GRIN IPO Potentially Promises Smiles for Everyone

| About: Smile Brands (GRIN)

Everyone has seen it: A great idea that’s so simple, so obvious, that you wonder why no one ever thought of it before.

Turns out such ideas are neither simple nor obvious. These ideas usually come from brilliant minds, from people who look at the way the world is, wonder why things are the way they are and question whether things can’t be done just a little differently.

I want to introduce you such an innovator. His name is Steve Bilt. He’s built a great business with a stunningly simple model. He’s parked it in a huge and highly fragmented industry and positioned it for serious long-term growth.

We’re not, happily, meeting Bilt at the end of this saga. We have the good fortune of meeting him at about Chapter Two in a very long book. It’s been a good story so far, and it’s about to get better.

It’s about to get better because now Bilt is willing to sell you a piece of this business.

And you can buy pretty soon.

Bilt founded Smile Brands in 1998. His idea was simple. There were only three parts:

1. Take jobs out of dentist offices that don’t need to be done there so that caregivers can focus exclusively on patient care.

2. Create a care-giving environment that’s clean and comfortable. Offer high-quality professional dental services that blue-collar “Middle American” workers can afford.

3. Build the entire concept around a brand rather than a dentist, and bring in some heavy-hitters with serious retail and marketing experiences to see if you can’t grow a business and make some money.

Since the company was founded 12 years ago, Bilt has built it into a highly organized network of 300 offices that comprise 1,100 dental professionals. It’s the largest dental-services provider in the United States. Though the business brought in nearly $460 million in 2009, Smile Brands has only captured 50 basis points of the $105 billion dental services market. There’s plenty of room for growth. And Bilt wants to grab a disproportionate share of it. In fact, “disproportionate share” is one of his favorite phrases.

Here’s how he’s going to do it:

Reverse the professional services model. Roughly 84% of the dental services market is controlled by one- or two-dentist offices that operate in a typical medical clinic setting. Phones are answered during normal business hours, which is when the office is staffed. Billing and finance are handled on a case-by-case basis. An on-site manager, typically one with a host of responsibilities and little formal training, tries to keep up with purchasing, records management, operational details, human resources and a thousand other tasks.

Smile Brands thinks this is nuts. First, call centers answer the phone 24/7 -- on the first ring, an innovation that, by itself, proved to deliver a +10% increase in business when it was instituted. Next, hours are extended so that working people don’t have to take time off from work to get care. Then the company centralizes billing and purchasing. Financing is either arranged through third-parties or tracked within a system designed for that function. The result of this is that every person who works in the clinic is totally focused on delivering care to patients. Functions that can be centralized are centralized. Tasks that require expertise are handled by experts. This creates a win-win for patients and the company.

Market a brand, not a dentist. Most dentists don’t advertise. They accept referrals and list their number in the Yellow Pages and rely on the fact that a good reputation will build a business over time. A simple and understated sign typically announces their nondescript office, which is usually clustered with other medical offices.

That doesn’t make any sense to Bilt. He wants the stores (which is what he calls them) “out front” on the “corner of Main and Main” with 30,000 cars going by in each direction every day. A visible, readable, branded sign faces the “drive aisle” and an anchor store sits behind. Smile Brands’ stores aren’t hidden, and the locations serve as valuable marketing tools because they’re in shopping areas where people often go for other things. When the need for dental care arises, consumers are already familiar with the brand and its location.

Make care affordable. Bilt outlines the new customer thought process thus: Customers want to see that the store is clean. They want to be comfortable there. Then they want to know that they can afford it.

“The best insurance in the space is still going to make you pay half out of your pocket,” Bilt said at a recent presentation to potential investors. “So you’re price sensitive.” To address this, Smile Brands offers competitive prices, plenty of treatment options and a complete array of financing alternatives.

Marketing also reinforces this. Since Smile Brands focuses on mid-market consumers with maximum household incomes of about $90,000, its commercials and direct mail and other marketing pieces are all value-driven, with calls to action accompanied by money-off offers or gift cards. “Consumer choice is driven by assessments of quality and value,” Bilt said in his presentation. “If you can deliver along these axes, you can attract disproportionate share.” As a result of these efforts 440,000 new patients are attracted each year.

The result of these steps has been a stellar success. A new location costs $500,000 to build and is cash-flow positive in six months. Experience -- 87 new stores -- shows that after 30 months the entire investment has been recouped and additional profits are money in the bank for the company. The average revenue per store is $1.5 million, with a dental-services margin of 26%.

Smile Brands operates in 13 major markets. Within those markets alone it has room for another 500 stores. In Los Angeles, for example, where Smile Brands has only a 23% penetration, it grew from 33 stores to 43 stores while achieving a compound annual growth rate of +7.4% market-wide, results that far outpace the +5% annual growth of the overall industry. The model operates in good times and bad and can be deployed at will. “We can go anywhere there are teeth,” Bilt said.

The shares in the company, whose motto is "Smiles for Everyone," are expected to price at between $16 and $18 and raise about $125 million. At the low end of the range the shares are only selling for about 13 times earnings, based on quarterly results detailed in the prospectus, and at about 14.5 times earnings at the high end. Clearly any company with margins and growth prospects will ultimately command a far greater premium. Thirty to 40 times earnings would not be unreasonable for this company as long as it remains in growth mode.

Investors who see the beauty in the model that Bilt has created and are interested in profiting as Smile Brands continues to capture its “disproportionate share” of the market should consider Smile Brands -- which will trade under the ticker “GRIN” on the New York Stock Exchange -- for the long term. The shares are expected to price and begin trading the week of May 8.

Disclosure: No positions