate/high discount rate of 10 %. When using the DCF model and estimating the current value, I omitted the terminal value, heavily due to the fact Korean businesses have a short time lived and get replaced quite remarkable. Otherwise, buyouts by bigger conglomerates or the intense market competition cause business to dissolve. Note that when taking this approach, I undervalued a key input to the DCF model and have a smaller NPV, and you should not want that if you intend to keep your money there for a longer time, it generates profits. The NPV of the business ended up being approximately KRW 516,000,000, with the book value at 2019 being KRW 603,543,150.

During this evaluation, I assumed the lack of terminal value as businesses within Seoul are usually short lived and easily regenerated. Although the business might have enduring value, its not going to give value tremendous value long down the line big enough to need terminal value considerations. The NPV of the business ended up being approximately KRW 516,000,000 with the book value at 2019 being KRW 603,543,150.

As Fickle Pickle was a small business, raising debt would have imposed unnecessary financial burdens. However, now that it has its core audience base of loyal customers, raising additional debt wouldn’t leave a constraint as they have a consistent cash flow. Loss of company control isn’t required to raise additional capital as well. So. on the next phases of growth and expansion like opening another branch or significant capital expenditures, Fickle Pickle should borrow money as its revenues and margins show stabilization over the years.

Being placed in a competitive environment with premium pricing needs Fickle Pickle to be efficient and offer a distinctive utility and experience to its consumers. As seen in the assumptions, we demand a higher price from consumers, and boosting prices, might have damaging impacts leaving pricing as a sensitive lever we can’t pull. The service offered, however, has significant room for improvement. From increasing the number of days open (after customer maturation) when the cost of production and service for the new days(Mon-Wed) are exceeded by the net profit to be made.

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One of the most significant growths is SG&A expenses to leverage the incoming traffic at Seoul’s “hottest” district, increasing the visibility of their presence and value proposition in the market. Plus, maintaining the service quality, number of customers/hours is going to increase with improved SG&A expenses. There is a peak number on the number of consumers/hours, as the current location isn’t big enough. The reach of optimal instore numbers is an indicator of expansion to new locations to capitalize on demands.

Looking at these prospects for Fickle Pickle, and understanding the intricacy of the investment process, I advocate for investing in the company as it will provide return in coming years.