My Close Shave at Supercuts: When a Stock Pick Goes Wrong
Book: Beating the Street by Peter Lynch with John Rothchild | ISBN: 978-0-671-75915-5
Peter Lynch has a regular barber. His name is Vinnie DiVincenzo, he charges $10 for a haircut, and he throws in pleasant conversation for free. Lynch has never had a problem with Vinnie’s work.
But in December 1991, Lynch cheated on Vinnie. A prospectus for Supercuts landed on his desk, and he decided to visit the chain at 829 Boylston Street in Boston. Research purposes, he told himself. He took his yellow legal pad and started taking notes in the waiting room.
He left with no sideburns. His family greeted him at the door with “What happened to you?” Acquaintances told him he looked “young,” which he correctly interpreted as meaning they previously thought he looked old.
This is one of Lynch’s best chapters because it shows something rare in the investing world: a professional admitting in real time that a pick didn’t work out, and walking you through the thinking that led him astray.
The Thesis That Looked Perfect
On paper, Supercuts had everything Lynch loved.
The hair care industry was worth $15 to $40 billion. Independent barbers like Vinnie were a vanishing breed. In New York State alone, the number of licensed haircutters had dropped in half. Hair grows half an inch a month. Somebody was going to have to cut it.
Lynch compared the situation to Service Corporation International, which consolidated the funeral home business. People die at a regular rate. Somebody has to bury them. The industry was full of inefficient mom-and-pop operators whose kids wanted to go to law school. Service Corp came in, rolled up the market, and became a huge winner.
Supercuts was doing the same thing for haircuts. Over 650 stores. A franchise model, so the franchisees put up the money for new locations. An ex-marine named Ed Faber, who had previously grown Computerland, was running the expansion. The company had come public in October 1991 at $11 per share.
The Numbers Were Compelling
Each Supercuts stylist handled 2.8 haircuts per hour. At roughly $9 to $12 per cut, that’s about $30 an hour in revenue. The stylists made $5 to $7 an hour in wages, with tips potentially doubling that. The franchise owner invested $100,000 up front and could expect a 50 percent pretax return on equity within two years.
The overhead was tiny. No expensive equipment. No factory upgrades. The biggest ongoing costs were rent, scissors, and combs. Supercuts got 5 percent of the gross from each franchise plus 4 percent on product sales. The company hired one new trainer at $40,000 for every 10 new shops, and those 10 shops would generate $300,000 in annual revenue.
Supercuts was a 20 percent grower selling at 16 times earnings. It had plans to be debt-free by 1993. And there was no dominant national chain in the haircut market. The biggest competitor, Fantastic Sam’s, had more locations but produced less than half the revenue per shop.
Lynch recommended it in Barron’s. “I got a haircut there, I tried it out,” he told the panel. Mario Gabelli looked at Lynch’s head and asked, “Is this your current haircut?” The editor’s response: “We won’t advertise that.”
Here’s What He Missed
Lynch is honest about the red flags he saw but didn’t weigh heavily enough. The debt level was 31 percent of total capital when he first looked at the balance sheet. That was high. Management said they’d pay it off with free cash flow, which sounded reasonable.
But the real problem with franchise businesses is harder to see from financial statements. It’s about consistency and quality control. Lynch got scalped at Supercuts. His sideburns were gone. His family thought he looked terrible. A company that promises the same haircut in Albuquerque and Miami needs to actually deliver on that promise, and Lynch’s own experience suggested otherwise.
He worried about employee turnover. The stylists were paid $5 to $7 an hour. Yes, they got medical benefits and tips. But low base pay in a service business leads to high turnover, and high turnover leads to inconsistent quality. The company told him turnover was low “so far.” So far is not forever.
Why This Chapter Matters
Lynch doesn’t tell you how the Supercuts story ends in this chapter. What he does is something more valuable. He shows you his complete thought process, including the parts where his enthusiasm got ahead of his judgment.
The thesis was sound. Fragmented industry. Disappearing independent operators. Growing demand. Franchise economics that worked on paper. But “works on paper” and “works in 650 real-world locations staffed by people making $6 an hour” are two different things.
Lynch’s rule says if you like the store, you’ll love the stock. But he admits this was an exception. He liked the stock’s prospects on paper far more than he liked the actual store experience. That should have been a bigger warning.
There are a few takeaways here.
Visit the business. Lynch physically sat in the Supercuts chair and got his hair cut. Most investors would never do this. The fact that he did is why he’s better than most. But he still didn’t listen to what the experience was telling him.
Watch for franchise quality risk. Franchise businesses are attractive because someone else pays for the expansion. But someone else is also running the daily operations. If the franchisee doesn’t deliver consistent quality, the brand suffers.
Even legends pick losers. Lynch ran the best mutual fund in history. He still made bad picks. The difference between him and most investors is that he owned his mistakes and learned from them. He didn’t pretend every call was a winner.
The haircut grows back. Lynch talked to Supercuts management about his scalping, and the CFO’s response was: “The good news is that hair grows back at the rate of half an inch per month.” It’s a funny line. It’s also a decent metaphor for investing. Bad picks happen. You recover. You keep going.
Lynch never went back to Supercuts. He stayed with Vinnie.
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