On May 24 2007, I invested in Village Super Market at a price of $42.90.
Village Super Market operates 23 ShopRite supermarkets, 16 of which are located in northern New Jersey, and six in the southern shore of New Jersey and in eastern Philadelphia. The stores average 55,000 square feet in size, the largest being above 60,000 square feet and the smallest being under 40,000 square feet. The company is the second largest member of Wakefern Food Corp., the largest retailer-owner cooperative and owner of the ShopRite name. Only members of Wakefern can use the ShopRite name. In short, Wakefern has a lot of say in things and Village Super Market is required to purchase products from them.
But there are two factors that make me think Village Super Market will continue doing well with this set-up. First off, they were founded in 1937 and this is a family operated business (they know how to deal with this company). Second, Village Super Market CEO Paul Sumas is Wakefern's vice chairman and on its board of directors. Village Super Market (which I'll call VSM from now on) has done well with this set-up and I think will continue to make the most of it. VSM's aim is to offer a wide range of quality products at consistently low products.
Market Cap: 282.96M
Shares Outstanding: 6.48M
Qtrly Earnings Growth: 13.9%
Qtrly Rev Growth (yoy): 1.60%
Revenue (ttm): 1.03B
Gross Margin (ttm): 26.83%
EBITDA (ttm): 44.75M
Profit Margin (ttm): 1.78%
Oper Margins (ttm): 3.07%
Return on Assets (ttm): 7.51%
Return on Equity (ttm): 12.27%
Net Income (ttm): 18.36M
EPS (ttm): 2.828
P/E (ttm): 15.44
P/S (ttm): 0.27
Total Cash (mrq): 54.58M
Total Debt (mrq): 28.35M
VSM is not a flashy, fast-growing company. Wall Street hardly knows about the company, and the stock is cheap as a result. VSM has a P/E of 15.44 while the industry average is 19.16. VSM's P/S is 0.27, while the industry average is 0.36. This doesn't mean that any company that has some ratios lower than the industry average means it's an undervalued stock, but there isn't any reason VSM should be trading at an average lower than its peers. The business has produced strong cash flow and fueled growth for many years, and I don't see that changing.
In fiscal 2006 (which ended on 7/29/06), the company produced $35.51 million in cash. Halfway through fiscal 2007, the company has produced $21.42 million in cash. The company hasn't relied on financing activities for a long time I don't think they will for a long time either. The business has become more consistent, and management has done a very good job creating shareholder value. Wall Street just hasn't made much note of it yet.
What's even more impressive is that the company is not opening new stores very often. Management has rather focused on remodeling stores, and whenever they do this they like to increase the selling space. So instead of plowing money into new stores, management upgrades and develops the company's current properties. In 2006, the company completed the remodels of three stores (two of them were relatively small) and began remodeling one store. According to the 10-K, management actually would like to be opening more stores, but there have been delays associated with government regulations and overall the difficulty of expanding in their current trading area. Management also says they would consider acquisitions should appropriate opportunities arise. Management is doing everything they can do with what they have, and they've been nicely producing business value as a result. Management is upfront with shareholders, which I find very promising. When I first researched the company I really got the impression that their top priority was to create shareholder value.
For 2007, $14 million in CapEx has been budgeted. Planned expenditures are completing the remodel of the Rio Grande store that they started in 2006, as well as construction on a new store in New Jersey (which I believe is expected to be completed in 2008). Management has been updating stores quite a bit in the past few years, improving the technology used in the stores so as to improve efficiency and speed up the purchasing process, delivery process, etc. I think this has played a major role with the company's improving margins. In 2006, the company sported a profit margin of 1.62%. In the latest quarter (2Q 2007), the profit margin was 1.87%. No, it's not a huge increase, but margins are improving pretty consistently now.
Let's take a deeper look into management. Chairman, CEO, and COO Paul Sumas is 73 years old and has been a director of the company since 1955. This company has been his life's work, so I'm confident he will continue to do a fine job running things. The only executive with the company who isn't in the Sumas family is CFO Kevin Begley, age 48, who has been with the company since 1987. Believe it or not, Begley is actually the least experienced executive with VSM. All the other executives (there are five of them) have been with the company from at least 1982. When most executives only stay with a company for 3-5 years or so, I put a lot on weight on the fact that the least experienced executive with a company has been with them for 20 years. It's extraordinary. This management team knows the company, knows the store, they know the business extremely well. And that's why I'm very confident in them and comfortable with them running the show. They simply know how to run this company. Just two months ago they announced that the quarterly dividend would be raised 12.5% to $0.18 per share. With the healthy balance sheet, strong cash flow that fuels growth and expansion, and improving margins, I look forward to seeing what management can accomplish over the years.
Risks / What to look for
Competition - Retail is a fierce business with a lot of competition. If VSM loses its customer base, they'll have a very difficult time competing and expanding. This is a major risk, but I think management knows how to deal with the competition. Think about it: management has been through soft economic conditions, strong economic conditions, all sorts of ups and downs, so I think they have a good idea of what to do when/if things soften up one way or another. They've faced competition ever since being with the company, it's nothing new. I'm confident management will be able to expand the business and continue to reward shareholders, but I will be watching the impact competition has on them going forward. Over the past couple years, it hasn't been a huge problem for the company. Stores - From what I've heard, the ShopRite stores aren't anything spectacular. This could turn out to hurt the company if custome!
rs decide they want something different, it's a risk all retail businesses face. I was thinking about this, and the truth is that even mediocre products can be turned into a business if management knows what to do. VSM's management has turned 23 ShopRite stores into cash-generating machines. Thus, I'm not too worried about the stores losing customer interest. This management team knows how to run the stores and I don't think that will change.
Economy - This actually isn't so much of a risk, just something to keep an eye on. Management's aim is to sell quality products at consistently low prices. If an economic downturn were to come (I don't expect anything major, but I'm not saying it isn't possible), VSM would probably do fine. People need to buy goods even when the economy is taking a dip, and VSM's high quality, low prices aim would probably do very well if management could keep executing it while in a struggling economy. I think VSM is a pretty safe investment in this regard; if the economy takes a hit, VSM probably wouldn't be hit too hard.
I'm not expecting anything spectacular in the way of growth. I think growth will be consistent around 13%-15% over the next few years. This stock is also pretty cheap, and I think deserves a P/E closer to the 17-20 range. The EPS is currently $2.83. For my "most expected" estimate, I'm going to say 13.5% annual growth for the next five years with a P/E of 17.
2.83 * (1.135^5) * 17 = $90.62
This translates into approximately 16% annual returns for the next five years, nicely beating the market averages. I think this earnings growth is very possible, both because of the store remodeling and expansion, and it's also important to take into account the improving margins. My doomsday estimate is 11% annual earnings growth with a P/E of 13.
2.83 * (1.11^5) * 13 = $61.99
My rosy scenario is 15% annual earnings growth pegged with a P/E of 19.
2.83 * (1.15^5) * 19 = $108.15
With VSM, you have a stock that Wall Street isn't noticing, a very experienced management team that's done a good job creating shareholder value, a business producing strong cash flow, a healthy balance sheet, and a stock with a low valuation. VSM should be above $50 right now, but I'm not planning to sell for a long time. There are simply too many pluses with this story to consider selling anytime soon. I expect market-beating returns for a long time and look forward to following this old company and excellent management team.
Disclosure: Author has a long position in VLGEA
VLGEA 1-yr chart