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Based in Milwaukee, WI, Roundy's Parent Co. Inc. (RNDY) scheduled a $200 million IPO with a market capitalization of $457 million at a price range mid-point of $11 for Wednesday, February 8, 2012.

RNDY is one of nine IPOs scheduled for this week (see our IPO calendar).

SUMMARY

RNDY is a leading Midwest supermarket chain with a 139-year operating history. We have achieved leading market positions in our core markets and are the largest grocery retailer in the state of Wisconsin.

The current RNDY is a product of a leveraged buyout. The balance sheet is stripped of cash and loaded with debt.

To entice IPO investors RNDY says it will pay an 8.4% annual dividend.

SUMMARY ANAYSIS

TO pay that 8.4% dividend RNDY would have to pay out 73% of its net income, which leaves little no room for growth capital.

In addition, RNDY operates at a low profit market of 1.4%, with annualized after-tax earnings of $52 million, but with annualized interest payments of $73 million. Revenue has been essentially flat the last three years.

So if there is a hiccup in top line revenue stability, or in operating and profit margins then it seems likely the dividend would be cut.

Industry leaders Safeway (SWY) and Kroger (KR) each pay out dividends in the range of 36% of earnings, so RNDY's payout ratio is way out of line on a comparative basis.

CONCLUSION

While the 8.4% projected dividend seems appealing, it seems to us that RNDY cannot afford to pay that dividend rate over the longer term, and remain competitive. Therefore we would pass on the RNDY IPO, even though others may find it attractive, at least in the short term.

BUSINESS

RNDY is leading Midwest supermarket chain with a 139-year operating history.

As of November 1, 2011, RNDY operated 158 grocery stores in Wisconsin, Minnesota and Illinois under the Pick 'n Save, Rainbow, Copps, Metro Market and Mariano's Fresh Market retail banners, which are served by RNDY's three strategically located distribution centers and our food processing and preparation commissary.

TOO MUCH LEVERAGE

RNDY will have a net worth of $303 million post-IPO and goodwill of $727 million.

That means RNDY has a negative net tangible worth of $727mm - $303mm = -$424 million.

SEPTEMBER QUARTER RESULTS

Net sales were $976.9 million for the third quarter 2011, an increase of $37.9 million, or 4.0%, as compared to $939.0 million for the third quarter 2010. The increase was primarily due to $21.2 million of net sales from the opening of three new stores during fiscal 2010 and 2011, and from an increase in same-store sales of 1.7%. Same-store sales increase was due to an increase in average transaction size of 3.1%, offset by a slight decline in the number of customer transactions of 1.4%.

NEW STORES

RNDY intends to opportunistically open new stores in its core markets, and intend to continue an expansion into the Chicago market with plans to open four to five stores per year in the Chicago market over the next five years. As of November 1, 2011, RNDY had opened four stores in the Chicago market.

STORE OPENINGS

A new store in RNDY's core markets can take a year or more to achieve a level of operating profitability comparable to the company-wide average for existing stores, with a slightly longer time horizon anticipated with respect to new Chicago stores.

In addition, many of new store openings in existing markets have had a near term negative impact on same-store sales as a result of cannibalization from existing stores in close proximity. Over the longer term, RNDY believes that any such cannibalization will be more than offset by future net sales growth and expanded market share.

COMPETITION

Principal competitors include retailers with traditional supermarket and "big box" formats. Some of these competitors have attempted to increase market share by expanding their footprints in our marketing areas.

For example, the number of Wal-Mart (WMT) stores with full grocery line offerings in Wisconsin has increased from 18 as of June 1, 2002 to 68 as of November 1, 2011. This competitor expansion creates a more difficult competitive environment for RNDY.

Other competitors include Kroger , Safeway and Costco (COST).

DIVIDEND POLICY

RMDU intends to declare quarterly dividends of $0.23 per share on all outstanding shares of common stock.

USE OF PROCEEDS

RNDY expects to net $111 million from the sale of 11.4 million shares. Shareholders intend to sell 6.8 million shares. Proceeds are allocated to repay debt.

Source: IPO Preview: Roundy's