Ever since SUPERVALU's (SVU) horrific July 11 earnings announcement, grocery store stocks have collectively taken it on the chin. SUPERVALU is down more than 60% since July 11, recently closing at yet another multi-decade low. Additionally, Safeway (SWY), The Kroger Co. (KR), Whole Foods Market (WFM), and Casey's General Stores (CASY) are down 15.13%, 7.45%, 10.35%, and 8.44% respectively.
If putting new money to work in stocks seems like a dicey proposition given the extreme uncertainty in both the U.S. and the world's economic outlook, consider taking a look at the corporate bonds of the companies in which you were considering an equity investment. You won't always find yields, maturity profiles, and call and put provisions you find attractive, but before taking the leap into the lower rung of a company's capital structure, take a look at the top of the food chain, the bonds.
Regarding the grocery store industry, and specifically the companies I mentioned above, there are a few fixed income possibilities to consider, but there is one I would like to focus on. As far as I am aware, Whole Foods and Casey's General Stores have no non-convertible bond, non-private placement debt available for retail investors to purchase. Kroger has several Baa2/BBB rated senior unsecured notes available for purchase with maturities ranging from 2013 to 2042. As a means of illustrating what to expect in terms of yields on Kroger debt, its 4/15/2042 maturing, 5.00% coupon note, CUSIP 501044CR0, is currently trading over par. This means Kroger's 30-year debt is yielding less than 5%.
On the other end of the spectrum, investors will find a multitude of SUPERVALU's Caa1/B- rated senior unsecured notes (including subsidiaries) providing plenty of opportunity to acquire bonds yielding more than 10%. However, I would like to caution investors that when purchasing bonds with ratings below single-B, you enter a part of the ratings spectrum with historically much higher rates of default. According to Moody's "Annual Default Study: Corporate Default and Recovery Rates, 1920-2011," since 1920, only 3.667% of single-B rated notes default within one year of having such a rating, versus 11.973% of Caa rated notes. That number jumps to 24.053% when talking about notes with Ca ratings and below. The bottom line: When purchasing individual bonds with ratings below single-B, exercise extreme caution.
While Kroger's debt doesn't offer yield and maturity profiles I currently find enticing and SUPERVALU's debt offers a level of credit risk that I find unattractive, there is one grocer falling somewhere in the middle: Safeway.
Safeway is North America's second largest supermarket chain with more than 1,600 stores across the U.S. and Canada. The company has plenty of senior unsecured debt available on the secondary market, and I would like to highlight two of the notes:
The 12/1/2021 maturing, 4.75% coupon note, CUSIP 786514BU2, is rated Baa3/BBB by Moody's and S&P respectively and has a make whole call. It is currently offered at 97.871 cents on the dollar for a 5.038% yield-to-maturity before commissions.
The 2/1/2031 maturing, 7.25% coupon note, CUSIP 786514BA6, is rated Baa3/BBB by Moody's and S&P respectively and has a make whole call. It is currently offered at 108.182 cents on the dollar for a 6.484% yield-to-maturity before commissions.
I realize that Safeway's stock currently pays a 4.59% dividend and is trading near multi-year lows at a valuation many investors might view as attractive. In addition, I'm aware that the company has good cash flow and decent liquidity. Furthermore, the short interest in Safeway is around 25%, which may cause some investors to believe that a short squeeze will one day take the stock to much higher levels. However, I also know that multi-year lows often precede more multi-year lows. Also, over the years, I've learned that when short interest in a stock reaches levels that seem ridiculously high (like 25%), long-term investors should look beyond the short-term possibilities of a short squeeze and instead attempt to figure out just what it is the short sellers find so unattractive about the bottom of that company's capital structure (the common stock).
If you'd like to focus your time on the credit risk of Safeway rather than the risk to your principal from an earnings growth and equity valuation perspective, consider the two CUSIPs mentioned above. If you are willing to buy the stock, you should at least be willing to consider investing further up the capital structure in the company's bonds. If a 5.038% or 6.484% yield is not enough to whet your appetite, you might even consider splitting the money you'd like to invest in Safeway between the senior unsecured notes mentioned above and a short put position in the stock. By shorting out-of-the-money puts with a smaller portion of the total investable assets, you could raise the average yield of the Safeway investment over time, or, in a worst case scenario, be forced to purchase the stock at a price lower than today's.
Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. I discuss this in my article, "Are You Paying Too Much For Your Bonds?" The current prices may also differ greatly from those listed at the time this article was written. The offer prices mentioned in this article come from tradeMONSTER's bond trading platform. For more information on any of these notes, including additional call or put features, please contact your broker or read the indenture.
Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.
Additional disclosure: I am long CUSIP 786514BU2.